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In its various guises and different names, means a fall in the value of a currency.

According to Wikipedia:

Devaluation is a reduction in the value of a currency with respect to other monetary units. In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, (currency) depreciation is most often used for the unofficial decrease in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation.
Depreciation and devaluation are sometimes used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation.
Depreciation and devaluation are sometimes used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation.

Historical Usage
Devaluation is most often used in situations where a currency has a defined value relative to the baseline. Historically, early currencies were typically coins struck from gold or silver by an issuing authority which certified the weight and purity of the precious metal. A government in need of money and short on precious metal might abruptly lower the weight or purity of the coins without announcing this, or else decree that the new coins had equal value to the old, thus devaluing the currency. This gave rise to Copernicus-Gresham's Law, which stated that "bad money drives out good", i.e., if pure gold coins and false coins are decreed to have equal value, people will use the false coins for currency and hide the good coins or melt them down into gold.
Later, paper currencies were issued, and governments decreed them to be redeemable for gold or silver (a gold standard). Again, a government short on gold or silver might devalue by abruptly decreeing a reduction in the currency's redemption value, reducing the value of everyone's holdings. Naturally, a government which made a habit of doing this would lead its citizens to hold gold or silver in place of the government's notes, so such governments would often outlaw private hoarding of precious metal in order to prevent Gresham's Law from taking effect.

Devaluation in Modern Economies
Present day currencies are usually fiat currencies with insignificant inherent value. The value of currency is determined by the interplay of money supply and money demand. As some countries hold floating exchange rates, others maintain fixed exchange rate policy against the United States dollar or other major currencies. These fixed rates are usually maintained by a combination of legally enforced capital controls or through government trading of foreign currency reserves to manipulate the money supply. Under fixed exchange rates, persistent capital outflows or trade deficits may lead countries to lower or abandon their fixed rate policy, resulting in a devaluation (as persistent surpluses and capital inflows may lead them towards revaluation). However, that a devaluation would reduce trade deficits depends on fulfilling the Marshall-Lerner Condition: the sum of exports and imports elasticities (in absolute value) must be greater than 1.
In an open market, the perception that a devaluation is imminent may lead speculators to sell the currency in exchange for the country's foreign reserves, increasing pressure on the issuing country to make an actual devaluation. When speculators buy out all of the foreign reserves, a balance of payments crisis occurs. Economists Paul Krugman and Maurice Obstfeld present a theoretical model in which they state that the balance of payments crisis occurs when the real exchange rate (exchange rate adjusted for relative price differences between countries) is equal to the nominal exchange rate (the stated rate) (Krugman, Paul and Maurice Obstfeld. International Economics (2000), Chapter 17 [Appendix II]). In practice, the onset of crisis has typically occurred after the real exchange rate has depreciated below the nominal rate. The reason for this is that speculators do not have perfect information; they sometimes find out that a country is low on foreign reserves well after the real exchange rate has fallen. In these circumstances, the currency value will fall very far very rapidly. This is what occurred during the 1994 economic crisis in Mexico.
Generally, a steady process of inflation is not considered a devaluation, although if a currency has a high level of inflation, its value will naturally fall against gold or foreign currencies. Especially where a country deliberately prints money (a usual cause of hyperinflation) to cover a persistent budget deficit without borrowing, this may be considered a devaluation.
In some cases, a country may revalue its currency higher (the opposite of devaluation) in response to positive economic conditions, to lower inflation, or to please investors and trading partners. This would imply that existing currency increased in value, as opposed to the case where a country issues a new currency to replace an old currency that had declined excessively in value (such as Turkey and Romania in 2005, Argentina in 2002, Russia in 1998, or Germany in 1923).

1967 UK Devaluation - Harold Wilson - The Pound in Your Pocket
On 19th November 1967, Harold Wilson (in)famously said "It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued."
We firmly believe this was a piece of propaganda (lie).

Propaganda is the dissemination of information aimed at influencing the opinions or behaviors of large numbers of people. As opposed to impartially providing information, propaganda in its most basic sense presents information in order to influence its audience. Propaganda often presents facts selectively (thus lying by omission) to encourage a particular synthesis, or gives loaded messages in order to produce an emotional rather than rational response to the information presented. The desired result is a change of the cognitive narrative of the subject in the target audience to further a political agenda.
Propaganda is the deliberate, systematic attempt to shape perceptions, manipulate cognitions, and direct behavior to achieve a response that furthers the desired intent of the propagandist.
Garth S. Jowett and Victoria O'Donnell, Propaganda and Persuasion

George & Gordon
"His decision was fiercely criticised during debates on devaluation in the Commons and Lords. Letters released under the 30-year rule reveal he also faced opposition from his deputy, George Brown".

