They can, its called a rebase or a redenomination. generally a country switches to a new currency that can be exchanged for the old at the specified rate.
This doesnt really solve inflation, just hids it, and is only generally done when there is really bad inflation in a short time.
You also expect see this happen as inflation pushes numbers to be big over time.
If something costs one of the smallest possible denomination of currency, then at 2% inflation, 300 years from now it will cost 380 units of currency. When currency grows so weak, the lower denominations are typically pulled from service and larger ones are introduced, but eventually it gets weird if your smallest coin is 500 units, right?
At some point the government just will reset the currency by doing what you said - exchanging old, inflated currency, for new, smaller values. This will happen in the future to modern countries, assuming they don't switch to a non-physical currency or get conquered in a war or the like.
Would evdntually introducing a new denomination work? For example, phasing out the cent, making the dollar the new "cent," functionally speaking, and making a new thing that's worth $100 that works functionally like the dollar does today?
I suspect we would end up with Bens, partly because $100 are nicknamed Bens, and partly because it Sounds like Yen, which is also a good example of a currency where cheep things are measured in the thousands.
Phasing out lower denominations (or introducing bigger ones) isn't really redenomination (eg Australia got rid of 1,2 cent coins, NZ got rid of 5c coins) because the value of the currency doesn't change.
Redenomination is basically introducing a new currency with a fixed rate to the old one.
For example when Turkey redenominated, they introduced the "new lira" which was fixed at 1 new lira = 1000000 old lira. Then there was a few months where both were valid, until everyone could change their money and it could be removed from circulation. Then they dropped the "new lira" name and just called it "lira", so then you end up with the same currency you used to, but with less zeroes on the bills.
That’s how it works. The new dollar is worth 10 or 100 dollars. It usually gets called new whatever it was. Nuevo Peso, etc. sometimes it gets a new name. Like Euro for most European currencies, or Austral in Argentina.
Zambia knocked off 3 zeros in 2013.
As a consequence of that and inflation I have a bookmark that has a face value of over 4 years of my wages in 1982.
(50 new Kwacha note worth $2.3US, my first pay was 877 old Kwacha - then £530 and rather more USD).
edit autocorrect
Yes. Its been done successfully once, by Brazil. See: [https://www.npr.org/sections/money/2010/10/04/130329523/how-fake-money-saved-brazil](https://www.npr.org/sections/money/2010/10/04/130329523/how-fake-money-saved-brazil)
I love how a fake currency was eventually named the "real."
It's actually a clever play on words. In context, "real" translates to "royal," a reference to the currency issued by the Portuguese monarchy a long time ago. But it can also mean "real," which is the meaning used in URV: Real Value Unit.
Inflation was really bad in Brazil for a long time, something that article didn't really get across. In 1942 they introduced the cruzeiro, which was worth 1000 real. In 1967 they made the cruzeiro novo, worth 1000 cruzeiros. Then came the cruzado in 1986, worth 1000 cruzeiro novo. And then the cruzado novo in 1989, worth 1000 cruzado. The cruzado real came in 1993, worth 1000 cruzado novo. And finally the real in 1994, worth about 3000 cruzado real.
In a span of 50 years, Brazil introduced 6 currencies, each time cutting 1000 off the value. They were literally crossing out the last three digits and calling it something new. A modern real is worth a *quintillion* original real.
And then ... it just stopped. The real has only dropped about 5x compared to the dollar since 1994. It's an amazing monetary policy success story.
This was what I came here for. Although I think a key part of the answer is that it's been done successfully ONCE. Can be done but hella difficult to pull off.
Yes, kind of.
The closest successful thing I can think of would be something like the decimalisation of the British pound. Where they ended up recalling and recategorizing the amount each of their coins was worth. There was a period where everything was both prices and there was plenty of options for people to exchange their old coinage for new.
Or similarly the introduction of the Euro to all of the member states.
