Redenomination
Categories: Forex
The best things in life may be free, but we still have to pay money for everything else. That’s why it’s so handy that we can just look at a currency bill and know how much it’s worth. Think about it: if we need to put five gallons of gas in the car at $3.50 per gallon, and we’ve got a twenty-dollar bill in our pocket, we know we have enough in cash to cover our purchase. It’s a great system.
But sometimes, that great system breaks down. If an economy’s inflation rate skyrockets out of control—and we’re talking, like, 1,000% inflation or worse, not the 3.1% we tend to freak out about here in the U.S.—then the value of that nation’s currency can take a major nosedive. That’s because the higher inflation is, the more things tend to cost, which makes the relative value of the currency we use to buy those things go down. Let’s say that gallon of gas that cost $3.50 before now costs $3,500.00. Kind of makes that twenty in our pocket look a whole lot less useful.
Anyway, when this ratio gets too far out of control, a country will sometimes consider doing a little something called redenomination. “Redenomination” is a change in the value of a currency, and it’s usually a reduction in value designed to combat hyperinflation. For example, in 2005, Turkey issued a new lira that was worth one million old lira. In 2006, Azerbaijan issued a new manat worth 5,000 old manat. Although these are both relatively recent examples, redenomination has been going on for centuries.
There are other reasons a country might redenominate. Sometimes they do it to decimalize their currency, which can make it easier to exchange it. For example, in 1971, the UK introduced a new penny that was worth 2.4x the old penny, largely because it’s a lot easier to do money math when all the various currency denominations are easily divisible. 100 pennies is equal to one dollar, ten single dollar bills is equal to one ten-dollar bill, etc. A country might also redenominate for political reasons, or because they’ve joined a new economic union that necessitates it, like when the EU and euro came onto the scene. Our own dollar hasn’t technically been redenominated, though it has gone through some other changes and facelifts over the years, like most actual Americans.
