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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Think of it like store credits. Gov A gives $10B to Gov B. Gov B can spend that store credit to buy things.
When Saudi Arabia was reimbursing the US for some of the costs associated with Desert Shield, they gave the military a check for about $750M. The military couriered that check back to NYC to collect the interest over the weekend.
its also wotrh noting that over 50% of ALL money today was never in physical form, it’s just data stored on computers, so adding more zeros on computer country B owns and retracting zeros on the computer country A owns if both parties agree is totally legal way of paying.
Can also be cash.
Back in 2016 President Obama sent a jet with $400 million in cash to Iran for American hostages and followed up with an additional $1.3 billion shortly thereafter to bribe them into his nuclear deal. [cash for mullah](http://www.wsj.com/articles/u-s-sent-two-more-planeloads-of-cash-to-iran-after-initial-payment-1473208256)
Hi I’m a transaction processing systems programmer who works for one of the top 5 global banks. So basically when money is actually going from one nation state to another it works like any other monetary transaction would, it just happens in a way that is extremely regulated, reliable, safe, traceable, and able to be validated. Governments hire banks and become their customers the same way a person would. For instance we have whole areas of our functional department that support Treasury Services, Global Funds Transfer, etc. These sorts of monetary transactions are why mainframes are still and will always be an integral part of IT infrastructure for certain companies.
ELI5 what is money? Like actually. It kind of doesn’t make sense sometimes.
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.
I noticed that no answers so far have mentioned gold. The transactions can take place with ownership of x amount of gold that’s in a vault somewhere, usually in the state reserve, but it can be gold that they already own in someone else’s vault. X amount of gold is simply marked as belonging to the other country instead of outright handing it over. The gold usually doesn’t actually change hands and instead sits in the vault, but its ownership alone is suitable as a medium of exchange.
This doesn’t always have to be gold either. It can be other valuable items, or simply money itself.
Most nations have accounts at the federal reserve. If the crediting is to be in dollars they can just credit or deduct their account balance.
Note that most money today is just database (book keeping) entries. Nobody sends chunks of money in ships or airplanes. Note also that money doesn’t even exist even if someone wanted to send it.
Finally and most importantly that’s also the mechanism by which the nation who serves this intermediary function gets to rule its doctrine over other nations. See sanctions US imposes on other nations.
Germany is still repatriating it’s gold from US and UK from WW2 I believe, rare case of actual gold moving between countries in modern times?
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