Working Paper: CEPR ID: DP6869
Authors: 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.
Keywords: International reserves; International currency; Reserve currency
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dollar (F31) | Sterling (F36) |
| Economic and financial shifts favoring the United States (N12) | Dollar (F31) |
| Dollar (F31) | Dominance (C72) |
| Sterling (F36) | Dominance (C72) |
| Devaluation of Dollar in 1933 (F31) | Sterling regaining position (F32) |
| Loss of dominance (C69) | Regaining of dominance (D74) |