“Exorbitant Privilege: Responsibilities and Challenges”: Prepared Remarks before the Council on Foreign Relations
Good morning. I’m honored that Mike and you invited me to speak today. Mike has a long history of public service, including having participated in hiring me twice, first into the Clinton Treasury Department and later the Obama Administration. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.
In 1965, Valéry Giscard d’Estaing, then Finance Minister of France and subsequently President of France, in speaking about the U.S. dollar, coined the term “exorbitant privilege.”[1] He was referring to the privilege the United States enjoyed due to the dollar’s dominance, what some call the dollar’s hegemony.
In choosing the word exorbitant, Giscard may have been suggesting that the United States had an unwarranted privilege. Though I would frame it differently, his message remains relevant. Being the dominant world currency comes with responsibilities and challenges.
The Council on Foreign Relations might be wondering, “What does the Chair of the SEC have to say given the vast body of academic and other work on currency hegemons?”[2]
With your indulgence, I’ll summarize in three points.
First, the U.S. capital markets play an integral role in the dollar’s dominance.
Second, though there may be other privileges it brings to the United States, the financing privilege accrues not only to us but to anyone who borrows or invests through the dollar capital markets.
Third, though this privilege may be secure in the near term and even possibly in the intermediate term, that should not lead to complacency. We need to have an eye on the long term as well.
Four Centuries: Three Hegemons
Four centuries of history give us a window into the responsibilities and challenges that come from that privilege.
Most of you are aware that, preceding the U.S. dollar, the British pound sterling was dominant from the early 19th to the mid-20th century. Before that, as some of you in this room may know, it was the Dutch florin for much of the 17th and 18th centuries.
History tells us that currency dominance comes from a mix of factors. To be a leading economy is important, but notably it’s not necessary to be the largest economy. The Dutch economy was smaller than Spain’s. Similarly, years later in 1870, the U.S. surpassed the British economy,[3] but it was still decades until the dollar became the currency hegemon.
The Dutch and British show us how important a strong rule of law is along with strong institutions. Both nations were amongst the earliest to have central banks, and, for their times, had responsible and consistent monetary and fiscal policies.
My thesis is that capital markets are integral to establishing currency dominance. The allocation and pricing of money and risk, which is what capital markets do, contributes to powerful network effects around a currency’s role in invoicing, banking, and trade settlement, all of which intersect with the network economics of capital markets themselves.
It’s critical that capital markets are accessible, deep, and trustworthy. Starting in the early 17th century, the Dutch had important innovations in their capital markets, including one of the world’s first central banks; the first joint stock company, the Dutch East India Company; and what’s believed to be the first stock exchange.[4]
Further, capital markets must have a recognized safe, liquid, and reliable asset (a government bond or obligation) in which to invest.
Issued by Dutch banks, florins were perceived as a safe asset; the supply was sufficient to support global trading. It is said florins were the world’s first fiat currency—a credit of banks not backed by a commodity.[5] Efficiency, resiliency, and foremost trust in capital markets are also reliant on the strength of a nation’s legal and regulatory institutions undergirding those markets.
The Spanish Empire’s economy was multiple times larger than the Dutch’s.[6] Yet Spain had a history of debt defaults that undermined confidence in its government bonds as safe, tradeable assets. Further, it lacked deep capital markets or innovation in financial technology.[7] It had neither a central bank nor a well-developed joint-stock corporation as a legal vehicle for capital formation.[8]
The Dutch experience also tells us something about how a nation can lose its hegemony. They lost two wars in the late 18th century with England and France,[9] but also made multiple policy mistakes in the intervening years.[10]
By the 1820s, the pound became the international currency of choice, and it remained so for more than a century. Once again, the currency hegemon was associated with a nation with a leading capital market. Britain also had a safe, tradeable asset called the British consol. This innovation in finance was a perpetual bond that consolidated various issues of government debt to provide greater supply and liquidity.[11]
Great Britain’s experience shows us something about maintaining a hegemony when you are not the largest economy, and how it can be lost as well.
The pound sterling remained the currency hegemon for roughly seven decades after the U.S. economy surpassed Great Britain’s. This was the case because of the factors I’ve mentioned, but also because other nations didn’t have a reason to switch; the U.S. dollar and capital markets didn’t yet offer a strong enough alternative.
