First, while network externalities, first-mover advantages and inertia matter, they do not lock in international currency status to the extent previously thought. Abstracting from the Commonwealth countries, whose allegiance to sterling was special, we show that the dollar overtook sterling already in 1929, at least 15 years prior to the date cited in previous accounts (see Figure 1).
And even when the Commonwealth countries are included, we find that the dollar was already within hailing distance of sterling as a currency of denomination for international bonds by the late 1920s.
Second, our evidence challenges the presumption that monetary leadership once lost is gone forever. Although sterling lost its leadership in the 1920s, it recovered after 1933 and was again running neck and neck with the dollar at the end of the decade.
Third, our findings challenge the presumption that there is room for only one dominant international currency due to strong network externalities and economies of scope. This is true even if one takes into account the Commonwealth countries, which were heavily oriented towards sterling for institutional and political reasons.History may matter, but markets definitely do.