The Long Struggle: Indonesia’s Money History

This is the English version of “Perjalanan Panjang: Sejarah Uang Indonesia”

Indonesia has a long history when it comes to money. Indonesia is considered a young country, it got its independence less than one hundred years ago. And like a young country, it has faced many problems: debasement, inflation, political instabilities, foreign debts, corruption, and much more.

To understand Indonesia, first, you need context. Indonesia is a vast country spread around 1,904,569 square kilometers, with more than 17.000 islands. Indonesia is the fourth most populous country in the world, with more than 270 million people. Indonesia is rich in minerals, oil, unique floras and faunas, and abundant natural resources. Although Indonesia is a young country, the region has been known since ancient times as a trading port, spice heaven and strong naval force.

Money in Indonesia’s region has changed from time to time: from gold, into bronze, into fiat money. We are going to look at the money history of Indonesia and derive why it is important for Indonesian people to hold Bitcoin.

Ancient Kingdoms

In ancient times, before Indonesia was established as a country, Indonesia consisted of mini kingdoms. Some of the larger ones were the Srivijaya and Majapahit kingdoms that ruled between the 13–17 centuries. These kingdoms used gold as their primary currency. The Majapahit kingdom was so rich that their troops were venerated in gold: gold spears, gold armor, and gold saddles.

A picture depicted Bhayangkara’s troops from Majapahit that venerated with gold armory

Majapahit ruled trade and had a strong navy. Majapahit’s king was ambitious and wanted to conquer more territory. To fulfill this ambition, he decided to replace his gold coin with a bronze coin made in China. This was the first act of currency debasement recorded in Indonesia’s history. Majapahit was successful in expanding its territory but with a debased currency it developed another problem. Fake money made out of tin began to circulate in Majapahit. The economy eventually collapsed, flooded with fake money, and it was the starting point of a fallen empire. Less than 100 years after Majapahit debased their currency, the kingdom fell.

Colonial Era

Indonesia is rich in spices and commodities. Many came to trade and many sought to monopolize the trade. Many countries; the Portuguese, the British, the Spanish, and the Dutch, fought to colonize Indonesia. In the end, the Dutch monopolized trade in Indonesia through the Dutch East Indies Company (VOC).

Land ownership in Indonesia was a tricky subject, many people can claim the ownership of the land, it can be the king who rules the land, the farmer who cultivates the land, or the house owner that was situated in the land. VOC saw this opportunity and was able to acquire the rights to harvest. Slowly, VOC ruled the ownership of the land and became the primary power in Indonesia.

As a company, the VOC owned a special right from the Dutch empire to print money and collect taxes. The VOC printed their own money and began to exert their power on the Indonesian people. VOC tried to rule Indonesia by minting their own coin called Doit. Unfortunately, Doit was not as valuable as Pound sterling for example. Doit was made out of tin and copper, while Pound sterling was made from silver. Doit was not free from counterfeiting. It was so bad that doit lost its value 15 percent of its value during the VOC period.

Indonesia was considered a profitable land and VOC raked in so much profit that made corruption became uncontrollable. In 1779 VOC went bankrupt because of mass corruption and the Dutch empire took over Indonesia’s affairs.

Doit money minted by the VOC, that was made out of tin and copper (Source: Good News Indonesia)

The Dutch implemented forced plantation or slave labor that made Indonesia into one of the world’s largest sugar producers. The Dutch had a clever way to go about this; they created a public debt and borrowed money from its citizen at low-interest rates (Elson 1994: 261–264). The Dutch used this strategy to create a labor force in Indonesia.

The story goes that the Dutch had a difficult time getting laborers for their sugar plantations because the Javanese wanted more money for their work than the Dutch wanted to pay, and enslaving the Javanese was proving difficult. So they came up with a financial scheme where they borrowed from their future and offered the borrowed money to Javanese women for having babies. In a bid to get free money from the Dutch, the Javanese women obligingly had more babies than they otherwise would. When all those babies came of age there were so many of them that there wasn’t enough work — and so the sugar plantations and their incredibly low nearly slave level wages waited for them. And that’s how the Dutch got their cheap labor, and why Java Island became the most populous island in the world. Until now there is a famous saying in Java “Banyak anak banyak rejeki –With many children, comes much fortune” to prove how effective this campaign is. Cheap money is a tool for enslaving people. Through this system, the Dutch successfully created 1 billion guldens in profit. The Dutch became one of the strongest colonial powers in the world.

