Convertible National Currencies

Currencies are convertible when holders can freely exchange them for other currencies. There are several advantages in using a particular national currency as an international standard of value and as an international reserve asset.  Unlike gold its costs of production and storage are negligible and  the reserve asset is in the same form as the currency used by traders and investors.  The supply can easily be increased or diminished to meet the needs of world trade.

The problem with this facility is that for the other countries to hold convertible currency, the country to which it belongs must be in constant trade deficit because it must import form other countries and pay them in its currency.  But a prolonged deficit will cast doubt on the ability of that country to maintain the exchange value of its currency.  Another problem is that if the country to which the currency belongs devalues the currency, the other countries holding it will lose purchasing power in international transactions.