The Purpose of Devaluation (1949)

From the December 1949 issue of the Socialist Standard

The alleged purpose of devaluing the £ was to enable British exporters to sell goods in America and elsewhere which they otherwise could not sell, the idea being that an article formerly priced at 4,000 dollars (or £1,000) would be much more attractive to an American buyer if he could buy pounds at a cheaper rate. To take the extreme case of the price remaining at £1,000 the American buyer can now get it for 2,800 dollars instead of having to pay 4,000 dollars. Actually some British exports much in demand have remained at their old dollar price which means that they sell for a higher price in pounds. Thus if the export continued to sell at 4,000 dollars its price in pounds. will have been raised from £1,000 to about £1,430 (at 2.8 dollars to the £).

Most articles will in practice be sold somewhere in between the two extremes, that is to say, sold at a smaller number of dollars (i.e. something less than 4,000 dollars) but at a larger number of pounds (i.e. something above £1,000).

Exporters who can sell at the old dollar rate and get a larger number of pounds will of course make much larger profits unless their costs of production rise equally through having to buy raw materials in America.

Those advocates of devaluation who think that it is a wonderful cure-all are living in a fool’s paradise. Obviously if it were so simple all countries would have done it long ago.

Devaluation is only a method of achieving a result that could be achieved in another way; and what we have to seek is the reason why Governments, including the Labour Government, sometimes prefer to resort to devaluation.

Since the purpose of devaluation is to enable British exporters to sell the goods that they could not sell before, it will at once be seen that this could have been achieved by the simple method of reducing the price of the articles. But what would have happened if the Government had ordered exporters to cut their prices? In the first place it would have reduced their profits, and if the reduction had been big enough it would have put the companies out of business—they would have gone bankrupt.

So if the Government had enforced a reduction of prices instead of devaluing the £, it could not have stopped there; it would have had to take the next step of saving the exporters from bankruptcy either by reducing wages or by getting cheaper production by trying to force the workers to work harder for the same wages.

This is the key to the situation. Rather than try to reduce the capitalists' costs of production by lower wages or harder work, the Government looked for a way out which works differently though designed to achieve the same result. It achieves the same result because devaluation raises prices at home through importers now having to pay a larger number of pounds to buy the same amount of goods as before in dollar markets.

The broad alternatives before the Government were (a) no devaluation but lowered wages or harder work, or (b) devaluation with a higher cost of living and wage freezing.

In practice the Government, knowing that it could not succeed, except by bitter struggle, in preventing any rise of wages at all, aims to hold wages back as far as it can while at the same time trying to get greater production as well (in some cases by longer hours).

One other thing devaluation was expected to achieve, that was to enable exporters to make a quick sale of otherwise unsaleable goods in order to get dollars needed for imports and thus buy a short breathing space for the rest of the Government's increased production campaign to bear fruit

The whole business of devaluation may be illustrated by taking the example of a concern which urgently needs cash to pay overdue bills, and which has stock on hand which is selling too slowly to enable the firm to find the cash through ordinary channels. In such a situation the firm may decide to have a sale to turn the stock into money. To do this it may have to sell the stock at less than it cost to produce but will think it worth while because it "buys time” and avoids bankruptcy.

Naturally they can’t go on selling their goods at less than cost of production, but they may hope to solve the problem by reducing wages or by inducing their workers to produce more at the same wages and by one or other method to be able to reduce their cost of production and gain a wider market for their goods.

The sale (like devaluation) solves no problem except to gain time. The solution to the problem for the firm as for the Labour Government is to gain markets at the expense of the working class, the workers having to accept a lower standard of living or to accept increased intensity of work.

And the “solution” itself is no solution in the long run because every capitalist country is striving to sell its goods competitively in the same world markets. It is just a phase in the never-ending treadmill of capitalism.

Edgar Hardcastle