Abstract

In the literature on international capital flows there is almost no mention of currency movements. “Capital” is usually understood to move through the channels of institutional finance or company accounts, where book entries record the changes in international assets and liabilities. Yet some capital moves in simpler and more tangible ways. Whenever domestic currency notes are acquired by nonresidents, foreign claims increase, constituting a capital inflow. The flow of currency back into residents’ hands represents a decrease in external liabilities—an outflow.1 The balance of payments counterpart entry to the currency flow may belong in a country’s current account, as with tourist expenditures, or the entry may belong in the capital account. An example of the latter case is a domestic bank’s shipment of currency to a foreign correspondent, whose demand account is debited in payment. Only a few major currencies—those widely accepted in global transactions or regarded as stores of value—are likely candidates for substantial international movement. The U.S. dollar is the most obvious candidate, but there are others, too.