<p>Because money is really just arbitrary numbers, and those numbers only really have any meaning in relation to the other numbers in the set. For example:</p>

<p>Average salary is \$50,000 and a entry-level car costs \$10,000. If the price drops by \$5,000, it's well known that sales will go up, ceteris paribus. But what we increased all prices and all wages by a factor of 100,000? Would that change people's behavior in an otherwise identical system? E.G. now the average salary is \$5,000,000,000 and the average car costs \$1,000,000,000 and the price drops 500,000,000, then what happens? </p>

<p>Well there is a fancy economic name for the theory that covers this (which I forget at the moment), but the answer is No, nothing would change. It's quite obvious that humans are very insensitive to absolute price and very, very sensitive to relative price. (There have been several economy-wide currency revaluations in other countries that serve as examples of this.) Adding or taking away a couple zeros at the end of the numbers doesn't change the really make a difference (provided you apply the change uniformly to all numbers everywhere).</p>

<p>The two major problems that hyperinflation a la Weimar Republic cause are 1.) governments are slow moving beasts and don't react quickly enough to start printing 1 billion dollar notes, etc. so you end up having to use a wheelbarrow full of cash for purchases (which in today's economy isn't as big of a concern since almost all money is just electrons in a computer somewhere,) and 2.) changing prices and adjusting to changing prices and adjusting your forward looking predictions about prices are all not costless actions. It takes time and energy to do any one of those three things. Because of that fact, it imposes a very real dead weight loss on the economy as a whole when prices increase or decrease very rapidly. The faster things move, the more costly it is to adjust and the more often you have to do so, so the DWL becomes exponentially greater than a more slowly-paced situation.</p>

CC BY-SA 3.0
2014-11-19T15:49:09.150Z
Could the fancy economic name you forgot be the classical dichotomy?
J. Gardiner
CC BY-SA 3.0
2014-11-21T03:18:54.390Z
Is the fancy economic name, homogenous to degree zero? or superneutral?
Jamzy
CC BY-SA 3.0
2014-11-18T21:26:03.670Z
2014-11-19T00:28:22.233Z
2014-11-19T00:28:22.233Z
Nate Vomocil
<p>There is a long, theoretical answer to your question. I'm going to give a much abbreviated version, and some pointers to some excellent theoretical literature on the topic. </p>

<p>The immediate answer is that the level of the currency doesn't matter, but rather the <em>change</em> in the level of the currency -- or, inflation -- matters. Then the next question is, why don't economists like very high inflation? Or rather, why do economists seem to prefer relatively low inflation?</p>

<p>The short answer to this question (as far as a short theoretical answer can go) is that when you set up a "modern" macroeconomic model -- that is, a Dynamic Stochastic General Equilibrium (DSGE) model -- and add elements to the market portion such that prices have a sluggish or 'sticky' component, and add a central bank which tries to set inflation such that the best society-wide outcomes happen, one of the emergent results is that the monetary authority (the central bank) would like to smooth out a number of possible effects which distort how the private household behaves. A distortion here means that the private household will act in a way that is best for the HH at the micro level, but bad for the economy at the macro level (which then filters back down and is also bad for the household at the micro level). One of these distortions is that the household will want to save some money in a non-interest-bearing asset -- i.e. cash. Basically the household will want to shove some cash in a mattress. However this is not good for the economy as a whole. In this basic version of the model, the central bank can eliminate this distortion by setting inflation to zero. </p>

<p>This result emerges from this basic theoretical model, and is called "the Friedman rule."</p>

<p>Good references to this in more detail are Jordi Gali's NBER working paper, <a href="http://www.nber.org/papers/w8767.pdf" rel="nofollow">here</a>, specifically the intro and section 5 (specifically, page 21), and Gali's longer monograph, <a href="http://rads.stackoverflow.com/amzn/click/0691133166" rel="nofollow">here</a>.</p>

