DEFINITION of Redenomination
Redenomination is the process whereby a country's currency is recalibrated due to significant inflation and currency devaluation. Certain currencies have been redenominated a number of times over the last century.
Another way of thinking about it is, redenomination changes the value of a financial security that occurs when a country's purchasing power had fallen substantially.
BREAKING DOWN Redenomination
While inflation is the main cause behind a country redenominating its currency, decimalization and monetary unions are also forms of redenomination.
Probably the most famous redenomination has been the Zimbabwean dollar. Beginning in the early 20th century, Zimbabwe experienced periods of hyperinflation where prices rose by astronomical levels. The inflation rate was so high that the government chose not to publish it for fear it wold cause chaos. In 2008, it was estimated inflation went from 100,000% to over one million percent, and then two months later to 250,000,000%.
The price rise was so fast than in a period of three years the largest denominated note went from the 1000 ZWN to the 1,000,000,000,000 (one trillion) ZWL. Between these two redenominations it introduced a 1,000,000 ZWL.
The redenomination was so severe that the country began to legalize foreign currency, and in 2015, the government announced the currency as a fiat currency with the plan to switch to the U.S. dollar 12-months later.
Redenomination is not just about changing the value of a single currency. When the euro was introduced in 1999, countries had to change their currency from its local one to the new European single currency. This process is in effect a denomination because the value of its banknotes is changing.
Initially, ten countries adopted the euro in 1999, with the largest currencies taken out of circulation being the Deutsche Mark, the Spanish pesata and the French franc. There are now 19 nations that use the euro, with the most recent being Lithuania that traded in Lithuanian litas for the single currency.