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Pound sterling

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The pound (symbol: £; ISO code: GBP), divided into 100 pence, is the official currency of the United Kingdom and the Crown Dependencies. The slang term 'quid' is very common in the UK.

The official full name pound sterling is used mainly in formal contexts and also when it is necessary to distinguish the currency used within the United Kingdom from others that have the same name. The currency in general is sometimes called just "sterling" (for example, 'payment must be in sterling'), particularly in the wholesale financial markets. The abbreviations 'ster.' or 'Stg.' are sometimes used. The term British pound, used particularly by the United States media, is not an official name of the currency.

The pound was originally the value of one troy pound of sterling silver (hence "pound sterling"). The currency symbol is the pound sign, originally with two cross-bars, then later more commonly £ with a single cross-bar. The pound sign derives from the black-letter 'L', from the abbreviation LSDlibrae, solidi, denarii – used for the pounds, shillings and pence of the original duodecimal currency system. Libra was the basic Roman unit of weight, which in turn derived from the Latin word for scales or balance. The ISO 4217 currency code is GBP (Great Britain Pound). Occasionally the abbreviation UKP is seen, but this is incorrect. The Crown Dependencies use their own (non-ISO) codes when they wish to reflect their distinctiveness. Stocks are often traded in pence, so traders may refer to pence sterling or GBX when listing stock prices.

The pound sterling is the fourth most traded currency in the world, after the US dollar, the euro and the yen.

Contents

Subdivisions

Since decimalisation in 1971, the pound has been divided into 100 pence (singular 'penny'). The symbol for the penny is "p"; hence an amount such as 50p (£0.50) is usually pronounced "fifty pee" rather than "fifty pence". (This also helped to distinguish between new and old pence amounts during the changeover to the decimal system).

Prior to decimalisation, the pound was divided into twenty shillings, with each shilling equal to twelve pence, making a total of 240 pence to the pound. The symbol for the shilling was '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 French word denier (sum of money), which in turn was from the Latin word denarius (the solidus and denarius were Roman coins). A mixed sum of shillings and pence such as "two shillings and sixpence" would be written as "2/6" or "2s 6d" and spoken as "two and six". Five shillings would be written as "5s" or, more commonly, "5/-". At the time of decimalisation, the smallest unit was the penny, although smaller value coins had been minted in years past.

After Decimal Day, the value of the pound remained unchanged, but it was now divided into 100 pence rather than 240 pence. Each decimal penny was therefore worth 2.4 pre-decimal pence. For the first few years after 1971, the decimal penny was commonly referred to as a 'new penny'. Coins for denominations of ½p, 1p, 2p, 5p, 10p and 50p all bore the inscription NEW PENCE (or NEW PENNY) until 1982, when the inscription changed to HALF PENNY, ONE PENNY, TWO PENCE, FIVE PENCE and so on. The old 1 shilling ("1/-") and 2 shillings ("2/-", florin) coins were equivalent in value to 5p and 10p respectively, and as such remained valid within the decimal system until the 5p and 10p coins were replaced by smaller versions in the early 1990s. The old sixpence also remained in circulation, with a value of 2½p, until it was withdrawn from circulation and demonetised in 1980.

Legal tender and regional issues

Pound coin
Obverse Reverse
File:1pound2000front.jpg File:1pound2000back.jpg
One-pound coin (2000, Welsh design)

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 should be accepted in payment of a debt. In Scotland and Northern Ireland, no banknotes are legal tender, and each bank which issues banknotes does so in the form of its own promissory notes. In the Channel Islands and Isle of Man the local variations on the banknotes are legal tender in their respective jurisdiction.

Scottish, Northern Irish, Channel Islands and Manx notes are sometimes rejected by shops when used in England as they are not legal tender. Scottish and Northern Irish notes' designs are also different from the English notes' designs.

Northern Irish notes may be printed by the Bank of Ireland — mistaken by many English shops for the obdolete Irish pound, even though they say "Sterling" and are regularly accepted as such in Northern Ireland. Other Northern Irish pound sterling notes include those issued by the First Trust Bank, the Northern Bank and the Ulster Bank.

