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- For details of notes and coins, see British coinage and British banknotes.
The pound sterling, which strictly speaking refers to basic currency unit of sterling, now the pound, can generally refer to the currency of the United Kingdom (UK). The standard ISO 4217 currency code is GBP = Great British Pound, (UKP is non-standard and sometimes wrongly used)
The sign for the pound is £ (or rarely just "L"). Both symbols derive from libra, the Latin word for "pound".
In the UK, in order to distinguish the unit of currency from the unit of mass, and from other units of currency that have the same name, a pound is often referred to as a pound sterling or sometimes simply sterling. The slang term quid is also substituted in informal conversation for "pound(s) sterling". The sterling was originally a name for a silver penny of 1/240 pound. In modern times the pound has replaced the penny as the basic unit of currency as inflation has steadily eroded the value of the currency. Originally a silver penny had the purchasing power of slightly less than a modern pound.
One pound is divided into 100 pence, the singular of which is "penny". The symbol for the penny is "p".
Prior to decimalisation in 1971, each pound was divided into 240 pence – although it was usually expressed as being divided into twenty shillings, with each shilling equal to twelve pence. The symbol for the shilling was "/" or "s" – not from the first letter of the word, but rather from the Latin word solidus. The symbol for the penny was "d", from the Latin word denarius. (The solidus and denarius were Roman coins.)
After Decimal Day, the value of one penny was therefore different from its pre-decimalisation value. For the first few years after 1971, the new type of penny was commonly referred to as a "new penny". Coins for denominations of ½p, 1p, 2p, 5p, 10p and 50p all bore the name "NEW PENCE" until 1982, when the inscription changed to "ONE PENNY", "TWO PENCE", "FIVE PENCE" and so on, also, the half penny was removed from circulation.
Legal tender and regional issues
Laws of legal tender are uniquely complex in the UK. In England and Wales, banknotes issued by the Bank of England are legal tender, meaning that they must be accepted in payment of a debt. In Scotland and Northern Ireland, no banknotes are legal tender, and each bank must issue its own 'promissory notes'. Scottish and Irish notes are sometimes rejected by shops when used in England (although they are valid legal tender). Scottish and Irish notes' designs are also different from the English notes' designs. The single Pound coin also has many varied designs on the head side, which differ from year to year with new designs appearing. Legal tender comes as 1 pence, 2 pence, 5 pence, 10 pence, 20 pence, 50 pence, 1 Pound coin, 2 Pound coin, 5 Pound note (and a rarely used collectors' coin), 10 Pound note, 20 Pound note, and 50 Pound note.
Gibraltar and the islands of Guernsey, Jersey, Saint Helena, the Falkland Islands and the Isle of Man, which are not part of the United Kingdom, also issue their own currencies, which are fixed to the value of sterling. None of the regional currencies are legal tender in England or in other regions, but they are commonly accepted by large businesses and banks. However, an exchange commission may be charged.
- See : British banknotes, Isle of Man pound, Guernsey Pound, Jersey pound, Gibraltar pound, Falkland pound, Saint Helenian pound
Present value against other currencies
The pound is now freely bought and sold on the commodity markets around the world and the value therefore fluctuates (rising when traders buy pounds, falling when traders sell pounds). It has traditionally been among the highest-valued of all base currency units in the world.
On 4 April 2005, £1.00 (GBP1.00) was worth $1.87 (USD1.87) and €1.46 (EUR1.46).
As a unit of currency, the term pound originates from the value of a troy pound of high purity silver known as sterling silver.
Sterling (with a basic currency unit of the Tealby penny, rather than the pound) was introduced as the English currency by King Henry II in 1158, though the name sterling wasn't acquired until later.
The pound sterling, stabilized in 1560-61 by Elizabeth I and her advisors, foremost among them Sir Thomas Gresham, brought order to the financial chaos of Tudor England that had been occasioned by the "Great Debasement" of the coinage, which brought on a debilitating inflation during the years 1543-51. By 1551, according to Fernand Braudel (Braudel 1984, pp 356ff), the silver content of a penny had dropped to one part in three. The coinage had become mere fiduciary currency (as modern coins are), and the exchange rate in Antwerp where English cloth was marketed to Europe, had deteriorated. All the coin in circulation was called in for reminting at the higher standard, and paid for at discounted rates.
