ABSTRACT
Before describing the nature of the economic watershed it must be stated that the popular thesis that the events of 1965 were caused overwhelmingly by economic factors is erroneous. Separate viewing of the financial crisis and the crisis of production in some sectors in 1965 helps to assess the policy priorities that were needed after 1965 and to judge the value of the policies that were actually followed. Moreover, the political upheavals that followed in 1965/6 could hardly be said to have facilitated remedies to the economic crisis. The ferocity of the military is evidence in itself that a non-economic crisis of severe proportions was occurring concurrently with economic decline. This chapter demonstrates that the financial crisis of 1965 was not caused by an economic crisis in the mass peasant economy wherein the vast majority of Indonesians find their livelihoods. Indeed, it could be said that the positive response of smallholders to new export opportunities delayed the foreign exchange crisis.
