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What is Currency Convertibility?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 November 2016
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    Conjecture Corporation
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Currency convertibility refers to the level of difficulty that would be encountered if an attempt was made to convert the hard currency of a given country into gold or the currency issued by another country. There are a number of different factors that can impact the level of currency convertibility that exists between currencies issued by any two countries. Political, social, and environmental issues can all play a part in determining how easy or how hard it is to exchange gold or other forms of currency for any one currency.

Political factors often play a role in determining the level of currency convertibility that is currently possible with any given currency. In the event that the issuing country is considered to be politically unstable, chances are that the ability to convert the currency will be somewhat more difficult, or at the very least yield an undesirable rate of exchange. Generally, when there is a change in government that is considered to be favorable by other countries, the ability to trade the currency is enhanced significantly.

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Other factors such as social and environmental barriers may also have a profound effect on currency convertibility. From the social perspective, trade with the country may be considered undesirable, and serves as the basis for making it more difficult to convert the currencies involved. Environmental factors, such as acts of nature that have led to natural disasters or a severe depletion of natural resources within the country may also decrease the desirability to trade the currency issued by that country. The end result is once again an undesirable rate of exchange, and possibly a flat refusal to trade the currency for certain other currencies.

In order for international trading to function, it must be possible to exchange the currency of one country for another. While it is possible to introduce a third and somewhat neutral currency into the currency convertibility process and thus manage a trade between two countries that do not recognize each other’s currency, this is an action that is sometimes frowned upon and is strictly regulated by some nations.

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