what happened when sterling lost its reserve status?

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LH
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what happened when sterling lost its reserve status?

Post by LH » Sat May 10, 2014 2:02 am

Image
http://trader2trader.wordpress.com/2013 ... 1450-2013/

I was wondering what the effects were when sterling lost its reserve currency status to the US dollar from the British/sterling perspective?

thx1138
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Re: what happened when sterling lost its reserve status?

Post by thx1138 » Sat May 10, 2014 6:01 am

I think that is going to be very difficult to decouple cause and effect wise given when the change happened. You had:

WWI ravage Europe
Global Depression with very different government reactions on either side of the Atlantic
WWII ravage Europe and drastically change the US industrial sector

And during all of that the colonies dismantled. Recall when people call the US an "empire" they don't know what they are talking about in the typical economic sense of the word. A better economic definition of empire is not just hegemony but a significant imbalance of foreign receipts and outlays reflected in a significantly higher GNP than GDP. For the US the two measures are almost identical. For Britian at the time the plot defines loss of reserve currency status GNP was almost 10% higher than GDP and then very rapidly the two converged as the colonial empire ended.

With these very extreme macroeconomic changes happening over the period in which Britian lost reserve currency status how will we attribute effects and causes reliably to that one event?

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Random Musings
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Re: what happened when sterling lost its reserve status?

Post by Random Musings » Sat May 10, 2014 6:48 am

At 84 years, the US dollar is getting a little long in the tooth.

Edit : 94 years as correctly pointed out by someone who can subtract properly.

RM
Last edited by Random Musings on Mon May 12, 2014 3:29 pm, edited 1 time in total.
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stlutz
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Re: what happened when sterling lost its reserve status?

Post by stlutz » Sat May 10, 2014 10:09 am

Holders of UK government debt have all been paid back with interest (avg. real return since 1900=1.4%). Real return on UK equities since 1900 has been about 5.4%

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nedsaid
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Re: what happened when sterling lost its reserve status?

Post by nedsaid » Sat May 10, 2014 10:46 am

From what I read on this thread, pretty much nothing. It sounds like holders of UK stocks and bonds still got real returns over inflation.
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whaleknives
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Re: what happened when sterling lost its reserve status?

Post by whaleknives » Sun May 11, 2014 12:11 am

The trader2trader chart of "Empires & Reserve Currencies 1450 – 2013" seems questionable and all too neat. I didn't check the source link (politicalmetals.com/2011/09/15/if-history-is-any-guide/) because my security software libels it as a source of "malicious links or payloads".

It's hard to believe that the French franc ("1720-1815") served as a global reserve for Britain during the French Revolution and Napoleonic Wars (1789-1815). Estimates of GDP's from 1700-1820 show the Netherlands with more than twice the economy of France, and still greater than Britain's, although declining.

Portugal and Spain ("1450-1640") were colonizing trading empires, but their GDP's were less than those of the Netherlands, France or Britain during that period. And the Anglo-Spanish War (1585–1604, including the Spanish Armada) prevented trade between those enemies.

I would hesitate to draw any conclusions (or make any extrapolations) from the chart.
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Valuethinker
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Re: what happened when sterling lost its reserve status?

Post by Valuethinker » Sun May 11, 2014 3:12 am

One has to be clear about cause and effect. Sterling lost its role as the global currency of denomination:

- because 2 world wars and the end of the British Empire radically altered Britain's place in the global power game. India for example no longer used sterling as its default currency, and Australia and Canada ceased to be pegged to sterling. Britain's vast overseas financial assets were spent, dissipated.

- Britain had a series of domestic problems around inflation and low productivity growth, declining industries (coal, textiles, steel, shipbuilding) that left it economically weaker than any of its major trading partners. There had been signs of this before 1914 (when the country was in social and political turmoil over Ireland and over Suffragette-ism) but it was manifest in the 1920s and 30s.

It wasn't what losing sterling caused, it was that these factors caused the loss of sterling.

It's estimated that the seigneurage of the USD (the benefit to the US of people holding USD outside the US, rather than exchanging them for other currencies) is around $60 bn a year. That would be lost. Just as Sterling lost that benefit.

http://www.amazon.com/Exorbitant-Privil ... 0199931097

takes you through the history of the USD and this (with references to sterling).

http://www.amazon.com/Globalizing-Capit ... 441&sr=1-4

also very useful.

The point being that if the loss of Sterling as the leading currency is an *effect*, then other symptoms that took place could also be effects of the root causes *rather than* effects of Sterling ceasing to be the currency numeraire.

Sterling's primacy was an artefact of 2 things: the largest global empire, and the country that hosted the first Industrial Revolution. Once other nations caught up, then the underlying logic of Sterling as the standard currency was no longer there.

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whaleknives
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Re: what happened when sterling lost its reserve status?

Post by whaleknives » Sun May 11, 2014 12:22 pm

And now that I think about it, gold and promissory notes based on gold deposits were probably the trade currencies of choice until the 19th century.
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