Indonesia slave labors carried the Dutch People (Source: Ilmu Dasar)

In 1828, De Javasche Bank (DJB) was founded by the Dutch as the central bank of Indonesia. DJB’s main role was mint gold coins and also exchanging gold. De Javasche Bank funds forced cultivation. Under De Javanesche Bank, the Dutch tried to unite all currencies circulating in Indonesia into a single currency under the Dutch empire called Gulden.

In the 1800s, the Europeans faced a long depression, the recession was caused by falling stock prices in Europe, causing commodity prices to fall. The recession occurred due to a lot of competition for commodities and an increase in the supply of these commodities, creating “spice bubbles”. The new price signal was felt in Indonesia in 1880 after the prices of commodities were destroyed and famine spread in Indonesia.

Japanese Occupation

Entering 1942, as a result of World War II, a war broke out between the Netherlands and Japan. The Dutch surrendered to Japan and Japan attracted sympathy from the Indonesian population by convincing them that Japan was on the Indonesian side. Even though, that was not the case.

Japan liquidated De Javasche Bank and merged it into Nanpo Kaihatsu Ginko (NKG) as Japan’s circulation bank for Southeast Asia. Despite the liquidation, the Japanese army still needed assistance from expert staff, mostly staff from De Javasche Bank. So most of NKG’s staff were staff from DJB.

At that time, the circulation money in the Dutch East Indies reached 610 million guilders, consisting of 365 million guilders in paper money, 75 million guilders in government securities, 93 million guilders in silver coins, and the rest in small notes. (Margana, 2018: 20)

In order to keep prices stable, Japan continues to use the gulden as the official currency in Indonesia. This was also the Japanese strategy to control Asia by using what was known as Japan Invasion Money (JIM). Japan used the already valid denomination (in this case in Indonesia the denomination uses Dutch Guilder). Japan printed approximately 3.3 Billion Gulden JIM. To attract sympathy from the Indonesian people, Japan then changed the denomination from Gulden to Rupiah.

Japan needed raw materials to meet the needs of industry and war. Japan controlled important commodities such as rubber plantations and rice. Several previous plantations, which were the main commodities from the Netherlands, were destroyed and replaced with war-beneficial commodities such as jatropha plantation as a source to make biodiesel. Many of the previous landowners were recruited as unpaid slaves to work on forced cultivation programs or even as Japanese troops.

Romusha’s (slave labour) work in the plantation (Source: Kompas)

Early Independence

In 1945, the Hiroshima and Nagasaki bombs were released on Japan. There was a vacuum of power. Indonesia then proclaimed its independence on August 17, 1945. But it was not easy for Indonesia to gain its independence because the allies, especially the Dutch, wanted to take Indonesia back and all its natural resources.

In 1947, the Netherlands received a loan from the World Bank amounting to $195 million, then following that year as many as 145,000 Dutch troops came to Indonesia to reclaim Indonesia (Rich, 1994).

To fight the allies, on October 30, 1946, Bung Hatta, vice president of Indonesia announced that Indonesia would print its own money which was called ORI, Oeang Republik Indonesia. This money was printed by Bank Negara Indonesia, the central bank made by the Indonesian government to compete with the Dutch-made De Javasche Bank. ORI is a greenback and not pegged by gold. ORI’s rate was set to Rp 2 = 1 gram of gold, Without any underlying, ORI continues to decline in value.

However, in the early days of ORI’s emergence, ORI’s liquidity was very limited. Bank deposits withdrawal since October 31 can only be done a maximum of Rp. 100 per month per person or Rp. 300 for marriage, birth, or dependents who are sick/died. For companies, the deposit’s withdrawal was limited to Rp. 2000 per month and other costs a maximum of Rp. 250 per week and for non-company entities, the maximum salary and costs are Rp. 500 per month. (Margana. 2018:50-51). So it was expected that the Indonesian people prefer to save the more readily available Dutch gulden.

