Devaluation

devaluation, decreasing the value of one nation's currency relative to gold or the currencies of other nations. It is usually undertaken as a means of correcting a deficit in the balance of payments. Although devaluation occurs in terms of all other currencies, it is best illustrated in the case of only one other currency. For example, if the United States is losing money in its trade with France, a decision may be made to devalue the U.S. dollar by 10%. Whereas previously one dollar may have been worth about 5.5 francs, a 10% devaluation causes it to be worth only about 5 francs. Such a move causes French products to become more expensive for Americans and U.S. products to become cheaper for Frenchmen. An ounce of French cologne that previously cost 55 francs in France and 10 dollars in the United States may still sell for 55 francs in France but will now cost 11 dollars in the United States. The net result of such a devaluation is that U.S. exports tend to increase and imports tend to decrease, thus helping to reverse the balance of payments deficit.

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devaluation

Reduction in the exchange value of a country's monetary unit in terms of gold, silver, or foreign currency. By decreasing the price of the home country's exports abroad and increasing the price of imports in the home country, devaluation encourages the home country's export sales and discourages expenditures on imports, thus improving its balance of payments.

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Devaluation 

an official lowering of the value of the monetary unit.

A monetary reform is usually accompanied by devaluation, which is implemented in capitalistic or feudal countries by a legislative measure to reduce the gold content of the monetary unit or to lower the rate of exchange of paper money in relation to gold or foreign money.

Devaluation at the present time is evidence of the crisis of the capitalist foreign-exchange system (as one of the manifestations of the general crisis of capitalism); it is a consequence of the loss of value of money and of a significant and prolonged balance of payments deficit. Devaluation encourages export but increases the foreign indebtedness of a state and causes a rise in prices of imported goods. By the same token, devaluation intensifies the political and economic contradictions of capitalism. The burden of devaluation, through the rise in prices and tariffs, is carried basically by the working masses; this in turn lowers living standards and intensifies the class struggle.

Before the general crisis of the capitalist system, devaluation to a greater or lesser degree contributed to the stabilization of the monetary system because it was (directly or indirectly) accompanied by a restoration of the exchange of the symbols of value for gold or silver (in coins or in bullion for the use of private individuals). Devaluation was implemented openly or in a concealed form. In an open devaluation, money was exchanged at a lower rate (for example, in Russia in 1839, 1 silver ruble equaled 3 rubles 50 kopeks in assignats); in a concealed devaluation, the exchange of money was effected at the nominal value but with a reduction of its gold or silver content. Thus, in 1897 in Russia, gold money was exchanged for bank notes using the ratio 1:1, but the gold content of the ruble was reduced by one-third, that is, from 26.1 to 17.4 doli of pure gold (1 dolia = 0.044435 g).

After World War I (1914-18), a number of devaluations were effected in capitalist countries (such as the open devaluation in Germany in 1924 and a concealed devaluation in France in 1928). Since the 1930’s devaluations, as a rule, have not brought stabilization to the monetary system and have not restored the exchange of bank notes for gold by private individuals; they have been carried out basically by means of reducing the official rate of exchange of bank notes. The first mass devaluation of capitalist currencies occurred at the end of 1949, when Great Britain and 36 other countries reduced the ratio of exchange of their currencies to the American dollar by from 12 to 30 percent and more. The second mass devaluation was effected in 1967 by Great Britain and by 25 other countries (the reduction of the rate of exchange amounted to 5 to 25 percent). In August 1969 the French franc was devalued by 11.11 percent. A total of more than 400 devaluations took place from 1949 to 1971 in capitalist states (more than once in some countries).

With the intensified world monetary crisis, the American dollar, which is the key currency of the capitalist world, was devalued by 7.89 percent in December 1971. Devaluation of the American dollar entailed devaluation of the currencies of many capitalist countries, but at the same time the currencies of the major capitalist countries—the main trade competitors of the USA-were revaluated. Devaluation often occurs in developing countries, especially those of Latin America. Thus, from 1965 to 1971 there were more than ten devaluations in Argentina and about ten in Brazil.

V. A. DROZDOV