The Long Struggle: Indonesia’s Money History
Indonesia has a long history when it comes to money. It is considered a young country, having gained its independence less than one hundred years ago. Like any young country, it has faced numerous problems, including debasement, inflation, political instabilities, foreign debts, corruption, and much more.
To understand Indonesia, context is crucial. It is a vast country, spanning 1,904,569 square kilometers and comprising more than 17,000 islands. With a population of over 270 million people, it ranks as the fourth most populous country in the world. Indonesia is abundant in minerals, oil, unique flora and fauna, as well as other natural resources. Despite being a young country, the region has been known since ancient times as a trading port, a spice haven, and a strong naval force.
The form of currency in Indonesia has changed over time, transitioning from gold to bronze and eventually to fiat money. In this article, we will explore the monetary history of Indonesia and examine why it is important for Indonesian people to hold Bitcoin.
Ancient Kingdoms
In ancient times, before Indonesia was established as a country, it consisted of mini kingdoms. Among the larger ones were the Srivijaya and Majapahit kingdoms, which ruled between the 13th and 17th centuries. These kingdoms utilized gold as their primary currency. The Majapahit kingdom, in particular, was renowned for its wealth, with its troops adorned in gold, including gold spears, gold armor, and gold saddles.
Majapahit ruled over trade and possessed a formidable navy. The ambitious king of Majapahit sought to conquer additional territories, leading him to make a significant decision: replacing the gold coins with bronze coins imported from China. This marked the first instance of currency debasement recorded in Indonesia’s history. While Majapahit successfully expanded its territory, the debased currency introduced another problem: the circulation of counterfeit money made from tin within the kingdom. Eventually, the economy collapsed under the weight of counterfeit currency, marking the beginning of the empire’s downfall. Less than 100 years after Majapahit debased its currency, the kingdom met its demise.
Colonial Era
Indonesia boasts a wealth of spices and commodities, attracting traders from various nations who sought to monopolize this lucrative trade. The Portuguese, British, Spanish, and Dutch all vied for control and colonization of Indonesia. Eventually, the Dutch emerged victorious and established a trade monopoly through the Dutch East Indies Company (VOC).
Land ownership in Indonesia was a complex matter, with multiple parties laying claim to the same land. Ownership could be attributed to the ruling king, the cultivating farmer, or the occupant of a house situated on the land. Recognizing this opportunity, the VOC maneuvered to acquire harvesting rights, gradually asserting control over land ownership and establishing themselves as the dominant power in Indonesia.
As a company, the VOC held a special privilege granted by the Dutch empire: the authority to print money and collect taxes. Utilizing this power, the VOC introduced its own currency and began exerting control over the Indonesian population. They minted a coin called the Doit in an attempt to govern Indonesia’s economy. Unfortunately, the Doit, made of tin and copper, lacked the value and status of currencies like the Pound sterling, which was crafted from silver. Counterfeiting plagued the Doit, resulting in a 15 percent loss in its value during the VOC’s reign.
Indonesia’s profitability made it a lucrative land for the VOC, leading to widespread corruption that spiraled out of control. In 1779, the VOC went bankrupt due to rampant corruption, and the Dutch empire assumed control over Indonesia’s affairs.
The Dutch implemented forced plantation or slave labor that made Indonesia one of the world’s largest sugar producers. The Dutch had a clever way of going about this: they created public debt and borrowed money from its citizens 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 awaited them. And that’s how the Dutch got their cheap labor, and why Java Island became the most populous island in the world. Up untill 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 guilders in profit. The Dutch became one of the strongest colonial powers in the world.
In 1828, the Dutch founded De Javasche Bank (DJB) as the central bank of Indonesia. DJB’s main role was to mint gold coins and exchange gold. De Javasche Bank funded forced cultivation. Under De Javanesche Bank, the Dutch attempted to unify all currencies circulating in Indonesia into a single currency under the Dutch empire called the Gulden.
During the 1800s, Europe experienced a prolonged depression. This recession was triggered by falling stock prices, which led to a decline in commodity prices. The recession was a result of intense competition for commodities and an oversupply of these goods, leading to what became known as “spice bubbles.” The impact of these new price signals was felt in Indonesia around 1880 when commodity prices plummeted and famine spread throughout the region.
