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Convertibility, in economics, is the concept that currencies can be readily exchanged for gold, or for another currency. The major modern currencies—the dollar, the Deutschmark, the pound and so on—are fully convertible, the last vestiges of non-convertibility having been abandoned in 1958. This oils the wheels of international trade, because countries can pay for their imports in any convertible currency, not one specified by the central bank.
Minor currencies in beleaguered economies such as the Mexican peso may be convertible only under strictly regulated circumstances. Such minor currencies nevertheless form the majority; more often than not, currencies are not fully convertible and/or are protected by exchange controls. Withdrawing convertibility, as happened in Mexico in September 1982, is one way to halt a run of speculation on a currency. To allow convertibility, a country must have sufficient reserves of foreign exchange or gold to back likely demands on the currency, or must have trust from the money markets. TF |
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