Who Gains Through Devaluation? (1968)

From the January 1968 issue of the Socialist Standard

Devaluation, as its name implies, is the act of lowering the value represented by the currency of a country in relation to gold. It is a particular form of currency depreciation. Keynes in his Tract on Monetary Reform, published in 1923, suggested as a distinction between the two terms that devaluation is currency depreciation which has been “fixed and confirmed by law”.

Its importance to capitalism lies in the fact that contracts and loans are drawn up in terms of pounds, dollars, marks and so on, but the values represented by them may be changed, sometimes drastically. If someone lent ￡100 twenty years ago and received it back to-day it would buy only half what it would have bought when it was lent. A textbook case is that of a British bank which in June 1914 lent 750,000 roubles (worth 78,000) to a Russian bank. Years later when the loan was repaid in the form of 750,000 roubles the rouble had been so devalued that all the British bank received was ￡5, and the courts upheld this. (It will be noted that the document under which the British Government recently borrowed a large sum through the International Monetary Fund contains a clause that the money has to be repaid, not in pounds, but in the currencies of the lending countries. This is to prevent the lenders being caught by another devaluation of the pound).

In order to guarantee a large measure of stability to the value of the pound, British law for a century before 1914 gave the holder of Bank of England notes the right, on demand, to convert them into a fixed amount of gold, or to convert gold into notes – the rate being approximately a quarter of an ounce of gold to the pound. Under that guarantee the pound was “as good as gold” and was accepted as such in other countries. Now the note in inconvertible, and owing to over-issue, has depreciated so much that at the new rate of $2.4 its equivalent in gold has fallen to less than one fourteenth of an ounce instead of the original quarter of an ounce.

If a currency is fixed in terms of a certain weight of gold, devaluation would take the form of fixing it at a smaller weight of gold. The American dollar, under an act of 1900, was fixed at about one twenty-first part of an ounce (one ounce was equivalent to $20.67). In January 1934 it was devalued to one thirty-fifth of an ounce (one ounce is $35).

For many years the British pound has been held at a specified rate against the dollar; at $4.03 from 1940 to 1949, then at $2.8 and now $2.4. Through the dollar the pound is thus indirectly related to gold.

Devaluation, both in our own times and historically, has been a common practice. Pick’s Currency Year Book 1966 recorded that in a period of twelve months 22 countries had devalued their currencies, six of them more than once. Keynes observed that “there is no record of a prolonged war or a great social upheaval which has not been accompanied by a change in the legal tender”. He held that this historical process was no accident but was the outcome of two factors; the desire of governments to reduce the burden of national debts by repaying them in depreciated currency and the political pull of money borrowers who have a like interest against money lenders.

English history has the example of kings, notably Henry the Eighth, who depreciated the currency (and pushed up prices) by issuing coins whose real metallic value was below their face value. The seller of an article would insist on being paid a larger number of the debased coins.

Though changes of value are usually downwards they are not invariably so. The German Government upvalued the Mark in 1961 and has recently contemplated a further upward revaluation.

It is mistrust of the stability of most of the world’s currencies that has produced massive private hoarding of gold, wherever this is legal and often where it is not.

Generally speaking, while each government can make its own currency legal tender within its own boundaries, payments to other countries must be in the currencies of these countries or in gold – among the exceptions were the pound when it was convertible into gold, and the dollar. If exports from a country are sold abroad in large enough quantities the foreign money received for the exports will be sufficient to pay for imports. American exports have for years been large enough to produce a big surplus, but the size of American investments abroad and of overseas military expenditure including that on the Vietnam war, has been so great that there have had to be large payments abroad in gold. Although American gold holdings are still very large the belief has been encouraged that the American Government may in due course devalue the dollar again.

The situation of British capitalism has been much more precarious. There has not been a large export surplus, and at times there has been a deficit, and foreign holders of balances in London (estimated at about ￡4,000 Million) fearing devaluation have been in a position to create “a run on the pound” by pulling out their balances. The British gold and dollar reserve has been much too small to withstand the pressure, even with the help of foreign loans.

Foreign bankers and others with balances in London lacked confidence in the pound because they could observe the adverse trade figures, and also the depreciation of the pound internally, as measured by the continued rise of the price level, a much faster rise than in the USA. They have observed the policy of successive British governments of pushing up the issue of currency notes without any regard to the additions really called for by the growth of production and trade. (One of the conditions attached to the latest foreign loan obtained by the British Government through the International Monetary Fund is that “the growth of money supply will be less in 1968 than the present estimate for 1967”).

In accordance with the Marxian law of value, commodities express their value in the universal equivalent, gold, the money commodity, because gold, like the rest of commodities, represents a given amount of socially necessary labour.

