by Alan de Bromhead (Queen’s University Belfast), David Jordan (Queen’s University Belfast), Francis Kennedy (Queen’s University Belfast), and Jack Seddon (Queen’s University Belfast)
This blog post is based upon the authors’ forthcoming article in the Economic History Review.
The sound of the orchestra fades away in the final movement of Haydn’s ‘Farewell’ Symphony as each musician, in turn, stops playing, snuffs out the candle on their music stand, and leaves. At the end, only two violins remain.
In our forthcoming article in the Economic History Review, we calculate, for the first time, the dates when 46 countries stopped pegging to sterling and took their sterling reserves decisively below 50 per cent of their foreign exchange (FX) holdings. We find that countries of the postwar Sterling Area followed a similar pattern when diversifying their international reserves away from sterling; see Figure 1. However, they each, in turn, dropped sterling as their majority FX holding, not only in response to the waving of a British conductor’s baton (if we adapt Keynes’s phrase about the Bank of England in the nineteenth century for the smaller stage of the postwar Sterling Area), but for reasons peculiar to their own circumstances and requirements.
Figure 1. UK and countries with majority sterling FX reserves, 1965-1979
This introduces a novel historical perspective on the end of the Sterling Area. Reserve transitions were widely spread and did not simply track repegging decisions clustered around the collapse of the Bretton Woods par value system or the abrupt removal of countries from the United Kingdom’s list of ‘scheduled territories’ that formally defined Sterling Area membership until June 1972; see Figure 2. In our article, we examine this cross-country variation in the timing of reserve policy transition, and the ‘demand-side’ country-specific factors—economic and political, international and domestic—that contributed to international sterling’s post-1965 ‘Farewell’. Specifically, we employ an innovative duration model analysis and qualitative archival evidence to explain when and why Sterling Area countries stopped holding sterling as the majority of their FX reserves.
Figure 2. Mapping the postwar disintegration of the Sterling Area
The historical literature has typically considered the Sterling Area in the 1950s and 1960s, focusing principally on the ‘supply side’, i.e., the UK as issuer of sterling. Giving sustained attention to variation in sterling’s share of FX reserves across countries shifts the focus of historical analysis from highly visible British decisions affecting the Sterling Area, to the more veiled, differentiated, and drawn-out process of reserve diversification. Formal endings mattered for understanding the end of the Sterling Area, but so too did, often concealed, economic agitation among the holders of sterling and the quiet politicking of incremental defection.
Our empirical results illuminate the importance of international transaction costs (trade and capital) and portfolio-risk considerations in reserve policy changes. But, in a finding that is potentially relevant for contemporary debates about the ‘dollar trap’, there is no statistical evidence that big holders of sterling were ‘trapped’ by risks of economic loss or the costs of switching. The role of international geopolitical and cultural factors was generally more ambiguous and subject to local conditions. Nonetheless, we find a place for politics in the process of monetary disintegration, with democracy serving to systematically delay transitions from sterling, and past colonial relationships also exerting an identifiable influence on countries’ transitions away from sterling.
What broader lessons does this historical survey offer regarding the determinants of international currency choice? Supply-side models of international currency choice, focused on an issuer’s economic size and network effects, feature prominently in the literature. Models that emphasize demand-side factors feature less; although, the arguments of Eichengreen and others, demonstrating that the demand-side matters too, offer a valuable alternative perspective. We interpret our findings in relation to the Sterling Area from this demand-side viewpoint.
Overall, the picture that emerges is multidimensional, and much explanation lies in local contingencies and national choices made outside the international relations and ties that were subject to direct levers of British control. Understanding when and why the music stops requires following the movements of individual players, not just the conductor.
To contact the authors:
de Bromhead, A., Jordan, D., Kennedy, F., and Seddon, J., ‘Sterling’s farewell symphony: the end of the sterling area revisited’, Economic History Review (forthcoming).