THE CASHIER scans the bar code and says, “49,000 won, sir.” After this, the customer opens his wallet and looks for four 10,000 and nine 1,000 notes. We have faced similar situations more than once in the grocery store. Just by imagining this kind of situation, one can easily ask: can’t this be easier? It can, and it will be possible soon enough due to the issuing of the new 50,000 bill this year. According to the Bank of Korea’s announcement, a 50,000 note is to be introduced before this summer, with the design of Shin saim-dang, a beloved female figure among Koreans. Since issuing a new bill has not been done for more than 30 years, many people are curious about its usage and influence in our society. In order to unravel such questions, The Yonsei Annals interviewed four prominent figures in the field of economics, along with summarizing the bullet points of the research paper produced by the Bank of Korea, to provide an in-depth analysis of this issue.
(1) May 2, 2007: Plans for issuing large denomination bills
- The necessity of issuing:
Currently, the maximum face value bill, 10,000 is too low when considering incomes, prices, and the present size of the Korean economy. Therefore, the Bank of Korea finds the need to harmonize the maximum face value with our economy to solve these inconveniences and inefficiencies by introducting higher denomination notes.
- Type of bills and designs:
A 100,000 and a 50,000 bill planned to be issued with a design agreed by numerous examinations and investigations.
- Date of Issue:
New bills expected to be issued in the first half-term of 2009.
(2) May 8, 2007: Standpoint of the Korea Independent Commission against Corruption (KICC)
- The government and the Bank of Korea have been maintaining a prudent stance in the controversy over issuing large denomination bills. However, after an in-depth discussion in the National Assembly, in Dec. 2006, they reached a conclusion to resolve this issue.
- In relation to this, KICC expressed concerns then about the negative effects that the new bill would have on anti-corruption integrity measures and requested to delay the issue. Understanding these concerns, the National Assembly agreed to address the issue by preparing complementary measures.
(3) Dec. 31, 2007: Decided to issue both 100,000 and 50,000 notes
- The Bank of Korea ultimately decided to issue new 100,000 and 50,000 bills in the first half of 2009.
100,000 gray, 50,000 yellow would be the main color
- Design (Figure):
100,000 Kim-gu, 50,000 - Shin saim-dang
(4) Jan. 22, 2009: Cancellation of issuing the 100,000 note
- Following the request of the Bank of Korea, the 100,000 note’s release will be called off.
- The previously suggested 50,000 note will be issued as planned.
The Bank of Korea
Ha Sung-keun (Prof., Dept. of Economics, Yonsei Univ.)
Annals: Why do governments issue large denomination bills?
Ha: Generally, when the magnitude of a country’s economy grows, the more notes are needed in order to conduct trade. Such a growth in demand results in the need to issue large denomination bills. Until now, Korea fulfilled those needs by checks that are issued by traditional banks. However, the process of issuing checks involves high expenses and inconvenience. To solve such problems, the government needs to issue bills that have higher face values, like the about-to-come 50,000 note in Korea.
Annals: Is now a good time to issue a new note?
Ha: This policy is well-timed; actually, it seems a bit late. Moreover, it was also appropriate to delay the issuing of the previously planned 100,000 note. The current economic crisis is resulting in the circulation of many new notes. In a time of crisis, printing additional money will not result in inflation. However, after overcoming the crisis, there is a possibility of inflation, or even high-inflation. Issuing large denomination bills can create expectations of high-inflation among investors. As a result, to stabilize the monetary value after the economic crisis, the government should maintain fiscal discipline in currency management.
Annals: Will there be any changes due to the advent of a new note?
Ha: Significant changes are not expected. There are concerns about the increase of illegal fund transactions due to these notes’ convenience compared to the past. However, due to the improvement of capacity management by the central loan, I expect no great disruptions due to an expanded underground economy.
Annals: Due to this policy, differences of opinion about redenomination have arisen. What are your thoughts about this issue?
Ha: Redenomination is a policy of modifying the monetary unit. For example, abbreviating our “won” into one out of a thousand, the current \10,000 would turn into one “won”. However, this can be dangerous, since it can change the relative cost of real assets, resulting in economic distortion. Considering this fact, redenomination can result in many side effects when an economy is struggling with high-inflation and an increase of asset values. In this sense, the proposed redenomination in 2004 was inappropriate. However, in this period of economic crisis, with a slowdown of inflation and stabilized real estate costs, redenomination is worth being considered.
Huh Chan-guk (Senior Research Fellow, Korea Economic Research Institute)
Annals: What importance does the new 50,000 note have?
Huh: Currently, the highest face value in Korea is 10,000. This note was first issued in 1973 considering the economy of that time. Since then, 30 years have passed and, along with the passage of time, the volume of Korea’s economy has grown approximately more than 100 times. A larger economy means higher prices of commodities. However, with no change in the face value of “won,” people had to experience the inconvenience of paying for high price products with many 10,000 notes. The new 50,000 will lift this burden of possessing many small bills, along with reflecting the size of our expanded economy.
Annals: We currently have checks. Why do we need notes?
Huh: The value of both checks and notes are the same; however, their role in the economy is different. Checks are issued by traditional banks, whereas notes are issued by the Bank of Korea. Since the Bank of Korea is managed by the government, it can be said that notes are issued by the government. Notes last longer compared to checks, since checks mostly return to the bank that issued them in 2 to 3 weeks. Once returned, used checks are abandoned or reissued, resulting in additional expenses. Therefore, one can see that checks are inefficient in terms of regulating the flow of currency, along with the increase in costs.
