Reports of the collapse of the economy in Indonesia are replete with references to the "devaluation" of the rupiah. But there has been no devaluation, and those who use that term should know better.
If a country uses gold as money, and reduces the quantity or purity of the gold in the monetary unit, there has been a devaluation. It is a self-defense measure taken by an over-extended government, or a means of economic warfare waged upon its creditors. If the rupiah, for instance, had been an ounce of gold, and was devalued to a half ounce, the Indonesian government could settle its debts for half the cost, since the debts would be denominated in rupiahs (defined by the Indonesian government!), and not in grams or ounces of gold. But the rupiah is not any amount of anything. It could not be devalued, having no particular value to begin with.
Rather, it has suffered a decreasing parity with the dollar. It now takes more rupiahs to buy a dollar than before; it is undergoing a decreasing exchange rate. This, however, is not a unilateral change, such as a devaluation. If a nation devalues its currency, it, and it alone, makes that devaluation. But a change in exchange rates requires some measure of international agreement. Indonesia alone cannot determine it. It is more likely that the new rate is dictated to Indonesia, than by it.
Poor Indonesia fell for the same trap that destroyed so many American farmers a few decades ago: easy "credit." There were so many wonderful things to buy, and dollars were cheap. Indonesia borrowed 133 billion of them. The only way borrowed dollars can be repaid is by more borrowing, unless the original cache of dollars is intact and available to be returned. But the new dollars became harder to borrow than the originals; things began to fall apart. It has now reached the proverbial man on the street, who is hustling to unload his rupiahs for goods while he can, and while the goods last. We have heard of stores being reduced to empty shelves in hours as Indonesians frantically seek to exchange the doomed rupiah for anything of value.
Why should some farmer in a remote Indonesian village be influenced by the rupiah/dollar exchange rate? Possibly he has never seen a "dollar," and the same may be true of the storekeeper with whom he deals. But the wholesaler who supplies the storekeeper has some dealings with dollars, and the distributor who sells to the wholesaler has borrowed lots of dollars to maintain his inventory. His income, however, is in rupiahs, and it takes more and more of those to buy the dollars he needs to service his debt. So his only alternative is to raise his prices in rupiahs, and this eventually manifests itself in higher prices in the little village store. A whole nation suffers because a group of ambitious Indonesians were conned by the international bankers into believing that they could borrow themselves into permanent prosperity.
In 1831 fifty-one bags of gold sovereigns arrived in Washington from England. They were the bequest of Mr. James Smithson to that city, to be used for the establishment of the Institution he ordained in his will. The sovereigns were melted down at the U.S. Mint and re-minted into American coins. Simple! No exchange rate was involved, just the change of gold from British units to American units, for gold is (and was) gold. The pound/dollar ratio was determined with a scale, not legislation.
An even better arrangement, one perhaps too good to ever be achieved, would have been for the British coins to be simply disks of gold, the purity and weight of which was stated on each coin. These would truly have been an international currency, with no need whatever for exchange rates, and no fear of devaluation, since terms such as "dollar," or "pound," or "rupiah,", etc., would not be involved. To devalue a coin made of pure gold, and weighing 100 grams, would mean changing the meaning of the words "gold," or "gram." There would be no such thing as exchange rates, because an ounce of gold is an ounce of gold everywhere.
Economic crises, such as the one in Indonesia, are not new. We can remember Poland, and Mexico, among others. The usual scenario is for the borrowing nation to agree to the terms of the bankers, enforced by their goons at the IMF. Why not? The bankers then loan still more money to the hopelessly indebted nation, thus enabling them to continue to earn interest on their investment.
The stringent demands of the IMF makes this all look reasonable, instead of the palpable rip-off it is. After all, if the borrower goes belly-up, his IOUs can no longer be regarded as "assets" of the bankers, and the "reserves" for additional borrowing. Maybe Indonesia will throw down the gauntlet and declare itself bankrupt. That would enable it to share its economic woes with those responsible for them; for the loss of 133 billion, and the additional loans based upon it, would shake the banking system to its foundations. It's going to happen, eventually, anyway. No bubble can be blown up indefinitely without exploding. Maybe it will start with Indonesia.
Dr. Paul Hein
13 January 1998
Also by Dr. Hein:
What's the Lek Lacking?
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