Pound Sterling- GBP

The pound sterling, also called the pound, is the legal tender 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 Tristan da Cunha.

The pound is denoted by symbol £ and its code in foreign exchange market is GBP.

A pound is subdivided into 100 pence (singular: penny).  There are number of countries that do not the sterling but have currencies called pound.

The Channel Islands, which include Bailiwick of Guernsey and the Bailiwick of Jersey and the Isle of Man, circulate their own local issues of sterling such as the Guernsey pound, Jersey pound and Manx pound. Some other territories that use their own version of pound alongside the pound sterling include: Gibraltar (Gibraltar pound), the Falkland Islands (Falkland pound) and Saint Helena and Ascension (Saint Helena pound).

Pounds used in all three islands, (Gibraltar, Falkland Islands and Saint Helena) are all separate currencies that are pegged at parity to the pound sterling. In the UK, some banks having operations in Scotland and Northern Ireland make private sterling denominated banknotes.

In the foreign exchange market, the sterling is most traded currency following the U.S. dollar, euro, and Japanese yen. The sterling is also third most favored reserve currency of the global reserves. The sterling along with three other most traded currencies (USD, euro and yen) forms a basket of currencies which evaluate the value of IMF special drawing rights, with an 11.3% (GBP) weighting as of 2011 (USD 41.9 %, Euro 37.4 %, Yen 9.4 %).

Names

In official context, it is called by its full name – pound sterling- to make easier differentiating the United Kingdom pound from other pounds in the foreign exchange market.

The currency name is at times abridged to just sterling, mainly in the wholesale financial markets, but not when referring to certain amount; for instance, we can hear people saying “Payment is accepted in sterling” but never get to hear “This costs five sterling”.

In addition to GBP, abbreviations such as “ster” or “stg” are also used, and the abbreviations “ster.” or “stg.” are sometimes used. The term British pound is also frequently used in less formal contexts, although it is not an official name of the currency.

A slang term for Pound sterling is quid, which is singular and plural.  The origin of this term is not known, however the general belief is that it was derived from the Latin ‘quid’ and widely speculated to come from the Latin phrase quid pro quo, which means “something for something.”

There is some ambiguity as to the origin of the term “pound sterling”. According to one source, it origin dates back to Anglo-Saxon times, when coins dubbed as sterlings were minted from silver; 240 of these sterlings weighed one pound. So in case of large payments were made, people used to refer it as “pounds of sterlings”

Some other references, including the Oxford English Dictionary, point out that sterling was a silver penny used in England by the Normans, dating back to 1300.

The pound sterling’s sign is (£), which is generally written with a single cross-bar, as on sterling bank notes, though a double cross-bar (₤)  version is also occasionally seen. The pound sign originated from the black-letter “L”, an acronym of Librae in Roman £sd units (librae, solidi, denarii) used for pounds, shillings and pence in the British pre-decimal duodecimal currency system. Libra was the basic Roman unit of weight, coming from the Latin word for scales or balance.

Pound sterling’s ISO 4217 currency code is GBP. Occasionally, the abbreviation UKP is also used, although this is incorrect as the ISO 3166 country code for (the United Kingdom of) Great Britain and Northern Ireland is GB.

The Crown dependencies have their own (non-ISO) codes: GGP (Guernsey pound), JEP (Jersey pound) and IMP (Isle of Man pound).  As stocks are often traded in pence, traders may refer it as pence sterling, GBX (sometimes GBp) when stocks are listed.

The Sterling Area

The sterling area was formed following the outbreak of World War II as a wartime emergency measure. The sterling area prompted cooperation in exchange control measures between a group of countries which at the time were generally dominions and colonies of the British Empire (later the Commonwealth). These countries either issued sterling as their currency, alternatively their own currency was pegged to the British pound; besides member countries with their independent currency kept large sterling balances in London for the purposes of conducting international trade. The objective of the sterling area was to guard the external value of the pound sterling. All of the British Empire, apart from for Canada, Newfoundland and Hong Kong merged with the sterling area in 1939.

The importance of the sterling area was gravely reduced in June 1972 when the British government (in consultation with the Irish, Manx, and Channel Islands governments) unilaterally created exchange controls to the other sterling area countries with the exception of Ireland, the Isle of Man and the Channel Islands.

The sterling area did not formally cease to exist on an exact date, but vanished in phases between June 1972 and 1979. Ireland took the decision itself to impose exchange controls on the UK in 1978 and, in 1979, the British government totally lifted all of the 1939 exchange controls.

