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.
University of California, Berkeley and Graduate Institute of International Studies, respectively. This draft was prepared for the conference in honor of Peter Temin, Cambridge, May 9th, 2008. A longer version, available on request, was presented to the Past, Present and Policy Panel, Genoa, Italy, 28-29 March 2008. For financial support we thank the National Science Foundation, the France-Berkeley Fund, and the Committee on Research of the University of California, Berkeley. For assistance with collecting the data we indebted to Walter Antonowicz, Benrhard Mussak, Pedro Carvalho, Rui Pedro Esteves, David Schindlower, David Merchan Cardenas, Mauricio Cardenas, Thomas Holub, Hans Kryger Larsen, Vappu Ikonen, Olivier Accominotti, Filippo Cesarano, Mariko Hatase, Corry van Renselaar, Leif Alendal, Oyvind Eitrheim, Virgil Stoenescu, Mrs. Blejan of the Romanian Central Bank, Pilar Nogues Marco, Lars Jonung and Patrick Halbeisen. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
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.