The pound sterling maintained its intrinsic value—"a fetish in public opinion" Braudel called it—uniquely among European currencies, even after the United Kingdom officially adopted the gold standard, until after World War I, weathering financial crises in 1621, in 1694-96, when John Locke pamphleteered for the pound sterling as "an invariable fundamental unit" and again in 1774 and 1797. Not even the violent disorders of the Civil War devalued the pound sterling in European money markets. Braudel attributes to the fixed currency, which was never devalued over the centuries, England's easy credit, security of contracts and rise to financial superiority during the 18th century. The pound sterling was the money of account of the Bank of England from its inception in 1694.
The gold standard
Sterling unofficially moved to the gold standard from silver thanks to an overvaluation of gold in England that drew gold from abroad and occasioned a steady export of silver coin, in spite of a re-evaluation of gold in 1717 by Sir Isaac Newton, Master of the Royal Mint. The de facto gold standard continued until its official adoption following the end of the Napoleonic Wars, in 1816 (Braudel, p. 361). This lasted until Britain, in common with many other countries, abandoned the standard after World War I in 1919. During this period, the pound was generally valued at around US$4.90.
Discussions took place following the 1865 International Monetary Conference in Paris concerning the possibility of the UK joining the Latin Monetary Union, and a Royal Commission on International Coinage examined the issues . Although the UK decided against joining, some of the arguments  make interesting reading in the context of the current debate on the adoption of the euro.
Prior to World War I, the United Kingdom had one of the world's strongest economies, holding 40 per cent of the world's overseas investments. However, by the end of the war the country owed £850 million, mostly to the United States, with interest costing the country some 40 per cent of all government spending.
In an attempt to resume stability, a variation on the gold standard was reintroduced in 1926, under which the currency was pegged to the gold price at pre-war levels, although people were only able to exchange their currency for gold bullion, rather than for coins. This was abandoned on September 21, 1931, during the Great Depression, and sterling devalued 20 per cent.
In common with all other world currencies, there is no longer any link to precious metals. The U.S. dollar was the last to leave gold, in 1971. The pound was made fully convertible in 1946 as a condition for receiving a U.S. loan of US$3.75 billion in the aftermath of World War II.
Following the U.S. dollar
Since leaving gold, there have been several attempts to peg the value of the pound to other currencies, initially the U.S. dollar.
Under continuing economic pressure, and despite months of denials that it would do so, on September 19, 1949, the government devalued the pound by 30 percent, from $4.03 to $2.80. The move prompted several other governments to devalue against the dollar too, including Australia, Denmark, Ireland, Egypt, India, Israel, New Zealand, Norway and South Africa.
In the mid 1960s the pound came under renewed pressure since the exchange rate against the dollar was considered too high. In the summer of 1966, with the value of the pound falling in the currency markets, exchange controls were tightened by the Wilson government. Among the measures, tourists were banned from taking more than £50 out of the country, until the restriction was lifted in 1970. The pound was eventually devalued by 14.3 per cent to $2.41 in November 1967.
A worse crisis followed in 1976, when it was apparently leaked that the International Monetary Fund (IMF) thought that the pound should be set at $1.50, and as a result the pound fell to $1.57, and the government decided it had to borrow £2.3 billion from the IMF. At its lowest, the pound stood at just $1.05 in February 1985.
Following the German mark
In 1988, Margaret Thatcher's Chancellor Nigel Lawson decided that the pound should "shadow" the German Deutsche Mark, with the unintended result of a rapid rise in inflation as the economy boomed due to inappropriately low interest rates.
Following the European currency unit
In another change of tack, in 1990 the Thatcher government decided to join the European Exchange Rate Mechanism (ERM), with the pound set at about DM 2.90. However the country was forced to withdraw from the system on Black Wednesday (September 16, 1992) as an international group of currency speculators led by George Soros exploited the fixed exchange rate by speculating on the interest rate differences between Britain and Germany (earning several billion dollars in the process).
