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World Currencies and Crises (Part 2)
by Hugo Drax
In an earlier episode, I discussed some of the major currencies of Europe. While gold is higher against all of them, some of them are sinking slower than the USA dollar. In this issue, we will examine some of the currencies of Asia. These include the Thai baht, Philippines peso, Indonesia rupiah, South Korea won, Malaysian ringgit, Japanese yen, and the Chinese yuan renmimbi. These are all official currencies, with the yuan entirely pegged to the dollar and the others somewhat closely controlled by central banks and other mechanisms to restrict (or try to restrict) the exchange rate.
No doubt you'll recall 1997 when many of these currencies were sinking rapidly. After
we've examined the etymology and history of these currencies, we'll discuss the Asian currency crisis.
Thailand
The Thai use a currency called the baht. The word “baht” in the Thai language means money. Previously, the baht was a silver coin of just less than half an ounce of silver (roughly 15.25 grams). It is also a term for a type of gold jewelry very popular in Thailand, which is 15.2 grams of at least 95% pure gold and formed as a necklace, or bracelet, made of links. The standard baht jewelry is specifically 23 karats pure. For many years, Thais have used these chains as money, so they are very standardized in weight and purity. A friend who has traveled in Thailand tells me that the links are often separated and used for purchases.
As a result of the 1997 currency crisis, the Thai baht currency now floats freely. The word Thai itself, by the way, refers to "free." So Thailand is the land of the free.
Philippines
The peso is a Philippines version of the Spanish money. In the Spanish language, "peso" means weight. Spain colonized the Philippines hundreds of years ago, although they never completely conquered all the islands. After 1898, the Philippines were US territory until 1942 when Japan conquered the islands (again, only some of them). After the World War II, the Philippines was independent and organized a central bank to issue its currency, the peso. Although not yet independent, the Philippines was represented at the Bretton Woods conference in 1944.
Indonesia
Rupiah comes from the Hindi and Sanskrit word "rupya" which means "wrought silver." A similar Sanskrit word, rupa, means to shape. So, the rupiah is shaped or wrought silver, and was certainly a silver piece prior to becoming a paper currency. Parts of Indonesia were occupied by the Dutch for hundreds of years before World War II. Since then, Indonesia has become independent.
Since July 18th, 1997, the rupiah has been floating. During this time it has lost 75% of its value against the USA dollar.
South Korea
Short words often have several meanings. I've found that in the Korean language "won" may mean "house" or "circle." Perhaps these words reflect a tradition of circular houses, or perhaps there are intonations that make the difference but aren't reflected in translation. Quite a few coins are shaped like circles, and some Asian coins have a hole in the middle so the coin looks like a circlet or sort of a ring. I'd be delighted if someone who knows the Korean language could offer more thoughts on this matter. South Korea had suffered for decades under Japanese occupation. In 1948, it was declared a republic and the U.S. occupation authorities in Korea supervised the election of Syngman Rhee. A few years later, the USA and South Korea were embroiled in the Korean War. Naturally, there was much work to rebuild Korea after the occupation by Japanese and communist imperialists.
Malaysia
There is a truly delightful history of the term ringgit on the
website, malaysianculturegroup.com, which indicates in part that ringgit means silver coin and is related to a term referring to jagged edges.
All the history of coinage worldwide reflects the problem of clipping, which involved taking a hammered coin of gold or silver with a smooth edge and reducing its metal content by shaving off the edge. It was often common to find such coins nearly triangular in shape because the clipping had been so poorly done. With more advanced stamping and milling methods, the Malaysians took to putting a jagged edge on their coins to prevent this practice.
Japan
The Japanese word "yen" derives from the Mandarin word for round, which reminds us of a round coin. No doubt at one time the Japanese yen involved gold or silver, but it does no longer. Japan’s currency is managed by the Japanese central bank. It doesn't figure as prominently in the Asian currency crisis as some of the others, so we should return to the yen another time for more detailed discussion.
