Commercially this term is used with reference to currencies and their value on the international exchange. Strictly speaking it applies only to currencies with a rate of exchange that is fixed in terms either of gold or some other currency of international repute. For example, the pound sterling was for a long period, before it was allowed to float in 1972, always quoted in terms of dollars; the rate of exchange between the pound and the dollar was fixed and tendencies for the rate to change were countered by direct action on the part of relevant monetary authorities. principally the Bank of England.
When an exchange rate is fixed it can only be changed by devaluation or revaluation by one of the countries concerned and by mutual agreement. The pound, for instance, was devalued against the dollar in 1949 and 1967, making the dollar more expensive to purchase in the United Kingdom and the pound less expensive in the United States. Imports to Britain were thus discouraged and exports encouraged. The effect of such devaluation, reflected in the international exchanges of the worid. should benefit the British balance of trade, but in fact in 1967 many other countries trading with the United Kingdom devalued their own currencies and the short-term advantage to Britain was not great.
The rules of the International Monetary Fund, sct up undcr the Bretton Woods Agreement of 1944, required exchange rates to be fixed between member countries and the prior permission of the I.M.F. to be obtained before any change in the rate by devaluation or revaluation could be made. It is not surprising that this rule was not always adhered to as the principal benefits from devaluation depend on the surprise element. The United Kingdom did not seek I.M.F. permission before the 1967 devaluation.
The fact that a currency devaluation tends to depress confidence in the stability of the devaluing country tends to make it a lastditch measure in handling a nation’s finances. It is usually resorted to after every possible alternative has been tried and rarely happens twice in a short space of rarely happens twice in a short space, of admission by a person that he is bankrupt.
Reference: The Penguin Business Dictionary, 3rd edt.