The currency war happened. The Indonesian government tried to kill Gulden by placing restrictions on the Indonesian people to deposit Japanese and Dutch money until October 16. People are worried that if they deposit their money in the bank, they will not get it back. And there are still many opinions that Gulden is more valuable than ORI. So people tried to spend their saved money in the market and the exchange rate of the Japanese Guilder jumped to 120 for 1 NICA money on the black market. Food prices were reported to have increased forty-fold and clothing prices twenty-fold two days before ORI was launched (Margana. 2018:51)

The Dutch used this opportunity to attack ORI because Gulden was stronger and had a silver backing. The Indonesian people also prefer to use Gulden money instead of ORI because it has more value and is more stable. Money is then used as a political and bullying tool. If a merchant in the market accepts Gulden money, it means he/she is a traitor to the nation, the Indonesian nationalists can tear his shops apart and close his shop. However, if you receive ORI money, the value continues to decrease, in less than a year 1 florin which was equivalent to Rp 2 was then worth Rp 500.

The Dutch government tried to kill ORI by circulating counterfeit ORI money and made it difficult for ORI to circulate. The war that happened between Indonesia and the Dutch, hampered ORI’s circulation. The central government of Indonesia provides a policy for local governments to print their own ORI to overcome a cash void known as ORIDA (emergency ORI). ORIDA can only be traded in a specific area, so if the money is printed in Jogjakarta, it can only be used in Jogjakarta.

Japanese Gulden

Indonesian ORI

Dutch Gulden

Emergency ORI (ORIDA)

So many currencies circulating in Indonesia created chaos in the economic system and also reduced the fungibility of the money. Each region began to print its own means of payment, some in the form of money, receipts, receipts, coupons, and payment receipts.

The circulation of ORI and ORIDA money could not be controlled, from the initial circulation of Rp 323 million, increased to Rp. 6 billion at the end of 1949. Inflation in Indonesia was increasingly out of control. ORI currency with the largest denomination of 100, rose to 250, then rose to 600 within 3 years.

This currency chaos led a confusion for the Indonesian people, they couldn’t save their wealth safely. Perhaps this led to a trend to save money in gold. If you ask any grandparents that lived during that time, they will say “ buy gold and land” because gold is the only money that didn’t lose value and is accepted everywhere.

Round Table Conference

In 1949, thanks to encouragement from other allies such as the United States, military aggression ended through the signing of the Round Table Conference agreement. In this agreement, the Netherlands recognized Indonesia’s independence, and Indonesia is now called the United States of Indonesia under the rule of the Queen of the Netherlands. There were 9 points mentioned in this conference but one of the hardest was that Indonesia had to pay all the debts of the Dutch East Indies. The total debt was 2.6 trillion guldens in March 1942 and expanded to 3.2 trillion guldens in December 1945, and also to finance military aggression against Indonesia in the amount of 5.9 trillion guldens. (Zanden, Marks. 2012:282) The Indonesian people had to pay a very high price for their independence.

The Indonesian government bears a heavy debt and as a result, caused many financial problems and devalued Rupiah. In order to reduce the foreign money circulation, the Indonesian government had the idea to physically cut the Gulden notes in 1950. This was known as Syafruddin’s Scissors. The idea was by cutting out the Gulden, the government could devalue the Gulden and “strengthen” the rupiah. The money that was cut had a value of Rp 5 and above. When it is cut in half, the left side is halved and the right side can be exchanged into state bonds with a maturity of 40 years. Sjafruddin’s scissors reduced the Gulden money circulation by 1.6 billion Rupiah but only temporarily. Indonesia continued to print money and the increase in money circulation between 1949 and the end of 1950 was 160%. It was one of the highest in Asia. (Margana. 2018: 70)

Syafruddin Scissor’s policy cut the physical gulden into two

The rupiah exchange rate also declined because it was pure fiat money without any underlying. At first 1 gram of gold was pegged at Rp. 2, after Syafruddin’s Scissors, 1 gram of gold was equal to Rp. 4.30, down by 53 percent. The government also fixes the dollar exchange rate at a double rate. The first exchange rate is the official government exchange rate, namely $1 = Rp 3.80 and the second exchange rate is for export-import activities, the export price is set at $1 = Rp 7.60 and for imports $1 = Rp 11.40. This policy was detrimental to exporters because it seemed that they were given a 66.7% tax for carrying out trade. And the difference from this exchange rate was used by the government to cover the state budget deficit.

