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What is Currency Devaluation?
The value of a country’s currency is often judged by weighing it against other countries’ currencies. When one country decides to lower the value of its monetary units, this is known as currency devaluation. As a result, stronger currencies are capable of buying more of the weaker currency.
Most people think of money as something which is used to make purchases. Many do not consider that money may also be purchased. There are numerous types of currencies in the world. Each normally has a different value when they are compared.
For example, one US dollar (USD) may equal seven South African rands (ZAR). This means if a person took one USD to South Africa and exchanged it, she would receive seven ZAR. If, however, South Africa decided to devalue its currency, one USD would purchase more ZAR, perhaps ten, because they would be cheaper.
On the contrary, currency devaluation means that the weaker currency will purchase less of more expensive currencies. If the person with seven South African rands wanted to exchange them for US dollars after the currency was devalued, she would not even receive a full dollar. Her seven ZAR would only equal some cents when converted to American currency.
A differentiation should be made between devaluation and depreciation. When a currency depreciates, it also loses value. The difference, however, is that devaluation is an official decision. This means that the lowering is intentional. With depreciation, this may not be the case.
One motive for currency devaluation is the lack of foreign currency reserves. A country generally buys its surplus currency with stronger foreign currencies. When these stronger currencies are in short supply or a country is unwilling to spend its foreign reserves, a dilemma arises. Currency devaluation may be seen as a solution because it will allow the country to use less foreign currency to recover more of its own currency.
There are numerous effects produced by currency devaluation. One that is often seriously considered is the impact on trade. When a country’s currency is devalued, its goods become cheaper to countries with stronger currencies. This can be a positive effect if the goal is to generate revenue.
Currency devaluation can also have a negative effect on trade. Weakening the currency means products in countries with stronger currencies become more expensive. If the country with the weak currency does not curb imports, this means it will need more money to pay for the same amount of foreign goods.
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![Currency devaluation usually occurs when a nation drastically increases its money supply, thus making each individual monetary unit easier to obtain.]()
By: Joop HoekCurrency devaluation usually occurs when a nation drastically increases its money supply, thus making each individual monetary unit easier to obtain. -
![Currency devaluation will have an impact on the exchange rates between different currencies.]()
By: SeanPavonePhotoCurrency devaluation will have an impact on the exchange rates between different currencies.
Discussion Comments
@miriam98 - We did see some of that, but fortunately the majority of people chose to remain honest. Most people recognized that business people were trying to make an honest living, and therefore did not try to exploit the situation. They waited until the stores adjusted their prices.
The real lesson for me is that this kind of thing can happen anywhere, not just in developing countries. As long as there is a currency market, there will be speculation. I think the U.S. should never have abandoned the gold standard so long ago.
@David09 - Yes, I remember watching the news about the Asian “meltdown” in the late 1990s. One of the unfortunate things about the devaluation of currency is that there are always speculators waiting to take advantage of the situation.
For example, store owners will have to readjust their retail prices on goods they sell whenever there’s a currency collapse like this. However, sometimes people will rush into the store before the stores have had time to readjust prices, and buy up products at the old prices—in your case, I guess it would have been a discount of several hundred percent.
I lived in Indonesia in 1998 and witnessed firsthand the effects of currency devaluation. Many of the businesses in Indonesia were owned by Chinese businessmen. As a result of the corruption in the country, with one stroke of the pen many of these businessmen pulled out from Indonesia, taking their U.S. dollars with them.
Since the dollar had propped up the Indonesian rupiah, when those dollars left, the Indonesian rupiah took a nosedive. It used to be that it would take 2,000 rupiah to equal a $1.00. However after the currency devaluation, it took 10,000 rupiah to equal $1.00.
As an English teacher, my school continued to pay me in U.S. dollars, so my salary wasn’t personally affected. However the Indonesian teachers got hit pretty bad. Thankfully, however, the nation has since recovered as more investment (and U.S. dollars) have flowed into the country.
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