devaluation

View more Business & Finance videos

Downward adjustment by monetary authorities in the official exchange rate of a nation's currency in relation to a Key Currency such as the U.S. Dollar or an established monetary standard such as gold. Devaluation occurs when a government increases the amount of its currency it is willing to exchange with other currencies at current exchange rates. Contrast with Depreciation. See also Revaluation.

noun

A lowering in price or value: depreciation, markdown, reduction, write-down. See increase/decrease, money.

Devaluation, a downward adjustment of the price of a currency in terms of other currencies, in a system in which each currency has a gold par value. The downward adjustment may be achieved through a devaluation of one currency, an upward revaluation of other currencies, or a combination of the two. The U.S. dollar has been devalued several times since the early nineteenth century. The gold content of the U.S. dollar, established at 24.75 grains (2 April 1792), was reduced to 23.2 grains (29 June 1834) and then raised to 23.22 grains (18 January 1837). The 1834 devaluation was intended to attract gold from Europe and thereby encourage a shift away from bank notes in domestic transactions. A century later, when the gold content of the dollar was reduced to 13.71 grains (31 January 1934), the aim was to raise dollar prices of U.S. farm products, which had a world market, by reducing the foreign-exchange value of the dollar. Under President Richard M. Nixon, the gold content of the dollar was reduced to 12.63 grains (31 March 1972) and then reduced another 10 percent to 11.368 grains (12 February 1973). For each dollar weight in gold, there is a corresponding price of gold per fine troy ounce of 480 grains (480/11.368 ≅ $42.22). Since convertibility of the dollar into gold was suspended 15 August 1971, the devaluations in terms of gold were pro forma only. The new gold prices were merely devices for measuring the downward adjustment of the U.S. dollar relative to other currencies set by the Smithsonian Accord (17–18 December 1971) to help correct a deficit in the U.S. international payments balance. The Reagan Administration briefly adopted devaluation policies in the 1980s, but abandoned them when they failed to reduce the trade deficit.

Bibliography

Edwards, Sebastian. Devaluation Controversies in the Developing Countries: Lessons from the Bretton Woods Era. Cambridge, Mass.: National Bureau of Economic Research, 1992.

Friedman, Milton. A Monetary History of the United States, 1867–1960. Princeton N.J.: Princeton University Press, 1963.

North, Douglass C. Structure and Change in Economic History. New York: Norton, 1981.

Samuelson, Robert J. The Good Life and Its Discontents: America in the Age of Entitlement, 1945–1995. New York: Times Books, 1995.

—Anna J. Schwartz/A. G.

A policy undertaken by a nation to reduce the value of its national currency either in relation to gold or in relation to the currencies of other nations.

A deliberate downward adjustment to a country's official exchange rate relative to other currencies. In a fixed exchange rate regime, only a decision by a country's government (i.e central bank) can alter the official value of the currency. Contrast to "revaluation".

Investopedia Says:
There are two implications for a currency devaluation. First, devaluation makes a country's exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country's trade deficit. 

Related Links:
Find out how fledgling economies can find some stability in their currency and attract foreign investment. Dollarization Explained
Discover how and why the U.S. dollar emerged as official currency in many foreign countries. The U.S. Dollar's Unofficial Status as World Currency
In 1985, the G-5 nations signed an agreement to devalue the United States currency and correct the GDP. To an extent, it worked. But there were casualties. The Plaza Accord: The World Intervenes In Currency Markets
Before entering this market, you should define what you need from your broker and from your strategy. Getting Started In Forex
Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers. A Primer On The Forex Market
This method may seem arcane, but many well-established strategies rely on it. Trading The Gold-Silver Ratio
Do speculators have a destabilizing effect on the financial system?

For other uses, see Devaluation (disambiguation).

Foreign exchange
Exchange rates
Currency band Exchange rate Exchange-rate regime Exchange-rate flexibility Dollarization Fixed exchange rate Floating exchange rate Linked exchange rate Managed float regime
Markets
Foreign exchange market Futures exchange Retail foreign exchange
Assets
Currency Currency future Non-deliverable forward Foreign exchange swap Currency swap Foreign-exchange option
Historical agreements
Bretton Woods Conference Smithsonian Agreement Plaza Accord Louvre Accord
See also
Bureau de change Hard currency
v t e

This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (February 2012)

Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged. ‘Devaluation’ means official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, depreciation is used for the unofficial decrease in the exchange rate in a floating exchange rate system. Under the second system central banks maintain the rates up or down by buying or selling foreign currency, usually USD.

