The pound sterling (symbol: £; ISO code: GBP), subdivided into 100 pence (singular: penny), is the currency of the United Kingdom, its Crown dependencies (the Isle of Man and the Channel Islands) and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and British Indian Ocean Territory.^[1][2][3]

This article covers the history of sterling and the issues of sterling in England, Great Britain and the United Kingdom. For other associated issues see Manx pound, Jersey pound and Guernsey pound. The Gibraltar pound, Falkland Islands pound and Saint Helenian pound are separate currencies, pegged to pound sterling. Sterling currently makes up the third-largest portion of global currency reserves, after the US dollar and the euro^[4] The pound sterling is the fourth-most-traded currency in the foreign exchange market after the US dollar, the euro, and the Japanese yen

Name

The full, official name pound sterling (plural: pounds 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. Otherwise the term pound is normally used. The currency name is sometimes abbreviated to just "sterling", particularly in the wholesale financial markets, but not in amounts; so "payment accepted in sterling" but never "that costs five sterling". The abbreviations "ster." or "stg." are sometimes used. The term British pound is commonly used in less formal contexts, although it is not an official name of the currency. A common slang term is quid (plural quid).

The currency sign 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, derived from the Latin word for scales or balance. The ISO 4217 currency code is GBP (Great Britain pound). Occasionally the abbreviation UKP is used but this is incorrect. The Crown dependencies use their own (non-ISO) codes. Stocks are often traded in pence, so traders may refer to Pence sterling, GBX (sometimes GBp), when listing stock prices.

Anglo-Saxon

The origins of sterling lie in the reign of King Offa of Mercia, who introduced the silver penny. It copied the denarius of the new currency system of Charlemagne's Frankish Empire. As in the Carolingian system, 240 pennies weighed 1 pound (corresponding to Charlemagne's libra), with the shilling corresponding to Charlemagne's solidus and equal to 12d. At the time of the penny's introduction, it weighed 22.5 troy grains of fine silver (30 tower grains)(c. 1.5 g), indicating that the Mercian pound weighed 5400 troy grains (the Mercian pound became the basis of the Tower Pound, which weighed 5,400 Troy grains, equivalent to 7200 tower grains). At this time, the name sterling had yet to be acquired. The penny swiftly spread throughout the other Anglo-Saxon kingdoms and became the standard coin of what was to become England.

Medieval

The early pennies were struck from fine silver (as pure as was available). However, in 1158, a new coinage was introduced by King Henry II (known as the Tealby penny) which was struck from .925 silver. This became the standard until the 20th century and is today known as sterling silver, named after its association with the currency. Sterling silver is harder than the fine silver that was traditionally used and so sterling silver coins did not wear down as rapidly as fine silver coins. The English currency was almost exclusively silver until 1344, when the gold noble was successfully introduced into circulation. However, silver remained the legal basis for sterling until 1816. In the reign of Henry IV (1412-1421), the penny was reduced in weight to 15 grains of silver, with a further reduction to 12 grains in 1464.

Tudor

During the reigns of Henry VIII and Edward VI, the silver coinage was drastically debased, although the pound was redefined to the troy pound of 5760 grains in 1526. In 1544, a silver coinage was issued containing just one third silver and two thirds copper. In 1552, a new silver coinage was introduced, struck in sterling silver. However, the penny's weight was reduced to 8 grains, meaning that 1 troy pound of sterling silver produced 60 shillings of coins. This silver standard was known as the "60-shilling standard" and lasted until 1601 when a "62-shilling standard" was introduced, reducing the penny's weight to 7 ²³â�„₃₁ grains. Throughout this period, the size and value of the gold coinage fluctuated considerably.

Expanding to Scotland

In 1603, the crowns of England and Scotland were joined but the governments and currencies remained separate. The pound scots, which had begun equal to sterling but had suffered far higher devaluation, was pegged to sterling at a value of 12 pounds scots = 1 pound sterling. In 1707, with the union of the two kingdoms to form Great Britain, the pound scots was replaced by sterling at the same value.

