Business, Society, and the Future of Capitalism

The total value of the global financial reserve—including government, private securities, and equities—now stands at one-hundred eighteen trillion dollars.

December 2007 | by David Delaney

Private capital is an enormous source of global wealth that has not historically played as significant a role in development as its scale would suggest. This is not for lack of interest. Private capital is constantly seeking investment opportunities. However, it only commits to those prospects that meet its appetite for risk and reward. Due to a variety of factors, many opportunities in developing countries are often perceived as overly risky or uncertain for the majority of investors. Institutions that offer to guarantee portions of loans made for such investments help investors rebalance their assessments of risk and reward and subsequently unlock considerable capital into developing countries. For example, in the past decade, the World Bank has approved twenty eight guarantees worth a total of two billion dollars. These guarantees have stimulated more than five dollars of private capital for every dollar spent by the World Bank. Yet this type of support remains a very small portion of the bank’s approach to financing in developing countries.

Hidden in Plain Sight

Sharp exchange rate volatility is a sign of stress in the world currency system and has reignited debate about whether the dollar will continue to be the world's primary reserve currency and what system could emerge in its place. But nobody has asked a more fundamental question—what are the benefits and costs of issuing a global reserve currency? Answering this question may shed new light on how the global currency system might evolve and whether businesses and economies should expect a continuation of an "unmanaged" reserve currency system that increases exchange rate volatility and threatens their competitiveness.

Some observers assume that the United States continues to enjoy an "exorbitant privilege" because of the dollar’s reserve currency status, as former French Finance Minister Valéry Giscard d’Estaing charged in the 1960s. But we find that the United States may not enjoy much of a privilege at all. In 2007–2008—a "normal" year for the world economy, the net financial benefit to the United States was between about forty billion and seventy billion—or 0.3 to 0.5 percent of US GDP. In a "crisis" year—such as the year to June 2009—we estimates that the net financial benefit fell to between—five billion and twenty-five billion because the dollar appreciated by an additional ten percent due its status as a "safe haven."

The research finds that reserve currency status has two benefits. The first benefit is Seigniorage revenue—the effective interest-free loan generated by issuing additional currency to nonresidents that hold US notes and coins—that generates an estimated ten billion. The second benefit is that the United States can raise capital more cheaply due to large purchases of United States Treasury securities by foreign governments and government agencies.


Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan