“A loaf of white bread costs 80 pence in the United Kingdom or RM 2.50 in Malaysia. But in South Korea, the figure goes up to around 3, 000 Won or in Indonesian currency, rupiah, it can go up to 15, 000. Why do these figures differ so much? Does spending in South Korea or Indonesia makes one a real millionaire?”

In recent years, East Asian countries such as Japan and South Korea have become increasingly popular amongst Malaysian tourists. The number of Malaysians visiting Southeast Asian countries like Thailand and Indonesia is also going up the slope.

If you are one of these numbers, have you ever realised, even before taking off, that you have turned into a millionaire, holding millions or even billions of, for instance, Won (₩)?

These countries are using banknotes and coins with very large face values, and often, many zeros on the notes. In economics, the number represents the denomination of the note; the greater the number, we could then safely say the higher the denomination.

The question is then, why are the currency denominations so high in some countries?

Let us take South Korea as an example.

In the early 1950s, the largest banknote in South Korea was ₩ 1000. However, in the next few decades since then, the ₩ fell in value in the floating exchange rate system and experienced what we call depreciation.

When depreciation hits, the value of a currency falls, causing goods and services to become more expensive than they initially were. A product can cost $ 10X although it initially costed only $ X. From this, it is clear how currency depreciation is related to inflation.

In 1965, the South Korean government actively reduced the value of money by producing and issuing more banknotes. As more and more notes were supplied while their demand remained unchanged, the currency value took a significant plunge. The South Korean government did so in an attempt to transform their nation’s economy into an export-led economy. When inflation occurs due to currency depreciation, imported goods become more expensive as more money is required to purchase them.

However, looking on the bright side, South Korea’s locally made products became equally competitive in price with other products on the international plane. Taking in together the simultaneous effects, the South Korean domestic productivity and consequently, purchasing power, increased. What then followed is that the economy slowly achieved stability via the growth of internal market.

Similar situations to the inflation in the late 1960s also occurred in the early 1980s as well as the late 1990s. The most recent event which was a financial crisis that occurred 2008 also hit South Korea and weakened the ₩ to a very significant extent. During these hard times, currency depreciation went beyond control and the South Korean market experienced intensive inflation.

Interestingly, South Korea is not the only country that had experienced an event as such. Her neighbour, China also once had Renminbi (RMB) denominations that skyrocketed as high as 50,000 prior to the 1950s.

During the Chinese Civil War between 1927 to 1950, the government of the People’s Republic of China (PRC) back then had no choice but to increase the production of banknotes, resulting in serious currency depreciation and this was due to lack of revenue. What followed, as had happened in South Korea, was uncontrolled inflation. In the early 1950s, the inflation rate had reached almost 100%.

Later in 1955, as the political and socio-economic landscapes became stable, the People’s Bank of China introduced the second series of PRC’s currency, now commonly known as Renminbi (RMB). During its introduction, the government moved the decimal point 4 places to the left i.e. reduced the currency denomination at the ratio of 1:10,000. In other words, what was previously valued as RMB 10,000 was then revalued to RMB 1. At that time, RMB5 became the largest RMB banknote produced by the bank.

Similarly, Turkey revalued its currency, Lira in 2005. Lira was redenominated at the ratio of 1:1,000,000. While in 2009, North Korea carried out the revaluation of its currency at the ratio of 1:100.

However, there are countries which had failed in revaluing their currencies. Zimbabwe, for example, attempted to drop 10 zeros (0s) off its currency banknotes in 2008 after a series of hyperinflation. Unfortunately, the attempt was in vain; it did not stabilize the market in Zimbabwe and inflation continued at an ever-impactful pace. The government had no choice but to introduce notes of 100 Trillion Zimbabwean dollars that could not even be used to purchase a loaf of bread. In April 2009, the Zimbabwean government abandoned the country’s currency and in other words, the currency was demonetised. Between 2009 and 2016, foreign currencies like US Dollars, South African Rand, and Botswana Pula were used in Zimbabwe as its official currencies.

The history of currency revaluation serves as a reminder for countries if they decide to implement it. While knocking off the zeros (0s) indicates a stronger currency, boosting investors’ confidence and making imports cheaper, exports will also become less price-competitive and subsequently and internal market production will be reduced.

Generally speaking, a large currency denomination denotes inflations experienced by a country, whether in the past or in the present. Reducing currency denomination can be deemed as a way to stabilise the country’s economic performance. Therefore, to currently stable and strong economies, it seems unnecessary to redenominate their currencies at least at the moment.

We should bear in mind that we are not becoming millionaires just over a few-hour flight. Spending our money wisely must still be given due regard in trip budgeting, as shared in Guide 101: Budgeting for A Trip.

 

 

Download the article here:

Millionaires-Around-the-World.pdf

 

Prepared by

Author – Max Kong

Editor – Nur Iman