During the 1980s and early 90s, a somewhat unusual system of special stores allowed some residents of North Korea to purchase everything from chocolates and footwear to luxury products like Japanese electronics and French perfume.
This seemingly capitalist exchange existed for a simple reason: the government wanted to encourage its citizens to spend foreign currency in the DPRK, so it implemented a system modeled on similar shops in the Soviet Union selling high-quality goods in order to obtain hard currency – shops which existed despite a well-established tradition of agitprop disparaging Western money.
Since the inception of the communist bloc after the Russian Revolution of 1917, the banknotes of capitalist countries – and above all, U.S. dollar notes – have been presented in official communist propaganda as an embodiment of all things evil.
These notes were viewed as capitalist greed incarnate, and so countless journalists – and even poets and writers – spent tons of ink on inflammatory invectives against the ill power of the capitalist currency.
Sergei Mikhalkov, better known as the author of both communist and post-communist versions of the Soviet/Russian state anthem, fumed in the 1940s: “Once you, the U.S. dollar, show up in any country, you bring poverty and death, and you are put into pockets by assassins and traitors of the motherland.”
However, this righteous hatred of U.S. banknotes was seldom shared by the economic managers and bankers of communist bloc countries. They understood perfectly well that, in order to run their economies efficiently, they badly needed currency to buy supplies and machinery from overseas. The convertible (or hard) currency of the developed capitalist economies was definitely preferable to the currencies of the fraternal communist countries.
Therefore, while propagandists and poets – the latter paid by the former – tried to outperform one another in inventing harsher invectives, governments of the communist bloc went to great lengths to acquire U.S. dollars, British pounds, German marks, Japanese yen, and so on.
U.S. dollar notes have been presented in official propaganda as an embodiment of all things evil
Most of the hard currency was acquired through foreign trade, usually by selling natural resources. However, there was another possible source of hard currency income, relatively small but by no means negligible: the hard currency in the pockets of individuals – both foreigner visitors and local citizens.
For a while, there had been attempts – at least in some countries – to simply confiscate foreign currency as well as gold and other precious metals. Such confiscation raids, targeting the households of the pre-revolutionary rich, were quite common in the Soviet Russia of the 1920s and the China of the 1950s. Yet as time went by, it dawned on the communist governments that it would be much better if they could somehow find ways to persuade people in possession of dollars and pounds to willingly spend their cash in state-run shops.
However, nobody in their right mind could expect these people to go to the regular state-run shops, which had very little to offer even in the more successful communist states – like, say, the relatively prosperous East Germany. In order to make sure that locals and foreign tourists would be willing to spend hard currency, the shops had to be special.
Hence nearly all communist countries settled on a simple plan: they established exclusive shops where the choice and quality of goods would be similar to the standards of the developed capitalist world, but where customers could use only hard currency or its local equivalent.
Governments of the communist bloc went to great lengths to acquire U.S. dollars, British pounds, German marks, Japanese yen, and so on
HARD CURRENCY SHOPS
The first shops of this kind appeared in Soviet Russia in the early 1930s and were known as Torgsin. This abbreviation stands for ‘trade with foreigners,’ but it is misleading since the Soviet Torgsin did not target foreign tourists, who were rare in the Soviet Union of the period, so much as local citizens in possession of foreign currency and, especially, gold and other precious metal. Back in the 1930s, there were still a number of people in the Soviet Union who used to be quite rich before the 1917 communist revolution and who somehow managed to keep some valuables through all the perturbations of the civil war and the revolution.
In subsequent decades, the system of hard currency shops in the Soviet Union underwent a number of changes, but by 1964, it took a rather stable shape, which existed until the collapse of the USSR. Around this time, the majority of other communist countries copied the Soviet system.
Basically, these systems consisted of two types of shops. First, there were shops which were open to foreigners and where foreign visitors could buy hard-to-get Russian souvenirs as well as high-quality consumer goods like they could find back home. In the Soviet Union, these chains were known as ‘Beryozka (Birch tree) shops,’ although in some non-Russian republics, equivalent shops had different names meant to appeal to foreigners with local ethnic roots – Kashtan in Ukraine, for example.
The second type of shops sold different consumer goods and targeted not foreigners but rather Soviet citizens who had access to foreign currency, largely because they worked overseas. The goods in these shops for locals were still far superior both in quantity and quality to what could be found in even the best regular shops in downtown Moscow.
The lucky owners of FTB checks could go to shops where Japanese tape recorders and high-quality stockings could be bought with little hassle
SOVIET LEGAL TENDER
When visiting hard currency shops, the Soviets were not supposed to pay with authentic foreign banknotes. As a matter of fact, it was illegal for any Soviet citizen to possess hard currency banknotes and any violation of this rule was punished seriously – up to the death penalty in some exceptional cases. Indeed, some people were executed for trading foreign currencies in the otherwise liberal and permissive 1960s and 1970s.
Instead of foreign banknotes, local customers in the Soviet Union were issued a peculiar type of legal tender known as ‘Foreign Trade Bank checks’ (cheki Vneshtorgbanka) or FTB checks.
Soviet citizens were normally required to exchange all currency at embassies before they returned home from overseas. In rare cases, when that was not possible, citizens had to exchange foreign banknotes within a very short period of time after returning to the Soviet Union.
There were three types of FTB checks: those issued in lieu of hard currency, in lieu of currency of the fraternal socialist countries, and in lieu of non-convertible currency of the developing world – like, say, India where in the 1960s and 1970s there was a large number of Soviet engineers and advisers.
