A British woman by the name of Sally Challen just inherited 1 million pounds. At first glance this is happy news, but there’s a backstory.
In 2011 she was found guilty in the murder of her husband. Last year the charges were reduced to manslaughter on account of years of emotional abuse from the now deceased. While her late husband's estate was initially assigned to the couple’s two sons, Elian Peltier of the New York Times reports that the funds were re-assigned based on the new information about the case.
Notable is that in Peltier’s accounting of Challen’s story, it was made clear to U.S. readers what most of them know in some shape or form: the British pound and the dollar don’t have a 1 to 1 relationship. At present a dollar is worth .80 pounds, or 4/5th of a pound. Peltier indicated that the 1 million pounds Challen would be receiving are worth $1.2 million.
It’s a reminder of a simple truth that too often eludes economists, along with the intellectually lazy politicians so easily gulled by them. For the longest time errant economists at prestige employers of economists like the IMF have promoted currency devaluation as a form of economic stimulation for an ailing country. Supposedly the devaluation renders the individuals and businesses in the devalued country more competitive globally. Supposedly it becomes easier for them to sell their wares globally. Such a view isn’t serious.
It’s the equivalent of a 5’8” college basketball guard shrinking the size of an inch in order to increase his odds of making the NBA. No doubt redefining the inch to something smaller might make it possible for the diminutive player to claim a height that starts with 6’, but no one in the League would be fooled. Height is height. Shrinking the inch won’t alter this reality any more than elongating a second will make someone fast.
It doesn’t work with currencies either. Everyone knows. Peltier is almost assuredly not a currency expert, but the Times reporter is fully aware that the mention of nominal currency amounts is meaningless without some kind of relative comparison. Heads will explode with the mere mention of gold, but historically this commodity the value of which is “least influenced” by other things was the objective measure that countries defined their currencies as a fraction of.
From 1944 to 1971 for instance, the dollar was defined as 1/35th of an ounce of gold, after which most of the rest of the world’s currencies were pegged to the dollar. Since the dollar had a definition in terms of gold, so did the world’s currencies have a gold definition based on the dollar’s.
Since 1971 the dollar has become the global currency against which other country currencies measure themselves. The world is on a dollar standard, for good and bad. Mostly bad. Mostly bad is the answer when it’s remembered that the dollar’s value is a moving target. Along these lines, five years ago a pound purchased $1.65 dollars.
Currencies were long measured in terms of gold not randomly, or based on the Bible, or sun spots, or because gold is shiny, but because it’s once again the commodity “least influenced.” Plain and simple. A currency defined in terms of gold could most achieve its singular purpose as a stable measure of value facilitating exchange.
In Challen’s case she’s soon to receive 1 million pounds, but the pounds on their own have no use. They can’t be eaten, and rarely are slept with. Of course when they’re slept with, the excitement about covering oneself with “money” is rooted in excitement about what the money can be exchanged for. Challen’s presumed pleasure in receiving the 1 million pounds is the goods and services she can purchase with the money.
All of which speaks to the foolishness of devaluation. Economists and politicians say devaluation boosts an economy, but an economy is just people. Devaluation just means the currency they work for suddenly commands fewer goods and services.
But wait, some will say, a devaluation renders the goods and services some are selling cheaper. No, it doesn’t. Such a statement is as braindead as a basketball guard claiming he’s 6’5” after redefining the inch. Height is still height, and value is still value.
When we buy something we’re ultimately exchanging products for products. I’ve got computers, I want the car for sale on your lot, but you want the hotel room offered up by a nearby resort. Playing around with currency values doesn’t alter the value of something on the way to making it more competitive. A computer is still a computer, a car is a car, and a hotel room is a hotel room regardless of what’s done with the currency.
Just as Peltier distinguishes between a dollar and a pound in the report on Sally Challen, so will those exchanging goods and services account for any movements in the value of currencies. With good reason. No one wants to give more for less. More important is that no producer will give more for currencies exchangeable for less. Please read on.
Assuming a major devaluation of the dollar, American workers will be impoverished first for their dollars buying fewer goods and services. But it won’t stop there. All production anywhere is a consequence of global cooperation among producers. Fully aware of the dollar’s reduced exchangeability, producers around the world will demand more dollars in return for the inputs that enable U.S.-based production. And of course it’s useful to point out that enhanced production is a consequence of investment in new ways of doing things, but if the dollar is seen as shrinking and unreliable, investors will be less willing to put money to work stateside.
Making basic what’s basic, there’s a reason you never read about rich countries that persistently shrink their currencies. Of course you don’t. Devaluations are anti-wealth now, and in the future. Rather than harm everyone with devaluation, companies that want their goods to be more competitive can simply reduce their prices. Life isn’t terribly complicated.
Looked at through the prism of Challen, she is expected to inherit 1 million pounds. Will she be better off if the pound is soon to devalued to a 1 to 1 relationship with the dollar? We know the answer. What’s bad for Challen is bad for every British citizen. Those citizens are the British economy.
John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is titled They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers. Other books by Tamny include The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at firstname.lastname@example.org.