devaluation


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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 paymentsbalance of payments,
balance between all payments out of a country within a given period and all payments into the country, an outgrowth of the mercantilist theory of balance of trade.
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. 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 Japan, a decision may be made to devalue the U.S. dollar by 10%. Whereas previously one dollar may have been worth about 100 yen, a 10% devaluation causes it to be worth only about 90 yen. Such a move causes Japanese products to become more expensive for Americans and U.S. products to become cheaper for the Japanese. 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.

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

References in periodicals archive ?
Following a devaluation, local general and/or finance managers may discover, among other things, that their planning and budgeting for the year must be redone; that unions want emergency pay raises; and that the government will not allow an increase in prices on controlled items.
It is generally said that the speed with which devaluation is taking place, the rupee may soon reach Rs120-125 against the dollar and that some mechanism has to be urgently evolved with the support of other market players to have the much-needed exchange rate stability.
Analysts say the currency devaluation was a long overdue move but this alone could not spur exports and government needs to take long-delayed reforms particularly in the taxation sector to ease pressure of external debt.
PAGE: Do You think devaluation of Pakistani rupee would attract foreign investors ?
Should devaluation occur, this would have repercussions for our ratings.
Provoking a devaluation of the dirham prior to floating the currency would be counterproductive.
If the CBE opts for a managed float of the pound they will take certain steps to mitigate the cost of the devaluation.
Contrary to the common man's conclusion, a devaluation will often result in a reduction of exports and a deterioration in a country's trade balance and balance of payments.
Assuming that market expectations are realized, despite the CBE's protestations, and a one-off devaluation, or a series of small devaluations, amounting to around 15 percent, will it be enough to ease the pressure on foreign exchange reserves and the Egyptian pound?
The question is whether the Chinese authorities can manage a gradual devaluation that is beneficial for the economy, or if devaluation will be chaotic with negative economic implications.
If the effectiveness of devaluation is coming into question, how will governments respond?
Summary: The recent yuan devaluation may trigger a currency war with other countries also devaluing, to boost exports and economic growth, comments Binod Shankar at Genesis Institute