Convertibility is the quality that allows money or other financial instruments to be converted into other

liquid A liquid is a nearly incompressible fluid that conforms to the shape of its container but retains a (nearly) constant volume independent of pressure. As such, it is one of the four fundamental states of matter (the others being solid, gas, a ...

stores of value. Convertibility is an important factor in

international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy) In most countries, such trade represents a significant ...

, where instruments valued in different

currencies A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general def ...

must be exchanged.

Currency trading

Freely convertible currencies have immediate value on the

foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...

, and few restrictions on the manner and amount that can be traded for another currency. Free convertibility is a major feature of a

hard currency In macroeconomics, hard currency, safe-haven currency, or strong currency is any globally traded currency that serves as a reliable and stable store of value. Factors contributing to a currency's ''hard'' status might include the stability and ...

. Some countries pass laws restricting the legal exchange rates of their currencies or requiring permits to exchange more than a certain amount. Some currencies, such as the

North Korean won The Korean People's won, sometimes known as the North Korean won (Symbol: ₩; Code: KPW; Korean: ) or Democratic People's Republic of Korea won (Korean: ), is the official currency of North Korea. It is subdivided into 100 ''chon''. The curre ...

, the

Transnistrian ruble The rubla ( ro, рублэ, rublă, , plural ruble; russian: рубль) is the currency of Transnistria and is divided into 100 ''kopecks''. It is also known as the rouble in Commonwealth English or ruble in American English. Since Transnistria ...

, and the Cuban national peso, are officially nonconvertible and can only be exchanged on the

black market A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the se ...

. If an official exchange rate is set, its value on the

is often lower. Convertibility controls may be introduced as part of an overall

monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...

. For example, restrictions on the

Argentine peso The peso (established as the ''peso convertible'') is the currency of Argentina, identified by the symbol $ preceding the amount in the same way as many countries using peso or dollar currencies. It is subdivided into 100 '' centavos''. Its ISO 4 ...

were introduced during an economic crisis in the 1990s and scrapped in 2002 during a subsequent crisis.

Commodity money

Convertibility first became an issue of significance during the time

banknote A banknote—also called a bill (North American English), paper money, or simply a note—is a type of negotiable instrument, negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes w ...

s began to replace

commodity money Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods. This is in contrast to representati ...

in the

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...

. Under the

gold Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile met ...

and

silver standard The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. Silver was far more widespread than gold as the monetary standard worldwide, from the Sumerians 3000 BC until 1873. Following t ...

s, notes were redeemable for

coin A coin is a small, flat (usually depending on the country or value), round piece of metal or plastic used primarily as a medium of exchange or legal tender. They are standardized in weight, and produced in large quantities at a mint in order t ...

at face value, though often failing banks and governments would overextend their reserves. Historically, the banknote has followed a common or very similar pattern in the western nations. Originally decentralized and issued from various independent banks, it was gradually brought under state control and became a monopoly privilege of the central banks. In the process, the principle that the banknote was merely a substitute for the real commodity money (gold and silver) was gradually abandoned. Under the gold exchange standard, for example the

Bretton Woods Institutions The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bret ...

, banks of issue were obliged to redeem their currencies in

gold bullion A gold bar, also called gold bullion or gold ingot, is a quantity of refined metallic gold of any shape that is made by a bar producer meeting standard conditions of manufacture, labeling, and record keeping. Larger gold bars that are produced ...

, or in United States dollars, which in turn were redeemable in gold bullion at an official rate of $35 per

troy ounce Troy weight is a system of units of mass that originated in 15th-century England, and is primarily used in the precious metals industry. The troy weight units are the grain, the pennyweight (24 grains), the troy ounce (20 pennyweights), and the ...

. Due to limited growth in the supply of gold reserves, during a time of great inflation of the dollar supply, the United States eventually abandoned the gold exchange standard and thus bullion convertibility in 1974. Under the contemporary international currency regimes, currencies are issued on the

fiat Fiat Automobiles S.p.A. (, , ; originally FIAT, it, Fabbrica Italiana Automobili di Torino, lit=Italian Automobiles Factory of Turin) is an Italian automobile manufacturer, formerly part of Fiat Chrysler Automobiles, and since 2021 a subsidiary ...

of the issuer (a government or central bank), and carry no guarantee of convertibility to a tangible asset.

References

{{Authority control Foreign exchange market Metallism

Currency trading

Commodity money

See also

References