Picture walking into a grocery store and seeing a carton of eggs priced at 120,000 rials. It is not that the eggs are infused with gold and platinum. The numbers got bloated. Iran now wants to tidy up the digits by cutting four zeros from the rial. In practice, 10,000 old rials will become 1 new rial, and prices, wages, and invoices will all shrink by the same ratio. If a loaf of bread costs 100,000 rials, it’s revised price-tag will show 10 new rials. But this is not a drop in price, it’s the same expense in fewer digits. Parliament’s plan has allotted the central bank up to two years to prepare this pseudo-reform, then another three years for the dual circulation of old and new currency.
Why do this at all? Because harsh inflation makes everything clumsy and awkward. Dropping zeros makes life simpler, invoices become readable, price tags begin to look normal, and the central bank does not need to print bills with a parade of zeros. There is also a psychological aspect. If the numbers look normal, people might feel things are back under control.
Why does inflation exist in the first place? Inflation occurs when governments pour new money into the economy at a rate exceeding the growth rate of available goods and services. As a result, the value of money depreciates, that is, prices increase and each banknote buys a smaller amount of goods and services. Governments use money printing to finance public deficits when they cannot or do not want to raise taxes to balance the government’s deficit or issue more debt (in other words, to sell more bonds), thus they increase their expenses on interest payments and reimbursement of loans they took from the public. The price hikes resulting from money printing is the reason why this form of financing government deficit is called inflation tax. It is the cheapest and cruelest form of taxation, as it does not necessitate the involvement of tax authorities and auditing, and it harms the most unfortunate segment of society, the poor, who don’t have the knowledge or ability to protect themselves against the constantly rising prices.
One of the prices that skyrocket in times of inflation is the price of foreign currency. When the local currency weakens against foreign currencies, imports get pricier. In Iran, because of sanctions and limits on foreign exchange and banking, dollars are scarce, and the unofficial foreign currency markets compensate through sharp price rises. The results are a leaping and volatile exchange rate, shortages and production bottlenecks, black market growth, and even more inflation.
This brings us to the core question. Will cutting zeros stop inflation? The honest answer is no. Redenomination changes how prices are written, not the economy underneath. It is like switching a ruler from centimeters to meters. The numbers get smaller, but the length does not change. If the money faucet stays open and the dollar keeps applying pressure from above, prices will keep climbing even with shorter numbers. Countries have tried this before. In Venezuela, zeros were chopped without fixing the budget, monetary policy, or the FX market, and inflation did not vanish.
So why do it in the first place? Because it has operational and symbolic value. It reduces daily friction and falsely signals to the public that someone is trying to restore order. However, as Nobel laureate Thomas Sargent has taught us, inflation cannot be uprooted without prohibiting the government from printing money, without the establishment of a strong and independent central bank that oversees monetary policy and is responsible for stabilizing inflation, and without the government’s commitment to run low deficits.
Nevertheless, the Iranian government cannot commit to these proven policy measures as it insists on spending huge amounts on unproductive activities, such as ballistic missiles and nuclear weapons, and not on productive ones like improving water and electricity infrastructures, which would necessarily boost economic growth and lower the inflation rate.
Until then, it must be said plainly. Dropping zeros tidies the numbers, not the prices. It makes life easier at the cash register and on the spreadsheet, but it does not shut the valve that pushes prices up.
Photograph: Central Bank of Iran, Wikimedia Commons