The main methods of monetary reform

When the stability of the financial system is violated, various methods of monetary reform are used in the country. Transformations are aimed at radically eliminating the shortcomings that have arisen in it. The government is moving to the use of a stable financial unit, which has a stable purchasing power. This ensures the development of relations inherent in a market economy.

Let's consider further the basic methods applied at monetary reforms.

General information

Methods of implementing monetary reforms, their characteristics are determined by regulations aimed at stabilizing the financial system. In the process of transformation, discounted banknotes are withdrawn, and new ones are issued in exchange.

Within the framework of reforms, the monetary unit or its gold content can change, the transition from one financial scheme to another is performed. In this case, conversions affect both cash and non-cash circulation. Meanwhile, no method of conducting monetary reforms does not guarantee the sustainability of a new financial instrument in the future.

In this regard, after the transformation, implementation of certain supporting activities is necessary. A significant role in this process is played by financial and credit policy. It should be justified and aimed at regulating the sphere of cash and non-cash turnover.

Classification

Methods of monetary reform include techniques that can, to varying degrees, affect the state of the financial system. In science, there are several ways of stabilization. In particular, the following methods of monetary reform are distinguished:

1. Diversification. It is a policy of the state and banks, focused on the regulation of the monetary reserve structure. This process is carried out by connecting different financial instruments to ensure international settlements and protection against losses. Typically, activities involve the implementation of unstable units and the acquisition of more sustainable.
2. Nullification. This method involves the announcement of the cancellation of an impaired financial unit and the introduction of a new instrument instead.
3. Devaluation. It consists in changing the national currency in relation to foreign currency, accompanied by a decrease in the purchasing power of the monetary unit.
4. Denomination. This method of conducting monetary reforms involves changing the nominal value of a financial instrument. Usually, it is performed under the condition of replacing the previous unit in a certain ratio with the entered one.
5. Revaluation. It involves the restoration of the previously existing gold content of the unit of account.

There are other methods of monetary reform. Deflation, for example, provides for the withdrawal from circulation of an excessive amount of banknotes. This allows you to reduce the amount of money in circulation.

Specificity of transformations

The development of the monetary sphere of the country is reflected in monetary reforms, the prerequisites for their conduct, goals and results. The key task of the reforms is to streamline the circulation of financial instruments and strengthen the entire system.

Methods of monetary reform are chosen depending on various factors:

• Mode of production;
• Specificity of the political structure;
• The position of certain classes in society;
• General state of the economy in the state.

Existing methods of monetary reform involve the removal of all or a certain percentage of paper signs, replacing them with new ones, restructuring the entire financial and credit sphere, changing the exchange rate and so on.

Nullification

The name of this method has Latin roots. It comes from the words nullus - "nonexistent", "no" and facio - "do". Monetary reform as a method of combating inflation is used by the government, as a rule, only in extreme cases. And the nullification is carried out in a situation of deep economic crisis.

It can be conditioned by the need to withdraw banknotes that have lost the validity of a legal settlement instrument. Such a situation arises, as a rule, with the change of political power. In some cases, nullification coincides with devaluation. In this case, there is an exchange of devalued signs of the old sample for new ones at a reduced rate.

This method of carrying out monetary reforms is relevant in cases when the economic crisis has reached such a level that the cost of a paper unit of account is practically reduced to zero.

Denomination

This name also comes from the Latin word nominatio, which means "name".

Methods of monetary reform include measures to change the nominal price of settlement tools with the exchange of old signs for new in a certain ratio. In the same proportion, the tariffs, prices, wages, etc., are recalculated.

The denomination is usually used to stabilize the circulation of money during inflation. However, this technique can also facilitate the simplification of the settlement system. In fact, denomination is a way of strengthening the state monetary unit.

Enlargement of the price scale occurs through the deletion of zeros. Devaluation in Russia was carried out on August 17, 1998. Enlargement in this case occurred almost 4 times - instead of 6.1 rubles. For 1 USD, 24 rubles were set.

Features of terminology

The concepts used in characterizing the changes in the unit of account do not in all cases allow us to accurately assess the essence of measures. For example, a denomination usually means a reduction in the nominal expression of financial instruments. This characteristic is acceptable for analyzing the reforms that took place in Russia.

In particular, the definition refers to the denomination of 1922. The ruble, issued in that year, replaced 1000 signs that had been issued earlier. A similar characteristic of the denomination is also applicable to the 1923 reform. In this year, the issued design marks were correlated with the emitted units in 1922 as 1: 100.

In 1961 a new replacement was made. The money released earlier changed to new ones in the ratio of 10 to 1 unit, issued in 1961. This measure was reduced to a change in the nominal value of the settlement instrument. This mattered mainly for the financial turnover within the state. Meanwhile, along with the denomination, the gold content of the unit of account was reduced 4.5 times. This measure was assessed as independent and related mainly to operations with foreign countries.

The name of the denomination in the Presidential Decree, approved on 04/08/1997, is not specified exactly. It is a way of "striking out zeros". In 1998, the denomination in the country was conducted in the proportion of 1: 1000. Under the Decree, the nominal value of the signs was to be changed, but not a monetary unit. At the same time, the denomination, in its essence, extends not only to cash, but also to financial instruments used in non-cash transactions.

