Higher denomination on notes vs Inflation

Money is one of my favorite subjects. The invention of currency and it’s valuation system feels so magical. In this article, will try to dig down the relevance of demonstrations to inflation.

Currencies such as Vietnamese dong (VND), Hungarian forint (HUF), Japanese yen (JPY), South Korean won (KRW), Cambodian riel (KHR) and ect. are having higher denominations. That means, there are lot of zeros in their bank notes. Have you ever wondered the reason?

In fact, the denomination is just a number, it has no real meaning if there is no information is available. For an example,  as at today, 1 South Korean Won (KRW) is equal to 0.00092 US dollars (USD). 50,000 KRW bank note is the highest denomination which is equal to 46 USD roughly. Vietnam has 500,000 VND bank note, which is the higher denomination on bank note among the region, I suppose. As at today, 1 VND is 0.000044 USD. The value of the highest note is nearly 30 USD.

Therefore actually the higher denomination alone doesnt mean much.

It is a known fact that the inflation plays a major role on deciding the denominations. Does it mean that those counties are associated to high inflation economies. Not really, as mentioned above, the denomination is just a number, if there is no information related to the currency is available. The reasons for having such high denominations can be due to many reasons. Inflation being one reason though. Without having information such as denominations over the past periods it is not possible to decide if the currency is currently facing any inflationary effects of the economy.

For example, Japanese yen having high denomination, not because the economy of Japan is experiencing an inflation right now, but because it experienced devaluation of currency in World War II period. Same goes with the Vietnamese dong, (VND) in early 1980.

Taking Vietnamese dong, the economy of Vietnam maintained inflation rate of 3.2% in 2016[1]. That is pretty good value. But after 1975, there was a soaring inflation which reached above 450% in 1986. So the high denomination could be due to the inflation occurred in 1980s. Without that information, the higher denomination of Vietnamese dong is just a number.

It is a fact that German economy collapsed in early 1900s, after the World War I due to inflation. It hit 29,500% of monthly inflation rate in 1923[3]. How come at present they have lower denominations then? The reason is, in 1923 the currency was German Papiermark. Later Rentenmark replaced Papiermark at the rate of 1 trillion Papiermark per 1 Rentenmark.

Another good example is Hungary. In July 1946, it hit 207.19%, daily inflation rate. Hungarian pengo was the currency at that time and it has been replaced by korona, and then later korona is replaced by forint (HUF) which is the official currency of Hungary today. The highest denomination of a bank note is 20,000 HUF even though the inflation rate is 0.4 % in 2016[2].

Zimbabwe faced the same issue recently. At this moment the official currency is the US dollar. Zimbabwean dollar was discontinued in 2009 as the inflation rate reached sky high. The highest denomination was 1.0e14. (14 zeros after 1)[3]. The daily inflation rate was 98%.

Another reason for having high denominations could be, not having decimal part in the currency. South Korean won or Japan yen have no decimals in the currency. Therefore when it is required to denote the smallest amount, higher denomination is required, even though it is not possible to buy anything using 1 KRW.

Apparently, it is not possible to compare currencies using the denomination. No currency gets stronger or weaker based on denomination of the notes, even though it feels that way. When taking alone, it is just a number and nothing else.

Summary

Higher denomination of a currency mean nothing much if no information of the currency presents. Inflation could be a reason for higher denominations.

[1] https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?end=2016&locations=VN&start=1996&view=chart

[2] https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?end=2016&locations=HU&start=1973&view=chart

[3] https://en.wikipedia.org/wiki/Hyperinflation

Advertisements

Please add your valuable idea below, will make a discussion, thanks !

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s