Devaluation And Exchange Control: Foreign Investment Risks

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Investing in overseas markets can be tempting, especially if the exchange rate works well in your favor. The problem is that markets can change rapidly, and instead of making $100 off of your $75 investment, you might end up with less than $50.

In 1949 the British pound sterling was devalued. Overnight it went from $3.68 to $2.80. This devaluation meant that if you, an American investor, had $3.68 deposited in an English bank and desired to "bring it home," all you had to bring home would have been $2.80. If some zeros are added, and the sum deposited was $36,800, you could bring home only $28,000. Your overnight loss would have been $8,800—one quarter of your entire investment.

Many of us sports car enthusiasts remember the devaluation for a more happy reason. Overnight the Jaguar XK-120 moved in price down to a level we could afford, and I promptly bought one. A car formerly priced at $3,680 could now be purchased for $2,800—quite a drop in price.

In the summer of 1959 we had a pleasant time when we arrived in Madrid. The peseta had just been devalued. The month before we would have received 40 pesetas for each of our dollars. Now we received 60. We had 50 percent more buying power. But if we had deposited $3.00 in a Spanish bank prior to the devaluation, we would have received a deposit credit for 120 pesetas, whereas if we wanted to bring our money home after the devaluation our 120 pesetas would buy only $2.00.

In 1960 both West Germany and Holland revalued upward by about 5 percent, so that if a person had money in either one of these countries he would have profited by 5 percent. His $1,000 investment would have became $1,050. This procedure is unusual. The same thing in effect happened under the administration of President Franklin D. Roosevelt. The dollar was devalued from $28 per ounce of gold to $35.

A person who deposited $28 in a foreign country could' have brought back $35. Similarly, with the outflow of gold that appeared daily in the papers and necessitated a statement on the part of Presidential Candidate Kennedy that he would not devalue the dollar, there was at least some risk that devaluation would again be employed in this country. The rumor that such devaluation might take place was no doubt responsible for a great deal of the money flow out of the United States to other countries.

Thus we cannot be sure when we send money abroad that we will get it back, or that we will get back the same amount. On the other hand, we cannot be sure that by keeping our funds in the United States we are doing the wisest thing either.

Exchange control is the final worrisome factor in investing abroad. When a foreign country imports more than it exports it can pay up only in gold, and this payment depletes a stock of gold, which is definitely limited in amount.

Since the foreign exchange situation in a country can change in a matter of months, you must keep up with foreign currency news in any country in which you invest.

The fact of the matter is that although there are certainly risks present in investing abroad which are not present when investing in the United States, there are certain great advantages, and if one studies the market carefully, it can be quite lucrative to take advantage of these opportunities.

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