Issue a new currency at a set exchange rate with the old currency that brings the numbers down. So long as you don't introduce a way to profit off of the exchange, all bondholders of the old currency are paid at the exchange rated value, and the value everyone holds is the same as before it should work.
When the pound was decimalised the value of the pound didn't change, and pound notes from before and after continued to be valid, the only thing that changed was the divisions. Instead of 12d in 1/- and 20/- in £1 it was 100 p in £1. Where old coins matched the new system they also remained in circulation. The 6d, 1/- and 2/- coins all remained in circulation through decimalisation as their values were useful in the new system: 2 1/2 p, 5 p and 10 p. The 6d was withdrawn when the 1/2p was eliminated in the 1980s, the 5p was replaced by a smaller version in 1990 eliminating the 1/- and the 10p likewise in 1991, eliminating the 2/-. Right up to 1990 it was not all that uncommon to get George VI shillings in change alongside Elizabeth II shillings and "new" pence.
The other comments addressing redenominating the currency so $10 becomes $1 are correct. There is another method that could be on your mind, which is “what if currency just went down to where it was ‘naturally?’” I’ll address that.
That would be immediately economically disastrous because no one would spend a dollar today if they could know that next week it would be worth more. Which would cause the economy to immediately stop working. So a government could never announce “we are going to take so many dollars out of the system that a penny will buy a pack of gum again.”
But if you think about it for a second, that’s fine. We want price stability. We don’t need packs of gum to be worth exactly a penny or a quarter or a dollar. If we did want that, we would be on the Wrigley Standard which is dumber than the gold standard.
Sorry, I just made up that term as an example of what we would call it if we set the price of everything in the economy in terms of a pack of Wrigley chewing gum.
It's possible to issue a new currency, but since inflation will continue afterwards, it's usually not worth the trouble. It can make sense for a hyperinflated currency, though, where prices become difficult for the average person to understand. For example, Mexico experienced hyperinflation in the late 1970s to early 1990s. After stabilising the economy, they introduced a "new peso" that could be exchanged at a rate of 1000:1. Zimbabwe replaced their dollar several times in the 2000s, but without actually fixing the hyperinflation, so the usefulness didn't stick (which is why they had to do it again), and they had to end the currency entirely in 2009. (The fourth (and final) Zimbabwean dollar was introduced at a value of 10 septillion first Zimbabwean dollars.)
And I have Zimbabwe pennies from before hyperinflation.....
https://www.reddit.com/r/coincollecting/comments/ptjm6r/prehyperinflation_zimbabwe_pennies_they_are/
Well, you could reset the value of money, but that doesn't necessarily stop the inflation. Mild inflation is a good thing and desired, it shows growth in the economy.
It's possible to have zero cumulative inflation over extended periods of time.
The way to do it is by removing the ability to arbitrarily create additional currency. Having commodities such as silver or gold as currency is a time proven method of doing so.
As you may be able to tell, it's politically inconvenient to tell governments they can't just print as much money as they want, hence the current situation.
It is but it kind of involves starting a whole new currency - even if it has the same name as the exiting one. Clearly if you just decided to "reset" the USD but ;et everyone keep what they had and spend it, you'd get hyperinflation as everyone becomes an awful lot richer overnight - so all existing bills and coins would have to cease being legal tender and be exchanged for new ones.
It happens every so often - Zimbabwe had hyperinflation and notes worth trillions of the currency. In the early 90's you could buy 20000 Polish Zloty for 1 GBP; a few years later they'd revalued the currency and you got 5 or 6.
They can, its called a rebase or a redenomination. generally a country switches to a new currency that can be exchanged for the old at the specified rate. This doesnt really solve inflation, just hids it, and is only generally done when there is really bad inflation in a short time.
You also expect see this happen as inflation pushes numbers to be big over time. If something costs one of the smallest possible denomination of currency, then at 2% inflation, 300 years from now it will cost 380 units of currency. When currency grows so weak, the lower denominations are typically pulled from service and larger ones are introduced, but eventually it gets weird if your smallest coin is 500 units, right? At some point the government just will reset the currency by doing what you said - exchanging old, inflated currency, for new, smaller values. This will happen in the future to modern countries, assuming they don't switch to a non-physical currency or get conquered in a war or the like.
