Say country A sends some billions of dollars to country B in aid or in exchange for some resource. How does the actual transfer take place? How does the wealth of country A decrease and the wealth of country B increase?
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Domestically, when someone at Bank A sends money to Bank B, no money actually changes hands. Bank A deducts funds from your account and Bank B credit funds to the recipient’s account. Then the two banks settle the transaction by crediting and debiting their bank accounts with the national reserve bank (Federal Reserve, Bank of England etc…). To make it easier the banks will batch thousands or millions of transactions in both directions and pay the net difference once a day or so.
For international transfers there is no global reserve bank. So, the banks do it with each other in a system called correspondent banking. To send cash from a Bank of America customer to a Royal Bank of Scotland customer, BofA will have cash on deposit at RBS. When RBS credits their customer they reduce the cash balance of BofA’s account. If you don’t have a correspondent banking relationship set up with the destination bank, other banks will step in as intermediaries.
A “wire” transfer is just the message used by all the banks to authorize all the transactions.
In the case of a government sending money to another government, they both have bank accounts at a regular bank and process it just like they were regular customers. Or a government will have funds on deposit internationally and get it debited from there.
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