How does a new currency stop inflation?

Question

Apparently, every time a currency falls victim to hyper inflation, sooner or later the country is gonna introduce a new currency to solve the problem.

But how does that help? If let’s say the us dollar lost 90% of it’s value every day, and you introduced a new currency, one of which is equal to 5 us dollars, wouldn’t that new currency, as it’s value is bound to the dollar, instantly lose 90% of it’s value every day as well?

In: 712

Answer 1

Let’s say a bank has 5000 gold pieces in its vault. Let’s say the price of gold is very much set in stone and is the “gold standard”. Everybody knows the value of a gold piece. It is exactly 1 gold piece.

But gold is heavy. So instead of trading in gold and having everyone carry around heavy pouches filled with gold, the bank makes these paper bills. Let’s call them Oogie Boogies (whatever). So how much is an Oogie Boogie worth, you might ask. Well the bank made 50,000 Oogie Boogie bills in total, so 10 Oogie Boogie is worth 1 gold piece. Simple. Everybody’s happy. Business thrives.

But one day, a well running business (that’s a business that runs wells), comes to the bank to make a particularly big withdrawal. Oh no, the bank doesn’t have anymore Oogie Boogie bills. So they quickly make some more. Pfew, crisis averted. But the following day, the same happens. And the day after and the day after that as well. But now the bank has created a total of 500,000 Oogie Boogie bills, while they still have the same 5000 gold pieces in their vault. That means that now 100 Oogie Boogies is worth 1 gold piece. Oh no, inflation!! Let’s quickly make some more bills to compensate! And by the end of the following week, it took 5000 Oogie Boogies to get to a valid of 1 gold piece.

So the bank said, scratch that. Oogie Boogie bills are better used as toilet paper. Let’s make some new bills. Let’s only make 5000 this time and we’ll call them Binga Bonga Bills. They sound cooler as well. One Binga Bonga Bill is worth one gold piece, so they’re much more valuable. Inflation solved!

Of course, it’s much more complex than this and there’s a lot more at play, which i don’t understand. But I think 5 year old me would understand this.