Japanese Occupation
Entering 1942, as a result of World War II, a conflict erupted between the Netherlands and Japan. The Dutch surrendered to Japan, who sought to gain the support and sympathy of the Indonesian population by portraying themselves as allies of Indonesia, despite that not being the case.
Japan liquidated De Javasche Bank and merged it with Nanpo Kaihatsu Ginko (NKG) to establish it as Japan’s circulation bank for Southeast Asia. Despite the liquidation, the Japanese army still required the expertise of the staff, most of whom were originally from De Javasche Bank. Consequently, the majority of NKG’s personnel were former DJB staff.
To maintain price stability, Japan continued using the guilder as the official currency in Indonesia. This was part of Japan’s strategy to exercise control over Asia through the use of Japan Invasion Money (JIM). Japan utilized the existing denominations (in this case, the Dutch Guilder) and printed approximately 3.3 billion Gulden JIM. Later, in an effort to garner sympathy from the Indonesian people, Japan changed the denomination from Gulden to Rupiah.
Due to their need for raw materials to support their industries and war efforts, Japan gained control over key commodities such as rubber plantations and rice production. Numerous previously-owned plantations, which were primarily operated by the Dutch, were destroyed and replaced with crops that served Japan’s wartime interests, such as jatropha plantations for biodiesel production. Many former landowners were coerced into working as unpaid laborers, participating in forced cultivation programs, or even serving as auxiliaries for the Japanese troops.
Early Independence
In 1945, the Hiroshima and Nagasaki bombs were dropped on Japan. Seizing the opportunity presented by the power vacuum, Indonesia declared its independence on August 17, 1945. However, achieving independence was not easy for Indonesia, as the allies, particularly the Dutch, sought to regain control over Indonesia and its abundant natural resources.
In 1947, the Netherlands secured a loan of $195 million from the World Bank, and in the same year, 145,000 Dutch troops were deployed to Indonesia to reclaim control (Rich, 1994).
To resist the allies, on October 30, 1946, Bung Hatta, the Vice President of Indonesia, announced that Indonesia would issue its own currency called ORI (Oeang Republik Indonesia). This currency was printed by Bank Negara Indonesia, the central bank established by the Indonesian government to rival the Dutch-controlled De Javasche Bank. ORI was fiat money, not backed by gold, and its exchange rate was set at Rp 2 = 1 gram of gold. However, without any underlying value, ORI continued to depreciate.
A currency war ensued. The Dutch seized the opportunity to attack ORI because the Gulden was stronger and had the backing of silver. Indonesian people also preferred using Gulden instead of ORI due to its higher value and stability. Money became a political and coercive tool. Accepting Gulden was seen as a betrayal to the nation, leading to the Indonesian army destroying and closing down the shops of merchants who accepted it. On the other hand, the value of ORI continued to decline rapidly. Within less than a year, 1 florin, which was equivalent to Rp 2, was worth Rp 500.
The Dutch government also attempted to undermine ORI by circulating counterfeit ORI money and creating obstacles to its circulation. The war between Indonesia and the Dutch impeded the circulation of ORI. To address the cash shortage, the Indonesian central government implemented a policy allowing local governments to print their own emergency ORI, known as ORIDA. ORIDA could only be used within specific areas, meaning that if the money was printed in Jogjakarta, it could only be used there.
So many currencies circulating in Indonesia created chaos within the economic system and reduced the fungibility of money. Each region began printing its own forms of payment, including money, receipts, coupons, and payment vouchers.
The circulation of ORI and ORIDA money became uncontrollable, starting from an initial circulation of Rp 323 million and increasing to Rp 6 billion by the end of 1949. Inflation in Indonesia spiraled out of control. The value of the largest denomination of ORI currency, 100, rose to 250 and then further increased to 600 within a span of 3 years.
This currency chaos caused confusion among the Indonesian people, as they were unable to safely preserve their wealth. This may have contributed to a growing trend of saving money in gold. If you were to ask grandparents who lived during that time, they would advise you to “buy gold and land” because gold was the only form of money that retained its value and was universally accepted.
