Convertibility and When a Currency Could Finally Buy Imports

A currency that cannot be exchanged for another is of limited use in international trade. For much of the postwar period most currencies were not freely convertible, and restoring convertibility was a longer project than rebuilding factories.

What inconvertibility meant in practice

Holding a currency that could not be exchanged meant an exporter could be paid in money that bought goods only inside the paying country, whether or not those goods were wanted.

Governments rationed access to the currencies that were widely accepted, allocating them through licensing to imports considered essential.

Importing therefore required an administrative decision as well as a commercial one, and firms competed for allocations rather than simply for customers.

Why controls were maintained

Countries emerging from the war needed to import capital goods and materials for reconstruction while having limited capacity to export, which produced persistent external deficits.

Free convertibility under those conditions would have exhausted reserves quickly, so controls were retained as a way of managing a genuine shortage rather than as a preference.

The controls also protected fixed exchange rates, since a rate cannot be held if holders of the currency are free to sell it in unlimited quantities.

Bilateral balancing filled the gap

Without a common settlement medium, countries arranged trade in pairs, agreeing to exchange goods of roughly equal value and settling any difference through credit arrangements.

This works, but poorly, because it requires each pair to balance rather than allowing a surplus with one partner to fund a deficit with another.

Multilateral clearing arrangements were built to partly solve this, allowing balances to be offset across a group of countries before any settlement was required.

The transition took years

Convertibility was restored gradually, typically first for transactions relating to trade and only later for capital movements, and at different times in different countries.

Sequencing mattered because opening capital movements before an economy could sustain the resulting flows tended to produce pressure on the exchange rate.

That sequencing question has recurred repeatedly since, and views on the right order and pace have changed considerably over time.

What changed once it arrived

With convertible currencies, an exporter could accept payment from any customer and use it anywhere, which removed a large administrative barrier from ordinary commerce.

Trade patterns reorganised around cost and quality rather than around which countries held usable currency balances with each other.

The volume of trade grew substantially in the period that followed, and while tariff reductions are usually credited, the removal of payment restrictions was doing comparable work.