China
The Chinese word yuan means "round" in the Mandarin dialect, or "round thing." Many early coins from China were round, some with a central cut-out. The term "yuan renminbi" refers to "a unit of the people's currency." The currency has been pegged to the dollar since 1995 at 8.28 RMB to the dollar. The peg came through the 1997 currency crisis intact, but has lately been criticized as a source of economic difficulties in the region. No doubt the new weaker dollar policy has brought renewed attention from USA government authorities suggesting that the yuan be floated.
Since 1949, China has been a communist country. However, after the death of Mao, significant policy reforms began to occur. China has established numerous economic development zones, brought back foreign tourism, made gold ownership legal, and one of its recent leaders promoted the idea of Chinese individuals becoming millionaires.
These policy reforms should not be misunderstood to indicate that laissez faire economics prevails, but the harsh restrictions of communism have been molded into somewhat more lenient economic fascism. The economic benefits have been tremendous, although there remain numerous cultural difficulties with the treatment of dissidents and the use of convict-slave labor.
Types of Money
There are two main classes of currency: free market money and fiat
money.
Free market money, such as the e-Bullion™
currency, is privately issued by a company, is redeemable for gold or silver based on terms specified in a user agreement, and a third party bullion service handles the storage of the gold and silver.
Fiat money is typically money issued by government decree.
Often, governments declare their money to be "legal tender" meaning that there are laws enforcing its acceptance by merchants.
As we've seen above, none of the Asian currencies are free market money even though the terms for their currency units, as with Europe, often derive from terms related to silver or gold coins.
With no free market discipline involved, no domestic competitors, and no redemption to gold available for those seeking to realize the value of their currency holding, a crisis seems to have been inevitable.
It seems words for money which previously involved gold or silver have been adopted by governments, presumably to gain the reputation of gold and silver as good money without having to actually provide for redemption in gold or silver.
Within fiat money there are three concepts currently in vogue regarding exchange
rates. These are:
1.) Floating exchange rates where the currency markets (regulated but somewhat subject to market discipline) set exchange rates.
2.) Fixed exchange rates where exchange rates are set by government authority.
3.) Pegged rates where the currency is pegged to some other existing currency.
In the United States, the dollar is operated by a monetary authority with quasi-governmental power. That authority is the
Federal Reserve System. The Federal Reserve sets monetary policies to regulate the scope of the money supply, but leaves exchange rates to be set by external market forces. The exchange rate regime is
floating.
A fixed exchange rate system does not typically manage the scope or size of the money supply, but
allows increases, or decreases, depending on market forces. Since credit markets and some types of banking transactions can effectively increase the money supply, and do so quite dramatically, the fixed exchange rate system is potentially vulnerable to very large increases in the supply of money. A fixed exchange rate is fixed by a monetary authority, typically the government.
The third type of system is a pegged exchange rate. For example, the Hong Kong dollar has been pegged to the USA dollar for some time. Also, the People's Republic of China yuan is pegged to the dollar. Very often, a currency board or other authority is used to establish and enforce the pegged or official exchange rate. Thus, currencies like the Panama balboa, the Djibouti franc, the Hong Kong dollar and the Chinese yuan are just other forms of USA
dollars. They come in all kinds of exchange rates, so there are really some pretty odd currency units. For example, at the official exchange rate of 180 Djibouti francs to the dollar, a 10,000 franc note would have a value of US$55.55. In practice, though, the official exchange rate is only available in this case from the Central Bank of Djibouti,
and only for large and highly qualified currency transactions. The effective exchange rate on the street is closer to 170, so that note is market valued at $58.82. A very odd denomination "bill" if you would.
Pegged rates, as discussed by Steve Hanke of Johns Hopkins and others, generate conflicts between exchange rates and monetary policies. So, pegged rates often require control over capital movement. So-called currency controls may mandate central bank oversight if money is transferred into or out of the country. Thus, many countries have "receive only” Western Union offices because the central bank, or government, won't permit payments to be sent that
way.