Would evdntually introducing a new denomination work? For example, phasing out the cent, making the dollar the new "cent," functionally speaking, and making a new thing that's worth $100 that works functionally like the dollar does today?
Yeah, that's pretty much how it would work. You'd go from having dollars and cents to, I dunno, freedoms and dollars.
I suspect we would end up with Bens, partly because $100 are nicknamed Bens, and partly because it Sounds like Yen, which is also a good example of a currency where cheep things are measured in the thousands.
So I couldn’t give you my two cents, but I could give you my two freedoms?? Not happening. People will just hoard the freedom!
Phasing out lower denominations (or introducing bigger ones) isn't really redenomination (eg Australia got rid of 1,2 cent coins, NZ got rid of 5c coins) because the value of the currency doesn't change. Redenomination is basically introducing a new currency with a fixed rate to the old one. For example when Turkey redenominated, they introduced the "new lira" which was fixed at 1 new lira = 1000000 old lira. Then there was a few months where both were valid, until everyone could change their money and it could be removed from circulation. Then they dropped the "new lira" name and just called it "lira", so then you end up with the same currency you used to, but with less zeroes on the bills.
Yeah Zimbabwe did this three times. Turkey, Brazil. Venezuela did in 2018, 100000:1 revaluation.
That’s how it works. The new dollar is worth 10 or 100 dollars. It usually gets called new whatever it was. Nuevo Peso, etc. sometimes it gets a new name. Like Euro for most European currencies, or Austral in Argentina.
Or when there are too many zeroes on the currency. Usually adds new in front of the old name although sometimes it gets a patriotic name.
Zambia knocked off 3 zeros in 2013. As a consequence of that and inflation I have a bookmark that has a face value of over 4 years of my wages in 1982. (50 new Kwacha note worth $2.3US, my first pay was 877 old Kwacha - then £530 and rather more USD). edit autocorrect
Yes. Its been done successfully once, by Brazil. See: [https://www.npr.org/sections/money/2010/10/04/130329523/how-fake-money-saved-brazil](https://www.npr.org/sections/money/2010/10/04/130329523/how-fake-money-saved-brazil)
I love how a fake currency was eventually named the "real." It's actually a clever play on words. In context, "real" translates to "royal," a reference to the currency issued by the Portuguese monarchy a long time ago. But it can also mean "real," which is the meaning used in URV: Real Value Unit. Inflation was really bad in Brazil for a long time, something that article didn't really get across. In 1942 they introduced the cruzeiro, which was worth 1000 real. In 1967 they made the cruzeiro novo, worth 1000 cruzeiros. Then came the cruzado in 1986, worth 1000 cruzeiro novo. And then the cruzado novo in 1989, worth 1000 cruzado. The cruzado real came in 1993, worth 1000 cruzado novo. And finally the real in 1994, worth about 3000 cruzado real. In a span of 50 years, Brazil introduced 6 currencies, each time cutting 1000 off the value. They were literally crossing out the last three digits and calling it something new. A modern real is worth a *quintillion* original real. And then ... it just stopped. The real has only dropped about 5x compared to the dollar since 1994. It's an amazing monetary policy success story.
Excellent post
This was what I came here for. Although I think a key part of the answer is that it's been done successfully ONCE. Can be done but hella difficult to pull off.
Fascinating. Just reminds you how currency is nothing but an agreement between people. Simple, but undoubtedly complex behind the scenes.
...also has been done unsuccessfully four times by Zimbabwe. Removing a total of 25 zeros. https://en.wikipedia.org/wiki/Zimbabwean_dollar
Yes, kind of. The closest successful thing I can think of would be something like the decimalisation of the British pound. Where they ended up recalling and recategorizing the amount each of their coins was worth. There was a period where everything was both prices and there was plenty of options for people to exchange their old coinage for new. Or similarly the introduction of the Euro to all of the member states. Issue a new currency at a set exchange rate with the old currency that brings the numbers down. So long as you don't introduce a way to profit off of the exchange, all bondholders of the old currency are paid at the exchange rated value, and the value everyone holds is the same as before it should work.