Round Table Conference
In 1949, thanks to the encouragement of other allies such as the United States, military aggression came to an end through the signing of the Round Table Conference agreement. This agreement resulted in the Netherlands recognizing Indonesia’s independence, and Indonesia was now referred to as the United States of Indonesia under the rule of the Queen of the Netherlands. The conference addressed nine key points, and one of the most challenging aspects was that Indonesia had to assume all the debts of the Dutch East Indies.
The total debt amounted to 2.6 trillion guldens in March 1942, which increased to 3.2 trillion guldens by December 1945. Furthermore, an additional 5.9 trillion guldens were required to finance the military aggression against Indonesia (Zanden, Marks, 2012:282). The Indonesian people paid an incredibly high price for their independence, both in terms of their struggle and the burden of debt they had to bear.
The Indonesian government faced a heavy debt burden, which resulted in numerous financial problems and the devaluation of the Rupiah. In 1950, the Indonesian government came up with the concept of physically cutting Gulden banknotes. This approach became known as the Syafruddin Scissors. The idea behind this strategy was to devalue the Gulden and consequently “strengthen” the Rupiah.
Banknotes with a denomination of Rp 5 and above were subject to the cutting process. When the note was cut in half, the left side was reduced by half its value, while the right side could be exchanged for state bonds with a maturity period of 40 years.
The decline in the value of the rupiah exchange rate can be attributed to its status as pure fiat money without any underlying value. Initially, 1 gram of gold was pegged at Rp. 2, but after the implementation of the Syafruddin Scissors, the value dropped to Rp. 4.30, representing a decrease of 53%. Additionally, the government introduced dual exchange rates for the dollar. The official government exchange rate was set at $1 = Rp 3.80, while the rate for export-import activities was set at $1 = Rp 7.60 for exports and $1 = Rp 11.40 for imports. This policy imposed a significant burden on exporters, as it effectively imposed a 66.7% tax on their trade. The difference between these exchange rates was utilized by the government to cover the state budget deficit.
In 1951, the Indonesian government nationalized the central bank, De Javasche Bank, and renamed it Bank Indonesia. The government purchased shares of De Javanesche Bank at a price of 8.95 million Gulden, equivalent to Rp 3.22 billion. The stock price was 20% higher than the normal price. By nationalizing Bank Indonesia, the government gained control over the printing of money. During this period, the ORI currency was replaced with the Rupiah.
Guided Democracy and Economy
During the Sukarno government, government spending in Indonesia increased significantly. Sukarno, the country’s first president, had ambitions for Indonesia to gain international recognition. To achieve this, Indonesia hosted high-budget events such as the Asian Games, GANEFO, and the Non-Aligned Movement Conference. Sukarno also constructed various monuments throughout Indonesia as symbols of his glory and patriotism.
Furthermore, Malaysia’s independence triggered a confrontation between Indonesia and Malaysia, and Indonesia also made efforts to annex Papua and make it part of Indonesia. These actions further inflated Indonesia’s spending. The budget allocated for the Trikora operation, aimed at seizing Papua, alone consumed 24% of the total State Budget. It was later revealed that one reason for Indonesia’s persistent pursuit of Papua was the discovery of a gold mountain by three Dutch geologists, which was later acquired by the US through the Freeport company.
On July 5, 1959, Sukarno announced a Presidential Decree that shifted the direction of the Indonesian government towards Guided Democracy. Sukarno declared himself President for life and introduced the Nasakom ideology, which combined Nationalism, Socialism, and Communism. Additionally, Sukarno intervened in economic affairs and implemented the Guided Economy, centralizing all economic activities under the control of the central government, with the regions functioning as extensions of the center.
Under the system of Democracy and Guided Economy, the economic situation in Indonesia became increasingly chaotic. The Governor of Bank Indonesia also took part in the cabinet as the Minister of Central Bank Affairs. Furthermore, all banks across Indonesia were consolidated into a single entity known as the Sole Bank, following the principles of the Bank Berdjoeang doctrine. According to this doctrine, banks shifted their role to financing development projects initiated by various government departments.