Purpose and Benefits of Sterling Area

Prior to the First World War, the British pound sterling was by far the most popular international currency, and the City of London was by far the world’s most famous financial centre. More than 60% of international trade was financed, invoiced and settled in sterling, and the largest proportion of official reserves, apart from gold, was kept in sterling. Although not all the territories within the British Empire used sterling as their local currency, many among them pegged their local currency at a fixed rate to sterling, as well as many foreign countries outside the Empire.

Following Britain’s exit from the gold standard in 1931, many countries that had pegged their currencies to gold pegged their currencies to sterling as an alternative; this group of countries became known as the “sterling bloc”. While the Second World War broke out, the sterling bloc countries within the British Empire shared a desire to guard the external value of sterling; legislation was thus passed throughout the Empire formalizing the British sterling bloc countries into a single exchange control area.

The benefits of the sterling area

Following the end of the Second World War, the sterling area was the biggest and most stable currency bloc in the world, and it offered its members with full freedom of payments. Members benefitted from the stable exchange rates and assured access to the financial resources of the City of London. In the meantime, the British government was able to use the collected reserves of the entire area’s membership to support sterling at times when there was a US dollar shortage.

Subdivisions and Other Units

Decimal coinage

After the decimalization in 1971, the pound was divided into 100 pence (until 1981 illustrated on the coinage as “new pence”). The sign for the penny is “p”; therefore an amount such as 50p (£0.50) correctly pronounced “fifty pence” is more informally, fairly regularly, pronounced “fifty pee”.

The new symbol helped distinguishing between new and old pence amounts during the switch over to the decimal system.  Until 1984, a decimal halfpenny was issued.

Prior to decimalization, the pound was divided into 20 shillings with each shilling divided into 12 pence, making 240 pence to the pound. The sign used to denote a shilling was “s”— not from the initial letter of the word, but from the Latin solidus.

A penny was denoted by a symbol “d.”, from the French denier and from the Latin denarius (both solidus and denarius were Roman coins). An assorted amount of shillings and pence, such as 3 shillings and 6 pence, was written as “3/6” or “3s. 6d.” and spoken as “three and six” (except for “1/1,” “2/1” etc., which were spoken as “one and a penny,” “two and a penny,” etc.). 5 shillings were denoted as “5s.” or, more commonly, “5/-“. The stroke (/) indicating shillings is also known as a solidus and was initially an adaptation of the long s which symbolized that word.

A range of coin denominations had, and in some cases continue to have, unique names—such as crown, farthing, sovereign and guinea.

In the 1950s, coins of George III, George IV and William IV had vanished from circulation; except for coins (at least the penny) depicting the head of any British king or queen from Queen Victoria onwards could be found circulating in the monetary system.

Silver coins were substituted by those in cupro-nickel in 1947 and by the 1960s the silver coins were hardly in circulation. Silver/cupro-nickel shillings (from any period after 1816) and florins (2 shillings) continued as the official currency after decimalization (as 5p and 10p respectively); the sixpences of 1816 remained legal tender until 1980 (as two and a half new pence).

History of pound sterling

Pound sterling is one of the oldest currencies used to date.

The pound was the unit of account in Anglo-Saxon England, comparable to 240 silver pennies and equivalent to one pound weight of silver. Later it evolved into the modern British currency, the pound sterling.

The accounting structure of 4 farthings = 1 penny, 12 pence = 1 shilling, 20 shillings = 1 pound was adopted after Charlemagne introduced it to the Frankish Empire.

The foundation of sterling dates back to the period of King Offa of Mercia, (757–96) who introduced the silver penny. It imitated the denarius of the new currency structure of Charlemagne’s Frankish Empire.  Similar to the Carolingian system, 240 pennies weighed 1 pound (equivalent to Charlemagne’s libra), with the shilling equivalent to Charlemagne’s solidus and equal to 12d.

When the penny was introduced, it weighed 22.5 troy grains of fine silver (32 tower grains is approximately 1.5 g), indicating that the Mercian pound weighed 5,400 troy grains (the Mercian pound became the foundation of the tower pound, which weighed 5,400 troy grains, equivalent to 7,680 tower grains). At this moment, the name sterling had not yet emerged. The penny rapidly reached throughout the other Anglo-Saxon kingdoms and turned into the standard coin of what was to become England.

Medieval

In earlier times, pennies were socked from fine silver (as uncontaminated as was obtainable). Nevertheless, in 1158, King Henry II, introduced a new coinage (called as the Tealby penny) which was socked from 0.925 (92.5%) silver.