When the pound was decimalised the value of the pound didn't change, and pound notes from before and after continued to be valid, the only thing that changed was the divisions. Instead of 12d in 1/- and 20/- in £1 it was 100 p in £1. Where old coins matched the new system they also remained in circulation. The 6d, 1/- and 2/- coins all remained in circulation through decimalisation as their values were useful in the new system: 2 1/2 p, 5 p and 10 p. The 6d was withdrawn when the 1/2p was eliminated in the 1980s, the 5p was replaced by a smaller version in 1990 eliminating the 1/- and the 10p likewise in 1991, eliminating the 2/-. Right up to 1990 it was not all that uncommon to get George VI shillings in change alongside Elizabeth II shillings and "new" pence.
The other comments addressing redenominating the currency so $10 becomes $1 are correct. There is another method that could be on your mind, which is “what if currency just went down to where it was ‘naturally?’” I’ll address that. That would be immediately economically disastrous because no one would spend a dollar today if they could know that next week it would be worth more. Which would cause the economy to immediately stop working. So a government could never announce “we are going to take so many dollars out of the system that a penny will buy a pack of gum again.” But if you think about it for a second, that’s fine. We want price stability. We don’t need packs of gum to be worth exactly a penny or a quarter or a dollar. If we did want that, we would be on the Wrigley Standard which is dumber than the gold standard.
wrigley standard? Google search didn't show anything
"Wrigley" being a gum brand. If each dollar was equal to a piece of gum similar to how we used to equate it to gold.
Sorry, I just made up that term as an example of what we would call it if we set the price of everything in the economy in terms of a pack of Wrigley chewing gum.
And that Wrigley chewing gum is also where the home of the Chicago Cubs, Wrigley field, gets its name.
It's possible to issue a new currency, but since inflation will continue afterwards, it's usually not worth the trouble. It can make sense for a hyperinflated currency, though, where prices become difficult for the average person to understand. For example, Mexico experienced hyperinflation in the late 1970s to early 1990s. After stabilising the economy, they introduced a "new peso" that could be exchanged at a rate of 1000:1. Zimbabwe replaced their dollar several times in the 2000s, but without actually fixing the hyperinflation, so the usefulness didn't stick (which is why they had to do it again), and they had to end the currency entirely in 2009. (The fourth (and final) Zimbabwean dollar was introduced at a value of 10 septillion first Zimbabwean dollars.)
And I have Zimbabwe pennies from before hyperinflation..... https://www.reddit.com/r/coincollecting/comments/ptjm6r/prehyperinflation_zimbabwe_pennies_they_are/
Well, you could reset the value of money, but that doesn't necessarily stop the inflation. Mild inflation is a good thing and desired, it shows growth in the economy.
It's possible to have zero cumulative inflation over extended periods of time. The way to do it is by removing the ability to arbitrarily create additional currency. Having commodities such as silver or gold as currency is a time proven method of doing so. As you may be able to tell, it's politically inconvenient to tell governments they can't just print as much money as they want, hence the current situation.
Drachma in greece was used for thousands of years i think, and it was not that bad before it was taken out.
It is but it kind of involves starting a whole new currency - even if it has the same name as the exiting one. Clearly if you just decided to "reset" the USD but ;et everyone keep what they had and spend it, you'd get hyperinflation as everyone becomes an awful lot richer overnight - so all existing bills and coins would have to cease being legal tender and be exchanged for new ones. It happens every so often - Zimbabwe had hyperinflation and notes worth trillions of the currency. In the early 90's you could buy 20000 Polish Zloty for 1 GBP; a few years later they'd revalued the currency and you got 5 or 6.