Gary North

May 9, 2009

The terms "devalue" and "revalue" were appropriate in the era of fixed exchange rates between national currencies. Unofficially, that era ended on August 15, 1971, when Nixon closed the gold window and floated the dollar. By 1976, all major currencies were floating.

A devaluation prior to 1971 was made by a central bank. It announced that the nation's currency would no longer trade at the existing fixed rate, but rather at a lower rate. All those who had moved their currency accounts out of the domestic currency and into the foreign currency won. They wound up with more foreign currency than they could get under the new regime. They could trade back for more units of the domestic currency.

Conversely, a revaluation is what happens on the other side of the border. A foreign central bank announces that it will raise the price of its currency, as denominated in a foreign currency. This devalues the other currency and revalues the domestic currency.

These overnight devaluations and revaluations take place because the true conditions of supply and demand are different from the price controlled currency system. The de-valuating nation finds a rush out of the domestic currency. Its holdings of a foreign currency are depleted, as foreign central banks exchange the officially overvalued national currency for the officially undervalued domestic currency. The devaluation is an admission of failure by the devaluing central bank. "We were wrong. Our currency really isn't worth what we said."

In late 1923, the German government revalued the mark by issuing a new currency with only a few zeroes. This was an admission of guilt and also a way to regain favor with Germans. It worked. The new currency circulated immediately. The same thing happened in 1948, when finance minister Ludwig Erhard knocked off a zero from the fiat marks, and also abolished all price and wage controls. The new currency was immediately successful. These were acts of revaluation. They raised the value of the domestic currency by abandoning the old currency.

If a new government knocked off zeroes from Zimbabwe's currency, and the central bank ceased printing money, the new currency would circulate. It would be trusted far more than the current currency is trusted, which is not at all. Some trust is better than no trust.

A revaluation is rare. It comes after a time of high inflation. It is a desperation move. It is an admission of failure. But it is usually believed when central bank policy moves to zero inflation.

If a central bank ceases to inflate, the recession will hit. If it sticks to its guns, the recession becomes a depression. Prices fall. This is a revaluation of the currency unit. It is the basis of long-term recovery. It has not happened anywhere in the West ever since the West went off a gold coin standard. Central banks never stick to stable money policies.