Money is often said to be the “great equalizer” because no matter how poor or rich you are, you at least have some, just like everybody else. Since everybody is exposed to it on a daily basis, it is also something relatable and familiar. And while central banks, exchange and interest rates are rarely seen as interesting, the history of the North Korean Won (KPW) is just that.
Perhaps the most interesting fact about the KPW is that its official exchange rate was pegged to the United States Dollar (USD) at a rate of 2.16 KPW per 1 USD for more than 20 years. And while this fact may or may not be interesting, the reason for this exact exchange rate almost certainly is – as it is said to be based upon Kim Jong-il’s birthday, the 16th of February. This exchange rate regime has been abandoned in 2001, but, as an economist, I cannot even begin to describe the economic and financial consequences of sticking to an official exchange rate of 2.16 for more than 20 years, bearing in mind that the unofficial rate is somewhere between 4000:1 and 5000:1.
In 2009 the North Korean government, without prior notice, revalued the KPW effectively overnight in order to curb inflation. This implied that an old 1,000 KPW note could be exchanged for a new 10 KPW note. Furthermore, a maximum cap was introduced and it was only possible to exchange a maximum of 100,000 old KPW (officially valued at 690 USD and unofficially at 35 USD). This revaluation therefore effectively meant cutting private savings by two zeros. The effects were so severe that, according to an article by the New York Times1, people took to the streets – an event that can be best described as “rather uncommon”. As a result, the maximum cap was raised to 150,000 KPW.
So where has this left the KPW, the North Korean people and what does it have to do with unification? Unfortunately, the KPW ceased to be accepted as a legal tender in certain department stores in Pyongyang, according to an article by the BBC2. Likewise, this implies that foreign currency is being increasingly used (especially the Euro and Chinese Yuan), which will be a source of further uncertainty for the North Korean people. Aphra Behn once said that “money speaks sense in a language all nations understand”, which is even and perhaps especially true for North Korea. As such, it is not just interesting to deal with the KPW, but through better understanding how it influences the North Korean people, we can better prepare for unification.