Convertibility

Convertibility

[kuhn-vur-tuh-buhl]
Convertibility is the quality of paper money substitutes which entitles the holder to redeem them on demand into money proper.

  1. 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 fact that the banknote was merely a substitute for the real commodity money (gold and silver) was gradually lost sight of. Under the gold standard, banknotes were payable in gold coins. In the same way under the silver standard, banknotes were payable in silver coins, and under a bi-metallic standard, payable in either gold or silver coins, at the option of the debtor (the issuing bank).
  2. Under the 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/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 1971.
  3. Under the contemporary international currency regimes, all currencies' inherent value derives from fiat, thus there is no longer any thing (gold or other tangible store of value) for which paper notes can be redeemed. One currency can be converted into another in open markets and through dealers. Some countries pass laws restricting the legal exchange rates of their currencies, or requiring permits to exchange more than a certain amount. Thus, those countries' currencies are not fully convertible.

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