Devaluation

Intervention of the monetary authorities

When a currency is maintained in a fixed mode of exchange, it happens that the foreign exchange rate defined by the Monetary authorities is not bearable on the means and long run. Within the framework of a mode of exchange, the monetary authorities indeed begin to ensure the conversion of the currency against the currency of reference; they have for that monetary reserves, but if request of currency foreign is too strong (case where the financial markets exchange the national currency against the foreign currency), these monetary reserves are not enough and the central bank must suspend the conversion of the currency, and devaluate.

The Monetary authorities often practice preventive devaluations to avoid losing all their Monetary reserves.

A devaluation then consists in modifying, with the fall, the official parity of a currency compared to another currency of reference (or a basket of currency, if the official parity is fixed compared to a weighted average of foreign currencies).

The devaluation can be an instrument of the Economic policy with an aim of starting again the Economic growth, by the revival of the Exportation S and the rebalancing of the commercial Balance (cf Effets ). However, such devaluations have often only one positive effect in the short and medium term; they must then often be republished, as long as fundamental economic imbalances will not have been solved, or that confidence in the currency will not have returned.

Following a devaluation, the commercial Balance generally follows an evolution in Courbe in J: initial degradation, then improvement.

Effects

With this measurement, the governments hope to increase the economic Compétitivité. The foreseeable effects are of two natures:

initially, the fall of the value of the national currency causes a rise in the price of the imports and a fall in the price of exports. Exchanged volumes adapting, at best, only in the medium term, that results in a degradation of the trade balance. It is the effect price .
in the medium term, the fall of the prices the export must allow an increase in the volume of the sales, while the rise in the price of the imports must discourage them. These changes must allow an improvement of the trade balance. It is the effect quantity. The quantity effect plays more or less according to whether the consumption of the exchanged goods is or not sensitive to the selling prices (the fall of the prices always does not affect the sold quantities).

These contradictory effects are clarified by the principle of the Courbe in J: the devaluation causes a short degradation of the pay of the trade balance (price effect), before allowing an improvement of a greater width (quantity effect).

There exists a risk that a country sinks in a vicious circle of the devaluation. Indeed, a country devaluating its currency in order to improve its commercial balance sees it in the short run worsening, impatient, it can then be tried to devaluate again, and thus to connect degradations (left downward the letter J).

In France

See also: economic History of France, French franc

During the 20th century, the Franc was devaluated many times, to restore the economic Compétitivité temporarily country.

For example, the January 25th 1948, Robert Schuman decides to devaluate of 80% the course of the Franc French, which did not cease depreciating since the end of the First World War. The course of the US Dollar had passed 119 francs has 214 francs.

The successive devaluations of the French franc during the Years 1950 and 60 do not make it possible to obtain a durably stable trade balance, contrary to the situation of the Germany whose Deutsche Mark remains a model of stability.

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