<p>Practically, because inflation is measured with some error, central banks target some value of inflation just above zero, with the goal that "true inflation" will then be somewhere closer to zero. There are other reasons as well, but I unfortunately don't have a great reference for these points. Central banks' annual reports is actually a great place to look here, as the text is written to explain such questions in layman terms. The US Federal Reserve board, and Reserve System Banks (for example the San Francisco Fed and Saint Louis Fed) have some great resources that explain these things. The Bank of England and the Riksbank (Bank of Sweden) also have some excellent resources. (Another expert is welcome to correct this and/or add references!)</p>

CC BY-SA 3.0
2014-11-18T22:27:54.437Z
2014-12-01T02:41:57.917Z
2014-12-01T02:41:57.917Z
CompEcon
<p>When economists worry about inflation or deflation, they are not necessarily worried about the normative value of the currency. The number of zeroes on any given bill only become a problem with massive hyperinflation, like with the <a href="http://en.wikipedia.org/wiki/Zimbabwean_dollar" rel="nofollow">Zimbabwean dollar</a> or massive deflation, of which I do not think a given real world example exists (If this is wrong, please correct me). This aspect, I will cover in the second paragraph. What economists worry about is the relative value of the currency. When economists worry about inflation, they often worry about price inflation. They worry that the <a href="http://en.wikipedia.org/wiki/Market_basket" rel="nofollow">basket of goods</a> that the public can buy shrinks in size. They worry about increasing food prices, gasoline prices (and energy prices in general), rent prices (in housing), et cetera. Similarly enough, they may also worry about deflation with regards to economic factors like asset prices, which institutions like the Federal Reserve might encourage to rise. In particular, the Federal Reserve's website argues that, <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm" rel="nofollow">"Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy."</a> The worry here is that falling asset prices will cause a drop in aggregate demand which will drive the economy into a recession, or worse a depression.</p>

<p>With regards to normative values for currencies, having a surplus of bills and coins that are either too little or too much in real terms is a problem. If half the currency in America are pennies, then the treasury's resources are producing money that is impractical to use for common, everyday use. Even today, the common disdain for getting change in pennies is shown through <a href="https://www.youtube.com/watch?v=77C47XYm_3c" rel="nofollow">social media</a>. One problem I could see with a currency having too many zeroes in its common denominations is if the public falls for the psychological effect known as the <a href="http://en.wikipedia.org/wiki/Money_illusion" rel="nofollow">money illusion</a>. The money illusion happens when people think in nominal terms as opposed to real terms. People overvaluing their currency may be unwanted if it prevents consumers from trading with other currencies. This could possibly lead to a country exporting less because the public has an artificially high demand for their currency (This is a really huge assumption, don't take this claim too seriously) and distorting the exchange ratios between the hypothetical currency and any other real world currency. </p>

<p>One point to note is that Friedman gave an analogy of a helicopter flying over a city and dropping newly printed money evenly across the country to avoid money injection problems (The Optimum Quantity of Money, 1969). I believe (I am no Chicago school economist) that he implicitly claimed that having the normative value of money raise is fine as long as the inflation happens for all those that hold the currency. He argued that the problem was with the method of money injection. Uneven money injection (There is a term for this, and I am hoping that someone will remind me what it is) create distortions in the real wealth of individuals. </p>

<p>As a conclusion, I am not sure if there are any standards for currencies with regards to the number placed on the common denominations of the money. The only example I can think of that would indicate some bounds would be the money illusion, and even that is just speculation on my part.</p>

CC BY-SA 3.0
2014-11-18T22:07:41.873Z
2014-11-18T22:16:33.153Z
2014-11-18T22:16:33.153Z
rosenjcb
<p>First of all, money has three basic functions: a store of value, a medium of exchange, and a unit of account.  Markets are able to work with any form of "money" as long as it is able to satisfy each of these conditions.  This explains why economies are still able to work with dollars, euros, <a href="http://online.wsj.com/articles/SB122290720439096481" rel="nofollow">mackerel</a>, and <a href="http://dailyreckoning.com/bitcoin-the-prison-cigarette-of-global-currencies/" rel="nofollow">cigarettes</a>.  </p>

