Thursday, June 11, 2009

The financial crisis in 1932 that took down absolute monarchy

A long lost cousin of mine connected with me on Facebook today making me a little bit homesick and thinking about my family from Sakolnakorn. I originally wanted to write about the year 1910 and some events that had rippled from the center to my hometown close to the border of the Mekhong.

I was looking through a history book for ideas about how to shape my post on 1910 but got sidetracked by an account of a "financial war" in the year 1932. It’s curious how we tend to overlook small details in history when it is overshadowed by larger events like the end of absolute monarchy and the birth of Thailand’s first constitution.

This small detail of how bad public financial management can put a government in a tough spot seemed to be a more worthy subject to write a blog post about to relieve myself a bit (just a teeny, weeny bit) of my self-imposed theme of economics which doesn’t seem to gather much attention here (yet still a point of interest close to my dear subject), so 1910 got pushed aside and here’s an interesting anecdote from the year 1932 in Thai history:

Anyway, the connection between 1910 and 1932 was that 1910 was when one of Thailand’s greatest king past away, leaving the country in a bit of a shock and vacuum. From the short period of 1910-1932 we saw two kings come and go.

King Prajadhipok didn’t expect to reign but many unfortunate events left him with a legacy of chronic problems, one of which was the finances of the state. The budget was heavily in deficit and the royal accounts a nightmare of debts and questionable transactions.

Pages 235 to 239 of David K. Wyatt’s “Thailand: A Short History” makes an interesting reread. So many echos of the present found in the past. I hope my readers can find the book on some dusty bookshelf, I don’t want to be accused of plagiarism or infringement of copyright.

So the Great Depression hits Siam and the price of rice dropped by two-thirds, inducing a spiral of reduced cash income, less taxes, credit falling apart, inability to buy retail goods and government expenditure cut by a third.

If Wyatt’s publisher’s reads me, I am asking permission to quote some words here and now (I know I can get away with a limited number of words):

“To make matters worse, a financial crisis developed as, under the prodding of the British financial adviser, Siam doggedly maintained the gold standard as the basis of its currency, while Britain abandoned it. This came to mean that Siam’s rice was priced much higher than competing rice sold in currencies that had left the gold standard. It also brought about a significant outlfow of gold from Siam.”

“The crunch came as the government prepared the budget for B.E. 2475, the financial year that was to begin April 1, 1932. Battles raged.....”

Public dissatisfaction, prophecies, drafted constitutions, coup d’etat and “Promoters” (49 military and naval officers and 65 civilians) later, history was made.

Debt and monetary standards, I wonder who’s going to be in government when that nasty knot unravels our system again.

Part II (added)

King Prajadhipok inherited a bad account he couldn’t undo coupled with complex incidences happening in and outside of Thailand. His administration’s inability to split the pie properly could have been the crucial tipping point for that important political change in Thailand.

Here’s my summary of the internal and external events that contributed to political malaise during that time:

  1. Huge budget deficits inherited from King Vajiravudh. Some of which were: 8% of 1910’s budget went to the new King’s coronation ceremonies costly nationalist to build Rama VI’s personal power base, such as, for a special palace guard and Wild Tiger Corp (a paramilitary group). Wild Tigers Corp was most expensive... nearly 20% of royal budget, 1.6 million out of the 96. million state budget-10% royal expenditure; 23% to military expenditure; Privy Purse and Ministry of the Palace were consuming nearly 10 percent of the annual budget
  2. Inability to find an accounting standard to control government expenditure causing power struggles within and between ministries and eventually laying off govt. work3. Financial mismanagement that aggravated the situation, such as borrowing from abroad, unpopular salary taxes, taxing land owned by peasants
  3. No policies for distribution of income, Thais becoming increasingly left out of economic activities dominated by Chinese and foreign merchants
  4. Lack of social investments, especially insufficient budget in support education, only 3 percent of the budget was allocated to education
  5. Rising affluence of Chinese minority accentuated by nationalistic sentiments, anti-Chinese and fear of communism among the Thais, anti-Japanese among the Chinese who had private schools and own press
  6. Only one dominant industry: rice export, controlled by Chinese merchants
  1. The post war environment, rise of nationalism, fear of communism, perceived threat of China’s proximity
  2. The great depression, price of rice fell
  3. Delayed exiting of the gold standard exchange regime, silver and gold just bled out of the country

One of the first things Pridi Panomyong and the People’s Party did once they took over government in 1932 was to propose an economic development plan. The Plan was rejected as being too socialist. Industrialization, however, was set into motion with establishments of a number of state enterprises. First being the Fuel Division of the Ministry of Defense which later became the Fuel Organization (1953), the precursor of PTT (so my posts are more connected than I thought). Other key state enterprises set up that was the beginning of industrialization (much earlier than the 60s as I originally thought) were: a spinning and weaving factory, also under the Ministry of Defense, to produce military uniform, later to become Siam Cotton Mill (1953); a paper mill; and a sugar refinery.

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