Exorbitant privilege
Two narratives of US reserve-currency status, on the same axes
After Nixon closed the gold window in 1971, the US dollar became the world’s unanchored reserve currency. The standard narrative says reserve-currency status produced American prosperity. The data shows two prosperities on the same axes — one for asset-holders, one for wage-earners. Both are true. The gap between them is the story.
The Triffin dilemma
Robert Triffin, a Belgian-American economist, predicted in 1960 the contradiction at the heart of any reserve-currency system: to supply the world’s reserves, the issuer must run persistent trade deficits (because the world demands more dollar-denominated claims than it sells dollar-denominated goods for); but persistent trade deficits eventually undermine confidence in the currency that is supplying them. The system cannot be in equilibrium for the long run.
Triffin’s prediction held: the gold-exchange standard collapsed in 1971 because the United States could not simultaneously supply the world’s reserves and maintain gold convertibility at $35/oz. The post-Bretton-Woods era resolved the immediate crisis by abandoning convertibility, but the structural pressure toward deficits remained — and was exported to the tradable-goods sectors of the US economy.
Who actually receives the privilege
The standard textbook says “the United States” receives the privilege. That is true at the aggregate level. At the distributional level it is more honest to say the privilege is received by: (1) the financial sector, which intermediates global dollar flows; (2) the federal government, which can issue debt at lower rates than otherwise; (3) consumers of imported goods, who get cheaper imports; (4) holders of dollar-denominated assets, who benefit from foreign demand bidding up prices; and (5) multinational corporations with foreign-currency-denominated cost structures.
The costs are received by: wage-earners in tradable-goods sectors, whose employment opportunities migrate offshore under structural deficit pressure; savers, who face persistent negative real interest rates whenever the Fed accommodates fiscal expansion; and foreign holders of US debt, who absorb dollar weakness or inflation when the system rebalances.