balance of payments, balance between all payments out of a country within a given period and all payments into the country, an outgrowth of the mercantilist theory of balance of trade. Balance of payments includes all payments between a country and its trading partners and is made up of the balance of trade, private foreign loans and their interest, loans and grants by governments or international organizations, and movements of gold (capital account). A chronically unfavorable balance of payments, when debits exceed credits, may affect the stability of the nation's currency, particularly where exchange rates are no longer fixed. After World War II the International Monetary Fund was established to handle problems relating to the balance of payments and foreign exchange.

Since the late 1950s the United States has generally experienced an unfavorable balance of payments because of large-scale foreign aid, sizable U.S. investment in Europe, and major U.S. military investments abroad. In the early 1970s the United States, in an effort to create a more favorable balance of payments, announced (1971, 1973) a devaluation of the U.S. dollar. However, the increase in the cost of petroleum from the Arab states (1973-74) had a negative effect on the balance of payments in the United States and most countries in Western Europe. In addition, tight money policies and high deficits adversely affected the savings rate in the United States in the 1980s and caused the balance of payments to decline even further. As a result, the United States looked to foreign borrowing to fill the gap, but the interest payments only increased the shortfall in the balance of payments. In the late 1990s and 2000s the U.S. balance of payments reached record negative levels.

Systematic record of all economic transactions during a given period between residents (including the government) of one country and residents (including the governments) of other countries. The transactions are presented in the form of double-entry bookkeeping. The U.S. balance of payments, for example, records the various ways in which dollars are made available to foreigners through U.S. imports, U.S. tourist spending abroad, foreign lending, and so on. These expenditures are shown on the debit side of the balance. The credit side shows the various uses to which foreigners put their dollars, including paying for U.S. exports, servicing debts to the U.S., and the like. Foreign countries may acquire more dollars than they need to spend on U.S. goods and services and may hold the surplus or purchase gold or securities; or they may have fewer dollars than they need to purchase U.S. goods and services, and may acquire additional dollars by transferring gold, selling holdings in the U.S., and so on. Certain forms of transferring funds (e.g., large outflows of gold) are less desirable as a way of settling foreign debts than others (e.g., transfers of currency acquired through international trade). The International Monetary Fund helps address problems relating to balance of payments. Seealso balance of trade.

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