If day to day buying and selling transactions were carried out in gold coin a certain total amount of gold would be required, representing a certain total value. If the gold is replaced by inconvertible notes the total value represented by the notes remains as before.

If the note issue is doubled the effect is merely that two notes are now functioning in place of the one unit of gold, and the outcome is that prices are doubled. If an article had been priced at ￡1 when the pound was ¼ of an ounce of gold, the doubling of an inconvertible note issue raises the price to ￡2. A larger increase of the note issue would correspondingly raise the price level still more.

At one time many economists, though rejecting the labour theory of value, nevertheless arrived at the same practical conclusion. Now the fashion is largely to disregard it.

The British currency note is more than five times what it was before the war, although total production has not even doubled. There are other factors affecting prices one way or the other but this is the main one in recent decades.

This policy of depreciating the pound has produced soaring prices – which all the post-war governments said they did not intend, and has produced the ceaseless race between wages and prices.

Their excuse for the policy of depreciation has usually been that it stimulates the growth of total production, but there is little evidence that it has done so.

But higher prices exact a penalty by increasing the difficulty of selling exports profitably. The Board of Trade reported recently that British exports were less well placed to compete in markets abroad in respect of price than they were twelve years ago – this in spite of big investments of capital to cheapen costs.

The Financial Times (21 November) stated that many firms fail to press exports because they are not sufficiently profitable.

Devaluation is a measure designed to counteract in export markets the higher prices resulting from the depreciation of the pound.

An example will show how the 14.3 per cent devaluation affects the prices of articles bought or sold in a country which has not devalued. Before the devaluation of the pound a $1000 article bought in USA for import to Britain cost ￡357. After devaluation it costs ￡417, an increase of 16.67 per cent. Conversely a British export selling in USA for $ brought in ￡357 before devaluation and ￡417 after, again an increase of 16.7 per cent.

The broad result is that devaluation helps British export companies but hits companies dependent on imported raw materials. Within a few days of devaluation it was being said that the better prospects for exports would put up profits by ￡250 million (Daily Mail 22 November). It was also forecast that the internal price level would rise by perhaps 5 per cent or 6 per cent.

The effects of devaluation cannot be isolated from other factors and it is not safe to read into the future what happened in the past. However, for what it is worth, after the 1949 devaluation of 30 per cent prices rose rather faster than they had been rising in the years before, profits rose sharply for two years and then dropped equally sharply, and the balance of payments moved in somewhat the same pattern. Unemployment rose a little then fell, but was back again at a fairly high level within three years.

The Wilson Government’s antics over devaluation followed the same humbugging course as in 1949―first the protestations that the government would not devalue because that would be bad for the workers, then the deed, then the pretence that it was a good thing after all.

Just before the Attlee Government devalued the pound on 18 September 1949 the Labour Party monthly journal Fact published an article explaining why the government would not devalue:

  If the pound were devalued to three dollars… up would go the price of bread. A similar rise would be unavoidable in the price of every commodity in which raw materials imported from outside the Sterling Area are a part of the cost. Thus, if devaluation succeeded in closing the gap (which is doubtful) it would do so by lowering our standard of living. The pound would buy less in Tooting and Bradford, as well as in New York and Winnipeg. Devaluation is therefore an alternative to wage-slashing as a device for cutting our prices at the expense of the mass of the people. (Fact, August 1949)

In 1967 it was the Chancellor of the Exchequer, Mr. Callaghan (now Home Secretary) who himself emphasised what a shocking thing devaluation would be; and then devalued.

The following are extracts from a speech by Mr. Callaghan in the House of Commons on 24 July 1967 (Hansard Cols 99 and 100.)

  Let there be no dodging about this. Those who advocate devaluation are calling for a reduction in the wage levels and the real wage standards of every member of the working class of this country. They are doing this, and the economists know it… This is a nostrum among economists who are quite clear-sighted and cold-hearted about its purpose. Un¬  fortunately it has been picked up by a number of people who clamour for devaluation because they believe that it is a way of avoiding other harsh measures. The logical purpose of devaluation is a reduction in the standard of life at home. If it does not mean that, it does not mean anything.

In 1949 after devaluation the Labour government insisted that wages should not go up because prices had gone up. In 1967 one of the “intentions” notified to the International Monetary Fund in connection with the loan reads: “There is no criterion for pay increases related to changes in the cost of living”.

Capitalism is not changed by devaluation: it has not become better or worse for the workers. “Strong” currencies or “weak” currencies do not alter the position of the workers.

British capitalism has been running an adverse balance of payments, has devalued its currency, and has about 600,000 unemployed.

German capitalism has been running a favourable balance of payments for years, altered the exchange rate of its currency upwards in 1961 not downwards, and early in 1967 had 655,000 unemployed !

There are no ways of making capitalism operate in the interests of the workers.

Edgar Hardcastle