Each year residents of the United States receive billions of dollars in interest and dividends from capital investments in foreign stocks, bonds, and the like.
U.S. residents receive these payments in return for allowing foreign residents to use U.S. capital which otherwise could be put to work in the United States.
Suppose that a U.S. firm has a longstanding capital investment in a profitable subsidiary abroad, and that the subsidiary transfers to the U.S. parent (as one of a series of such transfers) some $10 million in dividends in the form of funds held in a foreign bank. The U.S. firm then has a new ( or enlarged) demand deposit in a foreign bank, as compensation for allowing its capital (and associated managerial services) to be used by its subsidiary. A debit entry on line 21 shows that U.S. private short-term claims on foreigners have increased, and a credit entry on line 4 reflects the fact that U.S. residents have given up an asset (the services of capital over the period covered) that is valued at $10 million.
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