From: thompson@atlas.socsci.umn.edu (T. Scott Thompson)
Newsgroups: sci.econ,misc.invest
Subject: Re: need details on devaluating U.S. currency
Date: 3 Sep 92 02:58:22 GMT
Reply-To: thompson@atlas.socsci.umn.edu
Distribution: usa
Organization: Economics Department, University of Minnesota

fierro@uts.amdahl.com (Doug Fierro) writes:

[Numerous questions of which I will only address a few.]

>  Can someone help me out with some specifics on devaluation of the
>U.S. dollar.  It is my impression that only the U.S. can devaluate
>U.S. currency. 

>  1) How exactly does the government devaluate the dollar?  Do they make
>     some sort of announcement that $1 is now worh $0.80 or do they 
>     "print" (buy debt) or circulate more dollars into the economy?
>     If the Treasury just puts more dollars into circulation, do they
>     announce a target percentage devaluation or is it decided then by
>     the world market?

Prior to 1972 (or was it '73, I'm not good at dates) the U.S. together
with most other major economic powers maintained a system of fixed
exchange rates between the dollar and the other major reserve
currencies.  The rates were fixed by having each central bank fix an
official price of gold in terms of their currency.  A devaluation of
the dollar was achieved by raising the official US dollar price of
gold, which implicitly lowers the value of the dollar.  When gold
convertibility was abandoned, this kind of policy went out the window
with it.  I'll leave it up to others to give the historical details.

Today governments can still influence the value of their currency, and
of other currencies, by buying and selling them on the open market.
But there are no longer any systems of fixed exchange rates between
the major currencies, so there can no longer be anything like an
"official" devaluation of the dollar.

Some economists and politicians think that we should go back onto the
"gold standard" as a way of enforcing fiscal responsibility.  I do not
believe that any major presidential candidates have advocated this.

>  2) When was the last time the dollar was officially devaluated? Was it
>     in the early '70s (under Nixon)?

This is correct.  The official devaluations failed to end a run on the
dollar that threatened U.S. gold reserves.  In response to this crisis
the U.S. Treasury was forced to stop supporting the official price of
gold.  The abandonment of official dollar-gold convertibility led to
the demise of the fixed exchange rate system and an employment boom
for economists specializing in writing papers on the pros and cons of
fixed vs. floating exchange rates.

>     2b) Do you think the U.S. might do it again in the near future (after
>         the November election)?

Not officially.  Clearly the value of the dollar has been falling
recently.

>     2c) will this push the price of gold up?

This seems plausible.  Or perhaps the price is already "too high" and
the current depreciation is a reaction to that.  It is difficult to
say which price changes cause the others.  They are determined
simultaneously.

>  3) What are the chances that the U.S. will collect existing currency and
>     re-issue new currency if a devaluation were in fact to take place?  I 
>     only ask this because my Mom heard Nth hand that a friend who works for 
>     the Treasury says that they are bulk ordering a new ink that might be 
>     used for new bill circulation (she gets these ideas.. :-).  I'm sure 
>     this is a wild rumor but it would be interesting to know if the U.S. has
>     done something like this in the past- like leaving the gold standard?
>     I'm not sure what issuing new bills would accomplish since the dollar
>     is a truly fiat form of currency with no real worth without the backing
>     of the government (and confidence of consumers).

I recently read a story about a new printing process being introduced
at the Bureau of Engraving.  Perhaps this explains the bulk order for
new ink.  There has been much talk about retiring pennies and one
dollar bills from circulation sometime in the not too distant future
(remember the Susan B. Anthony dollar?) but I have not heard any talk
about changes beyond this.  I think that your intuition about the real
effects of issuing new currency is "on the money." :)

I'll leave the rest of your questions for the macroeconomics experts
in netland.
--
T. Scott Thompson              email:  thompson@atlas.socsci.umn.edu
Department of Economics        phone:  (612) 625-0119
University of Minnesota        fax:    (612) 624-0209