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

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  • Barry Eichengreen
  • Marc Flandreau

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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14154.

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Date of creation: Jul 2008
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Publication status: published as Eichengreen, Barry & Flandreau, Marc, 2009. "The rise and fall of the dollar (or when did the dollar replace sterling as the leading reserve currency?)," European Review of Economic History, Cambridge University Press, vol. 13(03), pages 377-411, December.
Handle: RePEc:nbr:nberwo:14154

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  1. Barry Eichengreen, 2004. "Global Imbalances and the Lessons of Bretton Woods," Economie Internationale, CEPII research center, issue 100, pages 39-50.
  2. Eichengreen, Barry & Sachs, Jeffrey, 1986. "Competitive devaluation and the Great Depression : A theoretical reassessment," Economics Letters, Elsevier, vol. 22(1), pages 67-71.
  3. Chinn, Menzie & Frankel, Jeffrey, 2008. "The Euro May over the Next 15 Years Surpass the Dollar as Leading International Currency," Working Paper Series rwp08-016, Harvard University, John F. Kennedy School of Government.
  4. 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.
  5. 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.
  6. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 927-54, August.
  7. Paul R. Krugman, 1979. "Vehicle Currencies And the Structure Of International Exchange," NBER Working Papers 0333, National Bureau of Economic Research, Inc.
  8. 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.
  9. Mundell, Robert A., 1999. "A Reconsideration of the Twentieth Century," Nobel Prize in Economics documents, Nobel Prize Committee 1999-5, Nobel Prize Committee.
  10. Barry J. Eichengreen & Jeffrey Sachs, 1984. "Exchange Rates and Economic Recovery in the 1930s," NBER Working Papers 1498, National Bureau of Economic Research, Inc.
  11. Accominotti, Olivier, 2009. "The sterling trap: foreign reserves management at the Bank of France, 1928–1936," European Review of Economic History, Cambridge University Press, Cambridge University Press, vol. 13(03), pages 349-376, December.
  12. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, December.
  13. 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, Blackwell Publishing, vol. 12(4), pages 565-74, November.
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Cited by:
  1. Samar Maziad & Joong Shik Kang, 2012. "RMB Internationalization," IMF Working Papers 12/133, International Monetary Fund.
  2. Arvind Subramanian, 2011. "Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition," Working Paper Series, Peterson Institute for International Economics WP11-14, Peterson Institute for International Economics.
  3. Agnès Bénassy-Quéré & Jean Pisani-Ferry, 2011. "What international monetary system for a fast-changing world economy," Working Papers, Bruegel 518, Bruegel.
  4. Bordo, Michael D., 2012. "Could the United States have had a better central bank? An historical counterfactual speculation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 597-607.
  5. Agnès Bénassy-Quéré & Jean Pisani-Ferry, 2011. "Quel système monétaire international pour une économie mondiale en mutation rapide ?," Working Papers 2011-04, CEPII research center.

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