Denomination (currency)
From Wikipedia, the free encyclopedia
Denomination is a proper description of a currency amount, usually for coins or banknotes. Denominations may also be used with other means of payment like gift cards.
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[edit] Subunit and super unit
In a currency system, there is usually a main unit(base), and a subunit that is a fraction amount of the main unit. In some countries, there are multiple levels of subunits. In the Ottoman Empire, 1 lira = 100 kuruş = 4000 para = 12000 akçe. Today, only a few places use this practice, notably Chinese speaking regions: mainland China (renminbi), Hong Kong (Hong Kong dollar), and Republic of China (New Taiwan dollar). In addition, Jordanian dinar is divided into 10 dirham, 100 qirsh/piastres, or 1000 fils. Many countries today where Western European languages are spoken have their main units divided into 100 cents or derivatives of the word cent.
Occasionally, a super unit is used as multiples of the main unit. Examples include Korean whan = 5 yang in 1893, Iranian toman 10 rials (used informally today). In the Ottoman Empire, lira and kuruş were super units at some point before becoming the main unit.
[edit] Decimal v.s non-decimal
A decimal currency is a currency where the ratio between the main unit and the subunit is an integral power of 10. Non-decimal currencies have the advantage in daily life transactions. For example, 1 German Gulden = 60 Kreuzer. 60 Kreuzer can be divided into 2, 3, 4, 5, or 6 parts that are still integers, making pricing easy. The underlining difference is that 60 has a higher density of divisors (12⁄60 = 20%) than 100 (9⁄100 = 9%). The main reason why many currencies before modern times were non-decimal is because the main units at that time were often quite large and computers were not invented yet.
[edit] Choice of name
It is common to name a unit with a unit of weight, such as pound, lira, and baht. These currencies are usually originally defined as that amount of some precious metal. Another choice of name is some form of derivative of the political entity. Afghan afghani and euro fall into this category. Sometimes the name is simply the name of the metal, of which the coins are made, such as Polish złoty and Vietnamese đồng.
[edit] Redenomination
[edit] Inflationary
Due to inflation, the same amount of monetary units have continuously decreasing purchasing power. In other words, prices of the same products or services must be expressed in higher numbers. When prices reach a certain point, the high numbers can impede the well being of daily transactions because of the risk and inconvenience of carrying stacks of bills, strain on systems, e.g., automatic teller machines (ATMs), and because human psychology does not handle large numbers well. To address this problem, authorities can alleviate it through the process of redenomination. Redenomination is the process where a new unit replaces the old unit with a certain ration. If inflation is the reason for redenomination, this ratio is some number larger than 1, usually a positive integral power of 10 like 100, 1000 or 1 million. Recent examples include
| New unit | = | x | Old unit | year |
|---|---|---|---|---|
| Revalued Zimbabwean dollar | = | 1000 | old dollars | 2006 |
| New Mozambican metical | = | 1000 | old meticais | 2006 |
| This table is not exhaustive. | ||||
Although the ratio is often a positive integral power of 10, sometimes it can be a×10n where a is a single digit integer and n is a positive integer. Partial examples include
| New unit | = | x | Old unit | year |
|---|---|---|---|---|
| Chinese "gold" yuan | = | 3 million | old yuan | 1948 |
| Chinese "silver" yuan | = | 500 million | "gold" yuan | 1949 |
| New Taiwan dollar | = | 40,000 | old dollars | 1949 |
| Azerbaijani new manat | = | 5000 | old manat | 2006 |
| This table is not exhaustive. | ||||
Occasionally, the ratio is defined in a way such that the new unit is equal to a hard currency. As a result, the ratio cannot be a nice even numbers. Examples include
| New unit | = | x | Old unit | = | Anchor currency | year |
|---|---|---|---|---|---|---|
| Brazilian real | = | 2750 | cruzeiro reais | = | United States dollar | 1994 |
| Yugoslav novi dinar | = | 10~13 million | 1994 dinara | = | German mark | 24 January 1994 |
| This table is not exhaustive. | ||||||
In the case of hyperinflation, the ratio can go as high as millions or billions, to a point where scientific notation is used for clarity or long and short scales are mentioned to disambiguate what kind of billion/trillion is meant.
In the case of chronic inflation or regular inflation, the authorities have a choice: a large redenomination ratio or a small redenomination ratio. When using a small ratio, more redenomination processes must be carried out in the long run. And each occurrence incurs costs of productivity in the financial, accounting, and computing industry. As a result, small ratio has the disadvantage of more cost associated to the changeover. However, the period of prices with large number can be shortened with a small ratio.
During a redenomination process, the new unit is often the same as the old unit, with the addition of the word "new". The word "new" may or may not be dropped a few years after the change. Sometimes the new unit is a completely new name, or a "recycled" name from previous redenomination or from ancient times.
| New unit | = | x | Old unit | year | Nature of the new unit |
|---|---|---|---|---|---|
| Turkish new lira | = | 1 million | old lira | 2005 | "new" is an official designation and will be dropped in 2009 |
| New Taiwan dollar | = | 40,000 | old dollars | 1949 | "new" is an official designation and is still used in official documents today |
| Yugoslav 1993 dinar | = | 1 million | 1992 dinara | 1993 | no official designation |
| Brazilian real | = | 2750 | cruzeiro reais | 1994 | recycled unit of Brazil before 1942 |
| This table is not exhaustive. | |||||
[edit] Monetary union
When countries form a monetary union, redenomination may be required and the conversion ratio is often not a nice even number, or even less than 1.
| New unit | = | x | Old unit | year | Monetary union |
|---|---|---|---|---|---|
| Austro-Hungarian krone | = | 0.5 | gulden/forint | 1892 | Latin Monetary Union |
| euro | = | 0.787564 | Irish pound | 1999/2002 | Eurozone |
| euro | = | 40.3399 | Luxembourgish francs | 1999/2002 | Eurozone |
| This table is not exhaustive. | |||||
[edit] Decimalisation
In many countries where an £sd system (£1 = 20 shillings = 240 pence) is used, the process of decimalisation was carried out. While they were at it, some chose to change the main unit as well. By defining 1 dollar = £0.5 = 100 cents, 1 shilling would conveniently turn into 10 cents. This is also a prime example where the ratio is less than 1.
| New unit | = | x | Old unit | year |
|---|---|---|---|---|
| South African rand | = | 0.5 | South African pound | 1961 |
| Australian dollar | = | 0.5 | Australian pound | 1966 |
| New Zealand dollar | = | 0.5 | New Zealand pound | 1967 |
| This table is not exhaustive. | ||||
[edit] Book keeping
When redenomination occurs, financial data that spans across the change must be presented with proper annotation. Otherwise, the data could give the illusion of astronomical change. For example, the GDP reported by the Central Bank of Nicaragua is properly documented.
