Redenomination

The term “redenomination” refers either to a change in the number of zeros associated with a given currency, or it can apply to the introduction of a new currency. On January 1, 2005, Turkey slashed six zeroes from its currency. One million of the old Turkish lira converted to one of the new Turkish lira (Economist, August 2004) Before the redenomination, 1 euro equaled 1.8 million Turkish lira. After the redenomination, 1 euro equaled 1.8 new Turkish lira. In July 2008, Zimbabwe slashed ten zeroes from its currency (US Fed News Service, July 2008). At the time of Zimbabwe’s redenomination its currency was trading a 110 billion Zimbabwe currency to one U.S. dollar. When a currency is redenominated, balance sheets, debts, and financial portfolios are adjusted accordingly.

The introduction of the euro can be viewed either as the introduction of a new currency or a redenomination but it raised many redenomination issues. Debts and balance sheets in displaced European currencies had to be redenominated in terms of the Euro. Each government enjoyed certain autonomy in deciding the redenomination process for their own currencies. The French and Italian authorities decided that their debt would not have any decimal places after redenomination whereas German authorities used decimal places. The timetable allowed governments to implement redenomination anytime between 1999 and 2002.

More commonly, redenomination refers the removal of zeroes from a currency. There are several reasons why countries undertake redenomination. One obvious reason is that it simplifies the mathematics of currency transactions. Extra zeros put a burden on accounting and statistical records, data processing software, and payment systems. From political and psychological perspectives, slashing zeroes wipes out evidence of past hyperinflation and monetary chaos, and serves as a commitment from government that uncontrolled inflation is a thing of the past. Redenomination may represent the finishing touches on tough but successful economic reform measures. Less common is the case where governments use redenomination to confiscate resources. Laos only gave its citizens one day to exchange old currency for new currency in 1976. The Soviet Union in 1991 and Nicaragua in 1988 only gave citizens three days to swap old currency for new currency (Mosely, 2005). In these situations, some citizens will not succeed in getting their old, worthless currency exchanged for the new currency. The loss to the citizens left holding the old currency becomes revenue to the government.

Between 1960 and 2003, developing and transition economies redenominated currencies on 60 different occasions (Mosely, 2005). In 14 of these cases of currency redenomination, only one zero was removed. In nine cases six zeros were removed. The median redenomination removed three zeros. Nineteen countries redenominated only once, and ten countries redenominated twice. As of 2003, Brazil has redenominated six times, the former Yugoslavia/Serbia five times, and Argentina four times (Mosely, 2005). A few countries have added digits to their currency: South Africa, 1961; Sierra Leone, 1964; Ghana, 1965; Australia, 1966; the Bahamas, 1966; New Zealand, 1967; Fiji, 1969; the Gambia, 1965; Malawi, 1971; and Nigeria, 1973. Adding digits makes the currencies more comparable to a key currency such as the U.S. dollar. Triple digit inflation or higher often leads to redenomination, but not always.

Japan has debated redenomination for the yen. In 2008, the yen often traded around 110 yen per one U.S. dollar. The introduction of the euro prompted concern that the yen’s stature as an international currency might suffer from new competition. A sluggish Japanese economy in the 1990s encouraged Japanese policy makers to consider the advantages of redenomination. In 1999, the ruling Liberal Democratic Party formed a committee to evaluate the idea of removing two zeros from the yen.

Among highly industrialized countries, Korea has the highest exchange rate with the U.S. dollar. The U.S. dollar is equal to more than 1000 Korean won. South Korean Officials have also discussed the possibility of redenomination.