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The Dollar-Pound Exchange Rate During the First Nine Months of World War II

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  • Bryce Kanago
  • Ken McCormick

Abstract

Between August 25, 1939 and June 7, 1940, there was a free market for British pounds in New York. German success at the outset of World War II caused the value of free sterling to fall relative to the official exchange rate. This imposed an externality that made it more difficult for Britain to finance the war. Eventually, the externality became large enough that Britain chose to take extreme measures to abolish it, even at the expense of tarnishing the reputation of London’s financial markets. We collected daily data to investigate how the market reacted to war news and to policy changes. Using methods developed by Bai and Perron (Econometrica 66:47–78, 1998 ; Journal of Applied Econometrics 18:1–22, 2003 ), we find 17 breaks in the exchange rate. Fourteen are associated with military events and three are associated with policy changes. The episode illustrates how markets can fail to serve the public interest during times of war. Copyright International Atlantic Economic Society 2013

Suggested Citation

  • Bryce Kanago & Ken McCormick, 2013. "The Dollar-Pound Exchange Rate During the First Nine Months of World War II," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 41(4), pages 385-404, December.
    • Handle: RePEc:kap:atlecj:v:41:y:2013:i:4:p:385-404
    DOI: 10.1007/s11293-013-9380-4
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    References listed on IDEAS

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    1. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
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    9. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    10. Derek H. Aldcroft & Michael J. Oliver, 1998. "Exchange Rate Regimes in the Twentieth Century," Books, Edward Elgar Publishing, number 865.
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    Cited by:

    1. Avni Önder Hanedar & Hatice Gaye Gencer & Sercan Demiralay & Ismail Altay, 2017. "Between war and peace: The Ottoman economy and foreign exchange trading at the Istanbul bourse," Working Papers 0108, European Historical Economics Society (EHES).

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    More about this item

    Keywords

    World war II; Exchange rates; The New York market for free sterling; F31; N24; N44;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-
    • N44 - Economic History - - Government, War, Law, International Relations, and Regulation - - - Europe: 1913-

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