Exorbitant privilege

The term exorbitant privilege (privilège exorbitant in French) refers to the benefits the United States has due to its own currency (the US dollar) being the international reserve currency. For example, the US would not face a balance of payments crisis, because their imports are purchased in their own currency. Exorbitant privilege as a concept cannot refer to currencies that have a regional reserve currency role, only to global reserve currencies.^{[clarification needed]}

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 (negative) U.S. net international investment position (NIIP) 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.^[1]

Origin

The term was coined in the 1960s by Valéry Giscard d'Estaing, then the French Minister of Finance.^[2] It is frequently mis-attributed to Charles de Gaulle, who is said to have had similar views.

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"^[2] 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."^[2] In February 1965, President Charles de Gaulle announced his intention to 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.^[3][4] 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 (the "Nixon Shock"). 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.^[5][6]

See also

• Demurrage
• Reserve currency
• Seigniorage

References

1. Curcuru et al. (2013).
2. Eichengreen (2011).
3. Lin & Neely 2020.
4. Varoufakis (2016), p. 272.
5. White, Simard & Bordo (1993).
6. de Vries (1976).

Literature

• Curcuru, Stephanie; Thomas, Charles P.; Warnock, Francis E. (2013). "On Returns Differentials" (PDF). International Finance Discussion Papers. Board of Governors of the Federal Reserve System. 2013 (1077): 1–53. doi:10.17016/IFDP.2013.1077. 1077.
• Curcuru, Stephanie; Dvorak, Tomas; Warnock, Francis (2008). "Cross-Border Returns Differentials" (PDF). The Quarterly Journal of Economics. Oxford University Press. 123 (4): 1495–1530. doi:10.1162/qjec.2008.123.4.1495. JSTOR 40506215.
• Curcuru, Stephanie; Thomas, Charles P.; Warnock, Francis E. (2009). "Current account sustainability and relative reliability". In Frankel, J.; Pissarides, C. (eds.). NBER International Seminar on Macroeconomics 2008. University of Chicago Press. pp. 67–109.
• de Vries, Margaret Garritsen (1976). The International Monetary Fund, 1966–1971: The System Under Stress. Washington: International Monetary Fund. ISBN 978-0-939934-11-9.
• Eichengreen, Barry (2011). Exorbitant privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. Oxford: Oxford University Press. ISBN 978-0-19-959671-3.
• Forbes, Kristin J. (2010). "Why do foreigners invest in the United States?". Journal of International Economics. 80 (1): 3–21. doi:10.1016/j.jinteco.2009.09.001. hdl:1721.1/65425. S2CID 39665017.
• Gohrband, Christopher A.; Howell, Kristy L. (2015). Hulten, Charles R.; Reinsdorf, Marshall B. (eds.). "U.S. International Financial Flows and the U.S. Net Investment Position: New Perspectives Arising from New International Standards". Wealth, Financial Intermediation, and the Real Economy. National Bureau of Economic Research. 73: 231–270. doi:10.7208/Chicago/9780226204437.003.0008.
• Gourinchas, Pierre‐Olivier; Rey, Hélène (2007a). "From world banker to world venture capitalist: The U.S. external adjustment and the exorbitant privilege". In Clarida, Richard (ed.). G7 Current Account Imbalances: Sustainability and Adjustment. Chicago: University of Chicago Press. pp. 11–55.
• Gourinchas, Pierre‐Olivier; Rey, Hélène (2007b). "International Financial Adjustment" (PDF). Journal of Political Economy. University of Chicago Press. 115 (4): 665–703. doi:10.1086/521966. JSTOR 10.1086/521966.
• Gourinchas, Pierre‐Olivier; Rey, Hélène; Govillot, Nicolas (2010). "Exorbitant privilege and exorbitant duty" (PDF). IMES Discussion Paper. Bank of Japan. 2010-E-20.
• Habib, Maurizio Michael (2010). "Excess returns on net foreign assets – the exorbitant privilege from a global perspective" (PDF). European Central Bank Working Paper Series. European Central Bank. 1158.
• Lane, Philip R.; Milesi-Ferretti, Gian Maria (2005). "A Global Perspective on External Positions" (PDF). NBER Working Paper Series. National Bureau of Economic Research. 11589.
• Lane, Philip R.; Milesi-Ferretti, Gian Maria (2009). "Where did all the borrowing go? A forensic analysis of the U.S. external position". Journal of the Japanese and International Economies. 23 (2): 177-199. doi:10.1016/j.jjie.2008.11.002. S2CID 154476552.
• Lane, Philip R.; Pels, Barbara (2012). Current Account Imbalances in Europe. CEPR Discussion Papers. Centre for Economic Policy Research. 8958.
• Lin, Ken-Hou; Neely, Megan Tobias (2020). Divested: Inequality in financialized America. Oxford/New York: Oxford University Press. pp. 18–20. ISBN 978-0-19-063831-3.
• Meissner, C.M.; Taylor, A. M. (2006). "Losing our marbles in the new century? The Great Rebalancing in historical perspective". NBER Working Paper Series. National Bureau of Economic Research: 12580.
• Rogoff, K. S.; Obstfeld, M. (2005). "Global Current Account Imbalances and Exchange Rate Adjustments". Brookings Papers on Economic Activity. 36 (1): 67–146.
• Varoufakis, Yanis (2016). And the weak suffer what they must? : Europe's crisis and America's economic future. London: Penguin Random House. ISBN 978-1-78470-411-7.
• White, Eugène; Simard, Dominique; Bordo, Michael (1993). "La France et le système monétaire de Bretton Woods" [France and the Bretton Woods monetary system]. Revue d'économie financière (in French). 26 (3): 249–286. doi:10.3406/ecofi.1993.2015.