Several things happened to change the dynamic. There were two world wars and the diminution of British economic power. Another important part of this story, though, was that the U.S. capital markets and a safe asset further developed.
Regarding our institutions and regulations, we set up our central bank in 1913. We established the securities laws and the SEC in the 1930s. We developed a deep, tradeable Treasury market, in part because of the funding of those two world wars. We also saw the broad public get significantly involved in the capital markets in the interwar years.
U.S. Dollar & Capital Markets Today
The Dollar
There are mutually reinforcing effects of using the leading currency as a medium of exchange (how transactions are settled), unit of account (how goods and services are priced), and store of value.[12] Further, there are reinforcing network effects when parties are settling, pricing, invoicing, borrowing, and investing in a dominant currency.
The U.S. dollar consistently has been the leading currency in foreign exchange transactions, representing 88 percent last year.[13] The U.S. dollar is used in more than 60 percent of the world’s invoicing, which relates to both settling and pricing a transaction. Outside of Europe, it represents more than 70 percent.[14]
There are numerous ways to consider a currency’s use as a store of value. One is official sector reserves held in U.S. dollars, which is about 58 percent of central bank reserves.[15] The private sector, though, also stores value in dollar assets. International investors have $23 trillion invested in U.S. capital markets, including more than $7 trillion in U.S. Treasuries.[16] This compares to the $14 trillion U.S. investors have invested in foreign financial assets.[17] Further, dollar funding of non-US banks is approximately $12 trillion.[18] There also is a vibrant offshore, dollar-based Euro bond market.
Further, nearly 70 percent of other nations, weighted by their share of world GDP, anchor their currency in part to the U.S. dollar.[19] Such reference to the dollar can thus influence other countries’ monetary policy and economies.
U.S. Capital Markets
That leads me to where we are today in terms of U.S. capital markets. The U.S. capital markets are the deepest, most liquid in the world. At 40 percent of the world’s capital markets, they outpace our 24 percent share of the world economy.[20]
Further, when one looks at foreign currency debt issuance, 70 percent is denominated in U.S. dollars, 21 percent Euros, and 2 percent renminbi.[21]
There are approximately 1,100 Foreign Private Issuers registered with the SEC along with at least 1,800 other foreign issuers engaging in our over-the-counter markets.[22]
Beyond these figures, I want to highlight three important features of U.S. financial markets.
First, there is significant competition between the nonbank and bank sectors in our $100-plus trillion capital markets. Our banking sector is but $23 trillion.[23] In the U.S., debt capital markets facilitate 75 percent of debt financing of non-financial corporations. In Europe, the U.K., and Asia, only 12-29 percent is raised in capital markets.[24]
Second, we have significant and robust competition between both private and public capital markets. The $26 trillion private funds sector[25]—private equity, private credit funds, hedge funds, venture capital—surpasses the size of the U.S. banking sector.
Third is a history of financial market innovations: money market funds, exchange-traded funds, indexing, asset securitizations, and the swaps markets, to name just a few. Though such innovations also come with risks, much of the world looks to the U.S. capital markets for innovation.
The size, depth, liquidity, and features of U.S. capital markets bring privileges to anyone raising funds in our markets by lowering the cost of funding. This benefits how we as a nation borrow in our Treasury markets. It also affects private sector issuers both domestic and international.
Europe’s vibrant capital markets are 15 percent of the world’s capital markets, but those markets are more fragmented than ours.[26] Christine Lagarde, President of the European Central Bank, called recently for a European-style SEC to unify Europe’s approach to the capital markets.[27]
China’s capital markets are distinct from Europe and the United States in that they don’t have a fully convertible currency. Nonetheless, China has sizeable capital markets; their equity markets are about a quarter of the size of ours.[28] The growth rate of their fixed-income and equity markets, however, has been two to three times that of the U.S. over the last ten years.[29] We should assume that, as their economy continues to grow, so too will their markets.
Responsibilities and Challenges
With the privileges of dollar and capital markets dominance also comes real responsibilities and challenges.
One of those responsibilities relates to the resiliency of the dollar-based financial system. Financial instability can flow in either direction.
First, given the significant use of the dollar in offshore banking and funding markets, when stress occurs in those overseas markets, it can disrupt the U.S. economy. Thus, the Federal Reserve operates central bank liquidity swap lines with select central banks.[30]
Second, given how integrated our capital markets are into the world’s capital markets, financial stability events in our markets can flow into other markets. We saw this with the mortgage crisis in 2008 when we exported instability to the rest of the world, which then had further reverberations back into the United States.