Unofficial gold standard

In 1663, a new gold coinage was introduced based on the 22 carat fine guinea. Fixed in weight at 44½ to the troy pound from 1670, this coin's value varied considerably until 1717, when it was fixed at 21/-. However, despite the efforts of Sir Isaac Newton, Master of the Mint, to reduce the guinea's value, this valuation overvalued gold relative to silver when compared to the valuations in other European countries. British merchants sent silver abroad in payments whilst goods for export were paid for with gold. As a consequence, silver flowed out of the country and gold flowed in, leading to a situation where Great Britain was effectively on a gold standard. In addition, a chronic shortage of silver coins developed.

Establishment of a modern currency

The Bank of England was formed in 1694, followed by the Bank of Scotland a year later. Both began to issue paper money, with the issues of the Bank of England gaining greater importance after 1707. During the Revolutionary and Napoleonic wars, Bank of England notes were legal tender and their value floated relative to gold. The Bank also issued silver tokens to alleviate the shortage of silver coins. The gold standard

In 1816, the gold standard was adopted officially, with the silver standard reduced to 66/-, rendering silver coins a "token" issue (i.e., not containing their value in precious metal). In 1817, the sovereign was introduced. Struck in 22-carat gold, it contained 113 grains of gold and replaced the guinea as the standard British gold coin without changing the gold standard. In 1825, the Irish pound, which had been pegged to sterling since 1701 at a rate of 13 pounds Irish = 12 pounds sterling, was replaced, at the same rate, with sterling.

During the 19th and early 20th centuries, many other countries adopted the gold standard. As a consequence, conversion rates between different currencies could be determined simply from the respective gold standards. The pound sterling was equal to 4.886 U.S. dollars, 25.22 French francs (or equivalent currencies in the Latin Monetary Union), 20.43 German Marks or 24.02 Austro-Hungarian Krones. 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,^[5] resulting in a decision against joining monetary union.

The gold standard was suspended at the outbreak of the war, with Bank of England and Treasury notes becoming legal tender. 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 fixed to gold at its pre-war peg, 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 suffered an initial devaluation of some 25%.^[6]

The free-floating pound

With the breakdown 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 became subject to a market appreciation. 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 $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 1980's 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 $1.05 in February 1985, before returning to the US$2 level in the early 1990s.

Following the Deutsche 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 Edward Heath referred to Lawson as a "one club golfer".)

Following the European currency unit

On 8 October 1990 the Conservative 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 Britain’s economic performance made the exchange rate unsustainable. Speculator George Soros famously made approximately US$1 billion from shorting the pound.

Black Wednesday saw interest rates jump from 10% to 15% in an unsuccessful attempt to stop the pound from falling below the ERM limits. The exchange rate fell to DM2.20. 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. Since early 2005, the £/€ rate has returned to an average of about £1.00:€1.46, which is equivalent to DM2.85.

Following inflation targets

In 1997, the newly-elected Labour government handed over day-to-day control of interest rates to the Bank of England (a policy that had originally been advocated by the Liberal Democrats). The Bank is now responsible for setting its base rate of interest so as to keep inflation in the consumer price index very close to 2%. Should CPI inflation be more than one percentage point above or below the target, the governor of the Bank of England is required to write an open letter to the Chancellor of the Exchequer explaining the reasons for this and the measures which will be taken to bring this measure of inflation back in line with the 2% target. On 17 April 2007, CPI inflation was reported at 3.1% (inflation of the retail price index was 4.8%). Accordingly, and for the first time, the Governor had to write publicly to the government explaining why inflation was more than one percentage point higher than its target.^[7]

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), having entered the system at the wrong fixed exchange rate. The Prime Minister, Gordon Brown, when Chancellor of the Exchequer ruled out membership for the foreseeable future, saying that the decision not to join had been right for Britain and for Europe^[8].

The government of former Prime Minister Tony Blair had pledged to hold a public referendum for deciding membership should "five economic tests" be met to ensure that adoption of the euro would be in the national interest. In addition to this own internal (national) criteria, the UK has to meet the EU's economic convergence criteria (Maastricht criteria), before being allowed to adopt the euro. Currently, the UK's annual government deficit to the GDP is above the defined threshold. In February 2005, 55% of the UK were against adopting the currency, with 30% in favour.^[9] 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 sovereignty^[10] and because it would, according to some critics, lead to suboptimal interest rates, harming the British economy.

