Why did the pound sterling lose it reserve status to USD? Was this due to some agreement during the Bretton Woods negotiations?

  • $\begingroup$ This is a big question, depending on how one interprets “why”. The mechanical reason was that the UK’s gold reserves were emptied during WWII. The Bretton Woods system made the USD the reserve currency to reflect the fact that the US had most of the world’s monetary gold. Beyond that, the explanation is a book-length history. It would help if you clarify how narrow you want the question to be. $\endgroup$ – Brian Romanchuk Sep 25 '20 at 17:16

As written, this question has an extremely wide scope, and an answer would be the length of a book. I will attempt a narrow answer.

People use “reserve currency” at present in a very loose manner. In the context of this question, it had a very specific meaning. Currencies were pegged, ultimately to gold. Currencies that had inadequate gold reserves used “strong” gold-backed currencies as extra backing for their pegs. Hence, the strong currencies were used as reserves.

Britain lost almost all of its gold reserves in World War II, in order to finance the war effort. (The process started earlier, with large losses in World War I.) Without adequate gold reserves of its own, the pound was not a credible backing for another country’s gold peg. Hence, it lost reserve status.

The Bretton Woods agreement enshrined the financial reality of the post-war system: the U.S. has accumulated almost all of the official gold reserves as a result of supplying the warring countries. The system was set so that the US dollar was gold-backed, and other currencies were backed by the USD.

Anything beyond this outline turns into a financial history of 1910-1950, for which there are many choices.


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