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Exorbitant privilege

Economic gain by reserve currency nation

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  • 5 chapters

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Through World War I, Exchange rate and Current account (balance of payments)

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 (including 74% of trade in Asia and 96% of trade in the Americas); 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 (such as the independence of the Federal Reserve) 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.

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