The Pound Sterling reference article from the English Wikipedia on 24-Jul-2004
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Pound Sterling

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This article is about Sterling or Pound Sterling, the currency of the United Kingdom and its dependencies. For details of notes and coins, see:


The basic currency unit of Sterling is now the pound – hence Pound Sterling, which strictly speaking refers to the currency unit rather than the currency.

Table of contents
1 Introduction
2 Subdivisons
3 History
4 On the value of British money
5 See also

Introduction

The Standard ISO 4217 currency code is GBP (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.

Subdivisons

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 20 shillings, with each shilling equal to 12 pence. 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 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 referred to as a "new penny".

History

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

Middle Ages

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. 1.3g). King Offa of Mercia c. AD 790 introduced a silver penny of 22.5 grains (c. 1.5g). 240 of these were made from a measure of silver known as the Tower pound: apparently it nominally weighed 5400 grains (c. 349.9g). In 1526 the standard was changed to the troy pound of 5760 grains (373.242g).

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.

Silver coins of greater value were the the groat of 4 pennies, inspired by a French coin (since Edward I), and the shilling of 12 pennies i.e. 20 to the pound (introduced by Henry VII in 1510).

The gold standard

Sterling unofficially moved to the gold standard from silver in 1717 thanks to Sir Isaac Newton, who was Master of the Royal Mint, and the use of silver declined until the official adoption of the gold standard following the end of the Napoleonic Wars, in 1821. This lasted until Britain, in common with many other countries, abandoned the standard during World War I, in 1919. During this period, the pound was generally valued at around 4.9 US dollars.

Prior to World War I, the UK 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 pounds, mostly to the USA, with interest costing the country some 40% of all government spending.

In an attempt to resume stability, a variation on the gold standard was re-introduced 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 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 3.75 billion US dollars in the aftermath of World War II.

Following the US 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 September 19, 1949 the pound was devalued by 30%, from 4.03 dollars to 2.80 dollars. 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 pounds out of the country, until the restriction was lifted in 1970. The pound was eventually devalued by 14.3% to 2.41 dollars 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 dollars, and as a result the pound fell to 1.57 dollars, and the government decided it had to borrow 2.3 billion pounds from the IMF. At its lowest, the pound stood at just 1.05 dollars in February 1985.

Following the German Mark

In 1988, the Thatcher government 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 speculants 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% to 12%, and then to 15% 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 Blair 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.

The euro

As a member of the European Union, the UK has the option of adopting the euro as its currency. However the subject remains politically controversial, not least since the UK 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.

On the value of British money

In 1999 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 1998, where the value in 1974 was indexed at 100.

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 5.0, increasing to a peak of 16.0 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 9.6 in 1914 and peaked at 24.8 in 1920, before declining again to 15.5 in 1933 and 1934 – prices were only about three times higher than they had been 180 years earlier.

Inflation really kicked off during and after the Second World War – the index was 20.0 in 1940, 32.9 in 1950, 46.4 in 1960, 68.2 in 1970, 243.0 in 1980, 458.5 in 1990, and 592.3 in 1998.

See also