The worth of a currency is decided relative to the value of the other currencies i.e. simply how much of the other currency can be purchased by one unit of your home currency. Generally speaking, this is the exchange rate with this currency pair and it fluctuates over time with currencies gaining or losing value against each other. Whenever a currency reduces its value against other currencies, this method is named devaluation.
Devaluation is an all natural process in the real history of financial markets. All currencies witness their currency rates falling and rising and if 10 British pounds could buy, say, 20 U.S. dollars last year, today the pound might be dolaris kursi devalued and its purchasing power would only be enough to buy only 15 dollars. In contrast to advertise devaluation, governments around the globe sometimes resort to devaluation as something to safeguard their trade balances. Thus, the neighborhood currency is forcedly devalued and its currency rates against other major currencies is reduced while restrictions are often imposed avoiding the home currency from being exchanged at higher rates.
These kind of government intervention in the foreign exchange market really are a perfect example of official devaluation while the natural market devaluation is usually referred to as depreciation, a process once the currency rates fluctuate downwards. In both cases, the nation whose currency is devaluated could benefit form the low cost of its export of goods, which now are cheaper to buy by customers in countries whose currencies are stronger. The real history of trade recalls many examples of intentional devaluation with the purpose of conquering new markets through the low currency rates of the devalued currency.
One of the biggest devaluation waves ever sold was in the 1930s when at the least nine of the leading world economies devalued their national currencies, including Australia, France, Italy, Japan and the United States. Throughout the Great Depression, each one of these nations made a decision to abandon the gold standard and to devalue their currencies by as much as 40%, which helped revive their economies and stabilised currency rates.
Meanwhile, Germany, which lost the Great War a decade earlier, was burdened to cover strenuous war reparations and intentionally provoked a process of hyperinflation in the country. Thus, the Germans witnessed the largest ever devaluation of these national currency and the currency rates hit rock bottom. In those days, the currency rate of the German mark to the U.S. dollar stood at several million or billion marks per dollar. On the other hand, this devaluation helped the German government in covering its debts to the war winners although the typical Germans paid a disastrous price for this government policy.
The governments around the globe are often tempted to lower unnaturally the currency rates to be able to take advantage of the low value of the national currency. The lower currency value encourages exports and discourages imports improving the country’s trade deficit and imbalances. However, the typical citizen of a nation with a recently devalued currency could have problems with higher prices of imported goods and overseas holiday costs.
