Paper Currency

Before we turn to an examination of specie movements as balance of payments transactions, a brief analysis of the rather puzzling paper-currency item is probably needed. Normally, paper currency does not circulate outside, or even cross, the boundary of the issuing country to any large extent, but travelers may carry some home currency with them if they have any reason to believe it may easily be exchanged for local currency abroad. In the immediate postwar years to the people of inflation-ridden central Europe the United States dollar was a symbol of stability. Hence American tourists found that paper dollar currency was readily accepted in those areas for hoarding. Fairly large amounts of United States currency cross into Canada and Cuba and of Canadian currency cross into the United States.

Ultimately most such migrant paper currency comes home again. The point for discussion here is its status on the balance of payments both as it leaves the country and as it returns. When the United States "exports" its own currency (i.e., when Americans take it abroad) it is properly a balance of international payments transaction only when and if it is sold (or exchanged) for foreign currency. At that time it should appear as a credit on the balance of payments. When, at some later time, the foreign holders of that dollar currency exchange it for their own currency and it is sent, through banking channels, to the United States, the imported currency appears as a debit on our balance of payments. Or, reversing the example, when the foreign departments of our banks buy the Canadian (or other foreign) currency which is offered to them, the transaction is just as surely a debit on our international accounts as if we had imported (and paid for) Canadian wheat. Later, when such foreign currency is sent abroad for exchange, it constitutes a credit on our balance of payments.