Problems of Convertibility
AN important function of money is to facilitate indirect exchange. By being generally acceptable as a medium of exchange, money enables people to sell in one market and buy in another. While money readily fulfills this function within the borders of most countries except on occasions of extreme inflation, governments from time to time have imposed restrictions on the foreign use of money, limiting its convertibility into foreign currencies and even making it difficult or unlawful for a seller to use the money received from his sales in one country to purchase from that same or from another country.
During the nineteenth and early twentieth centuries, the use of currencies in international transactions was seldom subject to interference by governments. The institution of the gold standard, with its convertibility of local currency into gold, assured relative stability of exchange rates between different currencies and thus further facilitated triangular and multilateral trade. The absence of restrictions on the interchangeability of currencies and the presence of institutions to provide such interchanges promoted multilateral trade in increasing volume and encouraged substantial international flows of capital. Neither an exporter of goods nor an exporter of capital had to worry about getting caught with nontransferable balances abroad or about getting rid of foreign exchange only with severe losses. Neither an importer of goods nor a debtor trying to repay had to worry about not being able to obtain the foreign currency needed for his payments. International