Black Wednesday saw interest rates jump from 10 per cent to 12 per cent, and then to 15 per cent in a futile attempt to stop the pound falling below the ERM limits, costing the country tens of billions of pounds as the exchange rate moved to DM 2.20.
Following inflation targets
In 1997, the newly elected Labour government caused a surprise when Gordon Brown handed over control of the currency to the Bank of England. The bank is now responsible for setting its base rate of interest so as to keep inflation within a range set by government.
As a member of the European Union, the United Kingdom has the option of adopting the euro as its currency. However the subject remains politically controversial, not least since the United Kingdom was forced to withdraw from its precursor, the European Exchange Rate Mechanism (see above). The pound did not join the Second European Exchange Rate Mechanism (ERM II) after the euro was created.
Braudel, Fernand, The Perpective of the World, Vol III of Civilization and Capitalism 1984 (in French 1979).
On the value of British money
In 2003 the House of Commons Library published a research paper (PDF document) which included an index of the value of the pound for each year between 1750 and 2002, where the value in 1974 was indexed at 100. (Update of original document published in 1998).
Reading this document, one is struck by the fact that the value of the pound remained remarkably constant for the whole of the period until the First World War, allowing for inflationary fluctuations in wartime and with many periods when prices declined. The value of the index in 1750 was 5.1, increasing to a peak of 16.3 in 1813 before declining very soon after the end of the Napoleonic Wars to around 10.0 and remaining in the range 8.5–10.0 at the end of the nineteenth century. The index was 9.8 in 1914 and peaked at 25.3 in 1920, before declining again to 15.8 in 1933 and 1934 – prices were only about three times higher than they had been 180 years earlier.
Inflation had a dramatic effect during and after the Second World War – the index was 20.2 in 1940, 33.0 in 1950, 49.1 in 1960, 73.1 in 1970, 263.7 in 1980, 497.5 in 1990, 671.8 in 2000 and 695.1 in 2002.
- In Anglo-Saxon times, small silver coins known as sceats were used in trade: these were derived from Frisian examples, and weighed about 20 grains (c. 1.3 g).
- King Offa of Mercia c. AD 790 introduced a silver penny of 22.5 grains (c. 1.5 g). Two hundred and forty of these were made from a measure of silver known as the Tower pound: apparently it nominally weighed 5400 grains (c. 349.9 g).
- In 1526 the standard was changed to the Troy pound of 5760 grains (373.242 g).
- See also Saxon pound
A Retrospective on the Bretton Woods System : Lessons for International Monetary Reform (National Bureau of Economic Research Project Report) By Barry Eichengreen (Editor), Michael D. Bordo (Editor) Published by University of Chicago Press (1993) ISBN 0226065871
The political pound: British investment overseas and exchange controls past-- and future? By John Brennan Published By Henderson Administration (1983) ISBN 0950873500
Monetary History of the United States, 1867-1960 by Milton Friedman, Anna Jacobson Schwartz Published by Princeton University Press (1971) ISBN 0691003548
- The international role of the pound sterling: Its benefits and costs to the United Kingdom By John Kevin Green ASIN B0007GYENQ
The Financial System in Nineteenth-Century Britain (The Victorian Archives Series, By Mary Poovey Published by Oxford University Press (2002) ISBN 0195150570
Rethinking our Centralized Monetary System: The Case for a System of Local Currencies By Lewis D. Solomon Published by Praeger Publishers (1996) ISBN 0275953769
Politics and the Pound: The Conservatives' Struggle With Sterling by Philip Stephens Trans-Atlantic Publications (1995) ISBN 0333632966
The European Monetary System: Developments and Perspectives (Occasional Paper, No. 73) by Horst Ungerer, Jouko J. Hauvonen Published by International Monetary Fund (1990) ISBN 1557751722
- The floating pound sterling of the nineteen-thirties: An exploratory study By J. K Whitaker Dept. of the Treasury (1986) ASIN B00072MOWS
World Currency Monitor Annual, 1976-1989: Pound Sterling : The Value of the British Pound Sterling in Foreign Terms Published by Mecklermedia (1990) ISBN 0887365434
Last updated: 05-11-2005 08:17:24