10. Balances of Payments
In Chapter 3, we engaged in an extensive analysis of the individual's balance of payments. We
saw there that an individual's income can be called his exports, and the physical sources
of his income, his goods exported, while his expenditures can be termed his imports, and
To say that exports pay for imports is simply to say that income pays for expenditures.
We also saw that it is nonsensical to call a man's balance of trade favorable if he chooses
to use some of his income to add to his cash balance, or unfavorable if he decides to draw
Draw Down His Cash Balance, so that expenditures are greater than income.
Every action and exchange is favorable from the point of view of the person performing
the action or exchange, otherwise he would not have engaged in it.
A further conclusion is that there is no need for anyone to worry about anyone else's balance
of trade.
A person's income and expenditure constitute his balance of trade, while his credit transactions,
added to this balance, comprise his balance of payment.
Credit transactions may complicate the balance, but they do not alter its essentials.
When a creditor makes a loan, he adds to his money paid column to the extent of the loan,
for purchase of a promise to pay in the future.
He has purchased the debtor's promise to pay in exchange for transferring part of his
present cash balance to the debtor.
The debtor adds to his money receipts column from the sale of a promise to pay in the future.
These promises to pay may fall due at any future date decided upon by the creditor and
the debtor.
Generally, they range from a day to many years.
From that date, the debtor repays the loan and transfers part of his cash balance to
the creditor.
This will appear in the debtor's money-paid column for repayment of debt, and in the creditor's
money-received column from repayment of debt.
Interest payments made by the debtor to the creditor will be similarly reflected in the
respective balances of payments.
More nonsense has been written about balances of payments than about virtually any other
aspect of economics.
This has been caused by the failure of economists to ground and build their analysis on individual
balances of payments.
Instead they have employed such, the National Balance of Payments without basing them on
on Individual Actions and Balances
Balances of payments may be consolidated for many individuals, and any number of groupings may be made.
In these cases, the balances of payments only record the monetary transactions between individuals of the group and other individuals,
but fail to record the exchanges of individuals within the group.
For example, suppose that we take the consolidated balance of payments for the Antlers Lodge of Jonesville for a certain period of time.
There are three lodge members, A, B and C.
In the consolidated balance sheet of the Antlers Lodge, the money payments between the members must, of necessity, cancel out.
Thus, consolidated balance of payments for Antler's Lodge shows money income from outsiders, exports, 75 ounces, reduction of cash balance for transfer to outsiders, 3 ounces, for a total of 78 ounces, compared with money expenditure on goods to outsiders, imports, 78 ounces.
The consolidated balance tells less about the activities of the members of the group than do the individual balances, since the exchanges within the group are not revealed.
This discrepancy grows as the number of people grouped in the consolidated balance increases.
The consolidated balance of the citizens of a large nation such as the United States conveys less information about their economic activities than is revealed by the consolidated balance of the citizens of Cuba.
Finally, if we lump together all the citizens of the world engaged in exchange, their consolidated balance of payments is precisely zero.
All the exchanges are internal within the group, and the consolidated balance conveys no information whatever about them.
Taken together, the people of the world have zero income from outside and zero expenditures on outside goods.
Fallacies in thinking about foreign trade will disappear if we understand that balances
of payment are merely built upon consolidated individual transactions, and that national
balances are merely an arbitrary stopping point between individual balances on the one
hand and the simple zeros of a world balance of payments on the other.
There is, for example, the perennial worry that a balance of trade will be permanently
unfavorable, so that gold will drain out of the region in question until none is left.
Drains of gold, however, are not mysterious acts of God.
They are willed by people, who on net balance wish for one reason or another to reduce their
cash balances of gold.
The state of the balance is simply the visible manifestation of a voluntary reduction in
the cash balance in a certain region or among a certain group.
Worries about national balances of payment are the fallacious residue of the accident
that statistics of exchange are far more available across national boundaries than elsewhere.
It should be clear that the principles applying to the balance of payment of the United States
are the same for one region of the country, for one state, for one city, for one block,
one house, or one person.
Obviously, no person or group can suffer because of an unfavorable balance.
He or the group can suffer only because of a low level of income or assets.
Seemingly plausible cries that money be kept in the United States, that Americans not be
flooded with the products of cheap foreign labor, etc., take on a new perspective when
we apply it, say, to a family of three Jones brothers.
Imagine each brother exhorting the others to buy Jones, to keep the money circulating
Another popular argument is that a debtor group or nation cannot possibly repay its debt because its balance of trade is in fundamental disequilibrium, being inherently unfavorable.
This is taken seriously in international affairs, yet how would we regard the individual debtor who used this excuse for defaulting on his loan?
The creditor would be justified in bluntly telling the debtor that all he is saying is that he would much rather spend his money, income and assets on enjoyable goods and services than on repayment of his debt.
and Debt, except for the usual holistic analysis, we would see that the same holds true for
an international debt.