devaluation

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DEVALUATION

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.

See alsoConsumer Purchasing Power ; Cost of Living ; Financial Panics ; Inflation ; Keynesianism ; Wages and Salaries .

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devaluation Lowering the value of one nation's currency with respect to that of another or to gold. The decision to devalue is made by a central government usually when the nation is having balance of payments problems. Devaluation stimulates the economy by reducing the foreign currency price of exports and raising the domestic price of imports.