Competitive Devaluations Could Be Good for Individual Countries and for the World Economy.

“Currency depreciation in the 1930s is almost universally dismissed or condemned. This paper advances a different interpretation of these policies. It documents first that depreciation benefited the initiating countries. It shows next that there can be no presumption that depreciation was beggar-thy-neighbor. While empirical analysis indicates that the foreign repercussions of individual devaluations were in fact negative, it does not imply that competitive devaluations taken by a group of countries were without mutual benefit. To the contrary, similar policies, had they been even more widely adopted and coordinated internationally, would have hastened recovery from the Great Depression.”

This quote is from Barry Eichengreen and Jeffrey Sachs, “Exchange Rates and Economic Recovery in the 1930s”, The Journal of Economic History, December 1985.


My comments: 1. The countries that exited the Gold Standard first got the strongest and most rapid economic recovery, while late floaters like France or Switzerland paid a heavy price in the form of a lengthier bout of depression and unemployment. Today the problem is to exit from the "Bretton Woods 2" regime of partly fixed exchange rates.

2. What we call “currency wars” or “chaos” can be seen as a simple “tâtonnement” of the governments towards and equilibrium vector of exchange rate prices. It is due to the fact that nobody knows exactly in advance the precise (and fluctuating) equilibrium price of the national currency, and especially not the other governments.

It follows that, while many economists claim that currency wars are a zero sum game (what one country gains another must loose) they nevertheless have a real utility: the production of new information about what the adequate equilibrium exchange rates should be. It is a positive sum game and a process of discovery, as useful as competition in other markets. Planners everywhere generally consider competition to be a pure waste. But they are wrong as the collapse of planned economies demonstrated.