<p>You are correct in saying that hyperinflation is bad, but the new numbers produced from the inflation is not necessarily bad.  Hyperinflation is merely a high rate of inflation and causes an overall increase in the prices of goods.  The reason inflation/hyperinflation is bad is because it destabilizes the money as a store of value.  The money is able to perform best in the economy when it can best fulfill it's three-pronged purpose.  </p>

<p>Also, remember that the market prices are completely dependent upon the supply and demand of the good.  Let's say that you want to purchase a good but will only buy it if it cost less than a certain amount, say one hour of your per hour wage.  Let us also say that the good is being sold at the price of one hour of your per hour wage.  In this example, regardless of how much the prices have been changed by inflation, you are still going to value the good at the same "price"; the good still costs you the same amount of time and effort (in this example, one hour at your job).<br>
In the strictest sense, the price of the good does not matter.  The value of the good is determined by how much you are willing to pay for it, and you arbitrarily decided that you would not pay more than the per hour value of your job.  Because the value that you assigned the good is not an objective number value, it is impossible for us to find a good's "ideal value" and keep the price "anchored" to that standard.  </p>

CC BY-SA 3.0
2014-11-18T23:41:16.593Z
2014-11-30T20:09:39.547Z
2014-11-30T20:09:39.547Z
Mathematician
<p>If a currency can be worth too little (e.g. needing \$10,000,000,000 to buy a loaf of bread) and worth too much (e.g. being able to buy a loaf of bread for $0.00001), why isn't there an "ideal value" (a point, range, or a shifting set of priorities based on market conditions) that a currency could be fixed or drawn toward?  </p>

<p>Many everyday transactions are still done in cash, requiring mental calculations from the transacting parties. Too large numbers and too small numbers create transaction costs that, at least for the extremes, cannot be ignored.  So conceivably, some "middle" point could be considered "ideal" as regards the <em>efficiency of money as medium of transactions</em>.</p>

<p>What forces may prevent such an "ideal value" for a currency from being established?</p>

CC BY-SA 3.0
2016-08-04T00:05:57.447Z
This was closed, but an answer which I think is very important is that the numbers are being used by human beings.  While the theoretical economic processes behind the numbers often don't care about the numeric value, human beings react to different sized numbers differently.  At a trivial level, having to count zeros on a Zimbabwean dollar would be frustrating.
Cort Ammon
CC BY-SA 3.0
2014-11-18T21:19:40.677Z
Why is it obvious that $0.25 for a car is bad? Indirect utility is homogeneous in prices and income. There is the problem of the smallest unit of currency being too large, but that's avoidable with electronic money and bank accounts could still go past the hundredth place. What could be problematic is rapid change in price levels relative to income.
Pburg
CC BY-SA 3.0
2014-11-18T21:54:30.927Z
Would you mind clarifying your question, specifically the third and fourth paragraphs.  I am having difficulty interpreting your question.
Mathematician
CC BY-SA 3.0
2014-11-18T22:12:11.207Z
Phrases such as "the economists I've encountered" are very vague, unverifiable, and unfalsifiable. Please provide citations of published pieces, or omit the phrase.
Mico
CC BY-SA 3.0
2014-11-18T22:16:00.627Z
@Mico You're hoping to verify or falsify my claim that I've had a conversation? They aren't published studies, I'm talking about personal discussions with individuals, and I'm saying that such conversations haven't helped my confusion on this topic. The search for more authoritative information is why I posted the question.
Nerrolken
CC BY-SA 3.0
2014-11-18T22:25:03.910Z
You misunderstood my point: Since you're (obviously) the only person who can either verify or falsify the claim, it doesn't support, advance, or refute anything.
Mico
CC BY-SA 3.0
2014-11-18T22:27:05.997Z
\$0.25 for a car is bad because it does not use a pragmatic range of the rational numbers. It means a cucumber would cost \$0.00001, whereas it is much more convenient if the most used monetary units are not fractions.
sshine
CC BY-SA 3.0
2014-11-18T22:36:04.133Z
You are confusing optimal price level and optimal changes in prices.
FooBar
CC BY-SA 3.0
2014-11-21T03:26:50.267Z
I think this question is ok. The wording is pretty bad but it is searching for a concept that economists use a lot. And a core assumption. Maybe it could be rephrased as "Why do currencies nominal values vary so much". Looking at the answers, they are sensible. I would strongly encourage the rewording of the question though.
Jamzy
<currency><value><inflation><deflation>
Why isn't there an "ideal value" for a given currency?
Nerrolken
# Why isn't there an "ideal value" for a given currency?

