How does a new currency stop inflation?

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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?

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18 Answers

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Hyper inflation often happens when monetary policy lets the government issue a lot more currency without any underlying backing for the value of the money being issued, devaluing the money in circulation, ending up in a feedback loop.

The triggers for the government issuing more currency can vary, such as trying to alleviate some other major economic crisis, but that’s the general idea.

When the government eventually throws in the towel on the old currency there is often a period where the country will adopt some third country currency (Eg US dollar) for transactions while they try to reset their systems. As they can’t print more US dollars/ Euros/Whatever everyone is stuck with a currency that’s not hyper inflating, which often brings its own pain, but a better type of pain than hyper inflation.

When the country has sorted out whatever shitshow led to the hyperinflation to start with they’ll start issuing their own banknotes again, but often backed by another currency to force stability. They do this by buying currency reserves in the backing currency (Eg massive quantities of U.S. dollars/ Euros / etc) and then issuing their own notes against those at a fixed rate – called pegging the currency. This forces stability on the newly issued currency as it forces limits on how much currency can be issued, provided monetary policy isn’t changed.

This idea of currency backed by another is quite common – eg a lot of the Middle East and some of Asia has their currency set up pegged to the US dollar, sometimes with a mix of Euros in the overall valuation.

It makes it tougher for some monetary policy things – eg interest rate adjustments, but the trade off gives better currency stability.

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