This standard was maintained until the 20th century and is today called as sterling silver, named after its association with the currency. Sterling silver is harder than the 0.999 (99.9%) fine silver that was usually used; and, therefore, sterling silver coins did not corroded as quickly as fine silver coins. The English currency was roughly made of entire silver until 1344, when the gold noble was successfully introduced into circulation.

Nonetheless, silver continued as the legal basis for sterling until 1816. During the reign  of Henry IV (1399–1413), the penny ‘s  weight was reduced  to 15 grains (0.97 g) of silver, with a further reduction to 12 grains (0.78 g) in 1464.

Tudor

Throughout the reigning period of Henry VIII and Edward VI the silver coinage was considerably debased, even though the pound was redefined to the troy pound of 5,760 grains (373 g) in 1526. In 1544, a silver coinage was circulated having just one third silver and two thirds copper—equating to .333 silver, or 33.3% pure. The end result was a coin copper in exterior, but moderately pale in color. Then in 1552, a new silver coinage was introduced, socked in sterling silver. However, the penny’s weight went down to 8 grains (0.52 g), indicating that 1 troy pound of sterling silver represented 60 shillings of coins. This silver standard was called as the “60-shilling standard” and remained until 1601 when a “62-shilling standard” was established, reducing the penny’s weight to 7 ²³⁄₃₁ grains (0.50 g).

Throughout this period, the size and value of the gold coinage fluctuated considerably.

Unofficial gold standard

Later in 1663, a new gold coinage was introduced based on the 22 carat fine guinea. The weight of the coinage was fixed at 44½ to the troy pound, then from 1670, this coin’s value differed greatly until 1717, when it was fixed at 21 shillings (21/-, 1.05 pounds).

Nevertheless, in spite of the efforts of Sir Isaac Newton, Master of the Mint, to decrease the guinea’s value, this valuation overvalued gold relative to silver when measured up to the valuations in other European countries.

While British merchants used to send silver in the foreign markets for payments, goods for export were paid for with gold. As a result, silver flowed out of the country and gold flooded in, which in turn led  to a situation where Great Britain was effectively on a gold standard.  Furthermore, an unceasing shortage of silver coins developed. This scarcity was further increased by the fact that silver was the only commodity acknowledged by China for exporting goods during this period. From the mid-17th century, roughly 28 million kilograms (62 million pounds) of silver was received by China, primarily from European powers, in return for Chinese goods.

Establishment of modern currency

The Bank of England was established in 1694, followed by the Bank of Scotland a year after. Both banks began to issue paper money.

Currency of the United Kingdom

At the beginning, the pound scots traded at par to sterling but later it suffered far higher devaluation. Consequently, the pound scots was pegged to sterling at a value of 12 pounds scots = 1 pound sterling. In 1707, the Kingdom of England and the Kingdom of Scotland merged to form the Kingdom of Great Britain.  According to the new treaty, known as the Treaty of Union, the currency of the ‘united kingdom’ was sterling with the pound scots being replaced by sterling at the pegged value.

In January 1826, the Irish pound was also replaced by sterling at the value 13 Irish pounds = 12 pound sterling.

Gold standard

During the period of the revolutionary and Napoleonic wars, Bank of England notes were official currencies and their value floated relative to gold. The Bank also circulated silver tokens to ease the shortage of silver coins. In 1816, the gold standard was implemented formally, with the silver standard reduced to 66 shillings (66/-, £3 6s), rendering silver coins a “token” issue (i.e., not containing their value in precious metal).

In 1817, the sovereign was introduced which was valued at 20 shillings. Socked in 22‑carat gold, it had 113 grains (7.3 g) 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 1801 at a rate of 13 Irish pounds = 12 pounds sterling, was changed, at the same rate, with sterling.

Between the late 19th and early 20th centuries, many other countries accepted the gold standard. As a result, conversion rates between different currencies were easily determined from the varied gold standards. The pound sterling  traded equivalent to 4.85 U.S. dollars, 5.25 Canadian dollars, 12.10 Dutch guilders, 26.28 French francs (or equivalent currencies in the Latin Monetary Union), 20.43 German Marks or 24.02 Austro-Hungarian Krones.

Following the International Monetary Conference of 1867 in Paris, speculation was doing the rounds that United Kingdom will possibly join the Latin Monetary Union. However, after Royal Commission on international coinage examined the issue, the possibility of entering the Monetary Union faded.

The gold standard was temporarily halted at the outbreak of the war in 1914, with Bank of England and Treasury notes becoming official exchange. Prior to World War I, the United Kingdom was considered as one of the world’s strongest economies, holding 40% of the world’s overseas investments. However, by the end of the world war, the country owed £850 million (£30.7 billion as of 2012) mostly to the United States, with interest payables totaling to some 40% of all government spending.

