Will the dollar go the way of the pound? An important economic historian sets the parameters.

• Author: James, Harold

Since the Second World War, the U.S. dollar has been the world s hegemonic currency. It took over that role from the British pound, and it is not surprising that the story of the pound often looks like a memento mori, the skull that medieval rulers placed before them in order to remind themselves of the transience and fallibility of the human condition.

Ever since the U.S. dollar became the central anchor of the international monetary system at the 1944 Bretton Woods conference, every currency prophet has thought that it could not stay the course. At first, critics worried about a permanent dollar shortage, in which countries would not be able to acquire enough dollars to trade with the United States. But from the early 1960s they worried about American deficits and the excessive creation of dollars.

Charles de Gaulle's critique from 1965 has been continually echoed ever since in barely modified formulations: "The United States is not capable of balancing its budget. It allows itself to have enormous debts. Since the dollar is the reference currency everywhere, it can cause others to suffer the effects of its poor management. This is not acceptable. This cannot last." In each episode of dollar weakness since the 1960s, pessimistic prophets have seen the dollar following the pound on the path of decline and yielding to a new currency: in the 1980s, it was the deutschemark and the yen; in today's debates it is the euro or perhaps the yuan. On every previous occasion, the criers of "wolf" got it wrong.

The story of the decline of sterling is the story of Britain's slow transformation from the world's largest creditor to a pariah status as an impoverished debtor. It was a transformation that was driven by declining rates of economic growth, and fading competitiveness; and it was punctuated by stark political crises.

The City of London was the financial center of the nineteenth-century world, most commodities were priced in pounds, and London banks played a preeminent part in financing international Wade. Before the First World War, some emerging market countries, notably Japan and India, began to hold reserves in sterling bills in London rather than in gold, as a way of earning a higher return. Britain's international role rested chiefly on her importance as an international capital exporter, with ever-rising current account surpluses in the decades before the First World War.

Before 1914, some critics suggested that the international role of...