BALANCE OF PAYMENTS

The balance of payments is similar to the balance sheets bookkeepers maintain to keep track of their companies' credits and debits. But it does not focus on the cash flow of a single company. The balance of payments records the credits and debits of the entire U.S. economy with its foreign trading partners. If U.S. consumers, businesses, or the government spend more in foreign economies than those economies spend in the United States, the balance of payments is "in deficit." If the reverse is true, the U.S. balance of payments is "in surplus."

The balance of payments is not the same as the balance of trade. The balance of trade is only one of two major components in the balance of payments. The first component is the "current account." The "current account" is roughly the same as the balance of trade, and includes all short-term imports and exports of goods and services. The second component is the "capital account", which includes long-term investments and loans between the United States and foreign economies.

Before 1933 the United States and most of the industrialized world was on the gold standard. Applying this standard meant that all international currencies were valued in terms of how much gold they represented. Because of the Great Depression, Great Britain abandoned the gold standard in the early 1930s, but it was not until the Bretton Woods Agreement of 1944 that a new system based on the U.S. dollar instead of gold was implemented. Under this system a country could always "devalue" its currency relative to other countries' currencies if its balance-of-payments deficit became dangerously large. This would wipe out much of the deficit. The United States was the only country that could not devalue its currency to lower its balance-of-payments deficit. That restriction was applied because the Bretton Woods system valued all currencies against the U.S. dollar. President Richard Nixon (1913–94) abandoned the Bretton Woods Agreement in 1973, which enabled the United States to devalue the dollar when necessary. Since then all world currencies including the dollar may be exchanged freely on the world market at whatever rate the market will bear. The United States continues to accumulate balance-ofpayment deficits, when the value of the dollar is strong compared to other currencies. Foreign goods and services are inexpensive relative to U.S. goods and services. The U.S. government offsets these deficits by selling U.S. government bonds to foreign investors attracted to the stable dollar.