Decimalisation is the process of transitioning from a fractional system of measurement into one that executes calculations using a power of 10. As it relates to the financial world, decimalisation can be applied to currencies and security pricing, with fractions being replaced by subunits of 100. The dollar currency denomination and penny-increment stock pricing are examples of decimalised systems of measurement within the world of finance.
Beginning in 2001, the Securities and Exchange Commission (SEC) ordered all United States stocks to be priced using decimals. In accordance, the NYSE, NASDAQ and American Stock Exchange made the change from fractional pricing to decimal pricing. The decision by the SEC to make decimal pricing a priority was an attempt to align the trade of American equities with other internationally prominent centers of trade.
The decimalisation of U.S. equities brought considerable change to the way stocks were priced. They would no longer be quoted in sixteenths of one dollar (1/16th = 6.25 cents); instead, they were to be quoted in one-cent increments. The impact was substantial, in that the basis for a stock's "spread," or difference between the bid and ask price, was now a single penny instead of six cents.
In addition to the provision of a tighter spread, decimalisation also increased liquidity through the creation of many different pricing levels. Under fractional pricing, the only price available to buy stock was on every 16th of a dollar. Decimal pricing created the ability to buy on the cent, which increased the liquidity of equities.
The decimalisation of a currency works in a similar fashion to that of stock pricing. In place of fractional monetary measurements, a standardised and decimal-based system is instituted. The base currency unit is comprised of subunits that are most commonly valued as 1/100th of the base currency. The subunit is the smallest denomination of the national currency available to the public for exchange.
Implementing a monetary system reliant on decimals affords several advantages to both the individual and financial institution. A few perks related to implementing a decimal currency include:
- Speed of conducting financial transactions,
- uniformity of international trade
- and a streamlined process of creating physical money
Detractors from decimalisation contend that the actual transition from one monetary system to another is expensive and inevitably leads to currency devaluation. Also, the break from traditional forms of money can be seen as a loss of national identity.
Currency Decimalisation: Overview
The origins of currency decimalisation can be traced to early 18th century Russia and the rule of Czar Peter the Great. The creation of the Russian ruble marked the first transition into a decimal-based monetary system. Initially, one ruble was equated to the value of 28 grams of silver, with one "kopek" being equal to 1/100th of a ruble. The use of the kopek as a subunit made the Russian ruble the world's first decimalised currency.
The Napoleonic era brought the idea of a decimal currency to Western Europe. In 1793, France adopted a decimal monetary system and introduced the modernised franc. The new franc was made up of 10 "decimes," with each decime consisting of 10 "centimes." The modern franc served as the Western world's introduction to decimalised currency.
Since then, money around the globe has evolved into a standardised structure via currency decimalisation. Listed below are the eight major global currencies that have undergone the transition from fractional to decimal denomination:
- United States dollar (USD): In 1794, USD replaced the colonial currencies of the period. Championed by Thomas Jefferson, USD was created as a decimal currency, with US$1 being equal to 100 pennies.
- Great Britain pound (GBP): GBP was decimalised on February 15, 1971. The shilling, half crown, six-pence and pound sterling were replaced by the new British pound and pence.
- Australian dollar (AUD): The Currency Act of 1963 outlined the plan for a decimalised AUD in place of the Australian pound and the British-style monetary system. AUD was formerly adopted by Australia in 1966.
- New Zealand dollar (NZD): In July 1967, New Zealand followed Australia in the decimalisation of their national currency. NZD replaced the New Zealand pound and use of the British monetary system.
- Canadian dollar (CAD): The provinces of Canada employed numerous forms of money, ranging from Canadian pounds to assorted varieties of precious metal specie. It was not until 1871 and the Uniform Currency Act that Canada adopted an official decimal currency, CAD.
- Swiss franc (CHF): Influenced by Napoleonic France, Switzerland unified its monetary system in 1850 with the Federal Coinage Act. It created the Swiss franc, which was made up of 100 centimes and inspired by the original French franc.
- Japanese yen (JPY): The yen was introduced in Japan's New Currency Act of 1871 by the Meiji government. Originally, one yen was made up of 100 sen. The sen is no longer in use, with the yen itself being the smallest denomination of currency in Japan.
- Euro (EUR): Since its institution in January 1999, the euro has been a decimal-based currency. One euro is equal to 100 cents.
At the present time, decimal based currencies are the global standard. With very few exceptions, nearly every country on the planet implements a decimalised monetary system.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…