Convertibility

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Updated: Aug 20, 2021

A currency is said to be convertible when it may be freely exchanged for another currency or gold. During the Second World War sterling was inconvertible, and it was made a condition of the Washington agreement of 1946 that it should be made fully convertible by July 1947. In fact, the sterling area’s gold and foreing exhange reserves were not able to support the demand for conversion, and convertibility lasted little more than five weeks. Two types of sterling emerged: (a) that eamed by the dollar-area countries, which was convertible, and (b) transferable sterling, which was used to finance trade inside the sterling area and which was not officially convertible. In fact, black markets grew up in which transferable sterling was converted into dollars at a discount. In February 1955 the Bank of England began officially to support the black market rate of exchange to bring it into line with the official rate. This meant, in fact, that the convertibility of transferable sterling was admitted. By the end of 1958 sterling was fully convertible for non­residents. All foreign exchange controls were completely removed by the U.K. in 1979.

Reference: The Penguin Dictionary of Economics, 3rd edt.



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