Historically, currency was often in the form of coins, and a government in need of funds might decrease the weight or purity of those coins to devalue them. Later, when paper currencies were introduced, countries might decree that a fixed amount of the new currency would be redeemable in gold (a devaluation). Today, it’s less common for a government to deliberately lower the value of its currency—that’s called devaluation. But it can still occur, for example when a country’s central bank or government creates a downward adjustment to balance trade by making exports cheaper and imports more expensive.
As a result, domestic products become more competitive on the international market and the country sees increased exports while seeing fewer imported goods. Ideally, this will lead to a better balance of trade and economic growth. But devaluation can also backfire and create other problems, such as inflation if demand for imported goods is not price elastic—meaning that higher prices for foreign goods can quickly boost local prices.
This is particularly a concern if the economy in question is already growing rapidly. A rapid devaluation can also inflame tensions with other countries and prompt them to respond with their own devaluations, leading to a race-to-the-bottom currency war that ultimately makes everyone poorer. In addition, if the country in question holds large quantities of foreign debt, a devaluation can raise interest rates on those bonds, which will make it more costly to pay them off.
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