In an effort to start again with stability, a deviation from the earlier gold standard was reintroduced in 1925, under which the currency was fixed to gold at its pre-war peg, even though people were only allowed to exchange their currency for gold bullion, rather than for coins. This system was discontinued on September 21, 1931, during the Great Depression, and sterling had to be devalued by 25%.

Use in the Empire

The Sterling was circulated virtually in every part of the British Empire.  However, in some parts, it was used together with local currencies. For instance, while Canada used the Canadian dollar, the sovereign was a legal tender over there.  There were many colonies and dominions that adopted the pound as their own currency.

Those colonies that adopted pound included: Australia, Barbados, British West Africa, Cyprus, Fiji, the Irish Free State, Jamaica, New Zealand, South Africa and Southern Rhodesia.

Whereas some of these local pounds retained parity with sterling throughout their existence (e.g. the South African pound), others diverged from parity after the end of the gold standard (e.g. the Australian pound).  All these currencies and others pegged to sterling made up the Sterling Area.

Bretton Woods

In 1940, an accord with the U.S.A. pegged the pound to the U.S. dollar at a rate of £1 = $4.03. (a year earlier a pound traded at  $4.86).  This rate was continued throughout the Second World War and became part of the Bretton Woods system which administered post-war exchange rates. Under ongoing financial pressure and despite months of refusals to do so, on September 19, 1949 the government devalued the pound by 30.5% to $2.80. The move forced many other currencies to be devalued against the dollar.

Later in 1961, 1964 and 1966, the pound came under renewed pressure as the exchange rate against the dollar was regarded as too high. Then during the summer of 1966, with the value of the pound dropping in the currency markets, exchange controls were made tighter by the Wilson government.

Some of the measures included: a ban on taking more than £5 by tourists out of the country; later in 1979, the restrictions were lifted.  The pound was ultimately devalued by 14.3% to $2.40 on 18 November 1967.

Decimalization

On 15 February 1971, the UK’s currency system was decimalized.  Both shilling and penny were replaced with a single subdivision, the new penny.  From 1981 onwards, the word “new” from coins was omitted.

Free-floating pound

After the collapse of the Bretton Woods system, the pound floated from August 1971 onwards. Shortly after the float, the currency appreciated a little, climbing to almost $2.65 in March 1972, down from 2.42- a rate which was initially fixed at the time of the float. Subsequently, the Sterling Area also ended the currency peg as most countries choose to float their currencies against the dollar and the pound.

1976 sterling crisis

In 1976, James Callaghan came to power. After joining the office, he was immediately cautioned that the economy was facing huge problems, according to documents released in 2006 by the National Archives. Following 1973 oil crisis, after effects were still being felt, with inflation rising above 27% in 1975. There were widespread fears in the financial markets the pound was overvalued and in April of that year The Wall Street Journal recommended the sale of sterling investments in a story titled “Good-bye Great Britain”.

While the UK government was running a high budget deficit at that time, the Labor party’ strategy emphasized high public spending. Callaghan was briefed there were three likely outcomes: a catastrophic free fall in Sterling, an internationally unacceptable cordoned economy or a deal with key allies to bolster the pound while painful economic reforms were put in place.

Meanwhile, the US government appreciated the crisis could jeopardize NATO and the EEC, and in light of this the US Treasury started to force domestic policy changes. In November 1976 the IMF announced the conditions for a loan, together with massive cuts in public expenditure.

1979–1989

In 1979, the Conservatives came to power, with an aim to follow fiscal austerity measures. Initially, the pound leaped, moving higher than the $2.40 level, as interest rates rose in reaction to the monetarist policy of targeting money supply. The pound’s high exchange rate was generally blamed for the deep recession of 1981. Sterling dropped sharply after 1980; at its lowest level, the pound touched $1.03 level in March 1985, before retreating to the US$1.70 level in December 1989.

Following the Deutsche Mark

Soon after 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 consequence of a swift rise in inflation as the economy performed strongly due to inappropriately low interest rates. (For ideological reasons, the Conservative Government refused to use other mechanisms to control the explosion of credit. For this reason, former Prime Minister Edward Heath dubbed Lawson as a “one club golfer”).

After the German re-unification in 1990, the opposite held true, as high borrowing costs to fund Eastern reconstruction, a need aggravated by the political choice to make the Ostmark equivalent to the Deutsche Mark (DM), meant rates in other countries shadowing the DM, particularly the UK, were far too high compared to domestic circumstances, leading to a housing decline and recession.