Hyperinflation
Radical policies implemented in Indonesia further exacerbated the uncertainty in the economy, leading to a rise in inflation. In an attempt to address the inflation issue, the Indonesian government undertook a redenomination of the Rupiah in 1959, significantly reducing its value by 90%. For instance, Rp 500 was reduced to Rp 50, Rp 1000 became Rp 10, and even bank accounts with balances exceeding Rp 25,000 were frozen. Consequently, people’s savings suffered a sudden loss of 90% of their value.
This policy created panic among the population, as the announcement was made solely through radio broadcasts, resulting in limited awareness among the public. Those who were aware of the redenomination hurriedly rushed to the market, attempting to spend their Rp 500 and Rp 1,000 notes as quickly as possible. Consequently, market prices surged, and inflation became uncontrollable.
To combat inflation, the Indonesian government utilized foreign exchange reserves and gold to address the balance of payments. However, Indonesia’s gold and foreign exchange reserves showed a negative balance of US$3 million.
In 1966, inflation skyrocketed to 500%. The exchange rate of the US dollar on the black market surged from 1 USD equivalent to IDR 5,100 in 1965 to IDR 17,500 in the third trimester, and eventually reached IDR 50,000 by the end of the year. Inflation was estimated to be around 500–1000% during the period of 1960–1965, plunging the Indonesian people into poverty.
My father, who was 16 years old at the time, recounted that his family had to substitute bulgur for rice due to inflation. Each family received a ration of rice from the government, but the quality was poor, sometimes even infested with maggots. To obtain the rationed rice, people had to queue for hours, and each family was assigned a specific date to collect their share. His family had to be resourceful in searching for alternative food sources, often collecting snails from the Brantas River, foraging banana weeds, and even resorting to consuming bushes or leaves. Despite my grandfather being a businessman with various ventures such as a workshop or soap factory, his business went bankrupt due to inflation and economic stagnation. The soaring costs of raw materials rendered him unable to sustain his business.
On the other hand, my mother’s father was a civil servant. Civil servants were supported by the state, receiving rice rations and adequate salaries. It’s no wonder that parents during that era aspired for their children to become civil servants. Despite the inflation, the government increased the salaries of Indonesian soldiers by 500%.
The unstable situation was further exacerbated by the growing influence of communism in Indonesia. President Sukarno, known for his anti-Western stance, rejected foreign aid with his controversial statement “Go To Hell With Your Aid.” Sukarno received significant support from the Communist Party. On September 30, 1965, seven high-ranking Indonesian army officers were abducted and killed, leading to further political instability in the country.
In response to the events of the September 30th Movement in 1965, General Suharto, leading the army, initiated arrests and carried out massacres of members of the Indonesian Communist Party. It is estimated that there were at least 500,000 members of the party. Sukarno issued instructions through Supersemar, appointing General Suharto as the leader of Indonesia, thereby ending Sukarno’s term as president for life.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-owned company responsible for managing oil and gas, defaulted on its foreign loans due to mismanagement and corruption under the leadership of Ibnu Sutowo, a close ally of Suharto. To prevent Pertamina from going bankrupt, the Indonesian government intervened by printing more money, resulting in a bailout. However, this bailout significantly increased the country’s debt, nearly doubling it.
The Indonesian economy was also supported by the oil boom that occurred during the Iran-Iraq War in 1979, contributing to an economic growth rate of 53% to 70% between 1979 and 1983. However, the situation changed after 1983 when world oil prices declined. As a consequence, Indonesia faced devaluation, with the exchange rate shifting from $1 being equivalent to IDR 703 to $1 equaling IDR 1,600. The weakening of Indonesia’s economy was further exacerbated by falling commodity prices, which resulted in a slowdown in trade and investment. Concurrently, government debt continued to rise, putting a strain on the country’s financial resources and making it increasingly challenging to fund development initiatives.
Private Bank Fever
Indonesia needed to explore alternative avenues for improving its non-oil and gas economy, and two significant developments in this regard were Pakjun 83 and Pakto 88. Under Pakjun 1983, state banks were granted the autonomy to determine deposit interest rates, and credit limit provisions were abolished. As a result, banks became more flexible in extending credit to businesses.
