Pound sterling

From Example Problems
Jump to navigation Jump to search
GBP redirects here. For other uses, see GBP (disambiguation).
For details of notes and coins, see British coinage and British banknotes.
Pound coin
front back
File:1pound2000front.jpg File:1pound2000back.jpg
One-pound coin (2000, Welsh design)

The pound sterling is the official currency of the United Kingdom (UK). Informally it is often simply called the pound.

The sign for the pound is £ (or rarely just "L"). Both symbols derive from libra, the Latin word for "pound". The standard ISO 4217 currency code is GBP = Great Britain Pound. Occasionally the abbreviation UKP is seen, but it is incorrect.

The pound sterling is one of the world's most widely traded currencies, along with the United States dollar, the Japanese yen, the Australian Dollar and the euro.

In the UK, in order to distinguish the unit of currency from the unit of mass (see pound), and perhaps from other units of currency that have the same name (see pound (currency)), the formal term pound sterling or sometimes simply sterling is used. 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.


The various British coins: 1p, 2p, 5p, 10p, 20p, 50p, £1, £2
File:Irl gbp 5 front.jpg
5 £ front (Northern Bank)

One pound is divided into 100 pence, the singular of which is "penny". The symbol for the penny is "p"; hence an amount such as 50p is often pronounced "fifty pee" rather than "fifty pence".

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 French word denier, which in turn was from the Latin word denarius. (The solidus and denarius were Roman coins.) The multiples involved in the pre-decimal currency were such that amounts such as a pound or a shilling had many factors into which they could be exactly divided. However, as these monetary amounts decreased in spending power, and their subdivision therefore became a less important issue, it was decided instead to introduce decimal currency in order to simplify arithmetic.

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 (or NEW PENNY) until 1982, when the inscription changed to HALF PENNY, ONE PENNY, TWO PENCE, FIVE PENCE and so on. The old 1/ and 2/ coins were equivalent in value to 5p and 10p respectively, and as such these coins remained valid within the decimal system until the 5p and 10p coins were each later replaced with smaller versions in the early 1990s.

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 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. The single 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 further complicate matters, 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 English coins and those from outside the UK. An exchange commission may be charged if used at a bank or a large business.

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.

Current exchange rates for Pounds, Dollars and other currencies can be viewed here.


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 pound sterling, established in 156061 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 154351. 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 169496, 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 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 [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 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.

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).

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 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.

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.

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.

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.

Following the German mark

In 1988, Margaret Thatcher's Chancellor 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.

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 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.

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 at 2%. The target is symmetrical.

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.

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.

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).

The document shows that the value of the pound remained 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 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.

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 5764 grains (373.242 g).
  • See also Saxon pound


  • The Perpective of the World, Vol III of Civilization and Capitalism, Fernand Braudel, 1984 ISBN 1842122894 (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 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
  • 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)
  • World Currency Monitor Annual, 1976-1989: Pound Sterling : The Value of the British Pound Sterling in Foreign Terms Published by Mecklermedia (1990) ISBN 0887365434

See also

External links


ca:Lliura esterlina cy:Punt sterling da:Engelsk pund (møntenhed) de:Pfund Sterling es:Libra esterlina eo:Brita pundo fr:Livre sterling he:לירה שטרלינג id:Pound sterling it:Sterlina inglese nl:Pond Sterling ja:UKポンド no:Britisk pund pl:Funt brytyjski pt:Libra esterlina ro:Liră sterlină ru:Фунт стерлингов sl:Funt šterling fi:Englannin punta th:ปอนด์สเตอร์ลิง zh:英镑