Interest and Dividends and Capital

The other transactions are sometimes more confusing. Interest and dividends, to be sure, should cause no difficulty. The "export" or "import" might be considered to be the bond coupons or--stretching the idea of export and import still further--the legal claims on declared dividends. The capital transactions require more careful examination. The general rule is: An inflow of capital (i.e., a capital import) creates a credit, while an outflow of capital (i.e., a capital export) creates a debit.

Now at first glance this seems to contradict the previous discussion, in which credits were defined, broadly, as exports and debits as imports, since here we have said that an import of capital creates a credit and an export of capital a debit; but the contradiction is only seeming. In the case of a capital inflow the "export" consists of the securities or the titles to property evidencing the investment. Hence by this test the capital import is a credit. A few examples will illustrate the point. Suppose an American buys, on the Toronto Stock Exchange, $1,000 worth of Canadian mining shares. By two tests this export of American capital is a debit on our balance of payments.

First, the share certificates are imported, and like all imports must be paid for. Second, the American will have a "bill" to settle with his broker in Toronto; i.e., a Canadian has a claim on an American, thus a debit on our balance of payments and, of course, a credit on that of Canada. Or suppose the American Soup Company invests $250,000 in a factory in Australia. We may imagine that $100,000 will consist of machinery shipped from the United States and thus ought to be excluded altogether from the balance of payments since no international payment resulted. The remainder--$150,000--the company needs in Australian currency in order to pay the local contractor for the erection of the building. So the company (or its bankers) will buy $150,000 worth of Australian pounds. This will give to some Australian bank (we shall suppose) a deposit in (i.e., a claim on) an American bank. The export of capital therefore turns out to be a debit on the balance of payments of the exporting or investing country, in the year in which the capital outflow occurs. Of course, in subsequent years the income from and any repayment of principal of such foreign investments will appear as credits on the balance of payments of the creditor country and debits on the balance of payments of the debtor country.

Banking and other short-term capital, as balance of payments items should cause no trouble for the reader who has understood the discussion of long-term capital.