Sterling Dollar

Such models rest, in turn, on a conventional historical narrative, epitomised by Triffin (1960), according to which it took between 30 and 70 years, depending on the aspects of economic and international currency status considered, from when the US overtook Britain as the leading economic and commercial power and when the dollar overtook sterling as the dominant international currency. Allegedly, sterling remained the dominant international currency throughout the interwar years and even for a time after the Second World War.

First, while network externalities, first-mover advantages and inertia matter, they do not lock in international currency status to the extent previously thought. Abstracting from the Commonwealth countries, whose allegiance to sterling was special, we show that the dollar overtook sterling already in 1929, at least 15 years prior to the date cited in previous accounts (see Figure 1). And even when the Commonwealth countries are included, we find that the dollar was already within hailing distance of sterling as a currency of denomination for international bonds by the late 1920s.

Sterling Dollar

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Second, our evidence challenges the presumption that monetary leadership once lost is gone forever. Although sterling lost its leadership in the 1920s, it recovered after 1933 and was again running neck and neck with the dollar at the end of the decade.

Third, our findings challenge the presumption that there is room for only one dominant international currency due to strong network externalities and economies of scope. This is true even if one takes into account the Commonwealth countries, which were heavily oriented towards sterling for institutional and political reasons.

These findings have important implications for the future of the international monetary system. They suggest that a shift from a unipolar dollar-based system to a multipolar system is entirely possible; that it could occur sooner than often believed; and that further financial deepening and integration will be a key determinant of the ability of currencies other than the dollar to strengthen their international currency status.

The international status of a currency will only rest on solid foundations, however, if financial deepening in the issuing country is sustainable, and not if financial innovation and liberalisation simply cause a boom that eventually goes bust. The impact of finance on international currency shares in global debt markets worked both ways in the interwar period. Our findings underscore this point as well, insofar as the collapse of the US banking system and subsequent financial retrenchment was the most important factor contributing to the decline in the share of the dollar in global foreign public debt between 1932 and 1939.

Note: Estimates from Chiu et al. (2012) based on UN (1948). The figure shows the evolution over time of the shares of sterling, US dollar, gold and other currencies in the global stock of foreign public debt (in percentage and at current exchange rates) based on a sample of 33 countries, excluding Commonwealth countries (India, Australia, Canada, New Zealand and South Africa).

This paper provides an historical perspective on reserve currency competition and on the prospects of the dollar as an international currency. It questions the conventional wisdom that competition for reserve-currency status is a winner-take-all game, showing that several currencies have often shared this role in the past and arguing that innovations in financial markets make it even more likely that they will do so in the future. It suggests that the dollar and the euro are likely to share this position for the foreseeable future. Hopes that the yuan could become a major international currency 20 or even 40 years from now are highly premature.

For US dollar LIBOR, in due course we will need to assess whether the remaining settings can be wound down in an orderly fashion when the panel ends on 30 June 2023, and if not, whether a synthetic US dollar LIBOR rate might be appropriate for certain contracts that are not within scope of LIBOR-related federal legislation. We want to understand whether there are any insurmountable barriers to transitioning outstanding US dollar LIBOR contracts before or upon the cessation of the panel, and if so, the size and nature of any exposures that market participants expect may remain at that point.

On 31 December 2021, publication of 24 LIBOR settings ended. For the 1-, 3- and 6-month sterling and Japanese yen LIBOR settings, we required the administrator of LIBOR to continue publication on a synthetic (and unrepresentative) basis from end-2021. This was to give the holders of certain legacy contracts more time to complete transition.

Everyone who has any acquaintance with the international monetary system knows that the pound sterling and the U.S. dollar have a special status as international or key currencies. In this brief history the author describes how they came to acquire this status.

But sterling was held not only as a convenient means of conducting current transactions but also as a buffer against future needs, i.e., as a reserve. In this respect, the function of the pound came to parallel that of gold, which was the traditional main reserve asset. In one respect sterling was even superior to gold, in that sterling reserves could be invested in London and thus earn interest. In fact, in the nineteenth century and up to 1914, London, as the banking center of the world, could provide a much greater variety of savings outlets than any other financial center. In addition, the risks of holding sterling, although higher than the risks of holding gold, were still very small, and this was in time to be true of dollars.

Moreover, many European countries introduced various kinds of controls on foreign exchange transactions during World War I, mainly in order to conserve their holdings of dollars; and European central banks stopped converting their currencies into gold on demand, thereby turning away from the gold standard. The United States, however, continued to follow its policy of convertibility. At the end of the war, there was a large pent-up demand from Europe for U.S. goods, and this demand was backed by rather substantial holdings of dollars. The United States was, of course, willing to supply these goods and it was also capable of doing so, not having suffered from the destruction of production facilities caused by the war as other countries had done.

In the years between the trough of the depression and the outbreak of World War II, two features concern us particularly: the formation of the so-called sterling area and the increasing relative financial strength of the United States.

The countries belonging to this loosely formed system (other than the United Kingdom itself and South Africa) held their official reserves almost entirely in the form of sterling (as opposed to gold), a practice which for most of them did not involve any considerable departure from long-standing custom.

Yet, while the dollar as a reserve currency is now more important than the pound, sterling remains a major currency in international trade. A large volume of international transactions is financed with credits from British banks and with sterling balances held by overseas residents. Although there are no figures available to demonstrate the quantitative role of sterling as a trading currency, a guess might be made that the share of world trade conducted in sterling is approximately the same as the share of world trade in which the sterling area participates, which is now slightly less than 30 per cent. This guess is based on the supposition that most, but not all, of the international trade of sterling countries continues to be conducted in sterling, and that some minor part of non-sterling area trade is also conducted in sterling. And although the New York financial market is now far bigger than that of London, it is still true that London remains an important financial center, which offers a very wide range of investment outlets and is far more diversified than other European financial markets.

In this brief historical sketch of the evolution of the pound and the dollar as reserve currencies no attempt is made to assess their role in the present international monetary system. The whole framework of international financial relations is being intensely debated, and major changes in the system are under consideration.

The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi). The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years.

Press Release: IMF Determines New Currency Amounts for the SDR Valuation Basket

Press Release: IMF Executive Board Concludes Quinquennial SDR Valuation Review and Determines New Currency Weights for SDR Valuation Basket

The United Kingdom's pound sterling was the primary reserve currency of much of the world in the 19th century and first half of the 20th century.[1] However, by the middle of the 20th century, the United States dollar had become the world's most widely-used reserve currency.[2][better source needed]

The Venetian ducat and the Florentine florin became the gold-based currency of choice between Europe and the Arab world from the 13th to 16th centuries, since gold was easier than silver to mint in standard sizes and transport over long distances. It was the Spanish silver dollar, however, which created the first true global reserve currency recognized in Europe, Asia and the Americas from the 16th to 19th centuries due to abundant silver supplies from Spanish America.[3]

While the Dutch guilder was a reserve currency[citation needed] of somewhat lesser scope, used between Europe and the territories of the Dutch colonial empire from the 17th to 18th centuries, it was also a silver standard currency fed with the output of Spanish-American mines flowing through the Spanish Netherlands. The Dutch, through the Amsterdam Wisselbank (the Bank of Amsterdam), were also the first to establish a reserve currency whose monetary unit was stabilized using practices familiar to modern central banking (as opposed to the Spanish dollar stabilized through American mine output and Spanish fiat) and which can be considered as the precursor to modern-day monetary policy.[4][5] 2351a5e196