Exorbitant privilege


The term exorbitant privilege refers to the benefits that the United States, as the world's supplier of safe assets, derives from its own currency being the international reserve currency. These safe assets, primarily government debt, tend to be sold at higher prices than the debt of other governments. Exorbitant privilege enables the United States to borrow beyond the fiscal capacity of other states. It also reduces price volatility in U.S. foreign trade, and give the U.S. the means to impose costly sanctions on other states.
The Dutch Republic had exorbitant privilege in the 17th and early 18th century. The United Kingdom had exorbitant privilege for much of the 19th and early 20th century. Around 1815, British national debt accounted for more than half of the world’s traded securities. Prior to World War I, the UK was at the center of global trade, the pound was the world's reserve currency, and the UK was the world’s safe asset supplier. When exorbitant privilege is lost, investors into government bonds suffer substantial losses and the affected government resorts to financial repression.
As of 2025, U.S. dollars were 58% of central bank reserves held outside of the United States; the overwhelming share of international trade is conducted in U.S. dollars ; and approximately 90% of foreign exchange transactions involve U.S. dollars. During times of international financial stress, demand for U.S. dollars typically increases, as it is perceived to be a safe asset.
Scholars have debated to what extent the position of the United States as the supplier of the world's safe assets is in peril for the future. On one hand, there are positive feedback effects associated with the exorbitant privilege that makes it hard for other currencies to become strong alternatives. U.S. administrations have also tended to maintain international alliances and safeguard domestic institutions that make the dollar desirable. On the other hand, recent U.S. political instability and attempts by the second Donald Trump administration to weaken Federal Reserve independence, attack official statistical agencies, and question international commitments have raised concerns among economists.

Origin

The term exorbitant privilege was coined in the 1960s by Valéry Giscard d'Estaing, then Minister of Finance, who would later become president of France. The phrase is often incorrectly credited to Charles de Gaulle, although he also did share similar views.
Some scholars argue that democracies tend to some of the advantages associated with the exorbitant privilege, as investors perceive democracies to be less risky for investment.

Opposition in France

In the Bretton Woods system put in place in 1944, U.S. dollars were convertible to gold between countries. In France, it was called "America's exorbitant privilege" as it resulted in an "asymmetric financial system" where foreigners "see themselves supporting American living standards and subsidizing American multinationals". As American economist Barry Eichengreen summarized: "It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one."
In February 1965, President Charles de Gaulle announced his intention that France exchange its U.S. dollar reserves for gold at the official exchange rate. He sent the French Navy across the Atlantic to pick up the French reserve of gold and was followed by several countries. As it resulted in considerably reducing U.S. gold stock and U.S. economic influence, it led U.S. President Richard Nixon to end the convertibility of the dollar to gold on August 15, 1971. This was meant to be a temporary measure but the dollar became permanently a floating fiat money and in October 1976, the U.S. government officially changed the definition of the dollar; references to gold were removed from statutes.

Effects of the exorbitant privilege

  • Lower Borrowing Costs: The US can borrow at lower interest rates because there is a high demand for dollar-denominated assets.
  • Trade Deficits: The US can run larger trade deficits without facing a balance of payments crisis, as its imports are purchased in its own currency.
  • Currency Stability: The dollar's status provides domestic stability and liquidity in global markets.
  • Economic Influence: The US has greater influence over global economic policies and financial markets.
  • Global Financial Stability: Since many countries hold reserves in US dollars, any significant shift in the value of the dollar can affect global financial stability.
  • Geopolitical Power: The dominance of the dollar enhances the US's geopolitical influence, as many countries rely on it for international transactions.
  • Export Consequences: A stronger dollar can make US exports more expensive and less competitive in global markets.
  • Capital Flows: The US experiences significant inflows of foreign investment
  • Monetary Policy Autonomy: The Federal Reserve has greater flexibility in setting monetary policy without worrying as much about the immediate effect on exchange rates or capital flows.
  • Seigniorage revenue: to obtain U.S. dollars, other countries have to supply the U.S. with goods and services in return for those dollars.

The position puzzle

Academically, the exorbitant privilege literature analyzes two empirical puzzles, the position puzzle and the income puzzle. The position puzzle refers to the difference between the U.S. net international investment position and the accumulated U.S. current account deficits, the former being much smaller than the latter. The income puzzle is that despite a deeply negative NIIP, the U.S. income balance is positive, i.e. despite having much more liabilities than assets, earned income is higher than interest expenses.

Literature

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