Following the European Currency Unit

On October 8, 1990 the Conservative government decided to join the European Exchange Rate Mechanism (ERM), with the pound set at DM2.95. However, the country was prompted to pull out from the system on “Black Wednesday” (September 16, 1992) as Britain’s economic performance made the exchange rate untenable.  Currency speculator George Soros famously made about US$1 billion from shorting the pound.

Following the ‘Black Wednesday’, interest rates climbed up from 10% to 15% amid an ineffective attempt to stop the pound from falling below the ERM limits. The exchange rate dropped to DM2.20. Those who argued in favor of a lower GBP/DM exchange rate were justified as the cheaper pound encouraged exports and contributed to the economic prosperity of the 1990s.

Following inflation targets

In 1997, the newly elected Labor government passed the day-to-day responsibility of controlling interest rates to the Bank of England (a policy that was earlier had been advocated by the Liberal Democrats).

The Bank is now in charge for setting its base rate of interest so as to maintain inflation in the Consumer Price Index (CPI) very close to 2%. In case of CPI inflation is more than one percentage point above or below the target, the governor of the Bank of England will need to write an open letter to the Chancellor of the Exchequer explaining the reasons for the variance and suggest actions needed to help bringing this measure of inflation back in line with the 2% target.

On April 17, 2007, CPI inflation stood at 3.1% and inflation of the Retail Prices Index was 4.8%) As a result, and for the first time, the Governor had to write publicly to the government explaining why inflation climbed up more than one percent over the target.

Euro

Since United Kingdom is the member of European Union, it can adopt euro as its official currency. However, this remains a politically contentious issue. Gordon Brown, then Chancellor of the Exchequer, ruled out entering the monetary union for the near future, saying that the decision not to join had been right for Britain and for Europe.

The government of former Prime Minister Tony Blair had vowed to hold a public referendum to decide on membership should “five economic tests” sufficed; ensuring that adoption of the euro would be in the national interest. Apart from these internal (national) criteria, the UK would have to meet the Eu’s “economic convergence criteria” (Maastricht criteria), before being permitted to adopt the euro.

Nevertheless, the Conservative/Liberal Democrat coalition ruled out entering the euro zone for the parliamentary term. At present, the UK’s annual government deficit, as a percentage of the GDP, is above the defined limit.

Back in February 2005, 55% of British citizens were against adopting the currency, with only 30% in favor of joining the euro zone. The proposal of substituting the pound with the euro has been controversial with the British public, mainly because of the pound’s identity as a symbol of British sovereignty. The other argument against joining the currency bloc is it would, according to critics, lead to suboptimal interest rates, hurting the British economy.

In December 2008 a poll conducted among 1000 people by the BBC showed that 71% were not in favor of euro, 23% said that they would vote yes to joining the European single currency, even as 6% said they were unsure. As result Britain refused to join the Second European Exchange Rate Mechanism (ERM II) after the Euro was created. Both Denmark and the UK have opted out from entering into the Euro. In principle, every other EU nation must sooner or later have to sign up.

The Scottish Conservative Party is also against entering the euro zone. For them there is a concern that the adoption of the Euro would almost mean an end of regionally distinctive banknotes, as the Euro banknotes do not have national designs.

The Scottish National Party have not so far established what the national currency of Scotland would be should independence be realized.

From January 1, 2008 onwards, the British sovereign bases on Cyprus (Akrotiri and Dhekelia) started using the Euro (together with the rest of the Republic of Cyprus).

Current Exchange value

Both pound and the Euro fluctuate against each another, even if there may be some correlation between price movements in their respective exchange rates with other currencies such as the US dollar. Inflation worries in the UK prompted the Bank of England to hike interest rates in late 2006 and 2007. As a consequence, the pound appreciated strongly against the basket of major currencies while the US dollar simultaneously depreciated. On April 18, 2007, the pound touched a 15 year high against the U.S. dollar, touching USD 2, for the first time since 1992.

The pound along with some other major currencies continued to appreciate against the dollar; sterling touched a 26-year high of US$ 2.1161 on November 7, 2007 as the dollar dropped worldwide. Between mid-2003 and mid 2007, the Pound/Euro rate stayed range bound (within ± 5%) of €1.45.

After the global financial crisis in late 2008, though, the pound has since tumbled at one of the fastest rates in history, touching $1.38 per £1 on January 23 2009 and falling below €1.25 against the Euro in April 2008. More downslide was seen during the remainder of 2008; most severely in December when its Euro rate touched an all-time low at €1.0219 (29th), even as its US dollar rate also declines.

Then in mid July of 2009, the Pound bounced back, reaching its highest level against the Euro at €1.17. In subsequent months the pound remained mainly steady against the Euro.