In terms of challenges, foremost of course is that nothing stands still. The economies, rule of law, and capital markets of other countries will continue to evolve and compete for leadership. Technology and business models continue to change. Further, nation states, including the United States, can be prone to policy mistakes. Defaulting on our debt would be one such example with significant negative consequences.
Another challenge may come from developments in the use of currencies over the last 50 years as we moved from paper to digital currency. Around the globe, we layered onto currencies additional roles to guard against illicit activity and tax evasion, including anti-money laundering and sanctions policies. Doing so creates incentives for nations and private actors alike to seek ways for possible alternatives.[31]
SEC’s Role: Efficiency and Resiliency in the Markets
That brings me back to why, as the Chair of the SEC, I’m thinking about currency hegemons. It’s because we oversee the U.S. securities markets and have a real role to ensure they remain the most efficient, competitive, and resilient in the world.
I take a long view on this. If we invest in capital markets now, it can benefit us in the decades to come. To put this in context, let me just mention a few SEC projects.
First as it relates to our safe asset, the $26 trillion Treasury markets, we have a series of proposed reforms. These include registering and regulating Treasury dealers and platforms, as well as facilitating greater central clearing of treasuries in both cash and funding markets.[32]
Second, we have numerous initiatives related to the efficiency of our markets. I would note those regarding equity markets[33] as well as recently completed rules about the private funds market.[34]
Third, regarding access to our capital markets, we sorted through a nearly 20-year challenge of ensuring that Chinese-related companies listed in the United States would allow for the proper inspection and investigation of their auditors.[35]
Lastly, we have numerous initiatives related to resiliency, including shortening the settlement cycle in our securities markets,[36] money market reforms,[37] and cyber risks[38] among others.
Conclusion
Though Giscard’s “exorbitant privilege” may be secure in the near term, we can’t take it for granted.
We need to have an eye on the long term as well.
The U.S. capital markets play an integral role in the dollar’s dominance.
Further, history tells us that such privilege comes with responsibility and challenges.
As part of our three-part mission, our role at the SEC is about promoting the efficiency and resiliency of our capital markets. This is good for investors and issuers in the near term. It’s also integral to our standing as a currency leader in the long term.
[1] See David Marsh, “Giscard d’Estaing: Architect of euro and sdr” (Dec. 3, 2020), available at https://www.omfif.org/2020/12/giscard-destaing-architect-of-euro-and-sdr/.
[2] In addition to academic papers noted elsewhere, see work by Barry Eichengreen and Robert Triffin.
[3] See Antonio Coppola et al., “Liquidity, Debt Denomination, and Currency Dominance” (February 2023), 27, available at https://www.nber.org/system/files/working_papers/w30984/w30984.pdf.
[4] See Giuseppe Dari-Mattiacci et al., “The Emergence of the Corporate Form,” 33 Journal of Law, Economics, and Organization (March 24, 2017), 193, available at https://academic.oup.com/jleo/article/33/2/193/3089484. Page 193 discusses Dutch invention of a joint-stock corporation.
[5] See Antonio Coppola et al., “Liquidity, Debt Denomination, and Currency Dominance” (February 2023), available at https://www.nber.org/system/files/working_papers/w30984/w30984.pdf.
[6] Ibid.
[7] Ibid.
[8] See Giuseppe Dari-Mattiacci et al., “The Emergence of the Corporate Form,” 33 Journal of Law, Economics, and Organization (March 24, 2017), 193, available at https://academic.oup.com/jleo/article/33/2/193/3089484.
[9] The Fourth Anglo-Dutch War was followed by Napoleon’s invasion of the Netherlands. See Britannica, “Anglo-Dutch Wars” available at https://www.britannica.com/place/Dutch-Republic. See also Britannica, “The period of French dominance (1795–1813),” available at https://www.britannica.com/place/Netherlands/The-period-of-French-dominance-1795-1813.
[10] See Antonio Coppola et al., “Liquidity, Debt Denomination, and Currency Dominance” (February 2023), 27, available at https://www.nber.org/system/files/working_papers/w30984/w30984.pdf.