Pakto 88 simplified the process of establishing private banks, requiring a capital of only Rp 10 billion (equivalent to approximately 9 million dollars at that time). This led to a surge in the establishment of new banks. According to records from Bank Indonesia, in September 1988, there were a total of 108 commercial banks in the country, including six state banks, 64 private banks, 27 regional development banks, and 11 joint venture banks. The total number of commercial bank branches during that period was 1,359. However, after the implementation of Pakto 88, by the end of the 1988/1999 financial year, the number had risen sharply to 1,525 branches. The peak of bank expansions occurred in 1994, with the number of private banks reaching 166, mixed banks totaling 40, and rural banks amounting to 9,196 units.With so many banks, fractional reserve banking went rampant.
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 the world of fractional reserve banking, banks have the ability to create money out of thin air. However, this practice comes with several inherent problems:
1. Misallocation of credit for speculation and the creation of asset bubbles.
2. Inflation resulting from the increase in the money supply.
3. Continuous debt dependency, as a decrease in borrowing leads to a reduction in the money available to service existing debts.
The frenzy of private bank establishment during this time also favored those close to Suharto. The Suharto era was plagued by corruption, with influential companies being controlled and owned by military personnel. The military played a significant role in Indonesia’s economic development, with many members holding strategic positions and corruption being widespread. To attain significant business ventures, one needed to have close ties to Suharto, his family, or friends of his associates. This resulted in a country filled with “cantillionaires” and kleptocrats.
Suharto and his inner circle indirectly benefited from borrowed funds from abroad that were channeled into their industries. Corruption was rampant, and according to the Global Report on Corruption 2004 by Transparency International, it was estimated that Suharto and his associates embezzled funds amounting to $15 to $35 billion dollars.
Asia Crisis
The start of the Asian Crisis actually originated outside of Asia. The “Reverse Plaza Accord” of 1996 was an agreement made by the United States, Japan, and Germany to rescue the Japanese manufacturing economy, which was slowing down due to the strengthening yen. In order to achieve this, they engineered a reversal to sharply decrease the exchange rate of the dollar, causing it to rise against other foreign currencies. The resulting liquidity flowed into the US stock market and also into asset markets in East Asian and Southeast Asian countries whose currencies were tied to the dollar, including Indonesia.
Prior to the Asia Crisis, many companies in Indonesia took advantage of the situation by borrowing cheap dollars while their liabilities were in rupiah. Additionally, most of the investments during that time were directed towards real estate. It was a period of prosperity, and the economy was thriving, leading to widespread wealth accumulation.
However, as a consequence of the reversal, East Asian governments and their associated financial institutions found it increasingly challenging to borrow US dollars to support their domestic industries and maintain currency pegs. These pressures reached their peak in 1997 when one by one, these countries were forced to devalue their currencies. The supply of Thai baht exceeded the market demand, causing investors to exchange their baht for dollars. The Thai government attempted to spend over $20 billion to maintain the baht’s pegged rate with the dollar but ultimately failed. Within a span of five weeks, the Thai baht lost over 20 percent of its value against the dollar. This led to a contagion effect that quickly spread to Indonesia and other countries in the region.
In response to the events in the Asian dollar market, the Indonesian government abandoned the fixed-rate exchange rate and transitioned to a free-floating rate, which caused panic among the Indonesian population. Under the fixed-rate system, Bank Indonesia was responsible for maintaining a constant value of the Rupiah by actively buying and selling foreign currency to manage changing supply and demand. With the adoption of a free-floating exchange rate, the value of the Rupiah became dependent on market forces of supply and demand.
In fear of the Rupiah’s value plummeting, people rushed to buy as many dollars as possible as a hedge. Within three weeks, the value of the Rupiah dropped from $1 being equivalent to Rp. 2,600 to $1 being equivalent to Rp. 13,600, and by May, it had nearly reached Rp. 16,000. Between July 2, 1997, and January 8, 1998, the Indonesian Rupiah depreciated against the dollar by 229 percent.
The Indonesian government attempted to stabilize the economy by raising bank interest rates, but this action further weakened the fragile banking system, especially with the influx of new banks following the implementation of Pakto 88. Through the Limited Cabinet Meeting on Economy, Finance, and Development and Production and Distribution, the government aimed to support healthy banks facing liquidity difficulties, while “unhealthy” banks would either be merged or liquidated. This support was provided through the Bank Indonesia Liquidity Assistance (BLBI) program, which was a collaboration between Bank Indonesia and the IMF.
