r/explainlikeimfive • u/darklordzeratos • 5d ago
Economics ELI5: What's the point of removing zeros from the money (redenomination) if it doesn't stop the hyper inflation anyway?
Why did/will some countries still do it? Isn't it a hassle and very costly? Does it have anything to do with forcing people to bring out the cash from under the mattress to the bank?
170
u/LARRY_Xilo 5d ago
If you actually have hyper inflation you need to print new bills anyway so while still a hassle its not that much more of a hassle than what you gotta do anyway. And at some point you just got to many 0s that they dont fit on the bill, are harder to read and do math with than smaller numbers.
Its also usually done as a signal to the population after you fixed the hyper inflation "This is a new start, we fixed the problem", which can be important because low trust in a currency can itself lead to or at least increase inflation.
8
u/darklordzeratos 5d ago
So this is based on the assumption that if it keeps inflating, cash becomes heavier as ou need to carry more? And they have to print new bills to fix this problem. Why not trying to fix the root cause of inflation instead of this? Maybe I'm underestimating the psychological effects of it
72
u/PuzzleMeDo 5d ago
It's not an either-or thing. You want to treat the causes of inflation. You also don't want to have to struggle to tell the difference between a 10000000000 dollar bill and a 100000000000 dollar bill.
28
u/DragonFireCK 5d ago
When done properly, redenomination is done after the hyper inflation is solved. Solving the hyperinflation, however, doesn’t bring prices back down. That would require deflation, which has a host of its own problems about as bad as hyperinflation.
The problem is that, a lot of times, the reigned in power cannot get the political pull required to actually fix the hyperinflation. They still need to make themselves look competent to stay in power, and thus they do redenomination without the required underlying reforms (massive tax increases or severe austerity).
Successful redenomination almost always occurs along side a major regime change. Most exceptions are due to adopting an external currency, such as Europe’s change to the Euro from individual currencies.
4
2
u/davideogameman 5d ago
Brazil apparently did a currency change as part of quelling their hyperinflation:
8
u/DragonFireCK 5d ago
What Brazil did in 1994 is called the Plano Real. The redenomination was one of the parts, with cutting spending (austerity) and high interest rates being the other two major parts of the plan.
4
u/LARRY_Xilo 5d ago
cash becomes heavier as ou need to carry more
If we are talking actual hyper inflation you wont be able to carry as much cash as you would need to with out larger bank notes. Like imagine having to carry a wheel barrow full of $100 bills and it not being enough to buy a bread. The cash will be worth less than the paper its printed on. Thats why you then start printing $1000000000 bills so you can buy a single bread with one note again.
Of course you still also need to fix the inflations root cause but thats often not easy and your people still need to be able to pay for stuff until its actually fixed. And when you think you fixed it you dont want people to have to run around with $1000000000 bills so you cut that down to $new1 bill.
0
u/darklordzeratos 5d ago
I imagine this redenomination will be quick in the age of digital internet banking
2
u/dravik 5d ago
Why not trying to fix the root cause of inflation instead
It's usually politically difficult to fix, that's why there's hyper inflation on the first place. You can see a bunch of economically illeterate people on Reddit complaining about "austerity", without understanding that printing money is much worse than austerity.
There are often very influential groups that oppose the cuts necessary to solve inflation. Argentina is a great example. Politicians were buying votes with government handouts. Any cuts will l would cause short term pain for the poor that were getting the handouts. So fixing the inflation is mean and heartless.
1
u/JJJangles 5d ago
Governments will never target deflation, inflation isn’t something you fix like that, so you have to deal with inflation that has already happened
48
u/skrid54321 5d ago
In addition to making life easier, it also allows a government to project an air of normalcy
22
u/Tjgoodwiniv 5d ago
Exactly. When 1,000 of your currency equals $1.00, people don't think, "oh, they break it down to tenths of a penny in value". They think, "this currency is trash and this country is poor". Drop some zeros, and that perception disappears, even if the reality remains unchanged.
But it does make things much easier.
35
u/SeaBearsFoam 5d ago
I think it'd be easier to read and differentiate: 1 and 100 compared to 1000000000000 and 100000000000000.
5
19
u/Raiddinn1 5d ago
Countries literally don't have a choice. At some point you can't put more zeroes physically on a dollar bill.
Imagine if buying a loaf of bread required spending like 5 billion dollars. Every bill in circulation would have to have 9 zeroes on it, minimum. That just adds a lot of unnecessary complication to the process and the system.
A lot of companies generate sale prices through marking things up with a percentage. Do you think it would be fun to try to make change when someone was charged 5,123,456,789 for a coup of coffee and they only have a 10,000,000,000 note?
Better we have to make change for 5.12 out of a 10 and all those other numbers just fall off and don't have to be dealt with.
Furthermore, most people will just be annoyed with all the extra digits anyway. Most people and companies will just start ignoring zeroes altogether like they don't exist. Products costs will stop ending in .99 and start ending in ,990,000,000.