On March 5, 2009, the Bank of England had announced that they would infuse £75 billion of new capital into the British economy, through a procedure known as quantitative easing. In United Kingdom’s history this was first ever time where such a drastic measure was being used, even though the Bank’s Governor Mervyn King suggested it was not an experiment.

By employing this new measure, the Bank of England was creating new money for the financial system which was used to purchase assets such as government bonds, bank loans, or mortgages. The initial amount declared to be created through this method stood at £75 billion, even as Chancellor of the Exchequer Alistair Darling had given permission for up to £150 billion to be created if required.

By November 5, 2009, some £175 billion were pumped in using quantitative easing; nonetheless, the effectiveness of the process remained wasn’t fruitful in the long term.

Annual inflation rate

The Bank of England had announced (2009) that the decision had been made to prevent the rate of inflation from falling below the two percent target rate.  Mervyn King, the Governor of the Bank of England, also had cautioned there were no other monetary options left as interest rates have already been cut to their lowest level ever (0.5%) and it was implausible that they would be cut further.

The 2009 quantitative easing measures from Bank of England were unprecedented in Britain’s economic history.  Later in October, inflation rate per annum was estimated at about 5% for October 2011 and  5.2% in September 2011.

Coins

Pre-decimal coins

The silver penny (plural: pence; abbreviation: d) was the official and only single coin in circulation between the 8th century and 13th century. Although some portions of the penny were clouted (farthing and halfpenny), it was more usual to find pennies cut into halves and quarters to give smaller change. Very few gold coins were struck, with the gold penny (worth 20 silver pence) an uncommon example.  In 1279, the groat, worth 4d was launched, with the half groat introduced in 1344. 1344 also saw the introduction of a gold coinage with the establishment (after the failed gold florin) of the noble worth six shillings and eight pence (‘6/8’) (i.e. 3 to the pound), along with the half and quarter noble.

Reforms in 1464 saw a fall in value of the coinage in both silver and gold, with the noble renamed the ryal and worth 10/- (i.e. 2 to the pound) and the angel introduced at the noble’s old value of 6/8.

While Henry VII was in power,  two important coins were introduced, the shilling (abbreviation: s; known as the testoon) in 1487 and the pound (known as the sovereign, abbr.: £ or L) in 1489.

In 1526, many new denominations of gold coins were added, including the crown and half crown worth five shillings (5/-), and two shillings and six pence (2/6, two and six) respectively. Henry VIII’s reign (1509–1547) saw a high level of ignominy which continued into the reign of Edward VI (1547–1553). However, this debasement was stopped in 1552 and a new silver coinage was introduced, including coins for 1d, 2d, 3d, 4d and 6d, 1/-, 2/6 and 5/-. The reign of Elizabeth I (1558–1603) saw the introduction of silver ¾d and 1½d coins, even though these denominations did not last. Gold coins comprised of half crown, crown, angel, half sovereign and sovereign. Elizabeth’s reign also saw the introduction of the horse-drawn screw press to create the first “milled” coins.

After the succession of the Scottish King James VI to the English throne, a new gold coinage was launched, including the spur ryal (15/-), the unite (20/-) and the rose ryal (30/-). The laurel worth 20/-, was introduced in 1619. The first base metal coins were also introduced, tin and copper farthings. Copper halfpenny coins followed during the reign of Charles I. At the time of the English Civil War, varied siege coinages were produced, often in abnormal denominations.

Following the reinstatement of the monarchy in 1660, the coinage was changed, with the end of production of hammered coins in 1662. The guinea was introduced in 1663, later followed by the ½, 2 and 5 guinea coins. The silver coinage included the denominations of 1d, 2d, 3d, 4d and 6d, 1/-, 2/6 and 5/-. Due to the extensive export of silver in the 18th century, the production of silver coins slowly came to a halt, even as the half crown and crown were not issued after the 1750s, and the production of  6d pence and 1/- stopping in the 1780s. One solution was the usage of the copper 1d and 2d coins and the gold ⅓ guinea (7/-) in 1797. However, copper penny was the only one of these coins to last for a long times.

To ease the shortage of silver coins, between 1797 and 1804, the Bank of England counter stamped Spanish dollars (8 reales) and other Spanish and Spanish colonial coins for circulation. King’s head was depicted with help of small counter stamp. By 1800, this coinage circulated at a rate of 4/9 for 8 reales.  Following 1800, a rate of 5/- for 8 reales was used. The Bank then introduced silver tokens for 5/- (struck over Spanish dollars) in 1804, followed by tokens for 1/6 and 3/- between 1811 and 1816.