(Asked by: username_0 on 2014-11-18)

If a currency can be worth too little (e.g. needing \$10,000,000,000 to buy a loaf of bread) and worth too much (e.g. being able to buy a loaf of bread for $0.00001), why isn't there an "ideal value" (a point, range, or a shifting set of priorities based on market conditions) that a currency could be fixed or drawn toward?

Many everyday transactions are still done in cash, requiring mental calculations from the transacting parties. Too large numbers and too small numbers create transaction costs that, at least for the extremes, cannot be ignored. So conceivably, some "middle" point could be considered "ideal" as regards the *efficiency of money as medium of transactions*.

What forces may prevent such an "ideal value" for a currency from being established?

**Tags:** currency, value, inflation, deflation
> **Comments:**
> **username_2**: Why is it obvious that $0.25 for a car is bad? Indirect utility is homogeneous in prices and income. There is the problem of the smallest unit of currency being too large, but that's avoidable with electronic money and bank accounts could still go past the hundredth place. What could be problematic is rapid change in price levels relative to income.  
> **username_3**: Would you mind clarifying your question, specifically the third and fourth paragraphs.  I am having difficulty interpreting your question.  
> **username_4**: Phrases such as "the economists I've encountered" are very vague, unverifiable, and unfalsifiable. Please provide citations of published pieces, or omit the phrase.  
> **username_0**: @Mico You're hoping to verify or falsify my claim that I've had a conversation? They aren't published studies, I'm talking about personal discussions with individuals, and I'm saying that such conversations haven't helped my confusion on this topic. The search for more authoritative information is why I posted the question.  
> **username_4**: You misunderstood my point: Since you're (obviously) the only person who can either verify or falsify the claim, it doesn't support, advance, or refute anything.  
> **username_5**: \$0.25 for a car is bad because it does not use a pragmatic range of the rational numbers. It means a cucumber would cost \$0.00001, whereas it is much more convenient if the most used monetary units are not fractions.  
> **username_6**: You are confusing optimal price level and optimal changes in prices.  
> **username_7**: I think this question is ok. The wording is pretty bad but it is searching for a concept that economists use a lot. And a core assumption. Maybe it could be rephrased as "Why do currencies nominal values vary so much". Looking at the answers, they are sensible. I would strongly encourage the rewording of the question though.  
> **username_1**: This was closed, but an answer which I think is very important is that the numbers are being used by human beings.  While the theoretical economic processes behind the numbers often don't care about the numeric value, human beings react to different sized numbers differently.  At a trivial level, having to count zeros on a Zimbabwean dollar would be frustrating.  

---

## 4 answers

### Answer by username_8 on 2014-11-18. Score: 6

Because money is really just arbitrary numbers, and those numbers only really have any meaning in relation to the other numbers in the set. For example:

Average salary is \$50,000 and a entry-level car costs \$10,000. If the price drops by \$5,000, it's well known that sales will go up, ceteris paribus. But what we increased all prices and all wages by a factor of 100,000? Would that change people's behavior in an otherwise identical system? E.G. now the average salary is \$5,000,000,000 and the average car costs \$1,000,000,000 and the price drops 500,000,000, then what happens?

