Devaluation
Foreign exchange |
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Exchange rates |
Markets |
Assets |
Historical agreements |
See also |
In
However, under a
Related but distinct concepts include inflation, which is a market-determined decline in the value of the currency in terms of goods and services (related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation.
Historical usage
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Devaluation is most often used in a situation where a currency has a defined value relative to the baseline. Historically, early currencies were typically coins, struck from gold or silver by an issuing authority, which certified the weight and purity of the precious metal. A government in need of money and short on precious metals might decrease the weight or purity of the coins without any announcement, or else decree that the new coins have equal value to the old, thus devaluing the currency. Later, with the issuing of paper currency as opposed to coins, governments decreed them to be redeemable for gold or silver (a gold standard). Again, a government short on gold or silver might devalue by decreeing a reduction in the currency's redemption value, reducing the value of everyone's holdings.
Causes
Fixed exchange rates are usually maintained by a combination of legally enforced
In an open market, the perception that a devaluation is imminent may lead speculators to sell the currency in exchange for the country's
Economic implications
There are significant economic consequences for the country that devalues its currency to address its economic problems. A devaluation in the exchange rate lowers the value of the domestic currency in relation to all other countries, most significantly with its major trading partners. It can assist the domestic economy by making
Devaluations in modern economies
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UK economy
1949 devaluation
At the outbreak of World War II, in order to stabilise sterling, the pound sterling was pegged to the United States dollar at the rate of $4.03 with exchange controls restricting convertibility volumes. This rate was confirmed by the Bretton Woods agreements of 1944.[4]
After the war, US Lend-Lease funding, which had helped finance the UK's high level of wartime expenditure, abruptly ended and the Anglo-American loan was conditional upon progress towards sterling becoming fully convertible into US dollars, thereby aiding US trade.[5] In July 1947, sterling became convertible but the resultant drain on the UK's foreign exchange reserves of US dollars was such that 7 weeks later, convertibility was suspended, rationing tightened and expenditure cuts made.[6] The exchange rate reverted to its pre-convertibility level, a devaluation being avoided by the new Chancellor of the Exchequer, Stafford Cripps, choking off consumption by increasing taxes in 1947.
By 1949, in part due to a dock strike, the pressure on UK reserves supporting the fixed exchange rate mounted again at a time when Cripps was seriously ill and recuperating in Switzerland.[7][8] Prime Minister Clement Attlee delegated a decision on how to respond to three young ministers whose jobs included economic portfolios, namely Hugh Gaitskell, Harold Wilson and Douglas Jay, who collectively recommended devaluation.[9] Wilson was despatched with a letter from Attlee to tell Cripps of their decision, expecting that the Chancellor would object, which he did not.[10] On 18 September 1949, the exchange rate was reduced from $4.03 to $2.80 and a series of supporting public expenditure cuts imposed soon afterwards.[4][8]
1967 devaluation
When the Labour Government of Prime Minister Harold Wilson came to power in 1964, the new administration inherited an economy in a more precarious state than expected with the estimated balance of payments deficit for the year amounting to £800 million, twice as high as Wilson had predicted during the election campaign.[11] Wilson was opposed to devaluation, in part due to the bad memories of the 1949 devaluation and its negative impact on the Attlee government, but also due to the fact that he had repeatedly asserted that Labour was not the party of devaluation.[12] Devaluation was avoided by a combination of tariffs and raising $3bn from foreign central banks.[13]
By 1966, pressure on sterling was intensifying, due in part to the
After a brief period in which the deflationary measures relieved sterling, pressure mounted again in 1967 as a consequence of the Six-Day War, the Arab oil embargo and a dock strike.[17] After failing to secure a bail-out from the Americans or the French, a devaluation from US$2.80 to US$2.40 took effect on 18 November 1967.[18][16] In a broadcast to the nation the following day, Wilson said, "Devaluation does not mean that the value of the pound in the pocket in the hands of the … British housewife … is cut correspondingly. It does not mean that the pound in the pocket is worth 14% less to us now than it was." This wording is often misquoted as "the pound in your pocket has not been devalued."[19][20] Nevertheless the devaluation forced James Callaghan to resign as Chancellor of the Exchequer, making way for Roy Jenkins.[21]
Other economies
The People's Bank of China devalued the renminbi twice within two days by 1.9% and 1% in July 2015 in response to slowing economic growth, leading to the 2015–2016 Chinese stock market turbulence. Although the devaluation was welcomed by the International Monetary Fund, it led the United States Department of the Treasury to label China as a currency manipulator in 2019.[22][23][24] On 5 August 2019, China devalued its currency in response to the imposition of trade tariffs by the United States against China.[2]
India devalued the Indian rupee by 35% in 1966.[25]
Mexico devalued the Mexican peso against the United States dollar in 1994 in preparation for the North American Free Trade Agreement, leading to the Mexican peso crisis.
On January 11, 1994, France decided to devaluate the CFA Franc in 14 African countries in Central Africa and West Africa.[26]
See also
References
- ISBN 978-0-321-07727-1.
- ^ a b c d e The United States and China may be headed for a currency war
- ISBN 978-1-886938-87-8.
- ^ a b "Dollar Exchange Rate from 1940". miketodd.net. Retrieved 14 October 2018.
- ISBN 0333730577.
- ISBN 1860661017.
- ^ Pimlott pp134-6
- ^ a b Beckett p278
- ^ Pimlott pp136-7
- ^ Pimlott pp138-9
- ISBN 0002151898.
- ISBN 9780224087506.
- ^ Pimlott pp352-4
- ^ Pimlott p414
- ^ Campbell p281
- ^ ISBN 0140153942.
- ^ Campbell p303
- ^ Pimlott pp477-82
- ^ Pimlott pp483-4
- ^ "BBC ON THIS DAY - 19 - 1967: Wilson defends 'pound in your pocket'". news.bbc.co.uk. 19 November 1967.
- ISBN 978-0-333-56081-5.
- ^ "China's Sudden Currency Plunge Raises Risk of a 2015-Style Panic". Bloomberg.com. 2022-04-28. Retrieved 2022-06-28.
- ^ "The Impact of China Devaluing the Yuan in 2015". Investopedia. Retrieved 2022-06-28.
- ^ "China stuns financial markets by devaluing yuan for second day running". the Guardian. 2015-08-12. Retrieved 2022-06-28.
- ^ Doerer, Kristen (Aug 17, 2015). "Your guide to China's devaluation of its currency". PBS NewsHour.
- ^ "Les 30 ans de la dévaluation du Franc CFA dans 14 pays francophones". Radio France Internationale. Jan 11, 2024.