Why the Euro Will Rival
Menzie Chinnw and Jeffrey Frankelz
wUniversity of Wisconsin and zHarvard University.
I. Introduction: When the Dollar Overtook the Pound
In the aftermath of World War II, the dollar emerged as the uncontested leader
among international currencies, a development of historic significance. In 1899,
the share of the pound in known foreign exchange holdings of official
institutions had been more than twice the total of the next nearest competitors,
the franc and the mark, and much greater than the dollar.1 Even as late as 1940,
the level of foreign-owned liquid sterling assets was still double the level of
foreign-owned liquid dollar assets. By 1945, however, the position of the dollar
and pound, as measured by this statistic, had precisely reversed (Aliber 1966,
We thank Brad Setser for useful comments regarding the reserves data and Benn Steil for
encouraging us to write this paper.
1$105.1 million in pounds, $27.2m in francs, $24.2m in marks and $9.4m in other currencies.
In 1913, the ranking was the same: $425.4 million in pounds, $275.1m in francs, $136.9m in
marks and $55.3m in other currencies (Lindert 1969, pp. 16–22).
r 2008 The Authors.
Journal compilation r 2008 Blackwell Publishing Ltd 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street,
Malden, MA 02148, USA
International Finance 11:1, 2008 : pp. 49 –73
pp. 19–20). The war itself – including US lending, UK borrowing and other
consequences – had completed the dollar’s rise to ascendancy.
The reversal reflected long-run trends in economic fundamentals that had
already been under way since the late 19th century. The US economy surpassed
the British economy in size in 1872.2 US exports did not pull ahead of UK
exports until 1915. The development of the financial system lagged behind; one
reflection is that the United States did not establish a central bank until 1913.
During the years following 1914, the United States passed from net debtor to net
creditor while the