Annals: What about the growing usage of credit cards? Does that not reduce the need for issuing notes?
Huh: The frequency in use of credit cards is remarkable, and will be greater in the future. Nevertheless, credit cards have limits in users: non-adults cannot use them. The 2003 credit-card crisis showed the harmful effects that credit cards have when their usage and users are not managed properly. Therefore, credit cards cannot be the dominant means of payment. Moreover, is it not better to have various payment methods? Just in case you do not have either cash or a credit card.
Chung Sung-Tai (Senior Economist of the Financial Research Dept., LG Economic Research Institute)
Annals: This issue has been discussed since 2004. Why do you think it took so long?
Chung: It always takes some time actually to practice a policy, whether it be small or big. It took more than four years to examine and investigate issuing the new \50,000 note. As many people say, the policy does seem to have been introduced a bit late. However, the important thing is not the issuing itself, but is rather that we consider why we need new notes: why, and for what purpose?
Annals: What kind of effects does issuing large denomination bills have?
Chung: Although some worry about the side effects of making a new note, I personally think there will not be huge changes in our society. Actually, it can help the society, since we currently face a possibility of deflation. Psychological expectations of the new note could prevent us from suffering from deflation in the future. Other than that, influences might occur due to various political and social reasons.
Annals: Is there an example of other countries that have issued such new bills?
Chung: Large denomination bills are mostly used in developing countries that suffer with high inflation but do not have concrete economic plans to solve this. These countries, such as Zimbabwe, try to avoid the problem by issuing large bills; but, as you see, the results mostly turn out to be failures. In the case of developed countries, they do not need to undergo such a process because most of them already have large bills. Korea is a backup group in this policy.
Annals: Other than this policy, what plans do we need to solve the current economic crisis?
Chung: Suggesting any economic policy is hard, since the economy is always affected by social and political issues. However, to suggest one: Korea should change its way of marking the foreign exchange rate. The “won” should be the standard when assessing the value of a dollar in Korea’s market. Nevertheless we use the dollar as a standard to assess our own money, the “won”. No other country does this.
Kim Hyo-seuk (Member of National Assembly, Democratic Party)
Annals: There was a controversy about this issue in 2004, and now, in 2009, it finally is in operation. Could you tell us about the process?
Kim: Comparing the values of the won-dollar, Korea will be the only country in the OECD to have four zeros. When considering the principal international currencies, one can easily find that other countries have less zeros than Korea. Bearing this in mind, at that time I proposed a concept called “Redenomination” in order to cut off some zeros. However, many concerns were raised, especially about the potential problem of inflation and possible side effects. Moreover, the expenses involved seemed too great a burden. Therefore, the assembly gave up redenomination and proceeded with another approach, which is the current proposal: issuing large denomination bills. This policy was suggested with the hope of simplifying the circulation of money and I hope it will achieve this when these notes actually begin to be used.
Annals: Despite the effort, the 100,000 was unexpectedly excluded. What are your thoughts about this?
Kim: I am not satisfied with the exclusion of the 100,000 bill. The official position of the government is that Dokdo is missing in the painting of the Daedongyeo map, which was planned to be used as the back design of the 100,000 note. Therefore, we cannot make further progress. However, before the announcement, some conservative groups sent a petition to the government opposing the publicly agreed Kim Koo design. Then they suddenly suggested former president Park Chung-hee as an illustration for the new 100,000 bill. Overall, the economic issue turned into an ideological conflict. If a certain design was the problem, then the government and the Bank of Korea should have suggested an alternative. Excluding the 100,000 for the reason mentioned above is nothing apart from ridiculous.
Annals: Some raise concerns about the potential side effects of issuing large bills (inflation, tax evasion, bribery etc.). To prevent this, what should be done?
Kim: Since we are putting in place a new policy, concerns are understandable. However, inflation seems to be irrelevant. Inflation was a subject of debate when we discussed redenomination. Actually, countries in Europe, when they adopted the Euro, suffered from inflation, Nevertheless, we shall issue new and larger bills, and since this is to reduce inconveniences in the circulation of money, I believe that it will not affect the price of commodities. Problems of tax evasion and bribery may result from such a change, and these should be guarged against with the new note.
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As researcher Chung mentioned during his interview, every policy, whether it be an economic or social one, needs enough time to operate effectively. It took a couple years to place fuel in the engine for a new note. Now it is time to start up the engine, step forward, and believe that this car is going to run properly.
Another economic issue: Redenomination
Redenomination is the process whereby a country's currency is recalibrated due to significant inflation and currency devaluation. Certain currencies have experienced redenomination a number of times over the last century for various reasons. For example, the Bulgarian “lev” was redenominated due to inflationary pressures at the end of the Second World War. After the redenomination, one new “lev” was equal to 100 old levs. The “lev” was redenominated 3 times in the 20th century. A recent example of redenomination occurred when the euro was introduced and the denomination of many European securities had to be changed to the “euro.” Korea also had controversies over redenomination in 2004, but this was not put into operation.
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In the past, the Korean government provided several reasons for delaying the issuance of higher denomination notes. However, the Ministry of Strategy and Finance finally settled on the issuance of 50,000 notes earlier this year. Even though the issuance of the new bill will bring many changes, and will have great effects on the society’s economy, most people are only aware of, and interested in, the designs of the new bills. To broaden readers’ understanding, this month's cover story, rather than focusing only on the appearance of the new bill, looks rather at economic experts’ views. This should expand students' comprehension of the new note’s broader societal implications.
Lee Suh-hye, Current Affairs Div.