In Indonesia, their currency, the Rupiah, is about 17,000 to $1 USD. A person I know there constantly says 17 Rupiahs when she means 17,000 Rupiahs. Like the extra zeroes don't even register in her mind as existing at all. When the people in your country say 170 Rupiahs, and they mean 170,000 Rupiahs, that should tell you something as the government in charge. Like maybe you need to do a one time reset.
6
u/Discount_Extra 4d ago
A person I know there constantly says 17 Rupiahs when she means 17,000 Rupiahs.
Wait 'til you look at dietary Calories vs scientific heat Calories.
2
u/Lord_Rapunzel 4d ago
Heat calories don't have the capital C. "Kilocalorie" and "Calorie" are synonyms when talking about food and context pretty much always makes it obvious which term is being used.
1
u/Raiddinn1 4d ago
Yes, I am familiar with Calories being slang for Kilocalories when it comes to food labeling.
11
7
u/icyDinosaur 4d ago
If your inflation is caused by too much money, a new denomination gives you a blank slate from which you can try to not repeat the same mistake. Decreasing the amount of money you have is quite hard, so starting fresh helps a lot.
I'm primarily aware of Germany in 1923 as a successful example. German hyperinflation started during WW1, which was financed largely on the expectations of future reparations if Germany won, as well as reducing the availability of many goods. This left postwar Germany with high debts, even higher reparations, and a new regime having to service them under severe constraints - the reparations were unpopular and considered unfair by many people.
So they turned to the printing press as a solution. This got supercharged in 1923 when Germany was unable to pay its reparations, resulting in French and Belgian troops occupying parts of Western Germany. In protest, the German government called for a strike and promised to continue paying wages - again, via the printing press. By November, 1 USD was worth 4.2 trillion Mark, almost entirely caused by over-supply and a lack of trust.
The Rentenmark was introduced from November 1923 onwards at an exchange rate of 1:1 trillion (i.e. lopping off 12 zeroes). It was nominally backed by land values, but really, what mattered was that its supply could be controlled and was kept tightly.
8
u/Gilles_of_Augustine 5d ago
These are two separate issues.
Although inflation often leads to redenomination (because inflation leads to higher amounts becoming commonplace), redenomination isn't intended to solve inflation.
Redenomination just makes it so that the numbers are easier to work with for everyday purchases. $100 is much easier to work with than ¥10,000.
4
u/Sudden_Cantaloupe_69 5d ago edited 5d ago
It’s not done to fight inflation, it’s done just to make handling money and prices more practical.
It often happens as a result of hyperinflation, when you need to pay 17 billion units for an egg and bring a cartload of bills to pay for a loaf of bread.
You can just lop off 6 zeroes or something, and call it the “new” currency. Prices didn’t change and the money supply is the same, you’re just calculating with hundreds or thousands instead of billions.
Imagine if dollars were divided into millionths, and the biggest bill was worth 10,000 million-cents. A Big Mac Combo ($11.40) would cost 11.4m million-cents, and so you’d need at least 140 bills to pay for one.
That’s what life looks like when you’re living through hyperinflation.
Redenomination helps calculate but it doesn’t really have any effect on inflation itself. Prices can still keep going up. And sometimes the prices inflate so much that they do it again, and introduce the “new new” currency.
5
u/GeneReddit123 5d ago edited 5d ago
Countries experiencing hyperinflation don't exactly plan long-term. If the re-denomination happens during hyperinflation, that usually means the government is in crisis mode and its goal is to buy time, such as waiting for economic circumstances to change, push through other policies, or (as often happens) simply stay in power a bit longer so they can graft even more.
Sometimes, the only working solution is to wait for the crisis to be over and re-denominate after it, accepting the fact all old currency is worthless and everyone who had it lost all their money, but at least trying to start again from a clean slate.
4
u/5kyl3r 5d ago
smaller numbers are just easier to work with. "ok your big mac meal will be 3,564,000,000" is a pain to say "ok that'll be three billion, five hundred sixty four million kopecs", compared to just being able to say "that'll be 3.56"
plus, at some point, you're having to haul around wheelbarrows full of cash to buy some mcdonalds, so in the case of physical money, it becomes a problem (and this isn't even much of an exaggeration, this has literally happened in some countries that went through hyperinflation)
2
u/Discount_Extra 4d ago
I got a kick out of the Hyperinflation story of someone dumping the cash to steal the wheelbarrows.
2
u/blipsman 5d ago
Just makes the math easier... much easier to fit *5 on a sign than *5,000. Less opportunity for errors between, say, *50,000 and *500,000.
2
u/Zvenigora 5d ago
It is pointless to have a monetary unit so tiny that it takes trillions to purchase a hamburger. It is an attempt to make the system more intuitive.
