Currency Convertibility Discussed
“It was gold that was chosen for Currency Convertibility Standard because it is accepted all over the world, is easily transportable and can be conveniently divided into different units.”
Currency convertibility can be defined as the method in which a currency can be exchanged for gold or various other currencies as per various rules and regulations of the IMF.A very important method of currency convertibility is the Gold Standard. In this system all the currencies are described as per their gold value. Thus, all the currencies develop a common linkage.
It was gold that was chosen for such a convertibility standard because it is accepted all over the world, is easily transportable and can be conveniently divided into different units.
Moreover, gold is a costly metal and very expensive to produce. So, a country cannot increase its gold reserves in a cost effective way. In this way, its currency is not able to get an unfair advantage in the world market.
At the end of the Second World War, a ‘par’ value of currency was decided upon. In this way, a method of fixed exchange rates for all currencies was developed. US dollar was the prominent currency and all the member nations were told to sustain the value of their currency close to the values decided by the system.
The buying and selling of different currencies on the foreign exchange market was done against the US dollar (usually). So, in an indirect way the dominance of gold was subdued to some extent. However, it still retained much importance because 1 US dollar was equivalent to the value of 1/35 oz. gold.
In case a country was not able to maintain the parity of its currency, it was decided upon that a world body would come to their aid. This world body that was established was the IMF (International Monetary Fund).
It helped the countries that experienced different kinds of economic problems (mostly the balance of payments problem) and hence were not able to keep their currency ‘at par’. The usual method was to give short-range loans. This method is still in vogue.
Some economists are against this system because they argue that it causes trade discrimination as the goods are not purchased from the cheapest source but from that source (country) where inconvertible currency is available in large amount.
This question is being debated and in all possibility a via media is likely to emerge.
Author - DeeKay
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