History shows currency devaluation may not be a calamity

Over the next few years, the debate about whether or not to remain in the euro will rage in countries like Greece, Italy, Spain, Ireland and Portugal. Opponents will argue that each country must ditch the euro and regain monetary sovereignty or it will be condemned to rising unemployment and stagnation.

Proponents will counter by insisting that retaining the euro is the only way to protect domestic and monetary fiscal credibility. By leaving the euro and devaluing their national currencies, they claim, the afflicted European economies will simply condemn themselves to many years of economic stagnation.

A similar debate took place in France nearly a century ago that may illuminate the problems Europe faces today. After the first world war, which wreaked havoc on the monetary arrangements of the pre-war years, France struggled over the issue of what to do with its currency.

Like most belligerents France went off gold during the war. Wartime inflation made it impossible to return the franc to the pre-war gold exchange rate, but there was a widespread belief that to fail to maintain the gold value of its currency was irresponsible behaviour that condemned a country to economic stagnation.

France struggled mightily to return to the pre-war exchange rate, but it could not. In 1928, yielding to the inevitable, it finally devalued the franc 80 per cent against its pre-war value. France's capitulation to monetary 'irresponsibility' mortified its bankers and its econo my, it was widely believed, would collapse relative to the countries that had returned to the pre-war exchange value.