WHY TRADE THE BRITISH POUND?
Aside from being one of the most actively traded currency pairs, the British Pound
holds a position of being the king of currencies in the international arena. Its stability and status as legal tender globally during the period of the British Empire contribute to its appeal.
HISTORICAL PERSPECTIVE
As a unit of currency, the term pound originated from the value of a troy pound of high purity silver known as sterling silver. 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.
The pound sterling, established in 1560 by Elizabeth I, brought order to the financial
chaos of Tudor England that had been caused by the “Great Debasement” of the
coinage, which brought on a debilitating inflation during the years 1543–1551. By 1551, the silver content of a penny had dropped to one part in three. The coinage had become a mere fiduciary currency (as modern coins are), and the exchange rate on the European continent deteriorated accordingly. All the coins in circulation were called in for reminting at the higher standard, and paid for at discounted rates.
The pound sterling maintained its intrinsic value uniquely among European curren-
cies, even after the United Kingdom officially adopted the gold standard, until after
World War I; it weathered financial crises in 1621, in 1694–1696, and again in 1774 and 1797. Not even the violent disorders of the Civil War devalued the pound sterling in European money markets. England’s easy credit, security of contracts, and rise to financial superiority during the 18th century all contributed to the fact that the pound was never devalued over the centuries. 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 due to an overvaluation of gold in England that drew gold from abroad and caused a steady export of silver coin, in spite of a reevaluation 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. This lasted until the United Kingdom abandoned the standard after World War I in 1919. During this period, the pound was generally valued at around U.S. $4.90.
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, al-
though 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
the pound was devalued by 20 percent.
In common with all other world currencies, the pound no longer has 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 $3.75 billion in the aftermath of World War II. At this time the pound sterling was used as the currency of the British Empire. As the Empire became the Commonwealth of Nations, dominions introduced their own currencies (such as the Australian pound).
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BANKNOTES AND COINS
As of July 2005, the Bank of England circulates the following banknotes, known as
Series E:
•5-pound note depicting Elizabeth Fry, showing a meeting of people possibly dis-
cussing prisoners’ rights.
•10-pound note depicting Charles Darwin, a hummingbird, and the HMS Beagle. (See
Figure 7.2.)
•20-pound note depicting Sir Edward Elgar, with a view of the west face of Worces-
ter Cathedral.
•50-pound note depicting Sir John Houblon, with a view of his house in Threadnee-
dle Street.
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