controlling over 20% of the world’s land mass and 25% of the global population prior to the outbreak of World
War I. With a lag, as is classic, its capital—London—emerged as the global financial center and its currency—the
pound—emerged as the leading global reserve currency. As is typical its reserve status remained well after other
measures of power started declining in the late 19th century and as powerful rivals like the US and Germany rose.
As shown in the chart above, almost all of the British empire’s relative powers began to slip as competitors
emerged around 1900. At the same time wealth gaps were large and internal conflicts over wealth were emerging.
As you know, despite winning both World War I and World War II the British were left with large debts, a
huge empire that was more costly than profitable, numerous rivals that were more competitive, and a
population that had big wealth gaps which led to big political gaps.
As I previously summarized what happened in the 1914 to post-World War II period, I will skip ahead to the end of
World War II in 1945 and the start of the new world order that we are now in. I will be focusing on how the pound
lost its reserve currency status.
Although the US had overtaken the UK militarily, economically, politically, and financially long before the
end of World War II, it took more than 20 years after the war for the British pound to fully lose its status as
an international reserve currency. Just like the world’s most widely spoken language becomes so deeply woven
into the fabric of international dealings that it is difficult to replace, the same is true of the world’s most widely
used reserve currency. In the case of the British pound, other countries’ central banks continued to hold a sizable
share of their reserves in pounds through the 1950s, and about half of all international trade was denominated in
sterling in 1960. Still, the pound began to lose its status right at the end of the war because smart folks could
see the UK’s increased debt load, its low net reserves, and the great contrast with the United States’ financial
condition (which emerged from the war as the world’s pre-eminent creditor and with a very strong balance sheet).
The decline in the British pound was a chronic affair that happened through several significant devaluations
over many years. After efforts at making the pound convertible failed in 1946-47, the pound devalued by 30%
against the dollar in 1949. Though this worked in the short term, over the next two decades the declining
competitiveness of the British led to repeated balance of payments strains that culminated with central banks
actively selling sterling reserves to accumulate dollar reserves following the devaluation of 1967. Around this time
the deutschmark began to re-emerge and took the pound’s place as the second-most widely held reserve currency.
The charts below paint the picture.
On the following pages we will cover in greater detail the specific stages of this decline, firstly with the
convertibility crisis of 1947 and the 1949 devaluation, secondly with the gradual evolution of the pound’s status
relative to the dollar through the 1950s and early 1960s, and thirdly with the balance of payments crisis of 1967
and subsequent devaluation. We will focus in on the currency crises.