Devaluation of Currency
Currency is the easiest from to settle bargains in trade and commerce, whether it be in a simple, elementary level between a seller and buyer or in a complicated level between one country and another. Each country is having her own currency and it is valued in terms of an international currency e.g. pound sterling or the American dollar. This linking is purely a matter of convention and convenience and this helps in carrying on international trade directly with Great Britain or U.S.A. or indirectly with other countries through them. The importance arises in settling payments for exports and imports and for services.
The financing authority of a country can change the value of their currency in relation to other currencies according to the strength or weakness of her balance of payment. This is a jugglery and requires a lot of tact and prudence. Let us take an example. About two decades ago an American dollar was worth about S$3 which means a dollar worth of goods was equivalent to three Singapore dollars worth of goods. Where there was a normal condition and one country was not enjoying more advantages than the other this exchange ratio continued. But the dollar was devalued and it has become equivalent to S$1.75 today.
Why did they do it? Though it is more complicated it can be explained this way. Suppose there are more foreign goods going in, then in terms of the US dollars the in things will become costly and so it will discourage people from going in for foreign services. That would mean the internal economy may be geared to better production. If it is luxury goods people are getting from other countries, than the increase in cost will discourage them from going in for the foreign product e.g. the motor car. The internal prices will become costly but production will rise. While this may discourage internal consumption, a foreigner may find it cheaper to buy in his currency; thus the effect of devaluation may be to boost up exports and, in fact, the monopoly items may have a facelift and this will encourage an expansion of export trade and so there may be new markets established. The foreign investor will find it advantageous to invest in the devaluing country. His investment will get an artificial, boost. Thus devaluation would encourage the flow of foreign money into the devaluing country. In terms of foreign currency it would not be advantageous to take money out. That money would, perforce, be ploughed back into the country’s economy.
Indirectly it would mean the people would have to work hard. Foreign goods may become dearer. It would mean incentive for more production. But devaluation is to be handled very carefully; otherwise it would wreck the economy of the country, shake the confidence of the foreign investor and also the prestige of the country concerned.
