When a country needs its currency to lose value, it will resort to various monetary policy strategies. Sometimes, this can have a direct influence on personal finance. Here we’ll tell you why and how devaluation happens and what consequences it brings.
When money used to be gold, silver or bronze coins, it was worth the value of the metal it was made of. But as those precious metals became scarce, money needed to be made from paper, copper, aluminium, tin and other cheaper materials. Because money no longer had the same worth as precious metals, it derived its value from the wealth of the country that issued it. In other words, a euro, dollar or peso is a certificate of ownership of some of the wealth stored in a central bank.
Because that wealth can be affected by economic behaviours and trends, countries can take mitigating measures related to the value of money. One such measure is devaluation. It means the value of one currency is reduced against another.
We mustn’t confuse it with depreciation, even though both mean one currency loses value against another. On the one hand, devaluation happens when a government makes monetary policy to reduce a currency’s value; on the other hand, depreciation happens as a result of supply and demand in a free foreign exchange market.
