Foreign exchange reserves have assumed considerable importance in the ongoing debate over risks to the international financial system and how it should be reformed in the wake of the great global credit crisis of 2008. The worry is that China's accumulation of foreign exchange reserves and the associated global imbalances were a factor setting the stage for the crisis. The worry for the future is that the country's huge volume of dollar reserves and the incentive this provides for portfolio diversification have disturbing implications for the stability of the dollar. One manifestation of the interest that the media and policy makers have taken in this topic is the frequency of references to ‘historical lessons’ that shed light on possible future developments. For example, one finds frequent reference to how the pound sterling was dethroned by the dollar as the leading international reserve currency and to the implications of this historical episode for what might happen next.

This article challenges the conventional view that the gold standard was stabilized by quasi-automatic central bank intervention and/or private arbitrage whenever the spot exchange rate reached the ‘gold points’. New archival evidence on the central bank of Austria–Hungary between 1896 and 1913 documents the use of sophisticated instruments such as foreign exchange forward and repo (sale-repurchase) contracts and a quest for market dominance both with respect to reserves held and the share in market turnover. The resulting change in the working of the foreign exchange market is shown to have supported the conduct of monetary policy, underlining the importance of market micro structure in the design and conduct of monetary policy. The picture that emerges is that of a much more ‘modern’ approach to exchange rate stabilization during the classical gold standard than is traditionally recognized.

Historical experience is often invoked in the modern debate on competition among reserve currencies, yet little is known about quantitative aspects or institutional features of reserve management. By drawing on newly obtained data on foreign exchange reserves, especially those broken down by currency, this article explores the competition between the British pound sterling and the US dollar for the status of leading reserve currency in Japan during the interwar period. We find that competition between these two currencies remained undecided and that their relative status alternated repeatedly. Historical materials and the results of econometric analysis suggest that the key factors explaining a choice of reserve currencies are trade volumes and the currency denomination of external debt. The latter criteria supported maintaining sterling's status as a reserve currency for the interwar period, reflecting its considerable share in debt service generated through issues that had been launched when London was the sole international market. The stability of potential reserve currencies is shown to be crucial as well. We also find evidence of institutional factors, which include taxation, foreign exchange controls and restrictions on financial activities.

French reserves policy during the interwar years has been heavily criticised because of its consequences for other countries. This article presents new monthly data on the Bank of France's foreign reserves currency composition between 1928 and 1936, and identifies the motivations behind reserves policy. The Bank of France's aim was to limit the risk of capital loss on its foreign portfolio. The determining factor in its portfolio allocation decisions was the credibility of reserves currencies on the exchange market. Credibility issues explain both the sale of pounds against dollars during 1929 and 1930 and the massive conversion of foreign holdings into gold from 1931 on. However, due to the huge volume of its reserves, the Bank also had to consider the effects of its own actions on the market. Its cooperative attitude towards sterling in the months before British devaluation can be explained through its market position. The Bank of France's portfolio choice was that of a large player in a low-credibility international monetary system.

Much as Paul David described the invention of the mechanical typewriter – it was invented 51 times before being patented by Christopher Sholes in 1867, licensed to the Remington Company and successfully commercialized – the connections between the gold-exchange standard and the Great Depression have been discovered repeatedly. They were discovered by Ehsan Choudhri and Levis Kochin in a seminal article in 1980. They were discovered by Barry Eichengreen and Jeffrey Sachs in articles published in 1985 and 1986. They were discovered by James Hamilton in an insightful article published in 1988. They were discovered by Peter Temin in his Robbins Lectures published in 1989. They were discovered by the now chairman of the Federal Reserve Board in his 1994 Journal of Money Credit and Banking Lecture. Moreover, these contributors to the contemporary literature had important antecedents, including Robert Triffin in the 1950s, Ragnar Nurkse in the 1940s, and Leo Pasvolsky in the 1930s.

Canada has perhaps the longest track record of adhering to a floating exchange rate regime, but it may well also have been the first country to adopt a managed float during the 1950s. In spite of criticisms levelled at the Canadian government's decision to float the dollar, the remarkable feature of the behaviour of the exchange rate during the so-called float is the relative stability of the nominal exchange rate, and the small volatility in its movements. This article stresses the impact of foreign exchange intervention in limiting exchange rate appreciations and in moderating exchange rate volatility, using newly found, and heretofore unused, intervention data. Until now, all studies of Canada's experience with the float have relied on official foreign exchange reserves data. A counterfactual experiment also suggests that nominal exchange rate levels, and variability, would have been different had there been no foreign exchange market intervention.

We provide the first econometric study of foreign exchange market intervention for the UK during the sterling crises from 1964 from 1967. We use daily data on spot and forward dollar/sterling exchange rates and reserve movements which allows a more precise description of the loss of credibility during four currency crises. Reserve losses are consistent with exchange rate crises. External assistance given to sterling throughout this period shored up the reserves and allowed the sterling peg to be maintained.