Most Thought-Provoking Monetary Policy in the World was Just Happened in Indonesia in 1950
(The title is subject to relativity. Here, I’m saying that it might be the most thought-provoking in the world. So, if you think there is another more thought-provoking one than cutting money into two halves, kindly please tell me. Happy reading, folks)
Have you ever heard about Uang Gunting Sjafruddin or Sjafruddin Cut Rupiah? Take a look at the above pretty insane (in good way) depiction of the currency being cut into two halves.
Oh no, I wish I’d never cut my money. Never ever.
One might wonder who Sjafruddin is and the most important of all, what on earth it is about. Sjafruddin is the name of Indonesian minister of finance — the person who cut the money. When he first assumed office in 1950, extremely bad financial instabilities occurred in Indonesia as impact of upset situations in politics, psychology of the people, military, etc. after many serious local rebellions from 1945 until 1949 and tense politics between Indonesia and Kingdom of Netherlands, its previous colonial “owner”. Enormous amount of government spending is funded for military demands and many others, resulting in a very serious hyperinflation in the country.
Inflation is a condition when the currency nominal is skyrocketing but people’s ability to pay for goods is worsening. People own lots of money, but they can’t pay affordable goods due to skyrocketing good price. Very, very hard situation.
Sjafruddin Prawiranegara was just a law scholar graduated from law school in Djakarta (though, he dreamed of mastering law in Leiden University, one of the most well-noted law school in Netherlands at that epoch, sadly his family couldn’t afford it). Later, his law school is widely known as University of Indonesia. He was also just a local newspaper editor and an ordinary tax inspector during Japanese occupation before he built up his career and became notable minister.
Post-1945 was just terrific and vulnerable years when so many instabilities and horrors happened. Indonesia was still lagging behind to struggle against the Netherlands aggressive military aggressions. What happened, exactly? In simple elaboration, The Netherlands refused to affirm Indonesia’s independence in August 17, 1945. Then he conducted two successive military occupations in order to gain back his authority on Indonesia. An enormous bloody inferno made so many deaths (e.g. Battle in Surabaya on November 1945). Indonesia felt so fatigue that the government couldn’t imagine what horrific consequences of its extremely excessive spending would be. Indonesia almost gave up.
At last, deploying skill of diplomacy, Indonesian politicians succeeded to gain Netherlands’ affirmation on Indonesia sovereignty, just two days after Christmas in 1949. Regretfully, what is beautiful is not always good. A big bounce stroke Indonesian economy at most — hyperinflation. The country’s total debt was 4.3 trillion Indonesian rupiah (IDR) or 322 million USD and its deficit was nearly 1.5 billion IDR (322,000 USD). Where was Sjafruddin?
“Someone must find him immediately.”
He was indeed so easy to find. Previously, from 1945 to 1950, the government had requested him for help to organize the country in the middle of chaos. He was appointed as minister of finance twice and in-request prime minister once. He was so popular people recognized. In 1950, President Sukarno again appointed him to took his third tenure as minister of finance. Sjafruddin was such a right person whom the country counted on. A very difficult task for him: heal the country. What would he do?
Surprisingly, in 20 March 1950, he announced the most controversial, thought-provoking, and bizarre monetary policy ever:
“Cut the money into two halves!” He said.
The general purpose behind his controversial policy was to cut the nominal value of the currency into one-half of its original nominal value (in economics, the term is ‘currency redenomination’). Why did Mr. Sjafruddin do that? At that time, most of the people still use 1930s gulden banknotes series circulated by the previous Dutch East Indies bank company, de Javasche Bank although the Indonesian official central Bank (Bank Indonesia) had launched the official banknote. Also, those outdated banknotes carried so much problem; excessive amount of money with skyrocketing prices considering the hyperinflation happened and confusing trading system indeed — which one do I use to pay? the gulden or the rupiah?
This is the real challenge. He had to find a way to transition from gulden into rupiah so that if people changed their money to rupiah, they wouldn’t lose their gulden. Hence, Mr. Sjafruddin announced to cut the greenbacks with nominal value from 5 gulden and up into two halves. The left half continued to be legal tender with one-half of its original nominal value which is valid until 5 April 1950. The right half could be exchanged with state bond at 3% interest and repayable in 40 years. Let I make it clearer.
Now, imagine you just receive half-cut 10 Javasche gulden. You can exchange the left half with 5 rupiah, which is one-half of 10. But, if you don’t exchange this until the due date 5 April 1950, your money will be invalid. In other words, you’ll lose 5 rupiah. Still, don’t forget to give the right half to the bank. It’s a state bond. A state bond is amount of money being given to the bank as an obligation. It means you lend 5 rupiah to the government. With 3% interest/yr and repayable in 40 years, you can get back the money you lent as much as about 6.5 rupiah in 1960, due to the interests for 10 years. Is that amazing?
Pretty, isn’t it. The money is nowadays popularized as ‘Uang Gunting Sjafruddin’ or Sjafruddin Cut. As a consequence, his policy was pretty successful to heal the country’s financial condition as to solve many problems in just one shot: totally transitioning gulden into rupiah, repressing the amount of greenbacks thus reducing inflation, and summing the Indonesian state treasury from obligations to repay the huge deficit in later years. His strategy was very brilliant!
Mr. Sjafruddin Prawiranegara is Indonesia’s great statesman. He was both a strategic-thinker and a strongly devoted man to his country. In 1951, the cabinet was reshuffled and the new minister succeeded him. Due to his being renowned as a smart guy to retain national economy stability, he was assigned to assume office as Governor of Bank Indonesia later in that year until 1957.
All in all, Sjafruddin Cut might be the most bizarre yet brilliant monetary strategy one have ever made in the world. It is almost impossible to cut all the money in a country into two halves. However, we talk about creativity. Creative deeds never limit someone from doing something insane (in a positive way) to solve problems. You cannot find statement saying “Cut the money if a country is having inflation” in textbook of macroeconomics, can you. I’m wondering that maybe, in few years from now, another country could be inspired to do the same like Sjafruddin Cut!
p.s. Don’t forget to tell me if you have one, like what I said earlier. Have a nice day.
yohanesnuwara
Bibliography
Bank Tabungan Negara. 1990. Banknotes and Coins from Indonesia 1945–1990. Jakarta: Serangan Umum 1 Maret Foundation & Perum Peruri
