Denomination is Definition, concept, essence, causes and consequences of the reform

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

Denomination is an economic term that means a change in the face value of money. The need for it, as a rule, arises after hyperinflation in order to stabilize the currency and simplify the calculations as much as possible. Most often, during the denomination, old money is exchanged for new ones, which have a smaller denomination. At the same time, old banknotes are withdrawn from circulation.

The essence of the concept

In the simplest terms, denomination is the replacement of old banknotes with new ones with a lower denomination. As a rule, several zeros are removed at once. With the help of this procedure, the state heals and renews the financial system of the entire country.

The essence of the denomination is to achieve these effects:

• end of hyperinflation;
• reducing the cost of subsequent money emission;
• financial system stabilization;
• increase in exportsdomestic goods;
• simplification of settlements and getting rid of the excess money supply that has accumulated in the country;
• application of new developments in the field of protecting the national currency from counterfeiting;
• decrease in the physical volume of the money supply;
• strengthening of the national currency.

Reasons

The main reason for the denomination is the hyperinflation that occurs before that in the economy. At this time, the monetary unit significantly loses its value. As a result, all calculations in the country have to be carried out in huge amounts, which is extremely inconvenient. Denomination is an opportunity to solve many problems at once.

Money supply is growing day by day, the government has to constantly turn on the money machine, issue banknotes, the denomination of which is constantly growing. This is very inconvenient, inefficient and costly. So the denomination is, in simple terms, a way to eliminate all these problems, to reboot the economy, to start life from scratch.

Progress of the reform

It is worth noting that the denomination does not happen all at once, but is extended over time. After its official announcement for some period in the country, it becomes possible to pay with both old and new banknotes. But how long it will be possible to exchange old banknotes for new ones, the government determines. As a rule, this period is from six months to one year. Throughout this period, only new banknotes are issued by public and private commercial institutions.

Negative Consequences

Obviously, the denomination is an attempt by the government to improve the economy, to bring it to its senses. But it is worth noting that it does not always lead to positive consequences. A negative effect is also possible.

There have been many cases in the economy when such changes led to an increase in loans issued in foreign currencies, an increase in the cost of imported goods, problems with importing equipment, which, as a rule, affects large and medium-sized manufacturers. Difficulties are also possible if you store large savings in denominations that are being phased out. Often it is impossible to quickly exchange them for new money.

Which countries dare to make such changes?

It is worth noting that the word "denomination" is familiar to residents of almost all modern states. Any economy at some stage of its development faced difficulties, the way out of which had to be sought by taking the most effective measures.

Especially difficult economic situation in many countries arose after the end of World War II. For example, it was then that the denomination was carried out in Poland and France, in the USSR during the Soviet period, the denomination was resorted to three times - in 1922, 1947 and 1961. It happened twice more in the history of modern Russia - in 1991 and 1998.

From recent examples, we can recall the denomination in Belarus in 2016. Then the local Belarusian rubles lost four zeros at a time. One new Belarusian ruble became equal to 10 thousand old ones. Also, coins appeared in circulation, which simply did not exist in the country before, all money was exclusively paper. This led to positive consequences for the Belarusian economy. Huge surplus money supply was withdrawn from circulation, the system of settlements made much easier. As a rule, most denominations lead to such consequences.

1922

The first denomination of the ruble in the USSR occurred in 1922. It is worth noting that at that time this reform was caused not only by economic, but also by political reasons. The young Soviet government sought to replace the tsarist money that was in circulation with new, Soviet ones.

Then, as in Belarus, four zeros were removed at once. 10 thousand old rubles corresponded to one new one. It is interesting that at the same time there was no exchange of coins, because metal money in the Soviet Union until 1921 was not issued at all. As a result, Soviet banknotes circulated in parallel with the royal chervonets until 1924. Only this year the denomination of the ruble was finally completed. So citizens were given plenty of time to change all the old banknotes they had for new money.

It was necessary to resort to the denomination again shortly after the end of the Great Patriotic War. In 1947, the denomination became a project of the Minister of Finance of the USSR Arseny Grigoryevich Zverev. He remained in this post until 1960, remaining in these decades one of the most authoritative Soviet officials.

That year the denomination was done at the rate of ten to one. As a result, ten old rubles corresponded to one new ruble. At the same time, prices decreased in the country, but the procedure for determining them, as well as salaries and other payments, remained at the same level. For this reason, not all economists consider this Zverev reform to be a denomination in its purest form. This remains a debatable issue.

A certain part of the researchers is of the opinion that this reform has more signs of a reform of a confiscation nature. During this period, all coins issued on the territory of the Soviet Union from 1923 to 1947 were in circulation without changing their value. The money that was on the accounts in savings banks was exchanged according to the following principle:

• up to 3,000 rubles at the rate of - 1:1 (it was about 90 percent of all deposits);
• from 3 to 10 thousand rubles - with a ratio of 3:2;
• deposits over 10 thousand rubles - with a ratio of 2:1.

This is about citizens' contributions. The money that lay on the accounts of enterprises and collective farms was exchanged 5:4. In this case, the amount did not matter. Unlike the previous denomination, very little time was given for the exchange - from December 16 to December 29. Already on December 29, all the old money was reset to zero.

1961

In 1961, the Soviet government carried out a full-fledged denomination at the rate of 10:1. 10 old Soviet rubles corresponded to 1 new one. At the same time, coins in denominations of 1, 2 and 3 kopecks remained in circulation without changing their value (this also included coins issued before 1947). I wonder what it isled to the fact that in just 13 years the value of copper money has grown 100 times.

For other cash, the rules were as follows: coins of 5, 10, 15 and 20 kopecks changed according to the rules of paper money - 10:1. Coins of 50 kopecks and 1 ruble were introduced, which had previously been in circulation only until 1927.

At the same time, the Soviet government artificially set the exchange rate. For one dollar, which before the denomination cost 4 rubles, the price was announced at 90 kopecks. The gold content turned out to be in the same situation. This led to the fact that the ruble was undervalued by more than two times, and its purchasing power in relation to imported goods decreased by the corresponding amount.

1991

In modern Russia, the denomination was first held in 1991. Then the denominations of 50 and 100 rubles were withdrawn from circulation. This was done very unexpectedly. The signing of the decree was announced on January 22 at 21.00, when almost all shops and institutions were already closed. In total, three days were given for the exchange - until January 25. Banknotes of 50 and 100 rubles were exchanged for smaller banknotes of the 1961 model or for new ones of the same denomination.

At the same time, no more than a thousand rubles per citizen was allowed to exchange. If there was more cash on hand, then a special commission considered the possibility of its exchange. At the same time, they limited the amount of money available for withdrawal from savings banks. It was forbidden to withdraw more than 500 rubles a month. The conditions in which citizens were placed were called draconian by many, and the reform caused strong discontent.

1998

The 1998 denomination was announced in advance. On August 4, 1997, President Boris Yeltsin issued a decree that from January 1 next year an exchange will be made: a thousand old money for 1 new ruble. The parallel circulation of both old and new money remained throughout 1998.

Remembering the negative experience of 1991, the government allowed the exchange of old banknotes in banks until 2002, and then President Vladimir Putin extended it for another year.

New coins and banknotes entered circulation on January 1, 1998. Interestingly, the appearance of the money did not change in any way, only three zeros were removed from them. Also, instead of a banknote of a thousand rubles, on which Vladivostok was depicted, a coin with a face value of 1 ruble was introduced.

At the same time, coins of 1, 5, 10 and 50 kopecks with George the Victorious on the reverse and ruble coins of 1, 2 and 5 rubles appeared. Most economists note that this nomination has led to the expected results.