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The rise and fall of the dollar (or when did the dollar replace sterling as the leading reserve currency?)

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  • EICHENGREEN, BARRY
  • FLANDREAU, MARC

Abstract

We present new evidence on the currency composition of foreign exchange reserves in the 1920s and 1930s. Contrary to the presumption that the pound sterling continued to dominate the U.S. dollar in central bank reserves until after World War II, we show that the dollar first overtook sterling in the mid-1920s. This suggests that the network effects thought to lend inertia to international currency status and to create incumbency advantages for the dominant international currency do not apply in the reserve currency domain. Our new evidence is similarly incompatible with the notion that there is only room in the market for one dominant reserve currency at a point in time. Our findings have important implications for our understanding of interwar monetary history but also for the prospects of the dollar and the euro as reserve currencies.

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Bibliographic Info

Article provided by Cambridge University Press in its journal European Review of Economic History.

Volume (Year): 13 (2009)
Issue (Month): 03 (December)
Pages: 377-411

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Handle: RePEc:cup:ereveh:v:13:y:2009:i:03:p:377-411_99

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References

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  1. Menzie D. Chinn & Jeffrey A. Frankel, 2008. "The Euro May Over the Next 15 Years Surpass the Dollar as Leading International Currency," NBER Working Papers 13909, National Bureau of Economic Research, Inc.
  2. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  3. Barry Eichengreen, 2006. "Global Imbalances and the Lessons of Bretton Woods," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262050846, December.
  4. Robert A. Mundell, 2000. "A Reconsideration of the Twentieth Century," American Economic Review, American Economic Association, vol. 90(3), pages 327-340, June.
  5. Flandreau, Marc & Sussman, Nathan, 2004. "Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century," CEPR Discussion Papers 4248, C.E.P.R. Discussion Papers.
  6. FFF1Alexander A. NNN1Weinreb, 2003. "Change and instability," Demographic Research Special Collections, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 1(12), pages 373-396, September.
  7. Accominotti, Olivier, 2009. "The sterling trap: foreign reserves management at the Bank of France, 1928–1936," European Review of Economic History, Cambridge University Press, vol. 13(03), pages 349-376, December.
  8. Choudhri, Ehsan U & Kochin, Levis A, 1980. "The Exchange Rate and the International Transmission of Business Cycle Disturbances: Some Evidence from the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 565-74, November.
  9. Paul R. Krugman, 1984. "The International Role of the Dollar: Theory and Prospect," NBER Chapters, in: Exchange Rate Theory and Practice, pages 261-278 National Bureau of Economic Research, Inc.
  10. Eichengreen, Barry & Sachs, Jeffrey, 1985. "Exchange Rates and Economic Recovery in the 1930s," The Journal of Economic History, Cambridge University Press, vol. 45(04), pages 925-946, December.
  11. Eichengreen, Barry & Sachs, Jeffrey, 1986. "Competitive devaluation and the Great Depression : A theoretical reassessment," Economics Letters, Elsevier, vol. 22(1), pages 67-71.
  12. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, December.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Der langsame Abschied vom Dollar
    by Tobias Straumann in Never mind the markets on 2014-01-27 04:00:42
  2. To RMB or not to RMB? Lessons from Currency History
    by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2014-08-18 10:42:16
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Barry Eichengreen, Marc Flandreau, 2010. "The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914-1939," IHEID Working Papers 16-2010, Economics Section, The Graduate Institute of International Studies.
  2. Albrecht Ritschl & Samad Salferaz, 2010. "Crisis? What Crisis? Currency vs. Banking in the Financial Crisis of 1931," CEP Discussion Papers dp0977, Centre for Economic Performance, LSE.
  3. Andreas Steiner, 2013. "A Tale of Two Deficits: Public Budget Balance of Reserve Currency Countries," Working Papers 97, Institute of Empirical Economic Research.
  4. Barry, Eichengreen, 2011. "The renminbi as an international currency," Journal of Policy Modeling, Elsevier, vol. 33(5), pages 723-730, September.
  5. Scott Andrew Urban, 2009. "The Name of the Rose: Classifying 1930s Exchange-Rate Regimes," Economics Series Working Papers Paper 76, University of Oxford, Department of Economics.
  6. Piffaretti, Nadia F., 2009. "Reshaping the international monetary architecture : lessons from Keynes'plan," Policy Research Working Paper Series 5034, The World Bank.
  7. Ignazio Angeloni & André Sapir, 2011. "The international monetary system is changing: what opportunities and risks for the euro?," Working Papers 632, Bruegel.
  8. Livia Chitu & Barry Eichengreen & Arnaud J. Mehl, 2012. "When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets," NBER Working Papers 18097, National Bureau of Economic Research, Inc.
  9. Shahin Vallée, 2012. "The internationalisation path of the renminbi," Working Papers 715, Bruegel.
  10. Ignazio Angeloni & Agnès Bénassy-Quéré & Benjamin Carton & Christophe Destais & Zsolt Darvas & Jean Pisani-Ferry & André Sapir & Shahin Vallée, . "Global currencies for tomorrow: a European perspective," Blueprints, Bruegel, number 592, December.
  11. Piffaretti, Nadia F., 2008. "Reshaping the International Monetary Architecture and Addressing Global Imbalances: Lessons from the Keynes Plan," MPRA Paper 12165, University Library of Munich, Germany.
  12. Sheng, Andrew & Kwek, Kian-Teng & Cho, Cho-Wai, 2009. "A tale of Asian exchange rate management: Romance of the three currencies," Journal of Asian Economics, Elsevier, vol. 20(5), pages 519-535, September.
  13. Barry Eichengreen & Marc Flandreau, 2010. "The Federal Reserve, the Bank of England and the rise of the dollar as an international currency, 1914-39," BIS Working Papers 328, Bank for International Settlements.
  14. Benjamin Cohen, 2012. "The Benefits and Costs of an International Currency: Getting the Calculus Right," Open Economies Review, Springer, vol. 23(1), pages 13-31, February.
  15. Scott Andrew Urban, 2009. "The Name of the Rose: Classifying 1930s Exchange-Rate Regimes," Oxford University Economic and Social History Series _076, Economics Group, Nuffield College, University of Oxford.

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