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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number
14154.
Length: Date of creation: Jul 2008 Date of revision: Handle: RePEc:nbr:nberwo:14154
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Find related papers by JEL classification: F0 - International Economics - - General F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions N1 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations N2 - Economic History - - Financial Markets and Institutions
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