In 1816, a new silver coinage was launched with denominations of 6d, 1/-, 2/6 (half-crown) and 5/- (crown). The crown was only issued occasionally until 1900. It was followed by a new gold coinage in 1817 with the introduction of 10/- and £1 coins, called as the half sovereign and sovereign. The silver 4d coin was reissued in 1836, followed by the 3d (“thruppence”) in 1838, with the 4d coin circulated only for colonial use after 1855. In 1848, the 2/- florin was launched, followed by the brief usage of double florin in 1887. In 1860, copper was substituted by bronze in the farthing (quarter penny, ¼d), halfpenny and penny.

At the time of the First World War, production of the half sovereign and sovereign was temporarily halted and, although the gold standard was re-established, the coins saw little circulation subsequently. In 1920, the silver standard, kept at .925 since 1552, was lowered to .500. In 1937, a nickel-brass 3d coin was launched; the last silver 3d coins were introduced seven years later. In 1947, the remaining silver coins were substituted with cupro-nickel. Inflation prompted the farthing to end production in 1956 and be demonetized in 1960. During the process of decimalization, the halfpenny and half-crown were demonetized in 1969.

Decimal coins

• 968: The earliest decimal coins introduced. These were produced by cupro-nickel.  Both 5p and 10p coins were equivalent to and circulated along with the 1/- and 2/- coins.
• 1969: The arched equilateral heptagonal cupro-nickl 50p coin substituted the 10/- note.
• 1971: The decimal coinage was established when decimalization came into effect in 1971 with the introduction of the bronze ½p, 1p and 2p coins and the pulling out of the 1d and 3d coins.
• 1980: The cessation of 6d coins, which had circulated at a value of 2½p.
• 1982: The word “new” was removed from the coinage and a 20p coin was launched.
• 1983: A £1 coin was started.
• 1983: The ½p coin production was ended.
• 1984: The ½p coin was demonetized.
• 1990s: The size of all 5p, 10p and 50p coins became smaller.
• 1991: The old 1/- coins, which had circulated in the system with a value of 5p, were demonetized in 1991 after the 5p coin became smaller.
• 1992: Bronze was substituted with copper-plated steel.
• 1993: The 2/- coins were likewise demonetized.
• 1998: The bi-metallic £2 coin was launched.
• 2007: In this year, the value of copper in the pre-1992 1p/2p coins (which are 97% copper) surpassed the value to such a degree that melting down the coins by entrepreneurs was becoming sensible business (with a premium of up to 11%, with smelting costs reducing this to around 4%)—even though this is prohibited, and the market value of copper has consequently fallen dramatically from these earlier peaks.

At present, the earliest circulating coins in the U.K. are the 1p and 2p copper coins issued in 1971. Before decimalization, coins aged one hundred years or more remained in circulation after any of five monarchs’ heads on the obverse was depicted.

In April 2008 an extensive redesign of the coinage was revealed. The new designs were introduced slowly into circulation, starting in summer 2008. The backside of the new 1p, 2p, 5p, 10p, 20p and 50p coins feature parts of the Royal Shield, and the new pound coin portrays the whole shield. The coins are of the same measurements as those with the old designs (which will continue to circulate).

Banknotes

The first sterling notes were introduced by the Bank of England immediately after its establishment in 1694. Denominations were at first written on the notes at the time of issue. Since 1745, the notes were printed in denominations between £20 and £1000, with any extra shillings added in writing. £10 notes were issued in 1759, which was followed by £5 in 1793 and £1 and £2 in 1797. The lowest two denominations were taken off from the circulation following the end of the Napoleonic wars. In 1855, the notes were transformed to being entirely printed, with denominations of £5, £10, £20, £50, £100, £200, £300, £500 and £1000 introduced.

The Bank of Scotland started issuing notes in 1695. Even though the pound scots continued to be the official currency of Scotland, these notes were denominated in sterling in values up to £100. Then from 1727 onwards, the Royal Bank of Scotland also issued notes. Both banks issued some notes denominated in guineas and pounds. In the 19th century, set of laws restricted the smallest note issued by Scottish banks to be the £1 denomination, a note not acceptable in England.

With the expansion of sterling to Ireland in 1825, the Bank of Ireland started issuing sterling notes, soon followed by other Irish banks. These notes consisted some unusual denominations of 30/- and £3. The highest denomination introduced by the Irish banks was £100.

In 1826, banks that were no less than 65 miles (105 km) from London were given permission to issue their own paper money. Since 1844, new banks were barred from issuing notes in England and Wales except for both in Scotland and Ireland. As a result, the number of private banknotes declined in England and Wales but multiplied in Scotland and Ireland. The last English private banknotes were introduced in 1921.