In 1951, the Government of Indonesia nationalized the central bank De Javasche Bank and changed its name to Bank Indonesia. The Indonesian government bought shares of De Javanesche Bank at a price of 8.95 million Gulden or Rp 3.22 billion. Even the stock price is 20% higher than the normal price. By nationalizing Bank Indonesia under the Indonesian government, the government was able to print more money. During the period of ORI and ORIDA were unified and to be officially replaced with Rupiah.

Guided Democracy and Economy

Indonesian government spending increased during the Sukarno government. Sukarno, Indonesia’s first president, had ambitions for Indonesia to be recognized internationally. Indonesia hosted big-budget events such as the Asian Games, GANEFO, and the Non-Aligned Movement Conference. Sukarno also built various kinds of monuments in Indonesia to show his glory and patriotism.

In addition, Malaysia’s independence also triggered a confrontation between Indonesia and Malaysia. And also Indonesia’s efforts to seize Papua to become part of Indonesia. This makes Indonesia’s spending even more bloated. At least Trikora’s budget to seize Papua alone has consumed 24% of the total State Budget. It was later revealed why Indonesia was so persistent in getting Papua was because three Dutch geologists found a gold mountain in Papua, that later was acquired by the US through Freeport company.

On 5 July 1959, Sukarno announced a Presidential Decree which changed the direction of the Indonesian government to Guided Democracy. Sukarno was appointed President for life and also the formation of the Nasakom ideology (Nationalism, Socialism, Communism). In addition, Sukarno also intervened in economic affairs and carried out the Guided Economy. All economic activities are centralized in the central government while the regions are an extension of the center.

President Sukarno and Mao Zedong

With Democracy and Guided Economy, the economic situation is increasingly chaotic. The Governor of Bank Indonesia participates in the cabinet as Minister of Central Bank Affairs. And banks throughout Indonesia were merged into one called the Sole Bank as part of the Bank Berdjoeang doctrine. Through the Bank Berdjoeang doctrine, banks switch functions to finance development projects run by government departments.

Hyperinflation

Radical policies made the Indonesian economy even more uncertain and inflation rose. To overcome inflation, in 1959, the Indonesian government redenominated the Rupiah and cut its value so that it was reduced to 90%. Rp 500 became Rp 50, Rp 1000 became Rp 10 and even bank accounts with amounts above Rp 25,000 were frozen. As a result, people’s savings lost 90% of their value overnight.

This policy caused panic in the community. The announcement was only done via radio and not many people know about this. For those who knew, they immediately flocked to the market and spend their Rp 500 and Rp 1,000 as fast as they can. As a result, market prices rise. And inflation became unstoppable.

To deal with inflation, the Indonesian government uses foreign exchange reserves and gold to finance the balance of payments. Indonesia’s gold and foreign exchange reserves showed a negative balance of US$ 3 million.

Inflation rose to 500% in 1966. The price of USD on the black market rose from 1 USD, equivalent to IDR 5,100 in 1965, to IDR 17,500 in the third trimester, and at the end of the year to IDR 36,000 until Rp 50.000 in the black market. Inflation was estimated to be around 500–1000% during 1960–1965. The Indonesian people fell into poverty.

Rupiah Exchange Rate (Source: Ekonomi Indonesia 1800-2010)

My father, who was 16 at the time, said that when inflation hit, his family had to eat bulgur instead of rice. Each family was given a rice ration from the government but the rice quality was poor, sometimes it was filled with maggot. To get the rationed rice, people have to queue for hours, and each family was assigned a special date to get the rice. His family had to be creative in looking for food ingredients, usually, they collected snails in the Brantas River, banana stems, and tried to eat bushes or leaves. Even though my grandfather, a businessman, had various businesses such as an auto repair shop and a soap factory, his business went bankrupt due to inflation and economic stagnation. The soaring cost of raw materials made him unable to continue his business.

