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I notice that for any pair of currencies, the exchange rates seem to stay around 1 (as opposed to, say, 1,000,000). This is no longer the case if one country experiences an economic crisis that results in a very high inflation, but otherwise, rates don't seem to deviate very much from 1.

As you may have guessed I have very little knowledge in finance, so correct me if any of my assumptions are wrong, my aim here is to learn.

An example I'm thinking of is the Leu in Romania. It was revalued several times, the latest in 2005, when 10,000 old Leus were converted to 1 new Leu. That made the exchange rate with euros, for instance, closer to 1, given that 1 old Leu ≈ 0.00025 Euros, then 1 new Leu ≈ 0.25 Euros.

Why is this? Is this something most countries do? Does this principle have a name?

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    $\begingroup$ I think this question better is suited for the Economics Stack Exchange. I can imagine that values closer to 1 make it easier to compare prices between countries but giving this phenomenon a name sounds like something an economist would do. $\endgroup$
    – Bob Jansen
    Dec 12 '20 at 17:44
  • $\begingroup$ I think this most often happens after a bout of inflation and the government wants to signal that it will now change its policies (and so also change inflation expectations). (In contrast, in countries such as Japan, Korea, Viet Nam where the prices are usually quoted with at least 2-4 zeroes behind, there hasn't been any such "zero-dropping", probably because there hasn't been any severe inflation in a long while.) $\endgroup$
    – user18
    Dec 13 '20 at 3:48
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    $\begingroup$ A good answer to this question would gather up all the instances of such "zero-dropping" and look at the reasons behind these redenominations. We'd then also compare these to instances where zeroes have persisted for many years (e.g. Japan, Korea, Viet Nam). $\endgroup$
    – user18
    Dec 13 '20 at 3:48
  • $\begingroup$ Wikipedia has a good list: en.wikipedia.org/wiki/… $\endgroup$ Dec 13 '20 at 4:51
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    $\begingroup$ Thank you. As you can see from the list, in some cases (e.g. Romania 2005, Poland 1995, it's exactly the scenario @KennyLJ described - clean up after the inflation ends. But in many other cases, governments presented it as a cure for inflation, which obviously could not be effective. $\endgroup$ Dec 13 '20 at 13:56
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There are some counterexamples to the premise of your question:

Bank notes:

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Price tags:

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Bank notes:

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Price tags:

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Bank notes (note that they write "mil" in small letters instead of 000):

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Price tags:

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Note that $ denotes the peso, not U.S. dollars.

Bank notes:

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Price tags:

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etc. These countries are not in any kind of economic crisis. The exchange rates are reasonably stable. The large numbers don't inconvenience anyone (except for some badly designed IT systems that can't handle very large or very small numbers accurately). These countries are all doing well.

Conversely, let us consider two countries at the opposite end from "doing well", whose currency is rapidly depreciating versus USD:

  • A USD is somewhere around 1,000,000 Venezuelan Bolivar (VES). Venezuela did redenominate its currency from "VEB" to "VEF" to "VES", over the last few years, dropping many zeroes. It did not help. The rapidly depreciating currency is one of the symptoms of their economic problems, not the cause.

enter image description here

  • A USD is somewhere around 100 Russian roubles (RUB). The rouble has been depreciating rapidly for years, especially after the West imposed painful sanctions to punish Russia for its aggression against Ukraine in 2014. Russia did already redenominate the rouble from "RUR" to "RUB" dropping 3 zeroes not long ago:

enter image description here

That did not help. Russia is still broke:

enter image description here

Russians looking for expired food.

Desperate Russian officials can't avert another imminent sovereign default, but are looking to delay the inevitable. They discuss redenominating their rouble again, dropping 2 more zeroes, and making 1 new rouble more valuable than 1 U.S. dollar, probably some variant of the Soviet "confiscatory redenomination" of 1947 (see https://en.wikipedia.org/wiki/Soviet_ruble#Fifth_Soviet_ruble,_1947%E2%80%931961 ). This won't help. Except for stroking Russian national pride, I fail to see the benefit of having a currency unit worth more than 1 USD.

Zimbamwe too used to have lots of zeroes on their bank notes: enter image description here but this was a symptom of their problems, not the cause.

Let us therefore look at some examples of currencies whose 1 unit is worth substantialy more than 1 USD.

  • A Kuwaiti dinars (KWD) is somewhere around 3 to 3.5 USD . This does not pose any inconvenience when a subunit of the currency is small enough. A 1/1000 fraction of KWD, worth about 1/3 of US cent, is called "fil". Here is a 1/2 KWD (500 fil) bank note:

1/2 KWD note

Price tags:

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This bottle of water costs 0.055 dinars, i.e. 55 fils, which is about 16 U.S. cents.

  • Chile widely uses an inflation-adjusted currency en.wikipedia.org/wiki/Unidad_de_Fomento - 1 unit of account is worth about 40 USD. It is not available as cash (bank notes or coins), but is primarily used to denominate real estate prices, stock prices, loans, etc.

