What is Redenomination?

Redenomination is the recalibration of a country's currency, typically due to hyperinflation and currency devaluation, whereby an old currency is exchanged for a new one at a fixed rate.

Key Takeaways

  • Redenomination is when the value of a currency is recalibrated due to a substantial change in the buying power of the currency.
  • In a redenomination, old notes are exchanged for new ones at a fixed exchange rate.
  • Hyperinflation is one reason a currency may undergo redenomination. Other reasons include decimalization or the country joining a currency union.

Understanding Redenomination

While significant inflation is the main reason for a country to redenominate its currency, other reasons include decimalization or joining a currency union. When redenomination occurs, old banknotes and coins are typically taken out of circulation and a new currency is issued. Sometimes, the old currency continues to circulate at a fixed value against the new notes.

When redenomination occurs, a new value is established for the new banknotes and coins. For example, in 2006, Zimbabwe redenominated its currency at a rate of 1,000 old Zimbabwe dollars to one new Zimbabwe dollar.

When hyperinflation is involved, redenomination becomes necessary because it requires too many old notes to facilitate commerce. Small bills essentially become useless if it requires a wheel barrel of them to buy a loaf of bread.

Redenomination may also occur when a country joins a currency union, such as the Eurozone, and starts using a currency like the euro instead of its own. When the euro was introduced in 1999, the 12 member countries first used the new currency in electronic payments and accounting. They then switched from their domestic bills and coins to the euro in 2002.

This process is in effect a redenomination because the value of the country's banknotes is changing. For example, the Irish pound was converted at a rate of 0.787564 pounds per euro.

Initially, 12 countries adopted the euro in 1999, with the Deutsche mark, Spanish peseta, and French franc among the largest currencies taken out of circulation. As of 2021, there are 19 nations that use the euro.

Example of Redenomination in Zimbabwe

Probably the most famous redenomination has been the Zimbabwean dollar, which circulated in Z$100 trillion bills—the largest denomination of currency ever issued—thanks to an annual inflation rate of more than 231 million percent.

The Zimbabwe government redenominated its currency several times starting in 2006. In that year, the country's first currency reform was launched in an effort to contain inflation. The Zimbabwean dollar was redenominated at a rate of 1,000 to one.

But inflation remained at astronomical levels. To keep pace, a Z$750,000 note was introduced in 2007. By the beginning of 2008, notes were circulating in Z$1 million, Z$5 million and Z$10 million denominations. Those face amounts were quickly dwarfed by a series of ever larger new bills. In July 2008, the government issued a Z$100 billion note, which could buy about three eggs at the time.

In August 2008, the government launched another redenomination. Old notes could be exchanged for new ones at a rate of 10 billion to one. Inflation continued unabated, and new issues of currency with staggering face amounts continued to appear. In January 2009, Z$10 trillion, Z$20 trillion, Z$50 trillion, and Z$100 trillion notes were issued.

In February 2009, the government redenominated a third time. Old currency could be exchanged for new currency at a rate of one trillion to one. By then, most people had quit the Zimbabwe dollar in favor of the U.S. dollar and South African rand.

Zimbabwe adopted a multicurrency system and dollarization in 2009. In 2015, the country formally abandoned the Zimbabwean dollar altogether. Bank accounts that held up to Z$175 quadrillion were paid a flat $5 USD. Bank accounts with amounts above Z$175 quadrillion were given 1$ USD for every Z$35 quadrillion held.