Can the Chinese Yuan Replace the Dollar? Lessons from the Dollar-Pound transition of the 1920's.

Abstract

More than fifty years ago, the dollar superceded the pound as the leading reserve currency, as dollar reserves held by countries around the world surpassed the pound reserves. Today, with its continuous fast-growing development since the late 1970’s, China has become the second largest economy in the world. Can China’s currency, the Chinese yuan, assume the position of the next major reserve currency? Given that the RMB is still not even a fully convertible currency, it is not possible to answer this question definitively at this time. But it is instructive to review the rise of the U.S. dollar as a reserve currency between 1920 and 1955, with a particular focus on the 1920’s, and to consider what lessons can be learned from the replacement of the British pound by the U.S. dollar, and then, to analyze the potential for the RMB to succeed the dollar.