Convertibility

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Convertibility

Convertibility is the quality of paper money

Money

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value....
substitutes which entitles the holder to redeem them on demand into money proper.

Historically, the banknote has followed a common or very similar pattern in the western nations. Originally decentralized and issued from various independent banks, it was gradually brought under state control and became a monopoly privilege of the central banks.

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Encyclopedia

Convertibility is the quality of paper money

Money

Gold standard

The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold....
, banknotes were payable in gold coins. The same way under the silver standard

Silver standard

The silver standard is a monetary system in which the standard economics unit of account is a fixed weight of silver. The silver standard was widespread until the 19th century, when it was replaced in most countries by the gold standard....
, banknotes were payable in silver coins, and under a bi-metallic standard, payable in either gold or silver coins, at the option of the debtor (the issuing bank).

Under the gold exchange standard

Bretton Woods system

The Bretton Woods system of money management established the rules for commerce and finance relations among the world's major developed country in the mid 20th century....
, for example the Bretton Woods Institutions, banks of issue were obliged to redeem their currencies in gold bullion, or in United States Dollar

United States dollar

The United States dollar is the unit of currency of the United States and was defined by the Coinage Act of 1792 to be between 371 and 416 grains of silver ....
s- which in turn were redeemable in gold bullion at an official rate of $35/troy ounce. Due to limited growth in the supply of gold reserves, during a time of great inflation of the dollar supply, the United States

United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
eventually abandoned the gold exchange standard and thus bullion convertibility in 1971.

Under the contemporary international currency regimes

Exchange rate regime

The exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors....
, all currencies' inherent value derives from fiat

Fiat currency

Fiat currency is money that exists because an authority or custom declares it to be money. . It achieves value because a government requires it in payment of taxes and says it can be used to pay debt or buy goods and services and because people trust that the value of the currency will be reasonably stable....
, thus there is no longer any thing (gold or other tangible store of value

Store of value

To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved....
) for which paper notes can be redeemed. One currency can be converted into another in open markets and through dealers. Some countries pass laws restricting the legal exchange rates of their currencies, or requiring permits to exchange more than a certain amount. Thus, those countries' currencies are not fully convertible. Some countries' currencies, such as North Korea

North Korea

North Korea, officially the Democratic People's Republic of Korea , is a state in East Asia, occupying the northern half of the Korean Peninsula....
's won

North Korean won

The won is the currency of North Korea. It is subdivided into 100 chon. The won is issued by the Central Bank of the Democratic People's Republic of Korea....
and Cuba

Cuba

The Republic of Cuba is a country in the Caribbean. It consists of the island of Cuba , the island of Isla de la Juventud, and several adjacent small islands....
's national peso

Cuban peso

The peso is one of two official currencies in use in Cuba, the other being the Cuban convertible peso . It is subdivided into 100 centavos....
, cannot be converted at all.