In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, depreciation is used for the unofficial increase in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation.

Depreciation and devaluation are sometimes incorrectly used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in 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.

Contents 1 Historical usage 2 Devaluation in modern economies 3 See also 4 References

Historical usage

Devaluation is most often used in 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 metal might abruptly lower the weight or purity of the coins without announcing this, or else decree that the new coins had equal value to the old, thus devaluing the currency.

Later, paper currencies were issued, and governments decreed them to be redeemable for gold or silver (a gold standard). Again, a government short on gold or silver might devalue by abruptly decreeing a reduction in the currency's redemption value, reducing the value of everyone's holdings.

Devaluation in modern economies

Present day currencies are usually fiat currencies with insignificant inherent value. When the U.S. dollar was fully disassociated from the gold standard in 1971, the value of any fiat currency became solely determined by the willingness of its issuing State to accept it as payment for taxes. Some countries hold floating exchange rates while others maintain fixed exchange rate policies against the United States dollar or other major currencies. These fixed rates are usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in a devaluation (as persistent surpluses and capital inflows may lead them towards revaluation).

In an open market, the perception that a devaluation is imminent may lead speculators to sell the currency in exchange for the country's foreign reserves, increasing pressure on the issuing country to make an actual devaluation. When speculators buy out all of the foreign reserves, a balance of payments crisis occurs. Economists Paul Krugman and Maurice Obstfeld present a theoretical model in which they state that the balance of payments crisis occurs when the real exchange rate (exchange rate adjusted for relative price differences between countries) is equal to the nominal exchange rate (the stated rate).^[1] In practice, the onset of crisis has typically occurred after the real exchange rate has depreciated below the nominal rate. The reason for this is that speculators do not have perfect information; they sometimes find out that a country is low on foreign reserves well after the real exchange rate has fallen. In these circumstances, the currency value will fall very far very rapidly. This is what occurred during the 1994 economic crisis in Mexico.

Generally, a steady process of inflation is not considered a devaluation, although if a currency has a high level of inflation, its value will naturally fall against gold or foreign currencies. Especially where a country deliberately prints money (a usual cause of hyperinflation) to cover a persistent budget deficit without borrowing, this may be considered a devaluation.

In some cases, a country may revalue its currency higher (the opposite of devaluation) in response to positive economic conditions, to lower inflation, or to please investors and trading partners. This would imply that existing currency increased in value, as opposed to the case with redenomination where a country issues a new currency to replace an old currency that had declined excessively in value (such as Turkey and Romania in 2005, Argentina in 2002, Russia in 1998, Germany in 1923, or Bizone/Trizone in 1948).

See also

Currency war Fixed exchange rate Inflation Monetary policy

Revaluation Store of value Beggar thy neighbour Internal devaluation

References

1. ^ Krugman, Paul; Obstfeld, Maurice (1999). "17 [Appendix II]". International Economics (5th ed.). Longman. ISBN 978-0-321-07727-1. 

• Economist.com | Economics A-Z

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Dansk (Danish)
n. - devaluering

Nederlands (Dutch)
devaluatie, waardevermindering (van geld)

Français (French)
n. - dévaluation

Deutsch (German)
n. - Abwertung, Devalvation

Ελληνική (Greek)
n. - (οικον.) υποτίμηση (νομίσματος)

Italiano (Italian)
svalutazione, perdita di valore

Português (Portuguese)
n. - desvalorização (f)

Русский (Russian)
обесценивание, девальвация

Español (Spanish)
n. - devaluación

Svenska (Swedish)
n. - devalvering

中文（简体）(Chinese (Simplified))
贬值

中文（繁體）(Chinese (Traditional))
n. - 貶值

한국어 (Korean)
n. - 평가 절하, 신분의 저하

日本語 (Japanese)
n. - 平価切下げ, 価値の引下げ

العربيه (Arabic)
‏(الاسم) تخفيض قيمه العمله مقابل العملات الأخرى أو الذهب, انخفاض قيمه شئ‏

עברית (Hebrew)
n. - ‮הורדת ערך המטבע, פיחות‬

If you are unable to view some languages clearly, click here.