– When one government does a business deal with another government, what do they use as an exchange of value?

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So for example, let’s say the British Government wanted to buy something from the US government. Well the U.K. wouldn’t exactly hoard a shed load of dollar bills “just in case” they fancied making a purchase from the US. By the same token, the US wouldn’t accept a she’s load of pound notes because they’d be useless to them (surely)

So what valuable asset do countries usually trade in?

In: Other

Money is just a proxy for valuable things such as gold in banks. So sometimes the payment between countries involves transferring actual gold.

>Well the U.K. wouldn’t exactly hoard a shed load of dollar bills “just in case” they fancied making a purchase from the US.

That’s actually sort of what they do. Every government maintains a supply of dollars that they use for international transactions and nearly all international transactions are conducted in dollars – including when they don’t involve the US.

The only international transactions that don’t involve dollars are transactions involving countries under US sanctions, IE – Iran, Venezuela, Cuba, and North Korea.

Venezuela and Iran tend to make deals using gold or oil.

Cuba can repair old Soviet weapons systems and so occasionally trades that as a service. It can also trade agricultural products. There was also a period during the 2000’s and early 2010s when it was trading with oil that Venezuela gave it, but Venezuela isn’t in an economic position to just give Cuba free oil anymore.

North Korea trades in domestically produced copies of Soviet weapons, ballistic missile technology, nuclear technology, military training, and occasionally black market dollars that China lets North Korea launder through its banking system.

The British government would not horde dollar bills for purpuses like this because they can just as easily go to a currency exchange market and buy it. Similarly the US government could easily accept British Pound as they too can easily go to a currency exchange market to trade it into US Dollars. This way they just find people who have bought something in the UK that they sold in the US, either directly or thorugh intermediary traders in other currencies, or someone with US Dollars who is willing to trade it into British Pounds expecting someone to come along later and trade it back for a better price.

> Well the U.K. wouldn’t exactly hoard a shed load of dollar bills “just in case” they fancied making a purchase from the US

Except that’s exactly what the U.K. does. Multiple shed loads. A single shed can, at best, load a few million dollars. Also, they use bunkers as treasuries, more safe than sheds.

Every country has a stash of currency for the countries they trade with. And in lieu of the correct currency, they’ll use dollars or euro’s. That’s what they call a “reserve currency”, currency you hold in reserve for international trade.