By some measures, the British pound is the oldest currency currently in existence. It has played a pivotal role in the development of finance and currencies worldwide and possesses an incredibly rich history.
Personally, I find the study of currencies fascinating. The British pound can be seen as a constant throughout the history of our nation, and every change it has gone through tells a story.
Understanding how the pound has evolved can help us understand more about ourselves and how the world used to work.
Origin of the Pound
The British pound, or pound sterling, actually originated in continental Europe and was heavily inspired by the Roman monetary system. In fact, the name derives from the Latin word Libra, meaning weight or balance. While the word Libra has long since been discarded, it makes its presence felt in both the £ symbol, an ornate L, and the abbreviation for the unit of mass, lb.
Much like the Roman system, the pound was divided into 20 shillings, a Roman solidus, and 240 silver pennies, the equivalent to a denarius.
The same system was already in place in Charlemagne’s France at the time.
King Offa is credited with introducing the system of money to central and southern England in the latter half of the 8th Century, overseeing the minting of the earliest English silver pennies.
At the time there were no higher denominations and the minting process was not yet perfect so it wasn’t unusual that 240 pennies did in fact not add up to an exact pound.
The first pound coin came into the scene under Henry VII in 1489 and was known as a sovereign. The shilling was first minted in 1504.
Debasing the pound
Debasing, as I have explained in some of my other work, is a form of currency devaluation. It can be defined as the act of reducing the quality of a coin by replacing part of its base metal, normally silver or gold, with a metal of inferior quality/value such as copper or nickel.
The biggest forms of debasement have been perpetrated by kings or governments since these were the people or institutions capable of this.
This would benefit them when paying for debts or acquiring new goods. Since their debts were defined in, say, shillings, and not ounces of silver, they could simply create a “new” debased schilling. By mixing the silver with another metal they could make a larger quantity of these shillings.
Of course, it wouldn’t take long for people to realize that these new schillings had, in fact, a lower value, at which point prices would adjust.
However, some interesting forms of currency debasement were also practiced by individuals. The act of clipping, shaving metal from the coin’s surface in a nearly imperceptible manner, was common.
Less common but also practiced was shaving. This was the process of putting coins into a bag and shaking it to later collect the dust that had come off of it.
At first, pennies were made from the finest silver available. However, King Henry II introduced a new coinage, known as Tealby pennies, made from 92.5% silver. This would remain the standard until the 20th century. This silver alloy is in fact now known as sterling silver.
The English currency was almost exclusively silver until 1344 when the gold noble was introduced into circulation
However, silver remained the legal basis for sterling until 1816.
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 5,760 grains (373 g) in 1526. In 1544, a silver coinage was issued containing just one-third silver and two-thirds copper—equating to .333 silver, or 33.3% pure.
It is estimated, that in the year 980 the pound could buy you 15 head of cattle under the reign of King Aethelraed the Unready.
But from the 15th Century to the year 2000, its purchasing power has fallen four-hundred-fold.
In 1999, the House of Commons library concluded that between 1750 and 1998, prices had risen by about 118 times
Interestingly, most of this inflation took place after 1945.
A Defacto Gold Standard
Something very interesting happened in 1622. A new gold coinage was introduced which in 1717 was fixed in value to 21 shillings, a silver coin. This valuation overvalued gold in terms of silver, in relation to other countries, which meant that money could be made by selling the silver abroad and using the gold in England. In line with Gresham’s Law, British merchants sent silver abroad in payments whilst goods for export were paid for with gold. As a consequence of these flows of silver out and gold in, Great Britain was effectively on a gold standard.
In principle, there should be no problem with this, but back then, this made trade a bit more difficult with China, as they only accepted silver.
As a response, the East India Company was created which redressed this trade imbalance through the indirect sale of opium to the Chinese.
The Royal Mint and the Bank of England
In the study of currencies, these are the two most important institutions one can look at. Most developed countries have an equivalent of what in England we call the Royal Mint and the Bank of England (BoE).
The Royal Mint is a government-owned mint that produces coins for the United Kingdom. Operating under the name Royal Mint Ltd, the mint is a limited company that is wholly owned by Her Majesty’s Treasury and is under an exclusive contract to supply all the nation’s coinage. As well as minting circulating coins for use domestically and internationally, the mint also produces planchets, commemorative coins, various types of medals and precious metal bullion.