While my mother, her father was a civil servant. Civil servants’ lives are supported by the state, they get rice rations and also adequate salaries. So it is not surprising why parents in that era wanted their children to become civil servants. One of the benefit as a civil servant, the government increased the salaries of Indonesian soldiers by 500% despite the inflation.

The unstable situation was also accompanied by the increasingly rampant communist influence in Indonesia. President Sukarno, who was an anti-Western influence, rejected foreign aid, with his controversial statement “Go To Hell With Your Aid”. Sukarno received a lot of support from the communist party.

On September 30, 1965, seven high-ranking Indonesian army officers were kidnapped and killed. This causes instability in the political conditions in Indonesia. As a reaction to the September 30th Movement of 1965, the army led by General Suharto carried out arrests and massacres of members of the Indonesian Communist Party. It is estimated that there were at least 500,000 members of the Indonesian Communist Party. Sukarno gave instructions through the Supersemar and made General Suharto the next leader of Indonesia, thus ending Sukarno’s term as president for life.

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Foreign Investments

Suharto’s government started with a tough one. He had to clean up the mess from the previous administration. Suharto re-opened foreign investment in Indonesia which was previously rejected by Sukarno. Suharto asked a group of mostly American-educated Indonesian economists, dubbed the “Berkeley Mafia”, to formulate the government’s economic policies. By cutting subsidies and government debt, and reforming the exchange rate mechanism, inflation fell from 660% in 1966 to 19% in 1969. The threat of famine was reduced by the entry of USAID rice aid shipments from 1967 to 1968.

In 1967 the Indonesian government enacted a law to accept foreign investment which was previously discontinued by Sukarno’s government. UU no. 1/1967 contains various incentives and guarantees to potential foreign investors. It includes a tax-free period and a guarantee of non-nationalization. Freeport was the first company to enter Indonesia, namely a US gold miner company located in Papua. Followed by mining and timber companies from a number of countries.

During the Suharto era, Indonesia received a lot of foreign aid. The Inter-Governmental Group Indonesia (IGGI) was founded in 1967, some of its members are the IMF, ADB, OECD, US, Japan, UK, and UNDP. Through IGGI, they provide loans of $600 million per year to Indonesia.

The Indonesian economy grew during the Suharto era. From 1966 to 1997, Indonesia recorded real GDP growth of 5.03% per year, pushing real GDP per capita up from US$806 to US$4,114. In 1966, the manufacturing sector accounted for less than 10% of GDP (mostly oil-related industries and agriculture). By 1997, manufacturing had increased to 25% of GDP, and 53% of exports consisted of manufactured products. Suharto was dubbed the “Indonesia Father of Development”.

Oil Boom

In 1975, Pertamina, the state company that manages oil and gas, defaulted on its foreign loans as a result of mismanagement and corruption under the leadership of Suharto’s close ally, Ibnu Sutowo. The Indonesian government did a bailout by printing more money to save Pertamina from bankruptcy. The Indonesian government’s bailout almost doubled the country’s debt.

Indonesia’s economic boom was also supported by the oil boom that occurred during the Iran-Iraq War in 1979. Indonesia’s economy grew between 1979–1983 from 53% to 70%. However, after 1983, world oil prices fell. And Indonesia again experienced a devaluation. From $1 equals IDR 703 to $1 to IDR 1,600.

Indonesia’s economy weakened due to falling commodity prices. As a result, trade and investment slowed down. On the other hand, government debt increased. Government financial resources are running dry, making it difficult to finance development.

Private Bank Fever

Indonesia must find other ways to improve the non-oil and gas economy, one of which is the existence of Pakjun 83 and Pakto 88. The Pakjun 1983 gave state banks the freedom to set deposit interest rates and abolished credit limit provisions. Thus, banks become more flexible to disburse credit.

