International and domestic payments

We shall return later to the vital distinction between international and domestic payments which is created by the existence of currency frontiers. Meantime it may be helpful to observe that balances of payments of a sort may be traced between localities or regions within the same currency area. To be sure, they lose significance because credit or debit balances pass almost unnoticed where there is no fluctuating foreign exchange rate and no gold movements to call attention to them. Yet structurally these intranational payments balances have much in common with international payments balances.

The Analogy of the Individual

One might even begin the analysis with the individual human being in economic society. Mr. Micawber rather dramatically called young Copperfield's attention to the fact that the balance between income and outgo in the affairs of a person could spell either prosperity or disaster. From analogies of this sort, as we shall see, the mercantilists were led to conclusions concerning the international balances of payments of a country which are from our viewpoint untenable. It can properly be observed, however, that the power of the individual to buy goods, services, securities, and so on, is limited by his income from sales of such things to others or from savings (investments) and by his capacity to borrow. If the individual's purchases exceed his income plus his borrowings, some of his creditors are very obviously going to have bad debts on their hands. Similarly, there is an intimate relationship between the international income and the international outgo of a country-its ability to buy from abroad is conditioned by the amount of its exports (of all sorts, including gold) and its foreign borrowings. We shall be at pains in this and subsequent chapters to demonstrate the nature and validity of this idea of balance or reciprocity. It is here needful only to observe that it has its roots in the ordinary relationship of man to man in an exchange economy. Fundamentally (ignoring all refinement of analysis) people cannot buy unless they can sell; neither can nations.