Revaluation, Redenomination, and the Marshall Plan

[Psych]

Understanding Iraq's currency reforms through the light of some history and Wikipedia!

REVALUATION

Revaluation means a rise of a price of goods or products. This term is specially used as revaluation of a currency, where it means a rise of currency to the relation with a foreign currency in a fixed exchange rate. In floating exchange rate correct term would be appreciation. The antonym of revaluation is devaluation. Altering the face value of a currency without changing its foreign exchange rate is a redenomination, not a revaluation.

In general terms Revaluation means a calculated adjustment to a country's official exchange rate relative to a chosen baseline. The baseline can be anything from wage rates to the price of gold to a foreign currency. In a fixed exchange rate regime, only a decision by a country's government (i.e. central bank) can alter the official value of the currency.

For example, suppose a government has set 10 units of its currency equal to one U.S. dollar. To revalue, the government might change the rate to five units per dollar. This would result in that currency being twice as expensive to people buying that currency with U.S. dollars than previously and the U.S. dollar costing half as much to those buying it with foreign currency.

Before the Chinese government revalued the yuan, it was pegged to the U.S. dollar. It is now pegged to a basket of world currencies.

REDENOMINATION

Inflationary

In times of inflation, the same number of monetary units have continually decreasing purchasing power. In other words, prices of products and services must be expressed in higher numbers. If these numbers become excessively large, they can impede daily transactions because of the risk and inconvenience of carrying stacks of bills, or the strain on systems, e.g. automatic teller machines (ATMs), or because human psychology does not handle large numbers well. The authorities may alleviate this problem by redenomination: a new unit replaces the old unit with a fixed number of old units being converted to 1 new unit. If inflation is the reason for redenomination, this ratio is much larger than 1, usually a positive integral power of 10 like 100, 1000 or 1 million, and the procedure can be referred to as "cutting zeroes".

MARSHALL PLAN (The German Mark)Currency reform of June 1948

Since the 1930s, prices and wages had been controlled, but money had been plentiful. That meant that people had accumulated large paper assets, and that official prices and wages did not reflect reality, as the black market dominated the economy and more than half of all transactions were taking place unofficially. The reform replaced the old money with the new Deutsch Mark at the rate of one new per ten old. This wiped out 90% of government and private debt, as well as private savings. Prices were decontrolled, and labor unions agreed to accept a 15% wage increase, despite the 25% rise in prices. The result was the prices of German export products held steady, while profits and earnings from exports soared, and were poured back into the economy. The currency reforms were simultaneous with the $1.4 billion in Marshall Plan money coming in from the United States, which primarily was used for investment. In addition, the Marshall plan forced German companies, as well as those in all of Western Europe, to modernize their business practices, and take account of the wider market. Marshall plan funding overcame bottlenecks in the surging economy caused by remaining controls (which were removed in 1949), and opened up a greatly expanded market for German exports. Overnight, consumer goods appeared in the stores, because they could be sold for realistic prices, emphasizing to Germans that their economy had turned a corner.

The introduction of the new currency was intended to protect western Germany from a second wave of hyperinflation and to stop the rampant barter and black market trade (where American cigarettes acted as currency).

[mrref]

Thank you for the history lesson.....

Edited June 25, 2011 by mrref

[Nani?]

ha ha ha american cigarettes were currency lol awesome

[Psych]

I cannot help but believe Shabby is very aware of the German mark and will implement a similar plan....

The reform replaced the old money with the new Deutsch Mark at the rate of one new per ten old. This wiped out 90% of government and private debt, as well as private savings....The result was the prices of German export products held steady, while profits and earnings from exports soared, and were poured back into the economy.

Read more:

[GaryB]

I cannot help but believe Shabby is very aware of the German mark and will implement a similar plan....

The reform replaced the old money with the new Deutsch Mark at the rate of one new per ten old. This wiped out 90% of government and private debt, as well as private savings....The result was the prices of German export products held steady, while profits and earnings from exports soared, and were poured back into the economy.

Read more:

Psyche, I appreciate the article and info but I dont think I agree with the perspective you are giving. Countries are forgiving Iraq's debt, left and right, and because of Saddam, sanctions, wars, and high unemployment...there is no private savings left. So this situation appears to be different than Germany. Why then do you believe, Shabbs will implement a similar plan for different circumstances? Thankyou for your insight.

[DinarBam]

Thx for post.

[KANAGAROO]

I think I understand things fairly well.

No one will like my scenrio, but here it is.

Shabbi will take the 25,000 note and say this is like a 2500 note and then raise the exchange rate to at least a dollar per Dinar. This would be equivalent to a rate of 1 milion current Dinar equalling 100,000 dollars.