Pakto 88 makes it easier for entrepreneurs to open a private bank, with just a capital of Rp 10 billion (or about 9 million dollars at the rate at that time). New banks have sprung up. Bank Indonesia noted, in September 1988, the number of national banks was only 108 commercial banks, consisting of six state banks, 64 private banks, 27 regional development banks, 11 joint venture banks. The total number of commercial bank offices in that period was 1,359 units. However, after the existence of Pakto 88, at the end of the 1988/1999 financial year, the number had skyrocketed to 1,525 units. The peak of bank additions was in 1994, where the number of private banks reached 166 units, mixed banks 40 units, and rural banks 9,196 units.

With so many banks, fractional reserve banking became uncontrolable.

Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers

In other world, with fractional reserve banking, banks can create money out of nothing. Fractional reserve banking holds several problems such as

  • Misallocation of credit for speculations, create asset bubbles
  • Creates inflation from the increasing of money supply
  • Continous debt, because if people stop borrowing money then there will be less money to service debt.

The private bank fever also favors the one closest to Suharto. The Suharto era was also full of corruption, important companies were controlled and owned by military personnel. The military plays an important role in Indonesia’s economic development. Many members of the military hold strategic companies and corruption is rampant. To have a significant business, one must be close to Suharto, or Suharto’s family or friends of Suharto’s friends. Created a country full of cantillionaires and kleptocrats.

Suharto and his closest people who hold important industries in Indonesia indirectly enjoy borrowed money from abroad that is poured into their industry. The level of corruption is rampant. Based on the Global Report on Corruption 2004 by Transparency International estimates the embezzlement of funds by Suharto and his entourage at $ 15 to 35 billion dollars.

Asia Crisis

The start of the Asia Crisis happened actually far from Asia. The “Reverse Plaza Accord” of 1996 was an agreement that made by the US, Japan and Germany to bail out the Japanese manufacturing economy that was slowing to halt with the ascent of the yen. They engineered a reversal to create a steep decline in the exchange rate of the dollar. Driving the dollar up against other foreign currencies. The liquidity then went into the US stock market and another into asset markets in the East Asian and Southeast Asian countries whose currencies were tied with the dollar, including Indonesia.

Before the Asia Crisis, many companies in Indonesia used the opportunity to borrow cheap dollars, while their liabilities were in rupiah. Until 1996, most of the investment also went to real estate. It was a party, the economy was booming, everyone was getting rich.

Because of the Reversal, East Asian governments and related financial institutions find it increasingly difficult to borrow US dollars to subsidize their domestic industries as well as maintain their currency peg. These pressures peaked in 1997 when one by one they devalued their currencies. The supply of Thai baht exceeded the market’s demand. Investors exchanged their baht for dollars. The Thai government tried to spend more than $20 billing to maintain the baht pegged rate with the dollar but ultimately fail. Within five-week Thai baht lost more than 20 percent against the dollar. And what happens next was the contagion effect that spread to Indonesia.

As a response to what happened in Asia dollar market. The Indonesian government revoked the fixed-rate exchange rate to a free-floating rate which caused panic for the Indonesian people. The fixed-rate system is a system in which Bank Indonesia is obliged to maintain a constant Rupiah by actively buying and selling foreign currency to deal with changing supply and demand. With the free-floating exchange rate, the rupiah exchange rate becomes dependent on supply and demand in the market.

People bought as many dollars as possible as their hedge, fearing that the rupiah value would plummet. The value of the rupiah decreased within 3 weeks. The price of $1 equals Rp. 2,600 plunged to $1 equals Rp. 13,600 and in May it was almost close to Rp. 16,000. Between 2 July 1997 and 8 January 1998, the Indonesian Rupiah depreciated against the dollar by 229 percent.

Rupiah Exchange Rate during Asia Crisis (Source: Bank Indonesia)

The Indonesian government tried to save its economy by increasing bank interest rates but this only weakened the fragile banking system especially after many new banks joined Pakto 88. Through the Limited Cabinet Meeting on Economy, Finance, and Development and Production and Distribution, the government will assist healthy banks experiencing liquidity difficulties, while “sick” banks will be merged or liquidated. This credit is referred to as Bank Indonesia Liquidity Assistance. This assistance was issued in collaboration between Bank Indonesia and the IMF.