[11] By the 1820s, Britain also enjoyed a well-developed body of law governing the joint-stock corporation, including capital markets laws that had been evolving since Parliament enacted the first securities statute in 1697. See Stuart Banner, “Anglo-American Securities Regulation: Cultural and Political Roots, 1690-1860” (1998), at 39.
[12] See Gita Gopinath and Jeremy Stein “Banking, Trade, and the making of a Dominant Currency” (April 2018), available at https://www.nber.org/papers/w24485.
[13] See Carol Bertaut et al., “The International Role of the U.S. Dollar” (June 23, 2023), Figure 9, available at https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-us-dollar-post-covid-edition-20230623.html.
[14] See Ibid., Figure 5. In Europe, given cross-country Euro invoicing, the dollar is 20-25 percent of invoicing. Further, according to SWIFT messaging data, 84 percent of trade finance market in September 2023 and 48 percent of global payments are in dollars. See also Swift RMB Tracker (October 2023), available at https://www.swift.com/swift-resource/252125/download.
[15] See Carol Bertaut et al., “The International Role of the U.S. Dollar” (June 23, 2023), Figure 2, available at https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-us-dollar-post-covid-edition-20230623.html.
[16] See SIFMA, “2023 Capital Markets Fact Book” (July 2023), 31, available at https://www.sifma.org/wp-content/uploads/2022/07/2023-SIFMA-Capital-Markets-Factbook.pdf.
[17] Ibid., 26.
[18] See Iñaki Aldasoro et al., “Dollar funding of non-US banks through Covid-19” (2021), Graph 1, available at https://www.bis.org/publ/qtrpdf/r_qt2103c.htm.
[19] Further, 50-60 percent, by country, anchor their currency in part to the U.S. dollar. See Ethan Ilzetzki et al., “Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?” (2019), Figure 2, available at https://scholar.harvard.edu/sites/scholar.harvard.edu/files/rogoff/files/ilzetki_reinhart_rogoff_qje_2019_2.pdf.
[20] See Carol Bertaut et al., “The International Role of the U.S. Dollar” (June 23, 2023), Figure 1, available at https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-us-dollar-post-covid-edition-20230623.html.
[21] Ibid., Figure 8.
[22] SEC staff estimate that, as of June 30, 2023, there were approximately 1,100 Foreign Private Issuers registered and reporting under the Exchange Act. Based on data reported by depositary banks, the American Depositary Receipts of at least 1,800 foreign private issuers are being traded in the OTC markets in reliance on the Rule 12g3-2(b) exemption, with possibly more foreign private issuers relying on the exemption for other classes of securities. See data from BNY Mellon, available at DR Directory (adrbnymellon.com); Citi Depositary Receipt Services, available at Citi's Depositary Receipt Services; Deutsche Bank Repository Receipt Services, available at Deutsche Bank - Depositary Receipts (db.com); J.P. Morgan Depositary Receipts, available at J.P. Morgan's https://www.adr.com.
[23] See Board of Governors of the Federal Reserve System, “Assets and Liabilities of Commercial Banks in the United States,” available at https://www.federalreserve.gov/releases/h8/current/default.htm. Total assets of approximately $23 trillion as of Nov. 22, 2023 (Table 2, Line 33).
[24] See SIFMA, “2023 Capital Markets Fact Book” (July 2023), 6, available at https://www.sifma.org/wp-content/uploads/2022/07/2023-SIFMA-Capital-Markets-Factbook.pdf.
[25] Per SEC Staff analysis of Form ADV data, inclusive of assets attributable to securitized asset funds, as of year-end 2022.
[26] See Linda Gorman, “Why the Euro Hasn’t Become an International Currency of Stature” (April 2020), available at https://www.nber.org/digest/apr20/why-euro-hasnt-become-international-currency-stature.
[27] See Martin Arnold, “Europe needs its own SEC, says Christine Lagarde” (Nov. 17, 2023), available at https://www.ft.com/content/acfc67d9-7f2a-4199-9c79-405fef9cb195.
[28] Further, China’s fixed-income market is about 40 percent of the U.S. market. When considering Hong Kong’s capital markets as well, the relevant total market sizes increase. See SIFMA, “2023 Capital Markets Fact Book” (July 2023), 7 and 13, available at https://www.sifma.org/wp-content/uploads/2022/07/2023-SIFMA-Capital-Markets-Factbook.pdf.