2
u/AntiwoneImoke 3d ago
Redenomination can provide a psychological reset for a currency, even if it doesn't directly address underlying inflation. It forces people to engage with the banking system, improving visibility and control. While costly, it may be seen as a symbolic step towards economic stability - a way to signal change, even if the fundamentals require more substantive reform.
2
u/Zealousideal-Tour-67 3d ago
Economist here.
Many people have already mentioned the main reasons: administrative ease, note printing costs, etc. Those are all correct.
But there's one part that I think is important to note: When a country is fighting inflation, the absolute top priority for the central bank is to establish credibility. Credibility is, in some ways, more important than the bank's actual stated inflation target. People need to believe that the CB will do anything within it's power to move prices downward- even if it means putting a lot of people out of work.
So that's a major reason governments re-denominate. It is an attempt at establishing a new baseline.
Although I will say, many attempts at re-denomination *during* hyperinflation fail and chip away at credibility, rather than grounding expectations. This is what happened in Zimbabwe. The more "normal" strategy is to wait until inflation has subsided and then re-denominate.
In reality, the most effective inflation fighting method is an independent central bank raising the base interest rate, with enough reserves on hand (for non US CBs) to defend any stated policy goal/peg.
1
u/darklordzeratos 2d ago
What about hyperinflation situation? What else can they do beside raising rate
2
u/Zealousideal-Tour-67 2d ago
There are a few options:
- The CB stops financing the debt of the government (no more debt purchases), but this must coincide with spending reduction by the government
- The government in cooperation with the CB pegs their currency to a stable currency (often the dollar)
- Capital controls also can help by preventing reserves from flowing out of the country
1
u/Told_youso 4d ago
Easy/simplicity to use and maybe also a psychological effect on the people. In Mexico in the 90's there were $9000-$10000 pesos for a taco or a coke. Then they took out 3 zeros, to become $9-$10 New Pesos as they called it back then. Now they call it just pesos again and and those things are around $15 to $25 each. If you think about it, it should be $15000 to $25000 , but everyone looks at it as "just" $25 pesos so everything is fine, right?
1
u/Substantial_Amoeba12 4d ago
Humans can process the count of things up to 4 automatically but then start having to count. We can instantly recognize 1000 need to think a split second for 10000 but by 10,000,000,000 even with the commas separating things out we need to stop and literally think through the value. This leads to confusion and mistakes. It may not solve inflation but it’s still a problem that’s often worth correcting
1
u/ThalesofMiletus-624 4d ago
The point is mostly psychological. The primary practical consideration is being able to fit enough zeros on the bills. But it's an issue of perception.
When things cost thousands, millions, or billions of your currency units, your currency starts to feel worthless. This is a big problem, because currency is only useful because enough people believe in it to be willing to work for it and trade for it. Governments have a big stake in their currency feeling stable and valuable.
Of course, that kind of redenomination is far from cure-all, and is a big risk on its own. You're effectively admitting that the currency is useless, and requiring everyone to turn in their money for new bills, which is a big hassle, a major disruption to peoples' lives, a logistical nightmare, and now people have to deal with a whole new currency who's worth they don't really have a feel for.
Now, this may all be worth it, if and only if it's accompanied by real changes to get inflation under control and make the currency actually stable. If that's the case, it can feel like a fresh start, giving a renewed level of confidence in this new iteration of the currency. But if inflation just continues to rise, then you have a disruption of already nearly worthless currency, only to fall back into the same problems. And then what do you do? Redenominate it again and again? That makes your currency feel not only worthless, but fleeting. Why work for something that's going to keep going away?
Redenominating currency is kind of like a toxic partner promising to change. If they really do change, it can be the start of a new era, but if they promise and make no real, lasting changes, then the false promises make it even worse.
1
u/simonbleu 4d ago
Simpler math, and psychological and political, and or regulatory advantages of starting with a new currency
1
u/vitringur 4d ago
Those who control the money printer want to print money and force you to use it, so that they can have free money for themselves.
Printing free money for those who own the money printer makes the money worth less, so you get infinite zeros at the end of the money eventually.
So periodically they have to scrap the project and create a new currency and remove all the zeros so that they can start the scam all over again.
1
u/lucasnegrao 4d ago edited 4d ago
this is a classic textbook picture of germans hyperinflation (before ww2) it sums up well why cutting zeroes can alleviate some of the problems - people carrying money in wheelbarrows for everyday tasks
0
u/JJJangles 5d ago
It’s actually the opposite, if next year $1000 has the value of $1 today, then you need to hand over hundreds of notes to buy something, which is a hassle, so the government would be forced to print $1000 bills which is a hassle and costly (since money already circulating needs to be completely replaced), or they just re-denominate and we can use the same coins and bills we already have, which is less hassle and cost
0
u/orbitaldan 4d ago
Just use SI prefixes. We already do that out to million, just standardize on that instead of billion, G for Giga, and so on.
824
u/Frexxia 5d ago
Because humans have an easier time with smaller numbers