-Written by Yeajin Shim
Lately the price on the menu is written with a decimal point such as 3.5. We all recognize 3.5 as 3,500 won as it has become more common to omit three zeros for convenience. Then, what if the value of 1,000 won is reduced to 1 won by which the government reduces the currency denomination to one-thousandth? This is called ‘redenomination of currency.’ For the matter of convenience as well as other economic and political reasons, the need for redenomination of won is on the rise.
First of all, what is redenomination? Redenomination is the process of changing the face value of the circulating currency. It is simply moving decimal points. Many foreign newspapers have emphasized the need for the Korean Won redenomination since Korea’s currency has such low face value unbefitting of its GDP size and national brand image. Korea is the only OECD country that maintains a quadruple-digit exchange rate to the U.S. dollar. Only few countries in the world have a quadruple-digit exchange rate to the U.S. dollar. In regards to Korea’s economic status, redenomination should be carried out. Many worry about social disruption that may arise after redenomination of the currency. However, as stated above, if people already recognize 3.5 as 3,500 won, doesn’t it reflect people’s consensus on currency redenomination? Also, having too many zeros causes accounting inconvenience. As the economy keeps growing, the size of financial market has already exceeded the volume of more than 10,000,000,000,000,000 won. Can you even read the number? Having sixteen zeros, we need an awkward monetary unit that we have never heard of and it also causes accounting problems. We cannot even imagine how big that number is. Why should we maintain that many zeros? Wouldn’t it be easier if we just erase three zeros to tackle such problems?
It is not an easy task though. There have been few trials of currency reform but they all ended in failure because all the positive effects take some time to rise on the surface while negative effects occur immediately. Inflation is most likely to occur as a direct impact of currency redenomination. Few other countries showed increased inflation rate right after currency redenomination. For example, if the price of a product which is currently at the price of 750 won is converted into 0.75 won, then merchants can round it off to 1 won. Relatively inexpensive commodities can cause prices to skyrocket which lead to inflation. In regards to economic growth, redenomination of currency can cause dual conflicting results. One possible scenario is that if a 750 won product becomes 0.75 won, then people might feel that the price has dropped and increase their consumption. On the other hand, as income would decrease in its face value, 2,000,000 won a month to 2,000 won, people will reduce their spending which will further freeze economy.
As the Korean economic size gets bigger, there is a need for redenomination for sure. But it’s the matter of time to decide the most appropriate time to maximize the benefit and minimize the cost. It is the 60th anniversary of currency reform this year. All those previous efforts ended in failure partly because it’s not necessary and partly because the positive effects don’t occur during the tenure. However, I believe the efforts themselves reveal the necessity of currency redenomination. I hope that currency redenomination will be carried out in the most appropriate time available for the Korean economy.
By. Yeajin Shim (firstname.lastname@example.org)