Editing Convertibility

{{Short description|Ability of money to be transformed into other stores of value}}
{{Use dmy dates|date=September 2021}}

'''Convertibility''' is the quality that allows money or other financial instruments to be converted into other [[market liquidity|liquid]] [[store of value|stores of value]]. Convertibility is an important factor in [[international trade]], where instruments valued in different [[currency|currencies]] must be exchanged.<ref>{{cite web|url= http://www.investopedia.com/terms/c/convertibility.asp |title= Currency Convertibility |publisher= [[Investopedia]] | accessdate =8 June 2010}}</ref>

==Currency trading==
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 a [[hard currency]].{{Citation needed|date=May 2010}}

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 [[Transnistrian ruble]], and the [[Cuban peso|Cuban national peso]], are officially nonconvertible and can only be exchanged on the [[black market]]. If an official exchange rate is set, its value on the [[black market]] is often lower.<ref>{{cite web|publisher = [[HowStuffWorks]] |title= How Exchange Rates Work |url= http://money.howstuffworks.com/exchange-rate4.htm | first = Ed | last = Grabianowski |date= 6 February 2004 |accessdate=8 June 2010}}</ref>

Convertibility controls may be introduced as part of an overall [[monetary policy]]. For example, restrictions on the [[Argentine peso]] were introduced during [[1998–2002 Argentine great depression|an economic crisis in the 1990s]] and scrapped in 2002 during a subsequent crisis.<ref>{{cite web|url= http://www.frbatlanta.org/pubs/econsouth/econsouth-vol_4_no_1-argentinaend_of_convertibility.cfm | title= Argentina: The End of Convertibility | first1 = Myriam | last1 = Quispe-Agnoli | first2 = Stephen | last2 = Kay |publisher= [[Federal Reserve Bank of Atlanta]] |accessdate=8 June 2010}}</ref>

==Commodity money==
{{More citations needed|date=May 2010}}
Convertibility first became an issue of significance during the time [[banknote]]s began to replace [[commodity money]] in the [[money supply]]. Under the [[gold standard|gold]] and [[silver standard]]s, notes were redeemable for [[coin]] 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 [[Bretton Woods system|gold exchange standard]], for example the [[Bretton Woods Institutions]], banks of issue were obliged to redeem their currencies in [[gold bullion]], or in United States dollars, which in turn were redeemable in gold bullion at an official rate of $35 per [[troy 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 contemporary [[Exchange rate regime|international currency regimes]], currencies are issued on the [[Fiat money|fiat]] of the issuer (a government or central bank), and carry no guarantee of convertibility to a tangible asset.

==See also==
* [[Convertible security]]
* [[Virtual currency]]

==References==
{{Reflist}}

{{Authority control}}

[[Category:Foreign exchange market]]
[[Category:Metallism]]