how do countries devalue currency_ - quora
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8/15/2015 (6) Balaji Viswanathan's answer to How do countries devalue currency? Quora
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On 6th June, 1966 India, hit by drought after two major wars (with China andPakistan), devalued rupee by a massive rate: from Rs.4.76=$1 to Rs.7.50 = $1(57% devaluation). Again in July 1991, hit by gulf war and collapse of SovietUnion (India's main trading partner then), India devalued rupee fromRs.18=$1 to Rs.25 to $1. [June is a bad time for Indian rupee]Historical Exchange Rate Regime of Asian Countries
Devaluation is usually a conscious process of controlling currency in a fixedrate regime. To do this, the government (that controls the forex market tightly)just have to announce that they are moving to a new level against the dollar.Let me use this opportunity to explain how exchange rates work.
The state of Earthopia has 3 villages Kumarville, Huville and Johnville.Initially they were all selfsufficient, with each of the villages producing all therice, vegetables, brick and clothes required for all their inhabitants. Things areworking so great since eternity.
Now, some villagers in Johnville found a new, faster way to make bricks. Thus,they started producing faster than the villagers there could buy. So, theythought they could sell some of them to the villagers in Huville that is goingthrough a rainy season. In return for the bricks, Huville guys thankfully gavesome extra rice. Johnville guys didn't need much rice, so they were willing tooffer only one extra brick for every 10 bags of rice.
Meanwhile, Kumarville is going through a drought season and go to beg theJohnville guys. So the John guys give them bags of rice, in return for the largepile of clothes.
The exchange process was however complex. The barter system had so manyissues (see more here: What would a world without money be like?) So, a triballeader from Johnville, let us call him Hamilson, thought he could use somespecially made coins. He calls the specially made coins Daluro. He sets 1 brickequals 1 Daluro. Thus, Huville and Kumarville guys need to get these Daluro tobuy stuff from Johnville guys.
Not to be left behind, the tribes of Kumarville and Huville give colorful namesRapi and Rambi to their own coins. 1 Rapi is set as 10 pair of clothes and 1Rambi is set as 10 bags of rice. These coins are then used among the villagers tobuy and sell stuff among themselves. At the current rate: 1 Rapi = 1 Rambi = 1Daluro. Equation 1.
Life is so good for Johnville people as they are getting a lot of , clothes and ricewithout working much. As the brick guys keep working hard, others startrelaxing more. the new tribal leader Burnke Bun is happy with this.
The drought in Kumarville ends and they start producing a lot of rice. Now,they are not in that need for the rice from Johnville and have a less need forDaluro. As richeis required less, Kumarville guys are willing to sell only 5clothes for every 10 bags of rice. By previous equations, now 1 Rapi = 10 clothes= 20 bags of rice = 2 Daluro.
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8/15/2015 (6) Balaji Viswanathan's answer to How do countries devalue currency? Quora
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In the meanwhile, Huville have adapted a part of brick building process andhave started producing enough bricks. They are now less willing to buy bricksfrom Johnville. They now set 1 Rambi = 10 bags of rice = 3 bricks = 3 Daluro.
This leaves the Johnville tribes with no options but to devalue their currency toaccept the reality that 1 Daluro = 0.5 Rapi = 0.33 Rambi. This spurs the localfarmers and weavers who can no longer buy rice and clothese from outside andstart getting back to work again.
Devaluation is essentially recognizing that one's currency is significantly lessthan what it used to be. This happens when a country is not letting its currencytrade in the markets and essentially sets how much its currency is set to adollar or other currency. Devaluation is a sudden, overnight change.
Other answers are confusing the natural process of currency depreciation (through inflation) with devaluation. Devaluation means a country's government (and central bank) announces overnight a big change in the country's exchange rate. It is usually a conscious process of controllingcurrency in a fixed rate regime. To do this, the government (that controls theforex market tightly) just have to announce that they are moving to a new levelagainst the dollar.
1. Currency Devaluation and Revaluation
2. The Implications of Currency Devaluation 34,133 views • 1,255 upvotes • Written 14 Feb, 2013 • Asked to answer by Tushar Gupta
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