On 6th June, 1966 India, hit by drought aftertwo major wars (with China and Pakistan), devalued rupee by 57 % from Rs.
50 = $1.
Why was the devaluation done and what makesa country devalue its currency! Let us imagine this hypothetical scenario.
Far away in a deep deep space, there was aplanet similar to our earth, where civilization had just started to emerge.
It had three states Kumarville, Huville andJohnville.
Citizens of these states were all hardworkingand self sufficient producing their own daily requirements of rice, brick and clothes.
Things were going great.
As time passed inhabitants of Johnville founda new faster way of making bricks.
Thus they started making more bricks thanrequired.
Since they had some extra bricks they thoughtof selling some bricks to the inhabitants of Huville who couldn’t produce more becausethey were going through a rainy season.
Huville guys thankfully gave some extra rice.
Johnville guys didn't need much rice, so theywere willing to offer only one brick for every 10 bags of rice.
Meanwhile kumarville is going through a droughtseason.
Their rice production was going down and lifewas getting pretty tough.
Before things could heat up, Kumarville guyspurchased 10 bags of rice from Johnville guys in return of 10 pair of clothes.
Since the exchanging process was complex thetribal leader of Johnville, let us call him crimton, started minting some special coinsand calls them daluro.
He sets an exchange rate of 1 brick = 1 daluro.
Thus, Huville and Kumarville guys need toget these Daluro to buy stuff from Johnville guys.
Inspired by Johnville, the tribes of Kumarvilleand Huville give colorful names Rapi and Rambi to their own coins.
1 Rapi is set as 10 pair of clothes and 1Rambi is set as 10 bags of rice.
These coins are then used among the villagersto buy and sell stuff among themselves.
At the current rate: 1 Rapi = 1 Rambi = 1Daluro.
Life is so good for Johnville people as theyare getting a lot of , clothes and rice without working much.
The drought in Kumarville ends and they startproducing a lot of rice.
Now, they are not in that need for the ricefrom Johnville and have a less need for Daluro.
As rice is required less, Kumarville guysare willing to sell only 5 clothes for every 10 bags of rice.
By previous equations, now 1 Rapi = 10 clothes= 20 bags of rice = 2 Daluro.
In the meanwhile, Huville have adapted a partof brick building process and have started producing enough bricks.
They are now less willing to buy bricks fromJohnville.
They now set 1 Rambi = 10 bags of rice = 3bricks = 3 Daluro.
This leaves the Johnville tribes with no optionsbut to devalue their currency to accept the reality that 1 Daluro = 0.
5 Rapi = 0.
So this is how countries recognize that theircurrency is significantly less than what it used to be.
And thus suddenly devalue their own currency! I got lot of amazing questions via facebookand youtube comments asking to make videos on astronomical, historical, biological field.
I have never covered any topic related toeconomics on this channel earlier.
So thought this as a great opportunity andmade a video on devaluation as requested by Ramsey.
Got some amazing questions on YouTube commentssections too.
I tried my best to answer most of them.
Keep asking more questions as who knows yourquestion will get featured in the next video along with the answer.
So what’s your next question? We are waiting :).