Distinguishing Between A Currency Revaluation and A Currency Re-denomination

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Greetings My SALONEDiscussion Brothers and Sisters,

As you may recall, two days ago, our friend, Dr. Omotunde E. G. Johnson, posted the following message on our serious forum:

Dear Samuel Lewis III;

 

All you great SALONEDiscussion contributors should continue this discussion after an investigation of the difference between revaluation of a currency and re-denomination of a currency. For example, Ghana did not recently revalue its currency. It re-denominated its currency. In an earlier discussion I had with others on this forum, there was a lot of discussion that immediately made me realize that many did not know the difference between revaluing a currency and re-denominating a currency. When I tried to explain the difference, I got insulted. So, I took an oath, which I am not going to break, that I will never again get into that discussion on this network. But I can assure you that you can easily find out the difference between the two concepts. You don't need a PhD in economics like me.     

 

Omotunde Johnson

Pursuant to our forum's mission of facilitating the discussion and implementation of ideas to uplift Sierra Leoneans, I would like to respectfully provide Dr. Johnson an opportunity to duly correct the material omission in his above-quoted posting by showing us exactly how he came to the conclusion, in regard to the discussants, that "many did not know the difference between revaluing a currency and re-denominating a currency."

For ease of Dr. Johnson's reference to a relevant post in the actual discussion of the concepts of revaluation and re-denomination on this forum last year, I humbly provide immediately below one of my own contributions to the discussion.

Sincerely,

Moh'm Jalloh

37432 Re: [SALONEDiscussion] The (Unnecesssary) Lesson the SL Govt. Must Now Learn from Ghana

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onemohm

Sep 12, 2014

Dear Amadu and Sir Samuel (Lewis),

Gentlemen, I crave your indulgence in permitting me to fulfill my longstanding promise (of by responding to your substantially similar questions in this single post in the interest of economy of time and efficiency. Cf. https://groups.yahoo.com/neo/groups/SALONEDiscussion/conversations/messages/37110

Amadu, you wrote:

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So Ghana did revalue and has done far better than us who did not?  It is clear from you easy-to-understand explanations to see what the revaluation of the Cedi did for Ghana.  But I am a bit confused with my non-economic brain and therefore please expound on this: Ghana went from Cedi (₵) 9600 to $1 to ₵ 2.80:$1.  What happened in Ghana is that all of a sudden my ₵9600 could now fetch about $3,500?  Layman economics, I posit...  What is giving in that picture?

Here are my answers to your above questions:

1.    Yes, Ghana most certainly has done better economically than our country after the 2007 revaluation of the Ghanaian currency that our own SL govt. rejected when we proposed it 6 months before Ghana implemented a substantially similar plan as the one we had proposed. Sam, in specific response to your question, Ghana did indeed implement a revaluation of its currency -- not a mere redomination of it.

Which naturally leads to a question asked of me by Sam that was thoroughly addressed here (as our friend Herbert correctly noted earlier in response to this thread), in my lengthy debate about the role of the IMF in the destruction of SL's economy with our friend, Dr. Omotunde E.G. Johnson, a former staff member of the IMF, here in May 2014. Cf. Re: [SALONEDiscussion] Implementing a Revaluation of the Leone" 
https://groups.yahoo.com/neo/groups/SALONEDiscussion/conversations/messages/36184

2.    To distill the distinction between a revaluation and a denomination that I minutely examined in my discussion with Dr. Johnson here in May earlier this year: A denomination simply means that the numerical value of the currency notes ONLY is changed by the currency issuing authority (typically an agency of the government). It is important to repeat that the only thing that changes in a revaluation is the numerical value printed on the currency.

        So, for example, the agency introduces new currency notes with a higher value (usually) than any existing currency note. This is typically done as a reaction to such a significant decline in the value of the currency that previous transactions that invooved the exchange of a few currency notes now involve hundreds and sometimes thousands of the highest denomination existing currency notes. Perhaps the most graphic example of this spectacle occurred in Zimbabwe in the late 2000's when that unfortunate country introduced new currency notes denominated in units of one million Zimbabwean dollars.

        A revaluation differs from a redenomination in a crucial aspect: Unlike a redenomination, a revaluation does not merely change the numerical value of a currency note; it also involves 2 steps that are absent in a mere redenomination, namely:

        (a)    The authority responsible for the country's currency publicly announces a change in the country's exchange rate with a major international currency (such as the dollar) that INCREASES the value of the revaluing country's currency against the international currency. (This is precisely what happened in Ghana in 2007 when the Ghanaian central bank announced that the NEW exchange rate between the cedi would change from cedi (₵) 9600 = $1 to ₵ 0.93 = $1). It is very important to note that the old currency was phased out and replaced by the new currency at a "local" exchange rate of OLD ₵ 10,000 = NEW ₵ 1 (Amadu, please keep this in mind as you read my answer below to your third question: "What happened in Ghana is that all of a sudden my ₵9600 could now fetch about $3,500?).  

        (b)    The currency issuing authority also takes active steps to defend the newly-set value of the currency against deterioration in in relation to major international currencies. That requires the use by the revaluing country of more or less significant amounts of foreign currency reserves (depending on the seriousness of the threat of deterioration posed to the local currency) in a bid to maintain the new value of the local currency. (Again, that is precisely what happened in Ghana in 2007/08 as the Ghana govt. tried valiantly to keep the value of its currency in the open market as close to its original revaluation value of ₵ 0.93 = $1. Yet, by May 2014 th3e exchange rate had deteriorated to ₵ 2.82 = $1)

I hope you can now see that, in their historical manifestations, a revaluation is typically opposite in nature to a typical redenomination: one does nothing to change the value (exchange rate) of the local currency while the other does everything to do just that.

3.    Amadu, unfortunately, it is inaccurate to assume that AFTER the revaluation "in Ghana ... all of a sudden my ₵9600 could now fetch about $3,500?)." In fact, my indefatigably patriotic friend, after the revaluation, your OLD cedi is now worth only 1/10,000th of the NEW cedi (since, recall, old cedis can now only be exchanged for new cedis at the rate of 10,000 old cedis for 1 new cedi. (Please recall the last sentence of my answer #1a) above. So, your (old) ₵9600 is now worth only 0.96 NEW cedis. And since the new cedi is exchanged at the rate of 0.93  to $1, it means your (old) cedis is worth $1.03 -- a very far cry from fetching  fetch about $3,500 fetch about $3,500$3,500!

Longtime forum members may recall that this is the same point I was obliged to repeatedly try to explain in 2007 to our always interesting friend, Alie Formeh Kamara (AFK) who surprisingly (having claimed to have an understanding of economics) posited here in 2007 that our 2007 revaluation proposal to the SL govt. would create instant Leone millionaires in our own country! Please see "Re: Understanding How Revaluation of the Leone Works (For AFK)