North Korea takes a page from the later Gorbachev monetary policy playbook.

Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country's currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

The revaluation and exchange limits triggered panic and anger, particularly among market traders with substantial hoards of old North Korean won -- much of which has apparently become worthless, according to news agency reports from South Korea and China and from groups with contacts in North Korea.

The currency move appeared to be part of a continuing government crackdown on private markets, which have become an essential part of the food-supply system in the chronically hungry North.

In recent years, some market traders have stashed away substantial amounts of cash, while establishing themselves in profitable businesses that the government struggles to control.

But under the rules of the new currency system, the wealth of these traders has largely disappeared, unless it is held in euros, dollars or Chinese yuan.

The revaluation replaces 1,000-won notes with 10-won notes but strictly limits the amount of old currency that can be exchanged, news reports said.

According to two Web-based groups with sources in the North, that limit was set Monday at 100,000 won, which at current black-market rates amounts to $40. All North Korean currency that individuals possess in excess of that amount becomes worthless under the revaluation.

Back in 1991, Mikhail Gorbachev confiscated old ruble notes in much the same way. Rather than make them worthless he forced citizens to deposit excess cash rubles into state-owned banks with the accounts frozen for five years. Hyperinflation in 1992-93 did the same work that Kim Jong-Il is doing to his citizens.

For many in poor countries like North Korea, banks are shunned because of a lack of transparency and poor service. People prefer to hold cash. It is not just speculators but average citizens who put their cash in safes, shoeboxes, mattresses, etc. To do this as winter sets in virtually assures that some small farmers, who will have converted crops to cash so they can buy food later, will now go hungry.

The confiscation of won will most likely stall inflation in North Korea. As the Soviet economy wound down additional rubles were printed to pay bills that could no longer be covered by a crumbling state industrial sector. It is less than a year from the confiscation to the end of the USSR. Not to predict that North Korea is going out of business soon, but this is certainly a sign of serious stress within the North Korean economy and political structure. To see what happened next, consider this account from Yuri Maltsev:

Everyone in the higher reaches of power had known for some time that a coup against Gorbachev [in the summer of 1991] would be a snap. One evening in Moscow, I discussed the possibility with a friend of mine, a general in the Soviet Army. He told me that an actual coup would be the easy part. "We could take power in ten minutes," he said. "But then what? We have no sausages, no bread � nothing to offer the people." The Moscow junta hoped its power grab would be bolstered by Gorbachev's low popularity. But as much as the people hated their ruler, they hated the coup leaders more. The coup government achieved only a short moment of glory. Once in power, it faced a people seething with anger at the crimes of totalitarianism and the poverty of socialism. The coup leaders also faced a hard winter, a very bad harvest, and the prospect of mass starvation. They lost their nerve, and Boris Yeltsin thwarted their efforts.

Does North Korea have a Yeltsin? I have no idea, but I'm going to be watching.

Labels: economics, money, socialism kills