Murphy's Law: Making It Seem Real

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December 12, 2021: North Korea has lots of problems and one that is getting worse is North Koreans distrusting their own currency, the won or, more precisely, the Korean People’s Won or KPW. North Korea is notorious for frequently printing more won whenever there is a crisis, which causes inflation and makes commonly used foreign currencies, like the Chinese yuan or American dollar more valuable. Many imported goods are priced in yuan or dollars and that lets people know when the government has turned to the printing presses again to create more money they could not earn or obtain legitimately. In late 2021 the covid19 lockdown is still in force and the government is so broke it cannot afford to buy the special paper and inks it uses to print KPW. As a stopgap, earlier in 2021 North Korea introduced a temporary substitute called donpyo, or money vouchers. These were printed on cheap paper using standard inks. Donpyo only comes in one denomination, worth 5,000 KPW. This has long been the highest value banknote and always has a picture of North Korean founder Kim Il Sung on. Disrespecting images of Kim Il Sung is a felony so no more valuable currency could be issued unless Kim Il Sung’s image was on it. Because of that the donpyo was not issued in larger denominations, which is what was really needed.

When North Koreans resisted using the donpyo, the impact could be seen in the exchange rates, with donpyo traded as if they were only worth 2,500 or 3,000 KPW. The government responded by ordering local communist officials to tell the people that donpyo were the equivalent of a government bank check, which they were. The problem is that most North Koreans have never used or even heard of checks, personal or certified (issued by the bank or government). Getting donpyo into circulation as equivalents of 5,000 KPW bank notes caused anger and protests. The North Korean government is still seeking a solution to this problem.

The basic problem is that North Korea is basically a cash economy, with the average monthly income of about 200,000 KPW, or forty 5,000 KPW banknotes. For a long time that was not a problem because much of the average income came in the form of goods or housing, which included rent, electricity, and much else. That has changed since the 1990s because the government lost the large Russian subsidies in 1991 when the Soviet Union disappeared. Years of mismanagement of the economy, where everything was state owned, forced the government to legalize the black markets and collect fees from those who ran these markets. In the last decade these markets have come to dominate the economy and created a class of wealthy entrepreneurs, called donju, who were much more efficient and productive than most government managers. Despite that North Korea still lacked a proper banking system with essentials like checks, credit cards and electronic money transfer. In the last few years North Korea has attempted to introduce electronic payments via cell phones, a “mobile money” system that has transformed the lives of people in many poor nations where there were few bank branches or ATMs. In North Korea most potential users of mobile money distrusted the North Korean state bank, which was the only bank available and all money for use by the mobile money must be deposited in the government-controlled bank. The government has manipulated that system, at the expense of the average North Korean, that few people will put a lot of money into a government bank and no foreign banks are allowed to operate in North Korea.

North Korea was always a barter or cash economy but that was difficult when there were fewer barter or government payment in goods transactions and more of the economy depended on cash. Despite several efforts to ban the use of the dollar, or even the Chinese yuan, the government was forced to relent, and allowed the use of dollars and the less frequently seen euro.

The use of dollars had other advantages because since 1990 North Korea has been the major producer of counterfeit American hundred-dollar bills. These North Korean "super notes" were very good but by 2015 over 600,000 of the North Korean fakes had been detected and taken out of circulation. Many more were not caught and are still in play. After 2015 fewer North Korean supernotes were detected and the more recent ones were unable to keep up with the constant improvements the U.S. made in American paper currency, making it easier to spot fakes and more expensive for counterfeiters to profitably match the real thing.

Only about fifteen to twenty percent of the fakes get grabbed in the U.S. As a practical matter, the counterfeiters find it easier to pass the phony bills outside the United States, especially in Asia. Typically, the counterfeiters will "sell" their counterfeit bills, as such, to others at a discount. Thus, in out-of-the-way parts of the world, where there are fewer people who can spot a good counterfeit, the bad bills become a secondary currency. This happened in North Korea. In many countries U.S. currency, even if it's possibly counterfeit, is seen as more reliable than the local stuff. But in North Korea the hundred-dollar super notes were illegal and many North Koreans became adept at spotting the fakes. These were often referred to as $70 bills because that was their worth in North Korea, unless you got caught by the police and sent to a possibly fatal term of hard labor in a prison camp.

North Korea has long had an edge in distributing its counterfeits because it could ship them, as diplomatic mail (which is not subject to inspection) to their embassies. There, embassy officials could sell the currency to local gangs for distribution. It’s not that easy if you are operating out of the North Korean embassy, which has also been used for distributing illegal drugs produced in North Korea and for all sorts of illegal schemes. The North Koreans must be careful even when operating out of their own embassies or using personnel with diplomatic immunity. Get caught too many times and your embassy is shut down and North Korean diplomats expelled. This has limited how many of these super notes they could sell. In practice the North Koreans move their embassy distribution to other countries if the local police become too much of a problem. If the North Koreans can successfully copy new hundred-dollar bill designs they have a hot product and there is much demand in many countries where there is a North Korean embassy. Figuring out how to make convincing fakes of the new hundred is a priority project for the North Koreans because the various embargoes, and continuing domestic economic problems, mean foreign currency is more precious than ever.

Despite that, after 2010 it became too expensive for the North Koreans to profitably produce hundred-dollar super notes and the North Koreans switched to other currencies. In addition to improved security in the new American notes, the U.S. made it more difficult for the North Koreans to gain access to some of the key materials used in the authentic notes. Meanwhile, enterprising North Koreans began counterfeiting the 5,000 KPW notes. At the time the dollar was worth about 5,000 KPW and the fake KPW notes never really caught on.

Among the many items less available in North Korea, because of the sanctions and now covid19, is foreign currency. Over the last ten or fifteen years, more and more businesses and consumers in North Korea have preferred to use U.S. dollars or Chinese yuan for all transactions. The North Korean currency is increasingly avoided because the government keeps printing more of the won than the economy can handle. This creates inflation and even domestic markets prefer to sell goods for dollars or yuan. Since before the covid19 lockdown in January 2020, a dollar cost 8,000 -8,500 won while a yuan cost 1,200-1,500 won. These exchange rates have been stable. In late 2017 one yuan cost 1,400 won and one dollar cost 8,500. Three years earlier it was 1,300 won for one yuan and 8,200 won per dollar. The yuan is preferred by many customers at markets as it is easier to get your change in yuan because many get yuan in small bill denominations across the border. The use of dollars at markets is technically restricted and usually reserved for major purchases. Since 2018 there has been less foreign trade and less opportunity to get more foreign currency into the country. North Koreans are being forced to use the North Korean won, which is still shunned by many because of government manipulation.

Even government officials now realize, because of recent experience, that just printing more won provides only the illusion of economic improvement and does longer-term economic damage. Many officials have adopted free-market attitudes. For example, the current recession has reduced activity at the legal markets. That means fewer merchants paying market stall fees to local officials. Such fee income has grown enormously over the last decade and currently totals over $100 million a year nationwide. Paid in cash, preferably dollars or yuan.

 


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