What is Redenomination?
Redenomination is the process whereby a country's currency is recalibrated due to significant inflation and currency devaluation, or when a country adopts a new currency and needs to exchange the old currency for a new one at a fixed rate. Redenomination is exchanging old currency for new currency, or changing the face value of existing notes in circulation.
Certain currencies have been redenominated a number of times over the last century.
- Redenomination is when the value of a currency is revalued or recalibrated due to a substantial change in the buying power of the currency, or the joining of a monetary union where one currency needs to be revalued as another.
- In the case of hyperinflation, old notes are typically replaced by new notes as the old notes become of little use to buy products which are becoming more and more expensive.
- After redenomination, old notes may still circulate for a time, but are usually exchanged for the new redenominated currency.
While inflation is the main cause behind a country redenominating its currency, decimalization and monetary unions are also forms of redenomination.
When redenomination occurs, old banknotes and coins are typically taken out of circulation or have a fixed value against new notes which have the recalibrated value.
When redenomination occurs a new value is established for new banknotes/coins based on the old notes. For example, 1,000 old Zimbabwe dollars may be converted to one new Zimbabwe dollar. This is actually what happened in Zimbabwe in 2006. Typically people redeem their old currency for the new currency. Although the old currency may still continue to circulate, it will be at 1/1,000th the value of the new currency, in this case.
When hyperinflation is involved, redenomination becomes necessary because it requires too many old notes to facilitate commerce effectively. For example, in Zimbabwe, the small bills formerly available become essentially useless if it requires a truckload of them to buy a loaf of bread which may cost five million Zimbabwe dollars.
Redonimation may also occur when countries join a monetary union, like the Eurozone, and start using a currency like the euro instead of their own. When the euro was introduced in 1999, countries had to change their currency from a local one to the euro. This process is in effect a denomination because the value of the country's banknotes is changing. For example, the Irish pound was converted to euros at a rate of 0.787564 pounds per euro.
Initially, ten countries adopted the euro in 1999, with the largest currencies taken out of circulation being the Deutsche mark, the Spanish peseta, and the French franc. As of 2019, there are 19 nations that use the euro, with Lithuania being added in 2015 which exchanged Lithuanian litas for the euro.
Example of Redenomination in Zimbabwe
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 would 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%.
Several redenominations occurred within the span of a few years starting in 2006. In that year, 1,000 old dollars (ZWD) could be exchanged for one new dollar (ZWN).
In 2008, as inflation remained at astronomical levels, 10 billion ZWN could be exchanged for one dollar of the new currency (ZWR). This was the second redenomination. At this time, foreign currencies began to be widely used and accepted (and in some cases required) to buy goods since retailers and businesses preferred receiving more stable U.S. dollars (or other widely used currencies), over ZWR.
As inflation continued, the country printed larger and larger banknotes, with ten zeros being added by late 2008.
In 2009, a third redenomination occurred, with one trillion ZWR being exchanged for one dollar of the new currency (ZWL). Despite the multiple redenominations, the inflation continued and ZWL continued to lose its buying power. By 2009 the U.S. dollar was the primary currency used in the country, and the Zimbabwe dollar mostly stopped circulating.
In 2015, the country began the process of abandoning the ZWL altogether and instead just using the U.S. dollar.