The Rise and Fall of the Dollar, or When did the Dollar Replace Sterling as the Leading Reserve Currency?

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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

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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6869.

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Date of creation: Jun 2008
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Handle: RePEc:cpr:ceprdp:6869

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-06-21 (All new papers)
NEP-CBA-2008-06-21 (Central Banking)
NEP-FMK-2008-06-21 (Financial Markets)
NEP-HIS-2008-06-21 (Business, Economic & Financial History)
NEP-IFN-2008-06-21 (International Finance)
NEP-MON-2008-06-21 (Monetary Economics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Eichengreen, Barry & Sachs, Jeffrey, 1986. "Competitive devaluation and the Great Depression : A theoretical reassessment," Economics Letters, Elsevier, vol. 22(1), pages 67-71. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
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. [Downloadable!]
Other versions:
- Barry J. Eichengreen & Jeffrey Sachs, 1986. "Exchange Rates and Economic Recovery in the 1930s," NBER Working Papers 1498, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
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. [Downloadable!]
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. [Downloadable!] (restricted)
Robert A. Mundell, 2000. "A Reconsideration of the Twentieth Century," American Economic Review, American Economic Association, vol. 90(3), pages 327-340, June. [Downloadable!] (restricted)

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

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. [Downloadable!]
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. [Downloadable!]

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