The balance of international payments of the United States (or of any country) consists of all the payments transferred into and out of its currency in a given period--usually a year, although sometimes shorter periods are used. It should immediately and forcefully be cautioned that the balance of payments does not list all the international transactions which take place between one country and others; it lists--or should list--only those transactions which resulted in payments within the period. Not only does the balance of payments properly include solely those international transactions which result in payments during the period in question, but the payments must be international payments-i.e., they must in some manner involve the exchange of one currency for another. An example or two may illustrate how an international transaction may sometimes not result in an international payment. It is, of course, clear that where the payment for goods or services exported to foreign countries is delayed beyond the balance of payments year--or even defaulted permanently--such exports should, in strict accuracy, be eliminated from any balance of international payments. Or suppose an American manufacturing company decides to put up a branch plant in Canada at a cost of $200,000, of which $50,000 will represent the cost of machinery to be purchased in the United States and paid for by the company with American dollars. Now so far as our official foreign trade statistics are concerned, this equipment will appear as an export of machinery to Canada valued at $50,000. Obviously, for balance of payments purposes a $50,000 deduction should be made from merchandise exports, since no international payment was made: One American company simply bought machinery from another American company and shipped it to Canada for installation. In practice, the balance of international payments of the United States would include the machinery as a credit (export) of $50,000 and would add $50,000 to new direct investments abroad, or debit. The two items thus offset each other, but neither item involves an international payment within the year and hence neither item should be included in the balance of payments. Of course, the new branch plant may in later years earn a profit which the parent company may convert into American dollars, but that contingency has nothing to do with the immediate balance of payments. Consider another example: An American owning Canadian mining shares listed only on the Toronto stock exchange may leave them in the custody of his broker. If, then, he orders his broker to sell shares worth $5,000 (Canadian currency) and hold the proceeds on deposit in Canada, there is no international payment, although the transaction is by some tests international. It should not appear on the balance of payments in any form.
All this is almost self-evident. Yet in the collection of balance of payments data it is almost impossible to be sure that all transactions are eliminated for which either no international payment at all is going to be made or in which the payment will be deferred beyond the balance of payments year. The Department of Commerce, for instance, is obliged to accept as balance of international payments items the commodity import and export statistics as recorded by the Customs Service, without attempting the corrections suggested above.
Theoretically, it should be possible to draw up a statement of the balance of international payments of a country which would really include all the payments made during the year on international account. Actually, however, the task is immensely difficult, even when attempted by a government department with unsurpassed fact-finding resources at its disposal. Some items-gold, silver, paper currency, bankers' balances, government transactions--are regularly recorded with reasonable accuracy, although anyone who has compared, for example, United States exports to Canada as recorded in official United States statistics with Canadian imports from the United States as recorded in official Canadian statistics, will have mental reservations concerning the accuracy even of the merchandise item on the balance of payments. The problem of ascertaining the volume of most of the "invisibles"--notably immigrant remittances, interest and dividends, and capital movements--is a tremendously difficult one. Consequently the student must be prepared to distrust any balance of payments statement which balances out neatly to the last dollar --although in theory it should do just that.
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