A Zelle transfer? A check in the mail? Help
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In the modern world, every country that isn’t under US sanctions has an account with the US Federal Reserve. Countries typically keep a meaningful chunk of money on deposit with the Fed, so when one loans money to another, they just tell the Fed about the transfer and the Fed updates its books. No physical money ever changes hands.
A lot of countries are also members of smaller, regional organizations like the EU or ECOWAS. Those organizations often have a bank, similar to the US Federal Reserve, where their members keep some money on deposit. If both countries involved in the loan are members of the same regional bank, they may just transfer the money through that instead of the US Fed.
For countries under US sanctions, the process is usually a lot harder. Iran, for example, conducts transactions mostly in gold. but sometimes in oil or weapons. So, for example, if Iran was going to loan you money, chances are they would put gold, oil, or rockets on a ship and send those physical items to your country.
How you pay Iran back is going to depend on what your country produces, but they typically want gold. Paying off your Iranian loan in gold works the same way that it did when you borrowed from them – you put the physical gold on a plane or ship and deliver it to Iran.
Since WWII, most transactions between countries occur at the US Federal Reserve. Prior to WWII, most transactions between countries were conducted in gold, similar to how Iran currently does it.
It’s the same as any other payment and boils down to one or the other:
– move physical tokens (coins, banknotes) between vaults
– trust a central bank to keep track of how much money everyone has
The US Federal Reserve System has a category of accounts called “foreign official” deposits. Those are literally just numbers in a database that say things like “The Treasury of the Republic of France has X dollars in the bank – we are the bank.”
They can use that account to write checks and wire transfers or to order a truckload of banknotes if that’s what they want.
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