The historical perspective

For those who managed to stay awake during their high school history classes, the adage, “The sun never sets on the British Empire” brings to mind some historical precedence regarding global reserve currencies and how they can lose that status.

William Silber, author of the book When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy notes that it took years for the U.S. dollar to topple the British pound as the world’s reserve currency. From the mid-19th century to the 1914-1925 period, Silber posits that the sterling was clearly the world’s reserve currency. He points to the outbreak of WWI in 1914 and the move in which every country but Britain and the U.S. went off the gold standard as the first element in that major shift.

“This put the dollar on the map,” Silber says. “It was an opportunity for America to behave like a financial superpower.”

However, the sterling just didn’t roll over and die.

“The sterling was the international medium of exchange,” Silber adds. “It is very difficult to overthrow a reigning king. There is staying power. Tradition is on its side. People like to use what they are used to.”

By the time Britain went off the gold standard in 1919, because of huge internal inflation problems, America had continued to make further inroads. Just a few years earlier, New York had taken over from London as the moneylender to the world, says Silber. The British, focused on paying for a war, no longer had capital to lend for international business projects.

“All the traditional British clients — Argentina, China, and Canada — had to go to New York because the British no longer had any more money to lend to the world,” Silber says.

Even by 1925, Silber admitted that the U.S. dollar had only “come even” with the British pound. Why?

“It is so hard to overthrow the international medium of exchange,” he says.

Which brings us to the question hanging over today’s marketplace.