During the 1998 monetary crisis, Bank Indonesia disbursed approximately 144 trillion in funds to commercial banks. Around 48 banks received BLBI loans. Initially, the Indonesian government gave these banks one month to repay the loans, but later extended the deadline to five years. Thirty-eight unhealthy banks were frozen, leaving Indonesian customers who had money in those banks suddenly unable to access their funds.
The involvement of the IMF in the Asian crisis further exacerbated Indonesia’s situation. The IMF provided a loan to Suharto’s government, but in return, Indonesia had to implement stricter monetary policies, such as raising bank interest rates, which caused a severe economic contraction. On May 5, 1998, as part of the agreement with the IMF, Suharto abolished subsidies for basic commodities, resulting in a 70% increase in prices for kerosene, electricity, and gasoline. This led to widespread panic and hysteria.
The crisis in Indonesia escalated into riots and violence, particularly targeting ethnic Chinese individuals. Many people, unaware of the full circumstances, sought someone to blame, and Indonesian-Chinese citizens became the primary targets. The parliament building in Jakarta was occupied by the people. On May 28, 1998, after ruling Indonesia for 32 years, President Suharto resigned from his position.
Bank Indonesia Liquidity Assistance’s Scandal
After the reformation, the repayment of the BLBI funds became an immediate priority for the borrowing banks. However, an audit conducted by the BPK revealed irregularities in the BLBI funds issued by Bank Indonesia (BI). The Financial and Development Supervisory Agency (BPKP) uncovered deviations in funds amounting to Rp. 54.5 trillion among the 28 banks that received the BLBI funds. As a result, there was disagreement regarding the government’s responsibility in providing a bailout.
In January 2020, a KPMG audit revealed that Rp. 80.25 trillion of the BLBI funds had been misappropriated. The Governor of Bank Indonesia, Syahril Sabirin, was detained as a suspect by the Attorney General’s Office. Subsequently, in November 2020, several officials from BI resigned from their positions. In 2001, a number of high-ranking bank officials who had received BLBI funds were arrested on suspicion of corruption, with many of them fleeing the country. As of 2021, the complete repayment of the BLBI funds has not been accomplished and remains an ongoing issue.
Bail-Out and Bail-In
In 2008, a subprime mortgage crisis occurred in the United States, which had a global impact, including on Indonesia’s economy. The flow of foreign investors’ funds into Indonesia stagnated, leading to a decline in the value of the rupiah against the dollar. In September 2008, Indonesia’s inflation rate reached 12%. To address the situation, the government injected Rp15 trillion into three state-owned banks in October 2008.
One of the troubled private banks during this period was Century Bank, and the government provided a bailout fund of IDR 6.7 trillion to support it. The government was concerned about the possibility of a bank run and hence agreed to provide the bailout fund. When Century Bank went bankrupt, thousands of customers became victims, such as Cahyadi Candra Mulia, who had IDR 5 billion in the bank but couldn’t access it. Furthermore, Century Bank was involved in several fraudulent investment practices, raising many questions about the bank’s bailout.
Indonesia also implemented a bail-in mechanism, as seen in the case of Asuransi Jiwasraya. Unlike a bailout, where the bank or private sector can request government assistance to cover debts through indirect taxes or money printing, a bail-in involves using customer funds to offset the losses experienced by the banks. The bail-in mechanism was officially established through the 2016 PPKSK Law.
Reflections
We have just delved into the extensive history of Indonesia, spanning from the royal era to the post-reform era. It is evident that over five centuries, the Indonesian people have endured various forms of suffering and difficulties stemming from inadequate financial policies and the politicization of money.
History has shown us that money serves as a political tool. An unstable monetary system can lead to political instability. Fiat money, which is currency issued by the government without a stable backing like gold or silver, is prone to easy devaluation. Take, for example, the 1946 ORI, which lost 53% of its value within just three years.
Fiat money is also susceptible to misuse. The temptation to print more money is far easier than engaging in productive endeavors or implementing policies to increase interest rates. The act of printing fiat money results in inflation, which ultimately harms society.
