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Convertible And Inconvertible Currency Know The Difference

Published on Friday, March 31, 2017

Convertible Money

  • The convertible money can be considered as a currency with huge amount of liquidity as the convertible money can be exchanged, sold or can be used to buy according to the demand of the holder. 
  • There are little or no government restrictions on the exchange of the convertible currency. Economic growth of the country plays a major role in deciding the value of convertible money. 
  • A positive economic growth encourages the investors to buy convertible currency. The convertible currency is issued against silver, gold and securities. 
  • The basic underlying principle under convertible money is that, all the currency is not presented for payment by the public at the same time, i.e. all the currency holders do not wish to convert the currency into cash at the same time. 
  • This provides for the government to hold only fractional reserves at the time of payment. The government need not maintain the exact equivalent of reserves against the convertible currency issued. 
  • The value of the reserves kept in the form of gold and silver is much less compared to the currency issued. 
The characteristics of convertible currency are: 
This currency can be converted into cash at the demand of the holder.
The securities which are maintained in the form of gold and silver can be converted into cash at any time.
There are two types of reserves under this system:
Metallic portion- contains gold, silver and standard coins.
Fiduciary portion – this portion contains only approved securities.
Merits of using convertible currency Valuable metals such as gold and silver are utilized in the economy.
This type of currency can be utilized for foreign trades. 
There is flexibility for encashment.
Demerits of using convertible currency
There is a fear of over issue of the currency by the authority.
This is not considered as secure as representative money.

Inconvertible money

  • Inconvertible currency cannot be converted into another currency or standard currency or which cannot be used to buy, sell or exchange it in the market. 
  • There are political and government restrictions imposed on this currency. 
  • The government or the regulatory authority can impose or label a currency as inconvertible to protect the investors from making bad investment and exchanging, buying or selling the stable currency. 
  • This currency cannot be converted or there are restrictions imposed on the foreign exchange market. It is also known as blocked currency.

The features of this currency are

  • The government or the monetary authority does not maintain reserves in the form of gold and silver for holders of this type of money. 
  • The monetary authority does not guarantee to convert this type of money into coins or gold. 
  • There is a possibility for the government to back up this type of currency in the form of treasury bills, bonds or government securities. 
  • Such currency is issued only in limited quantity as there is no guarantee to convert into gold or coins or standard money.

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