Convertibility of Currencies

the ability to exchange (convert) the currency of one country for the currency of another or for gold according to officially established parities.

Free convertibility of currency into gold existed in the major capitalist countries until World War I. During the temporary stabilization of capitalism that came after the war, convertibility was restored in the form of exchange for gold ingots. The collapse of the gold standard during the world economic crisis of 1929–33 meant the end of currency convertibility into gold. Until August 1971, only the US dollar was convertible into gold, and on a limited basis that was open only to central banks and various official agencies of the capitalist states.

Since the late 1950’s and early 1960’s, free convertibility of currencies has nominally existed in many capitalist countries, but in practice no capitalist country converts its currency into gold; in most countries, restrictions have been established as well on convertibility into the currencies of other countries. As a rule, relatively free convertibility is permitted for nonresidents, such as foreign holders of cash balances. This is known as nonresident convertibility. The same kind of convertibility extends to currency received through trade, tourism, and other current operations. This is known as commercial convertibility.

Within established currency zones, the currencies of member countries are convertible. For example, citizens of countries of the sterling zone are permitted to exchange their currency for the currency of any other member, but not for US dollars or West German marks. Especially rigid restrictions on currency convertibility have been set up with regard to international transfers of capital. The convertibility of the currencies of capitalist countries is also substantially limited by the fact that only certain authorized banks and other institutions such as tourist agencies, airlines, and major hotels that are specially permitted by the government are eligible to make such exchanges.

In the socialist countries, planned convertibility of currencies operates within the framework set by the monopoly on foreign trade and that on foreign currency. All foreign trade bodies and certain other organizations receive the right to acquire the foreign currency required to execute all transactions that they have concluded. The overall program for socialist economic integration among the member countries of the Council for Mutual Economic Assistance (COMECON) calls on these countries to work out the terms and procedures by which a convertible joint currency such as the transfer ruble will be introduced and made part of the national currency of each COMECON member. Mutual convertibility of all national currencies of COMECON members is also foreseen.