In its essence, it is LARGE inflation, followed immediately by LARGE deflation. It is treating money as the marker it is, but making sure all the coins fall in the right slots.
Now, the best way to do this would be just to do it. Don’t announce it: just do it. That won’t happen here, of course, so we need to think through some details. It literally does not matter if we even change how the physical dollar looks. Most money is 1’s and 0’s anyway, and that is where the inflation and deflation happens.
Let’s think this through, though. The day is announced, and comes. For simplicity a national holiday is declared. All debts are paid in full. All banks are fully capitalized (in fairness, all the major Federal Reserve banks should probably have their collective assets seized; for pragmatic purposes, though, I am willing to let their ill gotten wealth stand, provided the system they used to get it is ended). Your credit card bill is gone. Your mortgage is gone. Our national debt is gone. Nobody owes anybody anything. The banks are full of money, and you now have more available cash.
What happens? What happens to that $500 you have in the bank in savings? We just quadrupled the amount of money in circulation. Now, the money the banks loaned was by and large created ex nihilo. When you get a loan, you pay it out. To build a house you pay carpenters and plumbers, who spend that money. When you pay the bank back, though, you take an equivalent amount of money, plus interest, OUT of circulation, negating its inflationary effect. [note, stuff like this is why it is so hard to measure “inflation”, which is a very slippery concept]. I just paid the bank back for you, without taking it out of circulation. This means the inflationary effect remains.
In concept I have Dollar One, and Dollar Two. Dollar Two is worth, say, 10 of Dollar One, after our money printing is done. What seems to make the most sense is that by a feat of accounting magic, your $500 is simply converted from Dollar One to Dollar Two. We get professional, actually competent, economists to estimate how this should work.
The day comes, and there will be uncertainty. Coffee might be priced anywhere from $1/cup to $50/cut, because people just don’t know. Your home might have been worth $250,000 of Dollar One, but with Dollar Two you just can’t be sure, until people start buying and selling again.
This is, however, the beauty of free markets: even when disrupted, they are self stabilizing. Within a week or so, I would expect most of the uncertainty to be gone. It may be that the price of your home falls to $125,000, but this will also mean that the buying power of the dollar has doubled, meaning the price means nothing at all. All of this can be sorted out in countless individual transactions, unhindered by the government.
I think some small country can make this work. Do you suffer through decades of failure, only to fail more, or try something bold and untried?
I would suggest this for the Greeks, but they don’t have a central bank, and are in any event too irresponsible not to wind up in the same place 10 years down the road.