THE devaluation of the pound last September, followed immediately by that of so many other currencies, is a sharp reminder of the changing pattern of economic relations in the postwar world. In itself it is like a single figure in red at the end of a company's balance sheet. Such a menacing cipher reflects only the net result of many factors, good and bad, in past experience, and indicates the compelling necessity of new adjustments. It mirrors neither the past nor the future pattern in all the complexity of individual transactions. It does, however, present an immediate challenge to think of both. This is an appropriate moment, then, to attempt a broad survey of the main forces determining the shape of things to come.
The present devaluation was, of course, not so much an act of policy as a recognition of facts and a surrender to necessity. Great Britain, and others in a comparable position, had been unable to sell enough to the dollar countries at current prices and exchange rates to balance their international accounts, even with Marshall Aid; and their reserves of gold and foreign exchange, especially those held in London for the whole of the sterling area, had therefore become dangerously depleted. Recognition of this, and increasing expectations of devaluation, had depreciated the pound, wherever transactions in it escaped the exchange control, even below its purchasing parity. The devaluation by 30.5 percent reflected both these influences. If the value of currency in purchasing power and in public estimation does not equal its exchange rate, the rate must obviously be allowed to adjust itself, before all reserves are exhausted. And that is what happened.
A new exchange rate is, however, more than a barometer. It changes the terms of trade with all countries whose rates have not been similarly altered; and must substantially modify, as it is intended to do, the whole pattern of foreign commerce. Before looking at deeper forces operating below the surface of current transactions, we should
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