Use of the term balance of payments

All this does very little to justify the use of the term "balance" of payments. Why not simply a statement of international payments, some being debits and some credits? In double-entry accounting the idea of balance, as visibly expressed in the familiar balance sheet, arises logically out of the fact that for every transaction completed by the enterprise two ledger entries are made, one offsetting the other. Hence it follows that the debits must equal the credits and the books must balance. When, however, we examine the totality of international payments of a country in a given period, what reason is there for anticipating that the credits will equal the debits, that is, that the exports, visible and invisible, will equal the imports, visible and invisible, including specie?

Certainly it is obvious that the analogy of double-entry accounting is of no assistance. Traders, railroads, steamship companies, tourists, immigrants, missionary societies, investors, governments, all engaged in activities which necessitated payments by foreigners to Americans and by Americans to foreigners. It is impossible that the persons and institutions in the United States who were responsible for the credit or "export" activities should have acted in concert with the persons and institutions who were responsible for the debit or "import" activities with the purpose of seeing to it that the value (in, say, dollars) of the two aggregates of payments were identical. The fact is that they acted separately and individually--although of course they were influenced by common sets of economic forces.

Yet on both logical and empirical grounds we are forced to the conclusion that somehow the total credits of a country on international account do balance or equal the total debits over any reasonable period of time. Every country in the world has its own currency. This means that the people of one country have only three ways of making payments to the people of another country, since neither will accept the other's currency as a final means of payment. The first way is to sell goods and services; the second way is to borrow or to sell shares or titles to property; the third way is to export some commodity granted peculiar acceptability by long custom, such as gold or silver.

Now what if, in that year, no Americans bought any goods or services from foreigners or otherwise became indebted to foreigners and that no American was willing to lend money to foreigners? The creditor Americans, of course, want payment in dollars. They might temporarily accept foreign currency if it could readily be converted into dollars at a satisfactory price or rate; but since we have assumed that no American had payments or loans to make to foreigners during the year there would be no demand for foreign currency (i.e., foreign exchange). Thus the first two means of payment would be denied to the foreign debtors; only by shipping gold (or silver, if it was acceptable) could they settle their debts to Americans.

Such a one-sided situation manifestly could not long continue. Logically there must be a balance between the inpayments and outpayments of a country on international account. To the extent that the aggregate credit transactions do not balance the aggregate debit transactions, there will be uncollectible accounts on one side or the other. For example, the United States might in one year engage in a considerably larger volume of credit than of debit transactions. The net credit balance would probably in part be settled by gold imports. Most countries, however, are no longer on an international gold standard and are reluctant to release much gold for export. They are more likely to "block" or "freeze" the "excess" American claims in domestic currency deposits. So far as the United States balance of payments is concerned, this situation may be reflected in either of two ways. The American funds blocked abroad may be regarded as an involuntary, indeterminate-term loan to the foreigners and hence as a debit to offset the (temporarily) uncollectible credit; or these latter may be deducted from the aggregate volume of credit transactions, leaving as a remainder only those which actually resulted in dollar payments to the United States. In either case the result would be the same, the international debit and credit payments (including specie) balance.

On empirical grounds there is added reason to conclude that the debits and credits in the international accounts of a country tend to equality. Every competent attempt to ascertain the volume of international payments of a country for a given period has revealed an approximate balance in the exports and imports (visible and invisible and specie). To be sure, some investigators have been rather casual in deriving unknown items by reference to known items; for example, taking from official statistics the value of commodity and gold imports and exports and estimating other services, they have assumed that capital movements comprise the remaining debit or credit needed to "balance" the balance of payments. This is not to deny that judicious and expert estimating is essential in balance of payments research; but it is clear that, if the initial assumption on which the estimating proceeds is that aggregate debits and credits must balance, the chances are that before the work is completed they will balance. Obviously, however useful and true such a balance of payments may prove to be, it would not be, to the unconvinced, very conclusive empirical evidence of the tendency toward equality in debits and credits. Where, in a given balance of payments, the area of estimation is known to be relatively small and the number of items based on official statistics, questionnaires, and the like, relatively large, a finding of approximate balance in aggregate debits and credits is significant evidence.