Scottish bank notes are issued by The Bank of Scotland, The Royal Bank of Scotland and The Clydesdale Bank.

The UK 1 pound coin also has many varied designs on the reverse side, which differ from year to year with new designs appearing; however, all of these are Royal Mint coins and of equivalent legality. The Channel Islands (including Alderney) and the Isle of Man issue their own coinage.

The nature of legal tender is even more restricted in Scotland — only Royal Mint coins are legal tender in the UK, and even then the use of smaller coins is limited (the five and ten pence coins are only legal tender to a value of 5 pounds, for example). However, 1 and 2 pound coins are legal tender to an indefinite amount. This was not always the case, as during World War II the Scottish banknotes were made legal tender by the Currency (Defence) Act 1939; this status was withdrawn on January 1, 1946.

To complicate matters further, some notes of the Bank of England were until recently legal tender in Scotland and Northern Ireland. This status only applied to notes under a value of 5 pounds, so following the withdrawal of the Bank of England 1 Pound note in 1985, no circulating notes were covered by this clause.

All commonly circulating British coins are legal tender throughout the UK, as are the rarely seen 5 pound and 25 pence ("crown") coins. Several gold coins issued by the Mint are still legal tender, though, as they have a bullion value far greater than their face value, they are never used in circulation and tend to be kept by collectors.

The British Overseas Territories of Gibraltar, the island of Saint Helena, and the Falkland Islands also issue their own currencies, which are fixed to the value of sterling.

The countries using sterling or these currencies tied to sterling are known as sterling zone countries. During the late nineteenth to mid-twentieth centuries, a large number of British dominions and colonies were members of the sterling zone.

See : Sterling banknotes, Manx pound, Guernsey pound, Jersey pound, Gibraltarian pound, Falkland Islands pound, Saint Helenian pound

History

Before Sterling

  • 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

Sterling

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

The sterling was originally a name for a silver penny of 1/240 pound. Originally a silver penny had the purchasing power of slightly less than a modern 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.

The pound sterling, established in 1560–61 by Elizabeth I and her advisers, 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 in turn 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 has been 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 the United Kingdom, in common with many other countries, abandoned the standard after World War I in 1919. During this period, the pound had a gold value of US$4.87.

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 [1]. Although the UK decided against joining, some of the arguments [2] 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% 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% of all government spending.

In an attempt to resume stability, a variation on the gold standard was reintroduced in 1925, 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 21 September 1931, during the Great Depression, and sterling devalued 20%.

In common with all other world currencies, there is no longer any link to precious metals. The US dollar was the last to leave gold, in 1971. The pound was made fully convertible in 1946 as a condition for receiving a US loan of US$3.75 billion in the aftermath of World War II.

The pound sterling was used as the currency of many parts of the British Empire. As this became the Commonwealth of Nations, commonwealth countries introduced their own currencies such as the Australian pound and Irish pound. This evolved into the sterling zone where those currencies were pegged to sterling.

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 US dollar.

Under continuing economic pressure, and despite months of denials that it would do so, on 19 September 1949, the government devalued the pound by 30%, from US$4.03 to US$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% to US$2.41 in November 1967.

With the break down of the Bretton Woods system — not least because mainly British currency dealers had created a substantial eurodollar market which made the US dollar's gold standard harder for its government to maintain — the pound was floated in the early 1970s and so subject to a market valuation. The sterling zone effectively ended at this time when the majority of its members also chose to float freely against the pound and the dollar.

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 targeting 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. As of August, 2006 it had risen back to $1.91.

Decimalisation

For more information, see: Decimal Day.


Following the German mark

In 1988, Margaret Thatcher's Chancellor of the Exchequer Nigel Lawson decided that the pound should "shadow" the West German Deutsche Mark, with the unintended result of a rapid rise in inflation as the economy boomed due to inappropriately low interest rates. (For ideological reasons, the Conservative government declined to use alternative mechanisms to control the explosion of credit. Former Prime Minister Ted Heath referred to Lawson as a 'one club golfer.')

