Misconceptions and Facts About Redenomination

Redenomination simply means changing the existing currency unit. For example, if the won were redenominated at 1/1,000, the current 1,000 won would become 1 won. In other words, it means removing the zeros.

Simply declaring that these zeros will be removed does not in itself create any economic problem. Only the unit in which the prices of goods and services are expressed changes. Since only the unit in which goods and services are denominated changes, there is absolutely no change in the relative prices of goods and services. Accordingly, there is also no change in the economy’s real variables, such as income, prices, exchange rates, exports, and imports.

For redenomination to succeed, the “three no’s principle” must be observed. This principle means no limit on the amount of old and new currency that can be exchanged, no limit on the exchange period between old and new currency, and anonymity in the exchange of old and new currency.

If the three no’s principle is not observed, property rights are violated. Relative prices among goods and services change, thereby affecting real variables. If limits are imposed on the amount exchanged and the exchange period, people holding old currency will be unable to use all of their assets. If anonymity is not guaranteed in the exchange process, people who fear that their asset position will be exposed will try to avoid the exchange, resulting in distortions in the economy.

In Korea’s case, it is not desirable to implement redenomination. It could be carried out if the benefits of redenomination were greater than its costs. However, the most important factor in implementing redenomination is trust in the government. Without trust in the government, it will fail. Moreover, it must be kept in mind that if redenomination is pursued together with other political or economic objectives, it will inevitably be accompanied by a severe economic shock.

I. The Meaning of Redenomination

II. Redenomination and Currency Reform

1. The Difference Between Redenomination and Currency Reform

2. Misunderstandings and Truths About Redenomination

III. Case Analysis of Currency Reform

1. Why Koreans Confuse Redenomination with Currency Reform

2. The 1st Currency Reform in 1953

3. The 2nd Currency Reform in 1962

IV. The Motives for Redenomination

1. The Motives for Redenomination as Seen in Foreign Cases

2. An Explanation of the Motives for Redenomination

V. Conclusion

References

Wiki:

https://www.cfe.org/w/bbsDetail.php?&idx=32

Original title: 리디노미네이션에 대한 오해와 진실

Author: Jae-uk Ahn

Date: 2019-06-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=2&idx=20225