Well there is a fancy economic name for the theory that covers this (which I forget at the moment), but the answer is No, nothing would change. It's quite obvious that humans are very insensitive to absolute price and very, very sensitive to relative price. (There have been several economy-wide currency revaluations in other countries that serve as examples of this.) Adding or taking away a couple zeros at the end of the numbers doesn't change the really make a difference (provided you apply the change uniformly to all numbers everywhere).

The two major problems that hyperinflation a la Weimar Republic cause are 1.) governments are slow moving beasts and don't react quickly enough to start printing 1 billion dollar notes, etc. so you end up having to use a wheelbarrow full of cash for purchases (which in today's economy isn't as big of a concern since almost all money is just electrons in a computer somewhere,) and 2.) changing prices and adjusting to changing prices and adjusting your forward looking predictions about prices are all not costless actions. It takes time and energy to do any one of those three things. Because of that fact, it imposes a very real dead weight loss on the economy as a whole when prices increase or decrease very rapidly. The faster things move, the more costly it is to adjust and the more often you have to do so, so the DWL becomes exponentially greater than a more slowly-paced situation.

> **Comments:**
> **username_9**: Could the fancy economic name you forgot be the classical dichotomy?  
> **username_7**: Is the fancy economic name, homogenous to degree zero? or superneutral?  

---

### Answer by username_10 on 2014-11-18. Score: 3

There is a long, theoretical answer to your question. I'm going to give a much abbreviated version, and some pointers to some excellent theoretical literature on the topic.

The immediate answer is that the level of the currency doesn't matter, but rather the *change* in the level of the currency -- or, inflation -- matters. Then the next question is, why don't economists like very high inflation? Or rather, why do economists seem to prefer relatively low inflation?

The short answer to this question (as far as a short theoretical answer can go) is that when you set up a "modern" macroeconomic model -- that is, a Dynamic Stochastic General Equilibrium (DSGE) model -- and add elements to the market portion such that prices have a sluggish or 'sticky' component, and add a central bank which tries to set inflation such that the best society-wide outcomes happen, one of the emergent results is that the monetary authority (the central bank) would like to smooth out a number of possible effects which distort how the private household behaves. A distortion here means that the private household will act in a way that is best for the HH at the micro level, but bad for the economy at the macro level (which then filters back down and is also bad for the household at the micro level). One of these distortions is that the household will want to save some money in a non-interest-bearing asset -- i.e. cash. Basically the household will want to shove some cash in a mattress. However this is not good for the economy as a whole. In this basic version of the model, the central bank can eliminate this distortion by setting inflation to zero.

This result emerges from this basic theoretical model, and is called "the Friedman rule."

Good references to this in more detail are Jordi Gali's NBER working paper, [here](http://www.nber.org/papers/w8767.pdf), specifically the intro and section 5 (specifically, page 21), and Gali's longer monograph, [here](http://rads.stackoverflow.com/amzn/click/0691133166).

Practically, because inflation is measured with some error, central banks target some value of inflation just above zero, with the goal that "true inflation" will then be somewhere closer to zero. There are other reasons as well, but I unfortunately don't have a great reference for these points. Central banks' annual reports is actually a great place to look here, as the text is written to explain such questions in layman terms. The US Federal Reserve board, and Reserve System Banks (for example the San Francisco Fed and Saint Louis Fed) have some great resources that explain these things. The Bank of England and the Riksbank (Bank of Sweden) also have some excellent resources. (Another expert is welcome to correct this and/or add references!)


