Quote of the Day: How Devaluations Make Difficult Economic Calculation

Governments in countries like the United Kingdom have destroyed much of their manufacturing industry through currency depreciation, while Germany contrasts with a history of engineering excellence and a firm currency. The German business owner in the post-war years had relative certainty of economic calculation, allowing him to build up his productive wealth; while the British business lobby resorted to encouraging successive governments to keep costs down by devaluing the pound, rather than investing their own resources in more efficient production.

Reducing costs by managing the currency is, to put it less politely, all about robbing the workforce of the purchasing power of its wages. But the workforce is, in economic terms, made up of individual entrepreneurs selling their skills and labour to employers. They are the unconscious victims of devaluation as indeed are small businesses, but at least in the short-term the central planners manipulating fiat money congratulate themselves that jobs have been saved.

The cost comes later, as consumers – who in turn are also entrepreneurs and savers – pay the bill through higher prices and lose on their savings through lower interest rates and monetary value. So where’s the benefit?

None. The history of nations whose governments respect sound money, such as Germany and Japan in the post-war years, has been one of persistent economic progress, despite otherwise economically incompetent governments. This is in contrast with the UK and some European countries, whose continual devaluations were always accompanied by economic underperformance. Since then all governments have increased their currency debasement efforts. Nevertheless, it is striking that businesses do better with a stable currency in the long run than with the supposed benefits of these continual devaluations.

This is from GoldMoney’s Alasdair Macleod on the Impossibility of Economic Calculation in a fiat world