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 DM2.95. However, the country was forced to withdraw from the system on Black Wednesday (16 September 1992) as the exchange rate became unsustainable. Speculator George Soros famously made approximately US$1 billion from shorting the pound. This has led to naïve criticisms that he instigated the collapse when in fact the movement was all but inevitable.

Black Wednesday saw interest rates jump from 10%, to 12%, and then finally to 15% in a futile attempt to stop the pound from falling below the ERM limits. The exchange rate fell to DM2.20. Ultimately proponents of a lower GBP/DM exchange rate were vindicated as the cheaper pound encouraged exports and contributed to the economic prosperity of the 1990s.

Bank Negara Malaysia is reported to have suffered losses of more than US$4 billion from the devaluation of the pound.

Following inflation targets

In 1997, the newly-elected Labour government handed day-to-day control of interest rates to the Bank of England (a policy that had initially been proposed by the Liberal Democrats). The Bank is now responsible for setting its base rate of interest so as to keep inflation at exactly 2%. Should inflation be more than 1% above or below the target, the Governor of the Bank of England is required to write a letter to the UK's finance minister, the Chancellor of the Exchequer, explaining the reasons for this and the measures which will be taken to bring inflation back in line with the 2% target.

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

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

The idea of replacing the pound with the euro has been controversial with the British public because of its identity as a symbol of British nationalism[3]. In Scotland there is additional concern that the adoption of the euro would mean the end of regionally distinctive banknotes.

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. (This was an update to an original document published in 1998.)

Regarding the period 1750–1914 the document states: 'Although there was considerable year on year fluctuation in price levels prior to 1914 (reflecting the quality of the harvest, wars, etc.) there was not the long-term steady increase in prices associated with the period since 1945.' It goes on to say that 'Since 1945 prices have risen in every year with an aggregate rise of over 27 times.'

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 as high as 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.

Online currency tools

There is a tool [4] that provides a method to convert historic numbers of pounds (and shillings/pence) into their present-day equivalents, at the Economic History Services web site. It handles dates since 1264, though with a cautionary note about methodology.

Parliament also published a report that goes back to 1750.

Value against other currencies

The pound is now freely bought and sold on the foreign exchange markets around the world, and its value relative to other currencies 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.

Template:Exchange Rate

See also

References

  • Bank of England Banknotes FAQ. Retrieved on 2006-05-07.
  • The Perspective of the World, Vol III of Civilization and Capitalism, Fernand Braudel, 1984 ISBN 1-84212-289-4 (in French 1979).
  • 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 0-226-06587-1
  • The political pound: British investment overseas and exchange controls past-- and future? By John Brennan Published By Henderson Administration (1983) ISBN 0-9508735-0-0
  • Monetary History of the United States, 1867-1960 by Milton Friedman, Anna Jacobson Schwartz Published by Princeton University Press (1971) ISBN 0-691-00354-8
  • The international role of the pound sterling: Its benefits and costs to the United Kingdom By John Kevin Green
  • The Financial System in Nineteenth-Century Britain (The Victorian Archives Series, By Mary Poovey Published by Oxford University Press (2002) ISBN 0-19-515057-0
  • Rethinking our Centralized Monetary System: The Case for a System of Local Currencies By Lewis D. Solomon Published by Praeger Publishers (1996) ISBN 0-275-95376-9
  • Politics and the Pound: The Conservatives' Struggle With Sterling by Philip Stephens Trans-Atlantic Publications (1995) ISBN 0-333-63296-6
  • The European Monetary System: Developments and Perspectives (Occasional Paper, No. 73) by Horst Ungerer, Jouko J. Hauvonen Published by International Monetary Fund (1990) ISBN 1-55775-172-2
  • The floating pound sterling of the nineteen-thirties: An exploratory study By J. K Whitaker Dept. of the Treasury (1986)
  • World Currency Monitor Annual, 1976-1989: Pound Sterling : The Value of the British Pound Sterling in Foreign Terms Published by Mecklermedia (1990) ISBN 0-88736-543-4

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