Funds disbursed by Bank Indonesia to commercial banks during the 1998 monetary crisis amounted to around Rp 144 trillion. The number of BLBI recipient banks is around 48 banks. The Indonesian government gave these banks a one-month deadline to repay the BLBI loans and then later changed the deadline to 5 years. The government froze 38 unhealthy banks. Imagine for the Indonesian customers who have money in that bank, overnight the bank was no longer operating.

The IMF’s participation in the Asian crisis also worsened Indonesia’s condition. The IMF provided a loan to Suharto and in return, Indonesia had to carry out a tighter monetary policy such as raising bank interest rates which caused an excessive contraction in the already contracted economy. On May 5, 1998, within the framework of the agreement signed with the IMF, Suharto abolished subsidies for basic commodities so that prices for kerosene, electricity, and gasoline rose by 70%, of course causing mass panic and hysteria.

The crisis in Indonesia was rampant, resulting in riots and violence against ethnic Chinese, a lot of people don’t understand what was going on, they tried to find someone to blame, Indonesian-Chinese became the main target. The people occupied the parliament building in Jakarta. By May 28, 1998, President Suharto resigned from his post after ruling Indonesia for 32 years.

Dollar exchange rate from Sukarno until present (Source: Bank Indonesia)

Bank Indonesia Liquidity Assistance’s Scandal

After the reformation, the BLBI Fund is due to be immediately paid by the borrowing banks. Through an audit from the BPK, it was found that there were irregularities in the BLBI funds issued by BI. The findings of the Financial and Development Supervisory Agency (BPKP) show that there have been deviations in funds of up to Rp. 54.5 trillion by the 28 banks receiving the BLBI funds. Then there was a disagreement about how much the government should bailout.

Based on the results of the KPMG audit in January 2020, it was found that Rp 80.25 trillion of the BLBI funds were misappropriated. The Governor of Bank Indonesia, Syahril Sabirin, was detained by the Attorney General’s Office with the status of a suspect. In November 2020, several BI officials resigned from their positions. In 2001, several high-ranking bank officials receiving BLBI funds were arrested on suspicion of corruption. Many of the bank’s top brass fled the country. Until 2021, BLBI funds have not been fully returned and are still a matter.

Bail-Out and Bail-In

In 2008, a subprime mortgage crisis happened in the United States which had an effect on the world economy, including Indonesia. The flow of foreign investors’ funds to Indonesia stagnates, resulting in a fall in the value of the rupiah against the dollar. Indonesia’s inflation increased to 12% in September 2008. In October 2008, the government injected Rp15 trillion into 3 state-owned banks.

One of the private banks experiencing problems was Century Bank and the government has provided a bailout fund of IDR 6.7 trillion. The Indonesian government was worried that a bank run would occur so that it agreed to this bailout fund. When Century Bank went bankrupt, thousands of customers also became victims. For example, Cahyadi Candra Mulia has IDR 5 billion in a century bank which he cannot access. In addition, Century Bank also has several fraudulent investment practices. So that the bail-out of Century Bank also raises many questions.

Indonesia has also adopted a bail-in mechanism as happened in the case of Asuransi Jiwasraya. In contrast to the bailout, where the bank or the private sector can ask the government to bail out debts by using indirect taxes or printing money. In simple terms, a bail-in is a way for banks to use money from customers to overcome the losses they experience. The bail-in was ratified in the 2016 PPKSK Law.

Reflections

We have just explored the long history of Indonesia from the royal era to the post-reform era. We can conclude that throughout five centuries the Indonesian people have experienced various kinds of suffering and difficulties, due to the use of inappropriate financial policies and the politics of using money.

From history, we can see that money is a political tool. An unstable monetary system will lead to political instability. Fiat money or money issued by the government, without a stable backing such as gold or silver can be easily devalued. Let’s see for example the 1946 ORI lost its value 53% in 3 years.

