Convertibility
Convertibilityis the quality that allows money or other financial instruments to be converted into otherliquidstores of value.Convertibility is an important factor ininternational trade,where instruments valued in differentcurrenciesmust be exchanged.[1]
Currency trading
[edit]Freely convertible currencies have immediate value on the different international markets, and few restrictions on the manner and amount that can be traded for another currency. Free convertibility is a major feature of ahard currency.[citation needed]
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 theNorth Korean won,theTransnistrian ruble,and theCuban national peso,are officially nonconvertible and can only be exchanged on theblack market.If an official exchange rate is set, its value on theblack marketis often lower.[2]
Convertibility controls may be introduced as part of an overallmonetary policy.For example, restrictions on theArgentine pesowere introduced duringan economic crisis in the 1990sand scrapped in 2002 during a subsequent crisis.[3]
Commodity money
[edit] | This articleneeds additional citations forverification.(May 2010) |
Convertibility first became an issue of significance during the timebanknotesbegan to replacecommodity moneyin themoney supply.Under thegoldandsilver standards,notes were redeemable forcoinat 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 thegold exchange standard,for example theBretton Woods Institutions,banks of issue were obliged to redeem their currencies ingold bullion,or in United States dollars, which in turn were redeemable in gold bullion at an official rate of $35 pertroy ounce.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 contemporaryinternational currency regimes,currencies are issued on thefiatof the issuer (a government or central bank), and carry no guarantee of convertibility to a tangible asset.
See also
[edit]References
[edit]- ^"Currency Convertibility".Investopedia.Retrieved8 June2010.
- ^Grabianowski, Ed (6 February 2004)."How Exchange Rates Work".HowStuffWorks.Retrieved8 June2010.
- ^Quispe-Agnoli, Myriam; Kay, Stephen."Argentina: The End of Convertibility".Federal Reserve Bank of Atlanta.Retrieved8 June2010.
