The Bear’s Lair: Biden has killed the Exorbitant Privilege

It was French President Charles de Gaulle who in 1965 referred to the dollar’s position as the world’s leading international reserve currency as conferring “exorbitant privilege” on the United States. De Gaulle’s words represented his usual mixture of deep and subtle wisdom and fierce resentment of the Anglo-Saxon powers. For forty years after he spoke, the “exorbitant privilege” seemed real and unassailable, with huge benefits to the U.S. economy. Now thanks to a succession of inept administrations and the missteps of President Biden, it is fast disappearing. There are limited possibilities to replace it; but replaced it will be.

De Gaulle was doubtless miffed that, despite France’s pre-eminent geopolitical position in the 17th and 18th centuries, neither the French franc nor its predecessor the livre tournois was ever a global international reserve currency – before Britain’s hegemony the Spanish “piece of eight” silver peso had come close to performing that function, being commonly tendered (as the “Spanish dollar”) in the American colonies for example.

France’s failure is a lesson to policymakers today; it was caused by the 1720 collapse of the Mississippi Scheme, in which the failure of the Banque Royale caused its banknotes, supposedly secured by France’s “Louisiana” possessions, to become valueless, thereby wiping out the country’s middle-class savings, with no bailout following. Such wanton destruction of holders’ property rights caused foreign investors to reject the livre; they used French fashions, French military tactics, French cooking and dodgy French philosophy, but rightly steered clear of its currency.

Britain’s hegemony as a world currency was already coming into being in the late 18th century, after her victories in the Seven Years’ War, although it was strained by the Napoleonic Wars and the need to suspend gold payments in 1797. However, it was finally brought into flower by Lord Liverpool’s wise decision in 1819 to resume the pound’s convertibility to gold at the pre-1797 parity. Until Britain’s damnfool decision to enter war against Germany in 1914, the country thereafter enjoyed several “exorbitant privileges.”

  • Since its currency was the universal unit of account, the global capital market, shipping and insurance markets naturally transferred to London, so that Britain and its City of London financial district enjoyed an ever-increasing surplus of “invisible” earnings, especially during the period after 1870 when its industrial prowess was relatively fading.
  • Britain’s balance of payments gained immensely from the pound being a universal settlement currency; whenever France settled a debt with Argentina, the money would flow through the Bank of England at some point.
  • While the pound remained the universal settlement currency, Britain itself could never go bankrupt; whenever necessary it could simply print more pounds to satisfy its debts. (In practice, the Gold Standard prevented Britain from taking much advantage of this because any such activity would have caused an outflow of gold; in a fiat money system such as today’s that constraint no longer operates.)
  • Finally, given the universal demand for pounds, foreign investors tended to keep their reserves in sterling; this increased the demand for “gilts” and reduced the interest rate the government had to pay on them.

No wonder De Gaulle was jealous; had France managed its affairs better in the 17th and 18th centuries, at least part of that “exorbitant privilege” might have accrued to France instead of Britain, which was domestically a smaller country with a smaller population.

Once World Wars I and II had wrecked its economy, Britain’s “exorbitant privilege” after 1945 was very limited, although several ex-colonies and protectorates were left to suffer in the “sterling area,” their balances constantly eroded by the sloppy policies of such as Harold Macmillan and Harold Wilson – they were finally put out of their misery in 1979.

The United States, with a much stronger economy and almost all the world’s gold reserves in 1945, was the natural successor to Britain’s position. With the Soviet Union and China blocked from the world’s monetary system, its “exorbitant privilege” was not as universal as Britain’s had been, except for a few years in the 1990s. However, its capital markets became the world’s entrepot (though gross overregulation and foolish policies in the 1960s led to the development of a Eurobond market outside the country). It was also able to run a perpetual and increasing balance of payments deficit, owing to demand for dollars in its trading partners. Finally, it has recently run a perpetual and increasing budget deficit, with debt soaring above 100% of GDP, without any undue alarums in the dollar bond market.

Until 2000, the United States position as global reserve currency was utterly unquestioned. Then several foolish steps made foreign holders of dollars begin to examine alternatives. The George W. Bush administration’s Middle East interventions and freezing of Iraqi assets, together with the regulatory aggressiveness in the Bush and Obama administrations against offshore bank accounts, made holders of those accounts question whether they wished to leave their wealth open to statist neocon meddling. Then the move to Gosplan interest rate policy, in which dollar interest rates were held far below market levels and below inflation, made dollar assets other than speculative equities thoroughly unattractive. The move in the gold price from $250 per ounce in 2000 to around $2,100 per ounce today is sufficient indication of investors’ desire to diversify away from the dollar and the Wall Street casino. The next slump in the U.S. stock market will see that tendency intensify.

Since 2020, the move out of dollars has quickened. China, for so long a reliable buyer of U.S. Treasuries, has in recent years been selling Treasuries and buying gold. The extraordinary performance of Bitcoin, which has survived what appeared to be a fatally repellant and expensive scandal at FTX, one of its main exchanges, and is now closing in on its 2021 high, shows that investors are so desperate to get out of dollars they will buy tokens with no economic reality, no reliable exchanges and a domination by the world’s dark money pools.

Most dangerous, the West’s seizure of $300 billion of Russian central bank assets, without a war against Russia being declared, and its invalidation of American Depositary Receipts in Russian companies held by ordinary U.S. investors have demonstrated a contempt for the norms of international law, as they have been observed for over 300 years, that no reasonable investor can ignore. The Bank of England turned over Czech assets to the Nazis in May 1939; that noble respect for property rights and international laws has been utterly violated by U.S. administrations in recent decades. The Biden administration has repeatedly shown itself contemptuous of property rights, both of Americans and still more of foreigners; there is no way that an asset holder should subject his wealth to the tyranny of people whose philosophical beliefs hold his wealth in contempt. Diversifying out of the dollar is not merely an economic choice, it has become a moral necessity, at least while the present administration or a like-minded successor is in power.

The problem is the lack of alternatives. The euro is managed by an entity even more convinced of its right to seize foreigners’ assets than the Biden administration. Britain still has remnants of the old laissez-faire attitudes, but they are well quelled at the present statist and inept Bank of England. The Chinese renminbi and the Indian rupee are both possibilities, but China’s dictatorial management and India’s general administrative chaos do not inspire confidence in foreign investors. Other countries might provide at least part of a reserve asset solution – Canada and Australia are both substantial natural resource economies – but they are too small and themselves subject to dubious management for the world to move to them en masse.

And then, there remains gold, the traditional solution. It has the same advantages of indestructibility, high value and diversified sources it has always had – indeed, its sources are considerably more diversified than in the 1970s, when the Soviet Union and South Africa dominated the supply. It is deflationary, but no longer impossibly so, as world population growth has slowed from 2.5% per annum in the 1970s to around 1% now, while global productivity growth has slowed to a crawl (so output no longer increases much faster than the potential money supply). It cannot be used in a Bretton Woods-type system, in which only governments can participate – the collapse of Bretton Woods in 1971 showed that governments are far too irresponsible to be given such control. However, a genuine gold standard, in which ordinary people can hold gold coins if they wish, is still perfectly feasible.

Perhaps that’s why China and other central banks have been buying up gold supplies recently. If China indeed moves to a gold yuan, complete with globally distributed gold coins bearing an image of Confucius, (not Mao Zedong!), the West may have little alternative but to move to a system in which “exorbitant privilege” belongs to the Chinese.

The United States and its governments will have only themselves to blame.


(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)