Formed over 1,100 years ago, the mint was historically part of a series of mints that became centralised to produce coins for the Kingdom of England, all of Great Britain and eventually most of the British Empire. The original London mint from which the Royal Mint is the successor was established in 886 AD and operated within the Tower of London for approximately 800 years before moving to what is now called Royal Mint Court where it remained until the 1960s.
One cannot underestimate the importance of having a well-developed mint at the disposal of a whole nation. This is what first allowed money to circulate in a massive standardized way which facilitated trade all over the country and the world.
The natural successor of the mint would be the Bank of England, which would begin to issue paper money in 1694.
Established in 1694 to act as the English government’s banker, and still one of the bankers for the government of the United Kingdom, it is the world’s eighth-oldest bank. It was privately owned by stockholders from its foundation in 1694 until it was nationalised in 1946.
England’s defeat by France in the 1690 Battle of Beachy Head, became the catalyst for England’s rebuilding itself as a global power. England had no choice but to build a powerful navy. No public funds were available, and the credit of William III’s government was so low in London that it was impossible for it to borrow the £1,200,000 (at 8% p.a.) that the government wanted.
To induce subscription to the loan, the subscribers were to be incorporated by the name of the Governor and Company of the Bank of England. The Bank was given exclusive possession of the government’s balances and was the only limited-liability corporation allowed to issue bank notes. The lenders would give the government cash (bullion) and issue notes against the government bonds, which can be lent again. The £1.2m was raised in 12 days; half of this was used to rebuild the navy.
Effectively, the BoE was originally set up to fund the government. In turn, they would receive special privileges, namely, the exclusive right to print notes. These notes were not in fact linked to the gold price, they were issued against government bonds, and their price floated somewhat relative to gold.
The Gold Standard
In 1816, the gold standard was adopted officially. In 1817, the sovereign was introduced, valued at 20 shillings. Struck in 22‑carat gold, it contained 113 grains (7.3 g) of gold and replaced the guinea as the standard British gold coin without changing the gold standard.
The gold standard was suspended when war broke out in 1914, with the BoE and Treasury notes becoming legal tender. Before World War I, the United Kingdom had one of the world’s strongest economies, holding 40% of the world’s overseas investments. But after the end of the war, the country was indebted: Britain owed £850 million (£37.3 billion as of 2015) with interest costing the country some 40% of all government spending. In order to resume stability, a version of the gold standard was reintroduced in 1925, under which the currency was fixed to gold at its pre-war peg. This was abandoned on 21 September 1931, during the Great Depression, and sterling suffered an initial devaluation of some 25%.
Many economists believe that, in fact, the Great Depression was caused partly due to this return to the Gold Standard at the pre-war rate. The British government should have accounted for the war-time price inflation, and adjusted the gold parity in accordance. In other words, the government should have devalued the currency from the beginning.
In 194w, the Bretton Woods system came into place. Countries around the world agreed to peg their currencies to the dollar, while the dollar would remain pegged and redeemable In gold.
This is a currency board system, which worked much like a gold standard. Central banks in each country would adjust the supply of money to maintain a fixed value against the dollar. In turn, the dollar was fixed to the price of gold. Effectively, the world was still under a gold standard.
However, in 1971 president Richard Nixon “closed the gold window”. Which is to say that the U.S.rejected its international obligations to offer gold for in exchange for their currency. The exact reason remains somewhat of a mystery.
This meant that for the first time in a long period, currencies were not fixed to anything. The British pound, for lack of a better word, was floating.
The pound floated for a while, during which time many “crisis” ensued. Attempts were made to fix the price of the pound to other currencies, first to the Deutsche mark. Then, in 1990 Britain tried to enter the European Exchange Rate Mechanism. This system was predicated on the European Currency Unit, which was an aggregate of the major currencies in Europe. The idea was that participating countries’ exchange rates could not deviate too far from this unit. There was a band of around 5% appreciation/depreciation.
Finally, in 1997, the Bank of England was given control to set interest rates on a daily basis. The concern now is not to maintain the value of the pound relative to anything, but rather, to control inflation through interest rate manipulation.