Effects

In the crisis conditions of 2009, the gradual depreciation of the ruble caused an increase in the value of 1 US dollar. With this change, there are certain negative consequences. In particular:

1. Increased interest in increasing the volume of exports. This is due to the fact that a unit of foreign exchange earnings can get a large ruble amount.
2. Increase the value of products in domestic markets. This is especially noticeable with regard to imported goods. This, in turn, negatively affects the material condition of the population.
3. Reducing the value of ruble savings.
4. Deteriorating conditions for the supply of foreign equipment.

All these consequences must be taken into account by the government choosing the methods of monetary reform. As part of the transformation, it is necessary to envisage measures to eliminate the negative phenomena of reducing the ruble rate for both the population and enterprises.

Devaluation

This name comes from the Latin devalvatio. In this word, the prefix de means moving down, and valeo means "standing", "meaning".

Methods of monetary reform include measures to officially lower the price of the unit of account. It was accompanied by the transformation of the financial system during the functioning of the metal signs. Devaluation at the same time was carried out by legislative reduction of the gold content of a financial unit or a decrease in the rate of banknotes relative to foreign currency or gold.

In modern conditions, the use of this method indicates a crisis in the monetary sphere of the country, a devaluation of money, or a significant (long-term) balance of payments deficit.

With devaluation, exports are encouraged, but at the same time, the size of the state's external debt is increased, and the cost of imported products is increased. As a result, the political and economic contradictions that are present in the economic system are exacerbated.

Revaluation

One of the methods of monetary reform is to limit the inflow of foreign speculative capital into the country. Revaluation (restoration) allows you to contain the increase in money supply and slow the price increase in domestic markets.

For example, after the First World War in England, in 1925-28, the government restored the gold content of pounds that existed before the war. The revaluation was carried out by raising the official rate of the national currency against the dollar.

Transformations in Russia 1895-1997.

During this period, S. Yu. Witte conducted monetary reform. Transformations were caused by:

1. The instability of the country's financial system.
2. Undeveloped external and internal economic relations.
3. Abolition of serfdom. As a result of the adopted law, many free people have appeared in the country.
4. The feudal backwardness of the state against the backdrop of the capitalist development of Europe.
5. Absence of foreign capital inflow.

The monetary reform of Witte was carried out by the method of devaluation. The gold content of the unit of account was reduced by 1/3. The gold ruble was considered a coin sign. The state bank was formed cash, the amount of which amounted to 1095 million rubles. At the same time, the named financial institution was given the opportunity to issue banknotes. Their amount was to be 1121 million rubles. And be provided with a gold cash. As a result of the transformation:

1. The structure of the circulation of financial instruments has changed significantly for the better.
2. The ruble managed to take the first position among all currencies of free conversion. At the same time, he overtook the US dollar and the pound sterling.
3. Foreign funds began to flow into the country.
4. Russia was recognized as a reliable and solvent economic partner and rose to capitalist lines.

An Important Moment

It should be noted that the importance of factors in the implementation of monetary reforms is not the same. Often, only with all the necessary conditions, transformations can become successful. In the case of Witte reforms, the necessary prerequisites existed in the form of productive growth and an almost deficit-free budget. But since the transformation provided for the transition to a free exchange of banknotes for gold, the necessity to form an appropriate stock was of particular importance. To achieve this goal, the slogan "We will not eat, but we will remove it" was put forward. And thanks to exports, the necessary capital was accumulated.

Transformations of 1922-1924

This reform was aimed at eliminating the negative consequences caused by the Civil and First World Wars. The key task was the removal of the rapidly depreciating unit of account from circulation. In the years 1922-1924. There were no necessary prerequisites for change, but there were conditions that required reforms.

These factors consisted in the fact that in circulation the mass of foreign currency began to prevail over the number of national settlement signs. Transformation began with the release of chervonets. Due to the lack of necessary conditions, the reform was completed only in 1924.

Here it is necessary to note the importance of production growth. Particularly increased the share of agricultural products. This factor has had a favorable effect on the course of the transformation. At the same time, the government had a large enough gold and foreign exchange reserves, but there was also a significant budget deficit. It was the need to overcome it that affected the duration of the transformation.

General background

The country's historical experience in the implementation of monetary reforms makes it possible to identify three key factors for successful implementation:

1. Production growth. It ensures an increase in supply and a reduction in the price increase for products. While maintaining the stability of the unit of account, these factors are of paramount importance.
2. Absence of a budget deficit. It allows you not to use money issue and not to attract credit funds to cover expenses. Due to this, solvent demand is limited and its likely impact on price increases.
3. Presence of a sufficient volume of gold and foreign exchange reserves. It helps maintain the stability of the national currency rate, if necessary, ensure the import of products and increase its supply in the markets.

Control questions

When studying the historical path of Russia, special attention is paid to crisis situations and government measures taken to exit them. To understand how well the information given above is learned, you can test yourself by answering a few questions:

1. What are the methods for carrying out monetary reform?
2. What are the prerequisites for successful implementation of the reforms?
3. What negative consequences can arise when the ruble rate is reduced?
4. What is the peculiarity of the transformations in 1895-1997?
5. Give a description of the monetary reform of 1922-1924? What is the reason for its duration?

Undoubtedly, the economic situation is now significantly different from the one that was earlier. However, when developing stabilizing measures it is necessary to take into account the experience of the past.