In 1914, the Treasury issued notes for 10/- and £1 to substitute gold coins. These were distributed until 1928, when they were replaced by Bank of England notes. Irish independence reduced the number of Irish banks dealing in sterling notes to five operating in Northern Ireland. Then, the Second World War had a severe effect on the note production of the Bank of England. Scared of mass counterfeit by the Nazis, the production of all £10 notes ended, leaving the bank to issue only 10/-, £1 and £5 notes. Scottish and Northern Irish issues were unaltered, with issues in denominations of £1, £5, £10, £20, £50 and £100.

The Bank of England reissued £10 notes in 1964. In 1969, the 10/- note was substituted by the 50p coin as part of the preparation for decimalization. Then in 1970, £20 Bank of England notes were reintroduced, which was followed by £50 in 1982.

After the introduction of the £1 coin in 1983, Bank of England £1 notes ceased to exist in 1988. Later, Scottish and Northern Irish banks followed, with only the Royal Bank of Scotland continuing to distribute this denomination.

The £5 polymer banknote, distributed by Northern Bank in 2000, is the only polymer note at present in circulation, although Northern Bank also manufacture paper-based £10, £20 and £50 notes and, amusingly, notes named “Titan”. A Titan is worth £100,000,000 (one hundred million pound) bank note, only 40 among them are in existence. Titans are only used within the banking system and are unavailable by the general public.

Legal tender and regional issues

According to the Royal Mint, Legal tender in the UK means “that a debtor cannot successfully be sued for non-payment if he pays into court in legal tender.” It does not mean that any normal transaction has to take place in legal tender or only within the amount denominated by the legislation.

Both parties are free to be in agreement to accept any form of payment whether legal tender or otherwise according to their wishes. In order to comply by with the very stringent rules governing an actual legal tender it is essential, for instance, actually to present the exact amount due because no change can be demanded.

All over the UK, £1 and £2 coins are legal tender for any amount, with the other coins being legal tender only for certain amounts. In England and Wales, Bank of England notes are also considered as legal tender for any amount.  In Scotland and Northern Ireland, no banknotes are at present legal tender, even though Bank of England 10/- and £1 notes were legal tender, so were Scottish banknotes, during World War II (Currency (Defence) Act 1939; this status was stopped on January 1, 1946). Nevertheless, the banks made deposits with the Bank of England to cover up the bulk of their note issues. In the Channel Islands and Isle of Man, the local divergences on the banknotes are legal tender in their respective jurisdictions.

Everywhere in the U.K., Scottish, Northern Irish, Channel Islands and Manx notes can be used as a means of payment. Guernsey, Jersey, the Isle of Man , all are in currency union with the United Kingdom and these currencies are not any different from the British pound, but are considered a local issue of banknotes and coins denominated in pound sterling.

It is lawful for shopkeepers to decide to reject any payment even though it would be legal tender in that jurisdiction, but not in their interest because no debt exists when the offer of payment is made at the same time as the offer of goods or services. When paying a restaurant bill after having the meal, or settling another debt, the laws of legal tender do apply and the payment cannot be rejected. But generally any sensible method of settling the debt (such as by credit card) will be accepted.

Commemorative £5 and 25p (crown) coins, hardly ever seen in circulation, are legal tender, as are the bullion coins issued by the Mint.

Value

In 2006, the House of Commons Library unveiled a document which consisted of an index of prices in pounds for each year between 1750 and 2005, where 1974 was indexed at 100. (The document included updated version from the earlier data)

Concerning the period between 1750 and 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 1751 stood at 5.1, climbing to a peak of 16.3 in 1813 before falling very soon after the end of the Napoleonic Wars to about 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 hit the peak at 25.3 in 1920, before falling to 15.8 in 1933 and 1934—prices were only about three times as high as they had been 180 years prior.

Inflation had a significant 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.

Bank of England

The Bank of England (earlier referred to as the Governor and Company of the Bank of England) is the central bank of the United Kingdom and the model upon which most contemporary central banks have been modeled. Established in 1694, The Bank of England is the second oldest central bank in the world (the oldest being the Sveriges Riksbank (Bank of Sweden), established in 1668). It was set up to act as the English Government’s banker, and to this day it still serves as the banker for HM Government.  Since its inception in 1964, the Bank was privately owned and operated. It was subordinated to the Treasury from 1931 in creating policy and was nationalized in 1946.

From 1998, it developed into an independent public organization, completely owned by the Treasury Solicitor on behalf of the Government, with autonomy in setting monetary policy.