Fiat money is also very easy to misuse. The temptation to print money is easier than producing something productive or increasing interest rates. Printing fiat money causes inflation, and inflation is detrimental to society.

Inflation is a hidden tax that people have to pay later on. Excessive inflation as happened in 1966 and 1998 also caused chaos in the country. Hunger and riots were rampant. All this happened slowly and suddenly. And the common thread of hyperinflation around the world is the printing of excess money.

Money printing can lead to the practice of cantillionaires, kleptocracy, rent-seeking, corruption, and nepotism. People who are close to the government enjoy an injection of new money either through the stock market or investment. This is the best field for corrupt practices. Which we saw this happen in the Suharto era.

Foreign loans also pose a different problem. Loans from the IMF and the World Bank that supported the Suharto government had two blades. On the one hand, the IMF loan allowed the post-chaotic government to build and reorganize the country, but on the other hand, the many loan terms resulted in misdirected policies and triggered sharper inflation, currency devaluation, and high unemployment.

Why do Indonesian people need Bitcoin?

From history, we see that from the kingdom era until the covid era, money can be easily debased through changing the material, counterfeiting or poor policies. Indonesian people need money that can be trusted, that it can’t be corrupted.

Bitcoin is the first money that can’t be corrupted, inflated, and faked. Bitcoin is digital money that was created based on cryptography and a hashing mechanism called Proof-of-work that prevents any double-spending, with a fixed supply and transparent issuance schedule. With this in place, people don’t have to be worried that their money suddenly losing value because there is more of it all of sudden. Since it is also run by a decentralized node that can be run by anyone, people also don’t need to be worry that suddenly they can’t access their funds, or bank becomes insolvent.

Bitcoin is accessible to everyone, just by having an internet connection people can own this money, there is no need for a bank, no need for a third party, no need for a permit. Everyone can own Bitcoin as little as they can afford, people can exchange their money for Bitcoin that can be divided up to 0.00000001 or what we called a sats. At the time of this writing (January 2022) 1 sats right now is equal to Rp 6, and candy right now costs Rp 100.

The main difference between Bitcoin and fiat money is that Bitcoin’s value goes up because it has a limited supply of 21 million. Indonesia’s government has printed over 2 Quadrillion Rupiah since its independence and it is expected to print more in the future. On average, Bank Indonesia printed 12% more Rupiah year over year. And on the contrary, Bitcoin supply is getting less and less every 4 years.

Indonesia M1 Money Supply
Indonesia M1 Money Supply (Source: Bank Indonesia)

Bitcoin creates a separation between money and state. Something that hasn’t happened in this world. By having money that can’t be controlled by the state, then it is free from state interference, dictator, kleptocrats.

Bitcoin is private, transaction is done pseudonymously and can’t be reversed. Bitcoin is also safe from confiscation — as long as the person owns the private key, no one can take it away from them. Just imagine, if another crisis happened, people can easily switch to more reliable currency, people can flee the country safely without a threat that their money can be confiscated or stuck in an insolvent bank.

State of Bitcoin Adoption in Indonesia

In July 2021, 7.4 million people in Indonesia have been registered as crypto users. But that only constitutes 2.5 percent of its total population. In 2019, Bank Indonesia forbid payment using cryptocurrency including Bitcoin. Cryptocurrency such as Bitcoin is categorized as asset commodities that can be traded in the exchange.

Cryptocurrency Adoption based on country (Source: Finder)

There is plenty of opportunity for Bitcoin adoption in Indonesia, but education is needed to make sure people don’t fall into a scam trap or get lost in the wilderness of ICOs, altcoins, and noises around cryptocurrency. But most importantly, people in Indonesia need to understand the value that Bitcoin provides — privately own and incorruptible money which holds long-term value.

Yes, it still a long way to go for Indonesian people to understand Bitcoin, and it takes a while to even make Indonesia accept Bitcoin as a legal tender. But if we can learn from whatever happened in Turkey, Argentina, Venezuela, Nigeria — Bitcoin provides a second chance for these countries. Bitcoin provides an escape plan from the fiat fiasco.

We are going to make it.

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