  • 1 Bitcoin (XBT) is worth thousands of dollars as of this writing. Conveniently, one hundred millionth of a bitcoin is called a satoshi and can be used in transactions.

  • Back when the U.S. dollar had a lot more purchasing power than it has today, prices commonly used "mill" (1/1000 USD). It's still perfectly legal (see https://en.wikipedia.org/wiki/Mill_(currency) ) and is often seen as the "9/10" on U.S. gasoline prices:

enter image description here enter image description here

Contemporary gasoline prices.

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Antique gasoline price sign: the gas costs 10.3 cents and the tax is 1.7 cents, i.e. 17 mills.

A good (but not quite complete) list of recent redenominations can be found in Wikipedia https://en.wikipedia.org/wiki/Redenomination#List_of_currency_redenominations . As you see, just swapping 1,000 units of the old currency for 1 unit of the new currency changes nothing. However in the 1947 Soviet confiscatory redenomination cited above, if the state owed you 10 old roubles before, then the state now owed you only 1 new rouble. But if you owed the state 10 old roubles, then you still owed 10 new roubles to the state. This may be the kind of scheme that Russian officials are contemplating again.

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    $\begingroup$ Agreed. The only practical constraint is that currency units are typically divisible by a maximum amount (e.g., one cent for a dollar), so there is an effective maximum value for a currency (since all everyday items would be worth one cent if the dollar were worth “too much”, and prices were comparable to elsewhere). Meanwhile, people would not be too happy is everyday items cost one million currency units, which is why countries sometime re-denominate after a high inflation period. This puts limits on “normal” ranges for exchange rates. $\endgroup$ Dec 12 '20 at 18:57
  • $\begingroup$ I lived in Italy pre-Euro. The local currency (lira ITL) was about 1,000 for 1 U.S. dollar, later close to 1,500. That did not incovenience anyone. People were just used to prices being in the thousands. Redenominations are expensive and provide little benefit. Russian officials promise a new currency whose unit will (temporarily) be worth more than 1 US dollar. vedomosti.ru/economics/articles/2020/07/09/… $\endgroup$ Dec 13 '20 at 3:47
  • $\begingroup$ Thank you for your answer, this is helpful. $\endgroup$ Dec 13 '20 at 7:03
  • $\begingroup$ Sure, 1000 units being equivalent to a dollar is not that bad. But it would be awkward if a cup of coffee cost one billion currency units. That happens after a hyperinflation, and a common response is to switch to a new currency. $\endgroup$ Dec 13 '20 at 12:37
  • $\begingroup$ Yes, "billions" would be inconvenient. But "tens of thousands" are OK. By the way, this is what Colombian banknotes look like medellinguru.com/wp-content/uploads/2018/02/… - they write "mil" in small letters instead of "000". $\endgroup$ Dec 13 '20 at 13:47
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This is mostly done by the individual countries out of convenience. First, most countries have a main currency, say the US-Dollar, and this unit can be separated into 100 small units, ie cents. One cent is then the smallest currency unit available in the US.

So if a country had a currency with a value much higher than 1 US-Dollar, that would be inconvenient because prices could not be adjusted as accurately. Imagine everything have to cost an integer amount of US-Dollars.

Having a currency value much lower is also inconvenient because you have to keep track of all the extra zeros that don't add any additional information. This does happen as the examples Dimitri Vulis answer show. Usually prices are then marked not directly in South Korean Won but rather in units of 1000 Won again resulting in small easy to use numbers.

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  • $\begingroup$ Thanks for your answer, I'm very curious: in Kuwait, 1 local dinar (KWD) is worth a little over 3 US dollars. Can you please clarify why this is inconvenient? $\endgroup$ Dec 13 '20 at 13:50
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    $\begingroup$ @DimitriVulis This means that in Kuweit prices can only be adjusted in steps of around 3 US cents. That is unproblematic, I was arguing that there is no country whose base currrency is worth 100 US dollars because that would be inconvenient. $\endgroup$
    – quarague
    Dec 13 '20 at 14:33
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    $\begingroup$ @DimitriVulis Note that the UF in Chile is an accounting unit, it is not available as cash in bank notes or coins. Chile uses Chilean Pesos for that purpose. All I'm saying is that is more convenient to have a value of your currency so that common items are priced in small numbers without a lot of extra zeros either before or after the comma. $\endgroup$
    – quarague
    Dec 13 '20 at 16:04
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    $\begingroup$ OK, having worked with these, I don't think that "CLF 0.000025" is materially less convenient than "USD 1/10 of 1 cent". We'll have to agree with disagree. I edited & added some of the points we discussed to my answer, thanks!! $\endgroup$ Dec 13 '20 at 16:15
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    $\begingroup$ "Usually prices are then marked not directly in South Korean Won but rather in units of 1000 Won again resulting in small easy to use numbers." What is your evidence for this claim? To my knowledge and contrary to this claim of yours, prices quoted in Japan, Korea, and Viet Nam typically explicitly include all the trailing zeroes. $\endgroup$
    – user18
    Dec 16 '20 at 5:19

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