2008 Devaluation
Effectively, during 2008, the pound sterling has devalued by a large amount.
Gauging the exact amount is almost impossible, because it depends what you measure its value against, but...

  • US Dollars
    In the earlier part of this year, the pound was worth over $2.00 US dollars. It is now worth less than $1.50; so has lost 25% of its value against the US dollar.

  • Euros
    In late 2007, the pound was worth about €1.50; it is now about €1.05; so has fallen by about 30% against the euro.

  • Gold
    On 1st January 2008, gold fixed at just under £425 per troy ounce. It has recently been around £530 per ounce. These figures reciprocate to 0.002353 ounces and 0.001887 ounces. To make this more easily understood, one pound was worth 7.3 grams, and is now only worth 5.9 grams, a depreciation of about 20%.
    On 29th December 2008, both gold fixings were above £600 per ounce. We believe this is a clear sign of future prices.

Gold Price Movements are Relative to Currencies
Relative price motion explained by example.

Devaluation, Currency Depreciation, Inflation, Debasement
All four of these words are, to some degree, interchangeable. Debasement is more appropriate when applied to pre-fiat currencies, when coins were made of precious metal. This happened relatively recently in our history, less than 100 years ago. Coins were invented about 2,500 years before this.
The Wikipedia article does a fair job of explaining some of the differences between the remaining three words.
Whichever shade of meaning you decide to employ for which word, the overall effect is that the value of money declines.

We don't like to get too political, but...
Labour governments tend to expand the state sector of the economy by high spending and increased taxation to pay for it. Conservative governments tend to reduce the state sector budget (spending less), and can therefore afford to reduce taxation. We are not surprised then, that our current government has allowed or (mis)managed our currency to depreciate in value, although this has been done by stealth rather than public announcement.
George Osborne recently produced strong government criticism when he stated that the huge costs of bailing out banks, other financial institutions, and the economy in general, could create a run on the pound, similar to a run on a bank such as Northern Rock. This is a point we have worried about for several months now. When does the government of a country run out of confidence in its ability to back failing institutions, and suffer from a severe withdrawal of confidence. It is not an actual shortage of cash which causes a bank run, more the fear that it will run out of cash, a loss of confidence.

Sovereign Debt
There have already been discussions about the ability of a number of countries to maintain a substantial value to their currencies, and to maintain liquidity. The IMF has become necessary and active once more. Britain had to be bailed out some decades ago, will it happen again, and when?

What About the USA?
So far, the US dollar has, to much surprise, benefitted from the credit crisis, the recession, and hot money flows. From statistics we have read, the recent American governments have put more dollars into existence than ever before, and by large factors. By any normal logic, the value of each dollar should be worth far less than it is (think about shares in a company). We believe that at some point, and not too far into the future, the value of the dollar must fall sharply. Which other currencies will gain we do not know, but we believe that one of the soundest measures of value is precious metal, particularly gold. We saw a news article recently quoting a Citibank expert as saying gold would reach $2,000 per ounce. We intent to comment on this on a forthcoming page.

Why This Page?
We created this page to explain devaluation, and its effect on prices of gold bullion, gold coins, and other precious metals.

New Gold Forecast
We tend to be reluctant to forecast future gold prices, but do try to comment on matters which may affect them. Any significant change in the exchange rate of one currency is almost certain to strongly influence the value of any commodity measured in that currency.
Because the pound sterling has recently dropped by about 20% - 25%, then we need to revise some of our previous thinking about gold prices.
It is worth looking at our record high gold prices, which we publish in three different currencies:

These are all based on London Gold Fix prices.
The highest fix in pounds sterling was £542.810 on the morning of the 10th October 2008. At the time gold was "only" $918. The dollar sterling exchange rate was therefore $1.69 = £1.
Today (3rd December 2008) the afternoon fix for gold was $766.25 and £519.280, giving the exchange rate of $1.4756; if gold were to return to its 10th October dollar price of $918 at this same exchange rate, this would make gold £622.12!
Further, if we take the record highest price in dollars, $1,023.50 on the morning of 17th March 2008, at today's sterling exchange rate, gold would be £693.62!
If you believe the forecast of the Citibank's expert for gold to hit $2,000; this would put gold at £1,355.38 per ounce.


We hope this page has been useful. You may wish to see some of the other advice and information pages on our website:-

Very simple advice about investing in gold.

Gordon Brown - 2007 General Election & Gold What form of physical gold to buy.

Gold Prices Index

Going Up

Going Down

Harold Wilson

Harold Wilson

Bullion Coin Selector Page


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