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?
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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.
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