---

### Answer by username_11 on 2014-11-18. Score: 2

When economists worry about inflation or deflation, they are not necessarily worried about the normative value of the currency. The number of zeroes on any given bill only become a problem with massive hyperinflation, like with the [Zimbabwean dollar](http://en.wikipedia.org/wiki/Zimbabwean_dollar) or massive deflation, of which I do not think a given real world example exists (If this is wrong, please correct me). This aspect, I will cover in the second paragraph. What economists worry about is the relative value of the currency. When economists worry about inflation, they often worry about price inflation. They worry that the [basket of goods](http://en.wikipedia.org/wiki/Market_basket) that the public can buy shrinks in size. They worry about increasing food prices, gasoline prices (and energy prices in general), rent prices (in housing), et cetera. Similarly enough, they may also worry about deflation with regards to economic factors like asset prices, which institutions like the Federal Reserve might encourage to rise. In particular, the Federal Reserve's website argues that, ["Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy."](http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm) The worry here is that falling asset prices will cause a drop in aggregate demand which will drive the economy into a recession, or worse a depression.

With regards to normative values for currencies, having a surplus of bills and coins that are either too little or too much in real terms is a problem. If half the currency in America are pennies, then the treasury's resources are producing money that is impractical to use for common, everyday use. Even today, the common disdain for getting change in pennies is shown through [social media](https://www.youtube.com/watch?v=77C47XYm_3c). One problem I could see with a currency having too many zeroes in its common denominations is if the public falls for the psychological effect known as the [money illusion](http://en.wikipedia.org/wiki/Money_illusion). The money illusion happens when people think in nominal terms as opposed to real terms. People overvaluing their currency may be unwanted if it prevents consumers from trading with other currencies. This could possibly lead to a country exporting less because the public has an artificially high demand for their currency (This is a really huge assumption, don't take this claim too seriously) and distorting the exchange ratios between the hypothetical currency and any other real world currency.

One point to note is that Friedman gave an analogy of a helicopter flying over a city and dropping newly printed money evenly across the country to avoid money injection problems (The Optimum Quantity of Money, 1969). I believe (I am no Chicago school economist) that he implicitly claimed that having the normative value of money raise is fine as long as the inflation happens for all those that hold the currency. He argued that the problem was with the method of money injection. Uneven money injection (There is a term for this, and I am hoping that someone will remind me what it is) create distortions in the real wealth of individuals.

As a conclusion, I am not sure if there are any standards for currencies with regards to the number placed on the common denominations of the money. The only example I can think of that would indicate some bounds would be the money illusion, and even that is just speculation on my part.


---

### Answer by username_3 on 2014-11-18. Score: -1

First of all, money has three basic functions: a store of value, a medium of exchange, and a unit of account. Markets are able to work with any form of "money" as long as it is able to satisfy each of these conditions. This explains why economies are still able to work with dollars, euros, [mackerel](http://online.wsj.com/articles/SB122290720439096481), and [cigarettes](http://dailyreckoning.com/bitcoin-the-prison-cigarette-of-global-currencies/).

You are correct in saying that hyperinflation is bad, but the new numbers produced from the inflation is not necessarily bad. Hyperinflation is merely a high rate of inflation and causes an overall increase in the prices of goods. The reason inflation/hyperinflation is bad is because it destabilizes the money as a store of value. The money is able to perform best in the economy when it can best fulfill it's three-pronged purpose.

Also, remember that the market prices are completely dependent upon the supply and demand of the good. Let's say that you want to purchase a good but will only buy it if it cost less than a certain amount, say one hour of your per hour wage. Let us also say that the good is being sold at the price of one hour of your per hour wage. In this example, regardless of how much the prices have been changed by inflation, you are still going to value the good at the same "price"; the good still costs you the same amount of time and effort (in this example, one hour at your job).  
In the strictest sense, the price of the good does not matter. The value of the good is determined by how much you are willing to pay for it, and you arbitrarily decided that you would not pay more than the per hour value of your job. Because the value that you assigned the good is not an objective number value, it is impossible for us to find a good's "ideal value" and keep the price "anchored" to that standard.


---

