An Exorbitant Privilege in the First Age of International Financial Integration

The exorbitant privilege literature analyses the positive returns differential on net foreign assets enjoyed by the United States in the last quarter of the twentieth century as the issuer of the global reserve currency. In the first age of international financial integration (1871–1914), the global reserve currency was the British pound sterling. Whether the United Kingdom enjoyed a similar privilege is analysed with a new dataset, encompassing microdata on railroad and government financial securities. The use of microdata avoids the flaws that have plagued the US studies, particularly the use of incompatible aggregate variables. A monthly proxy for the British international investment position is constructed and estimates for capital gains and dividend yields obtained. The estimation points to an average privilege of 8.3% of GDP, with high variation. The finding supports the claim that in part exorbitant privilege is a general characteristic of the issuer of the global reserve currency and not unique to the late twentieth century US. Nonetheless, a decomposition of returns shows that there were fundamental differences between pre-war Britain and the late twentieth century US investment patterns and their response to the advantage presented by exorbitant privilege