[29] See SIFMA, “2023 Capital Markets Fact Book” (July 2023), 11 and 13, available at https://www.sifma.org/wp-content/uploads/2022/07/2023-SIFMA-Capital-Markets-Factbook.pdf. Per page 11, fixed-income market—15.9 percent 10-year growth rate in China vs. 4.7 percent in U.S. Per page 13 for equities—11.3 percent 10-year growth rate in China vs. 5.3 percent in U.S.
[30] See Board of Governors of the Federal Reserve System, “Central Bank Liquidity Swaps,” available at https://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm. The Federal Reserve also has set up international repo facilities, available at https://www.federalreserve.gov/monetarypolicy/fima-repo-facility.htm
[31] See Joe Sullivan, “A BRICS Currency Could Shake the Dollar’s Dominance” (April 24, 2023), available at https://foreignpolicy.com/2023/04/24/brics-currency-end-dollar-dominance-united-states-russia-china/. See also Gary Gensler, “‘We’ve Seen This Story Before’: Remarks before the Piper Sandler Global Exchange & Fintech Conference” (June 8, 2023), available at https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-060823.
[32] See Gary Gensler, “Fall Feelings: Treasury Markets’ Efficiency and Resiliency” (Nov. 7, 2023), available at https://www.sec.gov/news/speech/gensler-fall-feelings-20231107.
[33] See Securities and Exchange Commission, “SEC Proposes Regulation Best Execution” (Dec. 14, 2022), available at https://www.sec.gov/news/press-release/2022-226; “SEC Proposes Amendments to Enhance Disclosure of Order Execution Information” (Dec. 14, 2022), available at https://www.sec.gov/news/press-release/2022-223; “SEC Proposes Rules to Amend Minimum Pricing Increments and Access Fee Caps and to Enhance the Transparency of Better Priced Orders” (Dec. 14, 2022), available at https://www.sec.gov/news/press-release/2022-224; “SEC Proposes Rule to Enhance Competition for Individual Investor Order Execution” (Dec. 14, 2022), available at https://www.sec.gov/news/press-release/2022-225; “SEC Adopts Rule to Increase Transparency in the Securities Lending Market” (Oct. 13, 2023), available at https://www.sec.gov/news/press-release/2023-220; and “SEC Adopts Rule to Increase Transparency Into Short Selling and Amendment to CAT NMS Plan for Purposes of Short Sale Data Collection” (Oct. 13, 2023), available at https://www.sec.gov/news/press-release/2023-221.
[34] See Securities and Exchange Commission, “SEC Enhances the Regulation of Private Fund Advisers” (Aug. 23, 2023), available at https://www.sec.gov/news/press-release/2023-155; “SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers” (July 12, 2023), available at https://www.sec.gov/news/press-release/2023-129; “SEC Proposes to Enhance Private Fund Reporting” (Aug. 10, 2022), available at https://www.sec.gov/news/press-release/2022-141; and “SEC Proposes Rule to Address Volume-Based Exchange Transaction Pricing for NMS Stocks” (Oct. 18, 2023), available at https://www.sec.gov/news/press-release/2023-225.
[35] See Gary Gensler, “Statement on PCAOB Enforcement Actions Regarding China-based Firms” (Nov. 30, 2023), available at https://www.sec.gov/news/statement/gensler-statement-pcaob-113023. See also “Statement on PCAOB’s Determinations Regarding Public Accounting Firms in China” (Dec. 15, 2022), available at https://www.sec.gov/news/statement/gensler-determination-statement-20221215.
[36] See Securities and Exchange Commission, “SEC Finalizes Rules to Reduce Risks in Clearance and Settlement” (Feb. 15, 2023), available at https://www.sec.gov/news/press-release/2023-29.
[37] See Securities and Exchange Commission, “SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers” (July 12, 2023), available at https://www.sec.gov/news/press-release/2023-129.
[38] See Securities and Exchange Commission, “SEC Adopts Rules on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies” (July 26, 2023), available at https://www.sec.gov/news/press-release/2023-139; “SEC Proposes New Requirements to Address Cybersecurity Risks to the U.S. Securities Markets” (March 15, 2023), available at https://www.sec.gov/news/press-release/2023-52; and “SEC Proposes to Expand and Update Regulation SCI” (March 15, 2023), available at https://www.sec.gov/news/press-release/2023-53,
Last Reviewed or Updated: Dec. 4, 2023