# 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.
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.

## Origin

The term was coined in the 1960s by Valéry Giscard d'Estaing, then the French Minister of Finance. 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" 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 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. 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.

## 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 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 Impact: 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, which can stimulate economic growth but also lead to volatility in financial markets. This inflow results mainly from the trade deficit, and has been increasing recently, which is one of the many reasons for the reaction from the BRICS movement.
* Monetary Policy Autonomy: The Federal Reserve has greater flexibility in setting monetary policy without worrying as much about the immediate impact on exchange rates or capital flows.