One way to address fixed rates which has been adopted with some success in various countries is to have a currency board. Currency boards have been shown to reduce corruption and stabilize monetary and exchange policies. A currency board typically requires that domestic notes and coins and deposit liabilities at the monetary authority (central bank, typically) be covered at 100% to 115% by foreign reserves denominated in a foreign anchor currency. Exchange rates are set at a specific rate and kept there. According to Professor Hanke, the first currency board was established in 1849. He also points out that it has been a response to chaos in countries where floating currency exchange rates have resulted in wild fluctuations. Hong Kong in 1983 saw wild fluctuations in its currency and established a currency board. (You can see Prof. Hanke's essays on this subject on the Cato.org web site.)
What Happened in 1997?
Several important trends seemed to reach critical points in 1997. The Asian currency crisis, according to Marshall Auerback of PrudentBear.com, was the result of an asset bubble, credit excess, and exchange rate overvaluation.
Asset bubbles are widely known. The Tokyo real estate market underwent an asset bubble in the 1980s culminating in 1992. The 1929 stock market peak was an asset bubble, as was the 1999 peak (in inflation-adjusted dollar terms) in stocks, especially tech stocks. Many other real estate markets have seen an asset bubble, as have various stock markets. An asset bubble can burst fairly rapidly, and although many warning signs precede the bursting of these bubbles, they are often ignored. When anyone tells you that "it is a whole new economy," and things like earnings are no longer important, you are hearing one of the warning signs than an asset bubble is about to collapse or at least lapse significantly.
Credit excess often comes hand in hand with an asset bubble. Borrowing becomes easier. More credit is extended. In effect, easy credit functions as inflation, bringing more money to chase the same goods and services, thereby raising prices and valuations. Assets now seem to be worth more, so more money may be borrowed against them, further extending the credit boom and promoting speculative excess. Exchange rate overvaluations are a temptation for many governments and monetary authorities. Fortunately, exchange rates are often stabilized suddenly and effectively by currency speculators.
A Calendar of Events
One of the first shocks through the system was the collapse of Hanbo Steel, a large Korean conglomerate. It had about US$6 billion in debts, and collapsed in January 1997. In early February, the Thai company Somprasong missed payments on foreign debt. As a response to these events, the Thai government announced it would buy US$3.9 billion in bad debt from financial institutions, but in the event it did not. With the crisis well underway in early March, the International Monetary Fund's managing director said, "I don't see any reason for this crisis to develop further." But it did.
By late March, the Malaysian central bank was restricting certain types of loans in an effort to head off crisis, and another Korean conglomerate, Sammi Steel, had failed. In early May 1997, Japan’s central bank hinted at higher interest rates to support the declining yen. Although they did not raise rates, the expectation led to significant sales of other Asian currencies.
In mid-May, the Thai baht was attacked by speculators selling it off. Presumably, much of these short sales were undertaken on margin and otherwise leveraged. Both Thailand and Singapore intervened to defend the value of the baht. The Philippines central bank raised its overnight rate on the peso and sold dollars.
By late May, Thailand’s largest finance company could not be saved. Mid-June of 1997 saw the resignation of Thailand’s finance minister, with the prime minister insisting that the baht would never be devalued. The Philippines again responds by raising its overnight rate, now to fifteen percent. Late June sees the Thai central bank suspending operations of sixteen finance companies and the prime minister reiterating his "no devaluation" promise in a nationally televised
address. In July, the Korean car maker Kia was asking for emergency loans.
On July 2nd, 1997, the Bank of Thailand announced a managed float of the baht and called on the International Monetary Fund for technical assistance. As a result, the baht is devalued by some 15% to 20%. So much for the "no devaluation" promise televised days earlier. The Philippines central bank is forced to intervene heavily to defend the peso, raising the overnight lending rate to 24%. Malaysia’s central bank follows suit, with some temporary success. Both the Philippines and Indonesia broaden the trading ranges for their currencies.
