On 6th June, 1966 India, hit by drought after
two major wars (with China and Pakistan), devalued rupee by 57 % from Rs.4.76=$1 to
Rs.7.50=$1. Why was the devaluation done and what makes
a country devalue its currency! Let us imagine this hypothetical scenario. Far away in a deep deep space, there was a
planet similar to our earth, where civilization had just started to emerge. It had three states Kumarville, Huville and
Johnville. Citizens of these states were all hardworking
and self sufficient producing their own daily requirements of rice, brick and clothes. Things were going great. As time passed inhabitants of Johnville found
a new faster way of making bricks. Thus they started making more bricks than
required. Since they had some extra bricks they thought
of selling some bricks to the inhabitants of Huville who couldn’t produce more because
they were going through a rainy season. Huville guys thankfully gave some extra rice. Johnville guys didn’t need much rice, so they
were willing to offer only one brick for every 10 bags of rice. Meanwhile kumarville is going through a drought
season. Their rice production was going down and life
was getting pretty tough. Before things could heat up, Kumarville guys
purchased 10 bags of rice from Johnville guys in return of 10 pair of clothes. Since the exchanging process was complex the
tribal leader of Johnville, let us call him crimton, started minting some special coins
and calls them daluro. He sets an exchange rate of 1 brick=1 daluro. Thus, Huville and Kumarville guys need to
get these Daluro to buy stuff from Johnville guys. Inspired by Johnville, the tribes of Kumarville
and Huville give colorful names Rapi and Rambi to their own coins. 1 Rapi is set as 10 pair of clothes and 1
Rambi is set as 10 bags of rice. These coins are then used among the villagers
to buy and sell stuff among themselves. At the current rate: 1 Rapi=1 Rambi=1
Daluro. Life is so good for Johnville people as they
are getting a lot of , clothes and rice without working much. The drought in Kumarville ends and they start
producing a lot of rice. Now, they are not in that need for the rice
from Johnville and have a less need for Daluro. As rice is required less, Kumarville guys
are 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 part
of brick building process and have started producing enough bricks. They are now less willing to buy bricks from
Johnville. They now set 1 Rambi=10 bags of rice=3
bricks=3 Daluro. This leaves the Johnville tribes with no options
but to devalue their currency to accept the reality that 1 Daluro=0.5 Rapi=0.33 Rambi. So this is how countries recognize that their
currency is significantly less than what it used to be. And thus suddenly devalue their own currency! I got lot of amazing questions via facebook
and youtube comments asking to make videos on astronomical, historical, biological field. I have never covered any topic related to
economics on this channel earlier. So thought this as a great opportunity and
made a video on devaluation as requested by Ramsey. Got some amazing questions on YouTube comments
sections too. I tried my best to answer most of them. Keep asking more questions as who knows your
question will get featured in the next video along with the answer. So what’s your next question? We are waiting 🙂