The three types were not equal – the ‘white strip’ FTB checks, a substitute for hard currency, was much more powerful – but they all were far superior to humble rubles. The lucky owners of FTB checks could go to shops where Japanese tape recorders and high-quality stockings could be bought with little hassle, as long as you had the right type of tender, of course.
North Korean currency from 2002 | Photo: Wikimedia Commons
THE NORTH KOREAN MODEL
This system made sense: it attracted hard currency. So little wonder that it was emulated by other communist states – including North Korea. In 1979, the system of pakkunton (literally: ‘exchanged money’) was first introduced in North Korea.
This system clearly followed the Soviet FTB checks model. Sometimes it is compared with the Foreign Exchange Certificate (FEC) system which existed in China, but the North Korean pakkunton system predated its better known Chinese equivalent: the pakkunton were first introduced in 1979 while the FECs appeared in 1980.
There was, however, one noticeable difference between the Soviet and North Korean systems: in North Korea, control over hard currency was much less strict than in the Soviet Union. The possession of hard currency was seen as a relatively minor crime. To a large extent, this reality stemmed from the existence of a large and affluent community of ethnic Korean returnees from Japan.
In the late 1950s and 1960s, some 95,000 ethnic Koreans from Japan chose to migrate to North Korea. Very soon, they discovered that the real North Korea was very different from the beautiful country portrayed in glossy Pyongyang propaganda. However, they had no way to go back, so in order to have a relatively comfortable existence in the North, they began to ask their Japanese relatives money.
Needless to say, the North Korean authorities encouraged this behavior, so the government – technically, North Korea’s Central Bank – introduced pakkunton in 1979. Simultaneously, they opened a network of currency shops in Pyongyang and other major cities. It was assumed – correctly, one should expect – that the Japanese returnees would be much more likely to beg their more prudent relatives in Japan for gifts of money if they had places to spend that money.
In North Korea, control over hard currency was much less strict than in the Soviet Union
THE PAKKUNTON SYSTEM
The system of currency shops and pakkunton, currency which emerged in North Korea around 1979, essentially had two tiers. On top, there was a number of shops which sold goods not much different from what one would buy in the average Japanese store, albeit at a significantly higher price.
There were also shops which offered lower quality products, often produced locally. These relatively inferior products were still far superior to what could be found at regular North Korean shops – especially taking into consideration that, by the late 1970s, pretty much everything in North Korea was rationed rather than sold for money.
There were not only two types of shops but also two types of pakkunton. From 1979, there were ‘green pakkunton,’ which could be used in lower tier shops to buy things like, say, North Korean chocolate, pork, strawberries, kids’ bicycles, or good footwear. There were also the so-called ‘red pakkunton,’ which were accepted only in upper tier shops that also accepted real foreign banknotes, but initially only from foreigners. The owners could buy Japanese tape-recorders and video players, beef, and Chanel perfume.
To complicate things further, both the green and red pakkunton at that time were divided into two subcategories: pakkunton which were issued to foreign residents of North Korea as well as pakkunton which were issued to locals. However, this distinction seemingly existed for police control purposes only. In terms of purchasing power, both ‘local’ and ‘foreign’ pakkunton were equal – as long as they belonged to the same color class.
Pakkunton looked very much like regular North Korean currency, although the notes were much less worn out since they were more frequently replaced. The only difference was a small green (or red, depending on color class) stamp. The coins were also identical to local coins but were marked with a star. In 1988 though, during the next pakkunton reforms, the coins were replaced with paper notes, the smallest being 1 chon, or 0.01 won.
In 1988, the system was reformed. The two color classes were swapped. From 1988 onwards, the ‘green pakkunton’ were issued as an equivalent of hard currency while the ‘red pakkunton’ were made an equivalent of the non-convertible currency of communist and developing countries. The new color-coding makes sense since the U.S. dollar is green while the red color has proper revolutionary connotations. Additionally, from 1988 the pakkunton came to be issued by the Korean Foreign Trade Bank (Choson Muyok Unhaeng). Finally, after 1988 the pakkunton banknotes also looked different from local currency of equivalent nominal value.
In practice, the pakkunton could be bought and sold. It was illegal, but the police seldom bothered about this particular type of currency trade, so near pakkunton specialized shops of both types, one could always find professional money changers. Of course, a pakkunton was expensive: its market price reflected its high purchasing power.
In 1995 the third and final reform of the pakkunton system took place. At that stage, the difference between red and green pakkunton was abolished; the communist bloc had ceased to exist, so most of the ex-communist countries switched to convertible currencies.
GROWTH OF PRIVATE MARKETS
Unlike its Soviet prototype, which lasted for six decades, the North Korean pakkunton system was operational for a relatively short period of time – fifteen years or so. By the mid-1990s, it began to disintegrate fast.
The system made sense only when North Koreans could not freely buy what they wanted in regular shops and when shortage and/or strictly enforced distribution limited their consumer choice. With the rapid growth of private markets, the situation changed dramatically.
By the late 1990s, it had become possible to buy high-quality imported goods at the market – as long as one has enough money, of course. Simultaneously, it became much easier to change foreign currency into local money and, around this time, foreign currency began to gradually replace North Korean won, at least for larger transactions.
The dollarization of the North Korean economy began and gradually made the pakkunton system obsolete. Around 2002 – the exact date is unknown – it ceased to exist.
Edited by Bryan Betts
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Featured Image: CPC_2326 by nknews_hq on 2016-10-06 18:06:11