By July 14th, the IMF is offering the Philippines over a billion dollars under fast-track regulations which had been introduced after the Mexican currency crisis. The central bank in Malaysia abandons its defense of the
ringgit. On July 17th, Singapore allows the Singapore dollar to depreciate. On the 24th, the ringgit hits a three-year low against the dollar. Malaysia’s prime minister attacks "rogue speculators" for taking advantage of the crisis. Hong Kong’s currency remains steady, but it is later revealed that during a two-hour period on an unknown day in July, a billion USA dollars were spent defending its value.
On July 26th, Malaysia’s prime minister identifies George Soros as the man responsible for the attack on the
ringgit. July 28th sees Thailand calling for IMF assistance.
As usual, the IMF "helps" by demanding austerity and a complete change to the finance sector in Thailand. The central bank in Thailand suspends 48 firms on the fifth of August. A week later the IMF announces a rescue package with sixteen billion taxpayer dollars in loans. Just two days after this rescue is announced, Indonesia’s rupiah is under severe pressure. On August 14, Indonesia abandons its managed exchange rate system, and the rupiah's value plunges. The central bank raises interest rates.
On August 23rd, Malaysian PM Mahathir Mohammad blames U.S. financier George Soros for leading the attack on East Asian currencies, "All these countries have spent 40 years trying to build up their economies and a moron like Soros comes along." Of course, that particular "moron" made a billion dollars in one day speculating on currencies. In September, Mahathir tells an international conference that currency trading is immoral and should be banned. Soros retorts that Mahathir is a menace to his own country.
By October, the crisis has reached epic proportions and is affecting stock prices. The Hong Kong Hang Seng index loses a quarter of its value. The Dow loses 554.26 points or 7.18 percent of its value, the largest one-day point loss. Trading is suspended. By early November, the crisis has spread to Brazil, Argentina, and Mexico. By late November, the crisis hits Russia with interest rates being raised to 28%. Stocks in Korea and Japan tumble and the yen loses value. New all time lows were reached for the won,
rupiah, baht and ringgit against the USA dollar in December of 1997. Some stabilization resulted from various promised and delivered IMF loans in December, but January 1998, saw new lows in the ringgit and much trouble for the Indonesia markets.
By January 22nd, the rupiah was down 60% from the beginning of 1998 and down over 80% from July, 1997. Although the Chinese New Year in early February heralded some impressive gains in stocks and currencies, the crisis persisted through March and April, only tailing off by July of 1998.
Lessons
One of the major lessons from the Asian currency crisis of 1997 is that monetary policies and exchange rate policies often conflict. Wherever foreign exchange is possible, currency speculators will take advantage of these conflicts to make money both buying and selling specific currencies. It is not likely that any fiat currency will be safe, which is why we strongly recommend you buy gold and silver.
An interesting aspect of the current USA weak dollar policy is that China and other countries which control their exchange rates against the dollar seem to be reaping much of the economic benefit. A weaker dollar is also a weaker
yuan, and there is far more growth in China’s manufacturing sector as a result than there could be in the US manufacturing sector. One may also wonder whether the cheaper dollar is going to encourage much in the way of international tourists, given the various restrictions on travel and the heightened inconveniences of the security apparatus at the airports. One thing seems certain, though: a weaker dollar spells much higher gold prices.
What answers are available for these entrenched difficulties with monetary policy and exchange rates? One of the proposals by Nobel Prize winning economist Friedrich Hayek was the development of free market money. Hayek wrote a brilliant book in 1976 called
The Denationalization of Money, in which he argued that political and monetary authorities were not the best keepers of currency. He suggested the establishment of private money systems. Only twenty years later, the development of the Internet made such private money systems successful by allowing them to rapidly reach a broad
audience.
If you are concerned about the future of the weak dollar policy, buy gold.
If you are concerned about the difficulties of situations like the Asian currency crisis, which was a repeat of the Mexico peso crisis of 1994-95 and the Hong Kong dollar crisis of 1983 and other crises too numerous to name, perhaps free market money is a solution.
Use e-Bullion as money. Many shops and sites online now accept e-Bullion (Google.com lists over 6,400 pages with the word "e-Bullion").
Tell your friends and associates that you'd rather be paid with e-Bullion™. The economy you save just might be your own!
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