THE FINANCIAL WARNING YOU WERE NEVER SUPPOSED TO HEAR 21
Napoleonic Wars and the official adoption of the gold standard
by the U.K. Many observers assume the 1944 Bretton Woods
conference was the moment the U.S. dollar replaced sterling
as the world’s leading reserve currency. In fact, that replace-
ment of sterling by the dollar as the world’s leading reserve
currency was a process that took 30 years, from 1914 to 1944.
The real turning point was the period July–November 1914,
when a financial panic caused by the start of the First World
War led to the closures of the London and New York stock
exchanges and a mad scramble around the world to obtain
gold to meet financial obligations. At first, the United States
was acutely short of gold. The New York Stock Exchange was
closed so that Europeans could not sell U.S. stocks and convert
the dollar sales proceeds into gold.
But within a few months, massive U.S. exports of cotton
and other agricultural produce to the U.K. produced huge
trade surpluses. Gold began to flow the other way, from
Europe back to the U.S. Wall Street banks began to under-
write massive war loans for the U.K. and France. By the end
of the First World War, the U.S. had emerged as a major credi-
tor nation and a major gold power. The dollar’s percentage of
total global reserves began to soar.
Scholar Barry Eichengreen has documented how the dol-
lar and sterling seesawed over the 20 years following the First
World War, with one taking the lead from the other as the lead-
ing reserve currency and in turn giving back the lead. In fact,
the period from 1919–1939 was really one in which the world
had two major reserve currencies — dollars and sterling — op-
erating side by side.
Finally, in 1939, England suspended gold shipments in or-
der to fight the Second World War and the role of sterling as
a reliable store of value was greatly diminished apart from
the U.K.’s special trading zone of Australia, Canada and other
Commonwealth nations. The 1944 Bretton Woods conference