Pound sterling

:GBP redirects here. For other uses, see GBP (disambiguation).

History

As a unit of currency, the term pound originates from the value of a troy pound of high purity silver known as sterling silver.

Related Topics:
Troy pound - Sterling silver

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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 word sterling is from the Old French esterlin transformed in stiere in Old English (strong, firm, immovable).

Related Topics:
Penny - King Henry II - 1158

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The pound sterling, established 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.

Related Topics:
1560 - 61 - Elizabeth I - Thomas Gresham - 1543 - 51 - Fernand Braudel - Fiduciary currency - Antwerp

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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 has been the money of account of the Bank of England from its inception in 1694.

Related Topics:
1621 - 1694 - 96 - John Locke - 1774 - 1797 - Civil War - 18th century - Bank of England

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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.

Related Topics:
Gold standard - 1717 - Isaac Newton - Royal Mint - Napoleonic Wars - 1816 - World War I - 1919 - US$

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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 http://www.gold.org/value/reserve_asset/history/monetary_history/vol2/1868feb18.html. Although the UK decided against joining, some of the arguments http://www.oup.co.uk/pdf/0-19-924366-2.pdf make interesting reading in the context of the current debate on the adoption of the euro.

Related Topics:
1865 - Paris - Latin Monetary Union - Royal Commission - Euro

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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.

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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.

Related Topics:
1926 - Pegged - September 21 - 1931 - Great Depression

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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.

Related Topics:
1971 - 1946 - US$ - Billion - World War II

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Pound sterling was used as the currency of the British Empire. As this became the Commonwealth of Nations, dominions introduced their own currencies (such as the Australian pound and Irish pound) - first pegged to sterling, and later breaking parity (Australia in 1931 and Ireland in 1979).

Related Topics:
British Empire - Commonwealth of Nations - Australian pound - Irish pound

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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.

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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 US$4.03 to US$2.80. (The U.S. dollar itself was derived from a 5 shilling coin used in the American colonies in the 1700s, hence the value of US$4 per pound sterling in use until then.) 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.

Related Topics:
1949 - 1700s - Australia - Denmark - Ireland - Egypt - India - Israel - New Zealand - Norway - South Africa

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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 percent to US$2.41 in November 1967.

Related Topics:
1960s - 1966 - Wilson - 1970 - 1967

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With the break down of the Bretton Woods system – not least because British currency dealers created a substantial Eurodollar market – the pound was floated in the early 1970s and so subject to a market valuation.

Related Topics:
Bretton Woods system - Eurodollar - Floated

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A further crisis followed in 1976, when it was apparently leaked that the International Monetary Fund (IMF) thought that the pound should be set at US$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. In the early 1980s the pound moved above the $2 level as interest rates rose in response to the monetarist policy of targetting money supply and a high exchange rate was widely blamed for the deep recession of 1981. At its lowest, the pound stood at just US$1.05 in February 1985, before returning to US$1.66 during the 1990s. In late 2004, the pound was worth US$1.94, but has fallen to mid-$1.70s as of July, 2005.

Related Topics:
1976 - International Monetary Fund - 1980s - Monetarist - Money supply - Recession - 1981

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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.

Related Topics:
1988 - Margaret Thatcher - Chancellor - Nigel Lawson - German - Deutsche Mark

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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).

Related Topics:
1990 - European Exchange Rate Mechanism - DM - Black Wednesday - September 16 - 1992 - George Soros

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Black Wednesday saw interest rates jump from 10 percent, to 12 percent, and then finally to 15 percent in a futile attempt to stop the pound from falling below the ERM limits. The exchange rate fell to DM 2.20 costing the country tens of billions of pounds.

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Following inflation targets

In 1997, the newly elected Labour government caused a surprise when Gordon Brown handed over day to day control of interest rates 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, with a secondary aim of maintaining high employment. There is no explicit exchange rate targetting.

Related Topics:
1997 - Labour - Gordon Brown - Bank of England

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The euro

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).

Related Topics:
European Union - Euro

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The pound did not join the Second European Exchange Rate Mechanism (ERM II) after the euro was created.

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Unique to Denmark and the UK is an opt-out from entry to the euro. Technically, every other EU nation must eventually sign up; however, this can be delayed indefinitely (as in the case of Sweden) by refusing to join ERM II.

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