The pound did not join the Second European Exchange Rate Mechanism (ERM II) after the euro was created. Denmark and the UK have unique opt-outs 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 Scottish Conservative Party claims that there is an issue in Scotland that the adoption of the euro would mean the end of regionally distinctive banknotes, as the European Central Bank do not permit national or sub-national designs of the banknotes.^[11] The Scottish National Party does not see this as a significant issue^{[citation needed]}, since an independent Scotland would have nationally distinctive coins, and its party policy includes entry into the single currency.

On 1 January 2008 the British sovereign bases on Cyprus (Akrotiri and Dhekelia) began using the euro (along with the rest of the Republic of Cyprus).^[12]

Current strength

Although the pound and euro are not fixed to one another, there are often long periods where they move together, although since the middle of 2006 this correlation has weakened. Inflation concerns in the UK led the Bank of England to hike interest rates in late 2006 and during 2007, causing sterling to rise to its highest rate against the euro since January 2003. This has had a knock on effect versus other major currencies, and the pound hit a 15-year high against the US dollar on April 18, 2007, having gone through the US$2 level for the first time since 1992 the day before.^[13] Since then the pound has continued to strengthen against the dollar, as have many other world currencies, and hit a 26-year high of $2.11610 on November 07, 2007. However, since late 2007 the pound began to weaken considerably against the euro, albeit less sharply then the dollar, falling below the 1.30 border for the first time in March 2008^[14].

On the value of British money

In 2006 the House of Commons Library published a document^[16] which included an index of the value of the pound for each year between 1750 and 2005, where the value in 1974 was indexed at 100. (This was an update of earlier documents published in 1998 and 2003.)

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 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 World War II”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 757.3 in 2005.

Value against other currencies

The pound is 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 base currency unit in the world. On 9 March 2008, £1 was worth US$2.01 or 1.31.

• 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.

The pound as a major international reserve currency

Sterling is used as a reserve currency around the world and is presently ranked third in amount held as reserves. The percentage which pounds make up of total reserves has increased over recent years, due in part to the stability of the British economy and government, gradual increase in value against many currencies and relatively high interest rates compared to other major currencies such as the dollar, euro and yen.

Currency composition of official foreign exchange reserves

	'95	'96	'97	'98	'99	'00	'01	'02	'03	'04	'05	'06	'07*
US dollar	59.0%	62.1%	65.2%	69.3%	70.9%	70.5%	70.7%	66.5%	65.8%	65.9%	66.4%	65.7%	64.6%
Euro					17.9%	18.8%	19.8%	24.2%	25.3%	24.9%	24.3%	25.2%	25.8%
German mark	15.8%	14.7%	14.5%	13.8%
Pound sterling	2.1%	2.7%	2.6%	2.7%	2.9%	2.8%	2.7%	2.9%	2.6%	3.3%	3.6%	4.2%	4.2%
Japanese yen	6.8%	6.7%	5.8%	6.2%	6.4%	6.3%	5.2%	4.5%	4.1%	3.9%	3.7%	3.2%	2.8%
French franc	2.4%	1.8%	1.4%	1.6%
Swiss franc	0.3%	0.2%	0.4%	0.3%	0.2%	0.3%	0.3%	0.4%	0.2%	0.2%	0.1%	0.2%	0.2%
Other	13.6%	11.7%	10.2%	6.1%	1.6%	1.4%	1.2%	1.4%	1.9%	1.8%	1.9%	1.5%	2.0%
	Sources: 1995-1999, 2006-2007 IMF: Currency Composition of Official Foreign Exchange ReservesPDF (84 KB) Sources: 1999-2005, ECB: The Accumulation of Foreign ReservesPDF (816 KB)           v â€¢ d â€¢ e       *Q1-Q3 only.

External links

• Don's World Coin Gallery - Great Britain
• The Global History of Currencies - United Kingdom
• Global Financial Data currency histories table
• (German) Chart: British Pound in Dollar
• (German) Chart: British Pound in Euro
• A history of sterling Daily Telegraph
• Purchasing Power of British Pounds from 1264 to 2005
• Five Ways to Compute the Relative Value of a UK Pound Amount, 1830 - 2005