The .38 special was REPLACED by the 357 magnum when police departments needed more firepower.
From an article by Massad Ayoob, guns magazine, January 2005
"...In the early 1960s, Lee Jurras and his Super Vel Company introduced commercially manufactured hollowpoint ammunition, emphasizing lighter bullets at higher velocities.
Two good things happened. Those with .38s now had ammo more likely to help them survive a gunfight. The .357 Magnum (anathema to most police chiefs for fear that it would overpenetrate and strike down bystanders--a well founded concern) got a lighter, faster, expanding Magnum slug not only likely to stay in the body, but inflict a wound more likely to end a fight.
Remington introduced what would become the .357 Magnum police load, a 125-grain semi-jacketed hollowpoint at a blistering 1,400 feet per second. It soon proved to, as some Texas cops said, "Drop the bad guy like a lightning bolt." Federal upped the ante with a similar bullet at 1,450 fps. Winchester followed suit, and Remington kept up with them."
And I found this blurb on Western shooting supplies web...
"The .38, .38 Special has been around for many years now, and was the standard issue for most US police departments in 1920’s. However with the 1930’s came the demand for a little more power. Many police departments demanded more stopping power and penetration as the .38 Special had been known to “careen” of car wind-screens, or fail to hole the thick heavy gauge steel of the cars of criminals.
The .357 was develop to meet this need, and was primarily seen as a police calibre. The leading developer for this was Phil Sharpe, who increased the length of the venerable .38 Special case by about 1/8”, the .357 was born.
It was not anticipated that civilian sales would be all that extensive, but to the surprise of Smith & Wesson, the public loved the new improved performance, and sales reflected this.
The model 27 continued until 1994, but had a special production in 1997-2000."
The .38 did not replace the 357.