Real-life example: Taiwan has been purchasing weaponry systems from the USA for self-defense against China. This buying habit has gone on for decades, adding up to many billions of dollars of purchases.
In technical terms, how does a country like Taiwan pay the USA for such purchases? Do the Taiwanese government and the US government have bank accounts, and Taiwan says, “OK, I’m going to wire $5,000,000,000 to you?”
In history, the USA bought Alaska from Imperal Russia by writing a check for $7.2 million dollars ($119 million in current funds).
Also, many purchases of weapons are between a foreign country and a private business, not the government – it just has to give export approval to the sale.
Pretty much. Governments make payments much like any other large organisation. Why wouldn’t they?
Some foreign governments store gold in the gold vault of the Federal Reserve Bank of New York. So if a government wishes to pay another government, it can have the Fed transfer gold from its compartment to that of the other country.
Why the hell would they pay in gold when they could just wire the money, just like they do for all their other purchases?
Well, paying in gold is also just a wired instruction. No actual gold is physically moved.
That’s not true. Read the linked webpage; the New York Fed moves actual gold bars, on the instruction of the owner. And I’m not saying that this is the only or usual way that countries pay each other. Just that it’s one possible way to do so.
OK, point taken. But it’s important to note exactly what’d going on here.
The gold in vault A does not belong to organisation A because it’s in their vault. Rather, it’s in their vault because it belongs to them. Simply moving it to another vault wouldn’t be enough to change the ownership status. There is no law of property that says that a bar of gold belongs to whoever happens to rent the space in which it happens to be located at the moment. Because the FRBNY does not commingle the gold of different owners, they won’t put gold in your vault unless it belongs to you, and they won’t take it out and put it in vault B unless it now belongs to the owner of vault B.
So, to get your gold moved into vault B, you need to transfer ownership of your gold to organisation B. It’s that transfer which constitutes the payment. The transfer is evidenced in writing. In consequence of the transfer, the FRBNY will move the gold to vault B, though you (or more probably organisation B) will have to pay a fee for this service).
Why would organisations agree to make payments by transferring ownership of gold bars? Maybe for very large sums, the cashflow costs of making the payment in currency (you try borrowing $100 million overnight) would exceed the costs associated with making the payment in specie.
I hope I am not taking over the question here, but I would like to drill down on the answer of wiring between countries.
Electronic banking and wiring makes sense to me within a country because there are authorities over the banks to make sure things stay honest (the government). How does this work between countries?
Lets say the Russian treasury’s holdings of US dollars is electronic. Pretend it is $4 Billion. What happens if Putin decides to open up a command window and make it $5 Billion instead. Who is auditing the Russian treasury? If another Russian official doesn’t like it, he won’t be around for long.
If Putin decides to buy a few billion boxes of Rice Krispies, he will wire the money to the Kellogg corporation. How will Kellogg know if those are “good” electronic US dollars or “bad” electronic US dollars? Who is to say otherwise?
The Russian Treasury has a bank account. If you want to increase the amount of US dollars the Russian Treasury is holding in the way outlined, it’s not the Russian Treasury’s books you need to falsify; it’s the bank’s.
OK, the Russian Treasury may well hold its dollars in a bank which is also controlled by the Russian state, and the state could abuse it’s control of the bank to have the records falsified. But this is kind of a short-term strategy, since a bank without a reputation for reliability is worse than useless to its owners. If Putin want to acquire dollars for free, obtaining them by theft or fraud, or even forging dollar bills, are more rational strategies than simply creating a false entry in the books of a state-owned bank.
And it’s true that countries could pay each other in shinny beads, feathers or bottle caps, but they don’t.
The question was how to countries pay each other sums of money, and something which is theoretical but doesn’t happen really doesn’t answer the OP.
Notice the sentence, “The New York Fed charges account holders a handling fee for gold transactions, including when gold enters or leaves the vault or ownership transfers (moves between compartments), but otherwise does not charge fees for gold storage.” (Bolding added by me.) That doesn’t sound theoretical. It sounds like, on occasion, one country transfer gold to another country.
Does the US treasury use a commercial bank? I thought the US treasury is too big for any commercial bank. Is the Russian one different?
The United States has a bank.
The bank is called the Federal Reserve.
The US Treasury has an account at this bank. When we pay our taxes, the numbers in this account go up. When the government spends money, the numbers in this account go down.
Other countries have their own banks, too. These are called central banks. For example, the central bank of the Republic of China (Taiwan) is, in English, called the Central Bank of the Republic of China (Taiwan).
The central banks of nations have accounts with each other. Naturally. If Taiwan wants to pay the United States government for something, they can use money in their account. They can tell the Fed to take the money out of their account, in order to give the money to the US government’s account. If they don’t have enough US dollars immediately to hand, they might have to arrange a series of transactions with various dollar-holding institutions around the world. Those banks can transfer money in their Fed accounts to the Bank of Taiwan’s Fed account, while the Bank of Taiwan in exchange transfers some other asset of equivalent value, perhaps their own New Taiwan Dollar. But they’re not likely to be short on American cash. It’s normal for central banks around the world to have extensive US dollar reserves.
The details could be expanded upon at tedious length, but the basics are pretty simple. Governments transfer money using government banks.
My WAG is that the countries would be buying and selling gold for other reasons than using them as payments. Countries may want to increase or the amounts of gold reserves, for example.
There simply is no practical reason for countries to make payments with gold except for extremely rare cases.
So, cite for with this happens, or has happened.
Of course treasuries use banks. Did you think they kept there money in banknotes in a shoebox under the bed?
The don’t, mostly, use commercial banks. They use government-owned banks, which also act as the central bank of the country. (Another reason not to trash the reputation of your bank by falsifying its books.)
But they can use commercial banks. The Bank of England was at one time privately-held, and accepted deposits (rather selectively) from the public as well as from the British government. It wasn’t nationalised until 1946. The Federal Government of the United States banked with privately-held banks for most of the nineteenth century.
Most of the time they used State Bank to make such payment.
It’s actually a bit more complicated than most people in this thread are making out to be. Here’s a blog post that talks about the process of making inter-bank transfers. There’s a bit more complication around forex and the like as well when dealing with foreign transactions.
Money transfer is actually pretty complicated but it’s abstracted away from the end user such that we normally don’t think about it.
Yes, I’ve oftened wondered about the complication when dealing with foreign transactions.
Making payments from AUS appears to be very simple. It looks a bit like SWIFT, and may be SWIFT for all I know.
But getting payments from Indonesia appears to be subtle and complex. Your payment may be reversed 6 months later. I don’t know if this is just the difference of appearance between paying and getting paid, or if the settlement system between Aus and anywhere is actually different than the settlement system between Indonesia and anywhere.
<nitpick>When Taiwan buys weapons from the US, they aren’t buying them from the government, they are buying them from the companies that make them (with US gov’t approval, of course).</nitpick>