Pound sterling
The
pound (symbol: £; banking code: GBP), divided into 100
pence, is the official
currency of the
United Kingdom (UK). The term
British pound is also used when it is necessary to distinguish the unit of currency from
others that have the same name. The
slang term "
quid" is very common in the UK.
The term
pound sterling is used mainly in formal contexts. The currency in general is sometimes called just "sterling" (for example, "payment must be in sterling"), although in legal terms this interchangeably refers to any of the currencies within the
sterling zone such as the
Jersey pound (c.f.
Decimal Currency (Jersey) Law, 1971). The abbreviations "ster." or "stg." are sometimes used.
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
LSD –
librae, 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. Stocks are often traded in pence, so traders may refer to
Pence sterling or
GBX when listing stock prices.
The pound sterling is one of the world's most widely traded currencies, along with the
United States dollar, the
euro, and the
Japanese yen.
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".
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 six pence" 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 one shilling ("1/‐") and two 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 withdrawn in 1980.
|
 | A £10 Bank of England note. |
 | A £20 Bank of England note. |
|
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. Scottish and Northern Irish notes are sometimes rejected by shops when used in England. 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 former
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. The one 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 nature of legal tender is even more restricted in Scotland — only Royal Mint coins are legal tender, and even then the use of smaller coins is limited (the five and ten pence coins are only legal tender to a value of five pounds, for example). However, one and two 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 five pounds, so following the withdrawal of the Bank of England one 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 five pound and twenty‐five 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.
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, or are sometimes accepted unknowingly — for example, many vending machines cannot distinguish between British coins and those from outside the UK. An exchange commission may be charged if used at a bank or a large business.
Such currencies tied to the pound sterling are known as
sterling zone currencies. During the late nineteenth to mid-twentieth centuries, a large number of British dominions and colonies were members of the sterling zone.
See : British banknotes, Isle of Man pound, Guernsey pound, Jersey pound, Gibraltar pound, Falkland Islands pound, Saint Helenian poundBefore 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 poundSterling
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 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 [
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
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%.
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.
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 Area 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
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%, 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 U.S. 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 Area 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
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 (
September 16,
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 pound devaluation.
Following inflation targets
In
1997, the newly-elected
Labour government made a surprising move when
Gordon Brown handed over 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
Chancellor of the Exchequer explaining the reasons for this and the measures which will be taken to bring inflation back in line with the 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 nation 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 is unpopular with the British public, while the proprietors of the popular press also oppose such a change. Without an extensive pro-euro publicity campaign this is expected to remain the case for many years to come.
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.
External links
There is a tool [
3] 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.
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.
* Historical exchange rates (since 1990) are given in
Exchange rates section of the
Economy of the United Kingdom entry.
* Current wholesale exchange rates between sterling and other currencies can be viewed
here.
*
Bank of Scotland*
UK topics*
Table of historical exchange rates against the US Dollar*
Legal tender*
Economy of the United Kingdom**
Economic history of Great Britain*
Irish pound*
Bank of England*
Chart: British Pound in Dollar*
Chart: British Pound in Euro*
A history of sterling Daily Telegraph
*
Historical British Pound Conversion
