Forex: International Payments in Foreign Exchange
Strictly speaking, money can only buy within national boundaries, The United States dollar in the United States; the pound sterling in Great Britain. If people residing in the United States want to buy merchandise in Britain they have first to acquire pounds sterling with dollars or else the British exporter, if he accepts dollars, will sell the dollars for pounds sterling on the British foreign exchange market.
International currency, money which could buy throughout the world, does not exist. Gold has approached the quality of international money since, where export and import of gold are free, international payments can be accomplished through the medium of gold.
Most international payments are cleared in one form or another and do not require any gold shipments. A greatly simplified example will serve as an illustration. If Johnson in New York has sold 5oo pounds' worth of chemicals to Miller in London, the necessary international payments can be made in the following manner: Johnson in New York draws a bill of exchange on Miller in London ordering him to pay 500 pounds and sells the bill to Wilson in New York who pays for it in dollars.
Wilson sends the bill to Turner in London, in payment for the imported woolen cloth, and Turner finally collects the 500 pounds from Miller. The identity of the value of the traded goods is a simplification which will appear less arbitrary when it is considered that a country's total in-and-out payments have to balance. The payments, however, between two countries will not tally unless they are artificially equalized through bilateral agreements.
There is no reason to assume that a country's export markets should coincide with its sources of raw materials. Country A may have a continuous import surplus with country B and a continuous export surplus with country C. This situation requires that country A must be able to use its earnings from exports to country C to pay imports from country B.
Yet even in the relation of one country to the rest of the world, imports and exports will not balance. International payments do not only originate from the purchase and sale of commodities, but also from services rendered (e.g., shipping services), from goods and services consumed by tourists in foreign countries, from capital exports (import of foreign securities), and capital imports (export of domestic securities), from interest and dividend remittances resulting there from, from settlements of loans and other debts (e.g., reparations) and from gold shipments.
All these in-and-out payments between one country and the rest of the world constitute a country's balance of payments and influence its foreign exchange market. Merchandise or securities sold or services rendered to foreigners, lead to a supply of foreign exchange on the domestic foreign exchange market, just as payments in the opposite direction determines the demand for foreign exchange.