Inflation acts as a hidden tax that individuals have to bear in the future. Excessive inflation, as witnessed in 1966 and 1998, has caused chaos within the country, leading to widespread hunger and riots. These events unfold gradually and unexpectedly. The common thread among hyperinflation episodes worldwide is the excessive printing of money.
Money printing can fuel the rise of cantillionaires, kleptocracy, rent-seeking, corruption, and nepotism. Those with close ties to the government benefit from the influx of new money, whether through the stock market or investments. This environment becomes fertile ground for corrupt practices, as exemplified during the Suharto era.
Foreign loans also present a distinct set of challenges. Loans received from organizations like the IMF and the World Bank, which supported the Suharto government, had two sides to the coin. On one hand, IMF loans enabled the government to rebuild and restructure the country following periods of turmoil. On the other hand, the numerous loan conditions resulted in misguided policies and exacerbated issues such as inflation, currency devaluation, and high unemployment.
Why do Indonesian people need Bitcoin?
From examining history, we can observe that throughout various eras, from the kingdom era to the current COVID era, money has been susceptible to debasement through changes in material, counterfeiting, or poor policies. The Indonesian people require a form of currency that they can trust, one that cannot be corrupted.
Bitcoin, as the first form of incorruptible, non-inflatable, and non-fakeable money, addresses these concerns. Bitcoin is a digital currency created using cryptography and a hashing mechanism called Proof-of-Work, which prevents double-spending. It has a fixed supply and a transparent issuance schedule. With these features in place, individuals no longer need to worry about their money suddenly losing value due to an increase in its supply. Additionally, since Bitcoin is run on a decentralized network that can be operated by anyone, people need not fear being unable to access their funds or banks becoming insolvent.
Bitcoin is accessible to everyone; all that is required is an internet connection. There is no need for a bank, third-party involvement, or permits. Individuals can own Bitcoin with even a small amount of money. They can exchange their currency for Bitcoin, which can be divided down to 0.00000001, known as a “sat.” As of January 2022, 1 sat is equivalent to Rp 6, and a candy costs approximately Rp 100.
The main difference between Bitcoin and fiat money lies in their value dynamics. Bitcoin’s value increases due to its limited supply of 21 million coins. In contrast, the Indonesian government has printed over 2 Quadrillion Rupiah since gaining independence, and it is anticipated that more will be printed in the future. On average, Bank Indonesia has printed approximately 12% more Rupiah each year. Conversely, the supply of Bitcoin diminishes progressively every four years.
Bitcoin creates a separation between money and the state, which is a unique phenomenon in this world. By having money that cannot be controlled by the state, it becomes free from state interference, dictators, and kleptocrats.
Bitcoin offers privacy as transactions are conducted pseudonymously and cannot be reversed. Additionally, Bitcoin is resistant to confiscation, as long as the individual possesses the private key, making it impossible for anyone to seize their funds. Just imagine, in the event of another crisis, people can easily switch to a more reliable currency and safely leave the country without the fear of having their money confiscated or trapped in a financially unstable bank.
State of Bitcoin Adoption in Indonesia
In July 2021, around 7.4 million people in Indonesia were registered as crypto users, accounting for only 2.5 percent of the total population. In 2019, Bank Indonesia prohibited the use of cryptocurrencies, including Bitcoin, for payments. Cryptocurrencies like Bitcoin are classified as commodities that can be traded on exchanges.
There is significant potential for Bitcoin adoption in Indonesia, but it requires education to ensure that people don’t fall into scams or become overwhelmed by the complexities of ICOs, altcoins, and the noise surrounding cryptocurrencies. However, the most important aspect is for people in Indonesia to understand the value that Bitcoin offers, which is an incorruptible form of money with long-term stability.
Indeed, there is still a long way to go for Indonesian people to fully comprehend Bitcoin, and it may take time for Bitcoin to be accepted as legal tender in Indonesia. However, by learning from the experiences of countries like Turkey, Argentina, Venezuela, and Nigeria, we can see that Bitcoin provides a second chance for these nations. It offers an escape plan from the troubles associated with fiat currencies.
We are going to make it!
