Devaluation is reduction in the value of a currency. Typically it refers to the value of the currency relative to some specific baseline, such as foreign currencies or gold, rather than prevailing wages and prices. General Name, Symbol, Number gold, Au, 79 Chemical series transition metals Group, Period, Block 11, 6, d Appearance metallic yellow Atomic mass 196. ... A wage is the amount of money paid for some specified quantity of labour. ... In economics and business, the price is the assigned numerical monetary value of a good, service or asset. ...

The term inflation is generally used differently from the term currency devaluation. The former applies to the value of the currency within the national region of use, whereas the latter applies to the external value on international markets. The extent to which these two phenomena are related is open to economic debate.

The term is most often used when a currency has a defined value relative to the baseline. Historically, early currencies were typically coins stamped 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. This gave rise to Gresham's Law, which stated that "bad money drives out good", i.e., if pure gold coins and false coins are decreed to have equal value, people will use the false coins for currency and hide the good coins or melt them down into gold. 1¢ euro coin A coin is usually a piece of hard material, generally metal and usually in the shape of a disc, which is used as a form of money. ... Weight is the force exerted upon an object by virtue of its position in a gravitational field. ... ... Greshams law is stated as: Bad money drives good money out of circulation. Greshams law applies specifically when there are two forms of commodity money in circulation which are forced, by the application of legal tender laws, to be respected as having the same face value in the...

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. Naturally, a government which made a habit of doing this would lead its citizens to hold gold or silver in place of the government's notes, so such governments would often outlaw private hoarding of precious metal in order to prevent Gresham's Law from taking effect. 1922 U.S. gold certificate The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. ...

Present day currencies are usually fiat currencies with insignificant inherent value. The value of currency is determined by the interplay of money supply and money demand. As some countries hold floating exchange rates, others maintain fixed exchange rate policy 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, persistant capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in a devaluation (as persistant surpluses and capital inflows may lead them towards revaluation). However, that a devaluation would reduce trade deficits depends on fulfilling the Marshall-Lerner Condition: the sum of exports and imports elasticities (in absolute value) must be greater than 1. Fiat money or fiat currency, usually paper money, is a type of currency whose only value is that a government made a fiat (i. ... The United States dollar, or American dollar, is the official currency of the United States. ... Capital controls are restrictions on the trade of assets across international borders. ... Balance of trade figures are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. ... This condition says that, for a currency devaluation to have a positive impact in trade balance, the sum of price elasticity of exports and imports (in absolute value) must be greater than 1. ... The graph of the absolute value function In mathematics, the absolute value (or modulus) of a real number is its numerical value without regard to its sign. ...

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 Obsfelled 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) (Krugman, Paul and Maurice Obstfelled. International Economics (2000), Chapter 17 [Appendix II]). 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 forign reserves well after the real exchange rate has fallen. In these circumstances, the currency value will fall very far very rapidily. This is what occurred during the Mexican Peso Crisis.

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. A 1,000,000,000 (1 billion) Mark banknote, issued in Bavaria/Germany during the hyperinflation of 1923 (http://www. ...

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 where a country issues a new currency to replace an old currency that had declined excessively in value. (such as Romania in 2005, Russia in 1997, or Germany in 1923)

See also

• Inflation
• Monetary Policy

Monetary policy is the process of managing a nations money supply to achieve specific goals—such as constraining inflation, achieving full employment or more well-being. ...

External links

• Economist.com | Economics A-Z