Currency in the UK: history, facts and forecasts

The pound sterling is one of the oldest, most respected and stable currencies in use today. It has undergone many metamorphoses in its long history and continues to change to meet the demands of the times. In this article we will explain where the pound sterling came from, why it is so called and how it gained its position.

When did the British currency come into existence?

There are several variants of its origin. It is not surprising, because in the Middle Ages Britain was not yet a united country. Then on its territory there were only disparate kingdoms of Angles and Saxons. They were constantly at war with each other, trying to assert their supremacy. The issue of their own currency was in line with these goals.

One such warring kingdom was Mercia. At the end of the 8th century, its ruler Offa introduced the silver penny, which quickly spread throughout the island. According to the most widespread version, this was the basis of the future English monetary unit.

Over the centuries, the type, weight and composition of coins changed. There were many different kinds of money circulating in the country at the same time. Queen Elizabeth I put an end to this. She banned the circulation of all variegated domestic currency, and gave the monopoly on coinage to the Royal Treasury. Later, she concentrated almost all financial matters in the hands of the Government, making the state the main economic regulator.

It is interesting that in parallel with the British pound, a parallel monetary system — wooden slats — was in use in England for quite a long time. It was introduced by Henry I in the early 12th century. It was designed to combat moneylenders who took valuable things for safekeeping, giving receipts in return. At a certain point, these receipts became so numerous that they almost became the equivalent of paper money. And this, firstly, could threaten the royal power, which did not control them. And secondly, it gave a great scope for fraud.

Henry I devised a system that was not very convenient, but quite unique. It involved taking wooden slats and marking their denomination with notches. Then the slat was split in two so that the notches remained on both halves. One half was put into circulation. The second half was kept by the king so that he could use it to check the authenticity of the first half. It was quite easy to convince everyone to use this system. There was no need for any threats or orders concerning the moneylenders’ activities. It was enough to declare that from now on taxes would only be paid with these measured rakens.

Despite the short-lived nature of the material, the system itself lasted over 700 years. It was finally abolished only in 1826.

Where did the name of the currency in the UK come from?

Pound. This word is simple. As you know, England adopts different systems of measurement — inches, pints, pounds, etc. A pound now is 453.6g. In those days, it was 490g. That’s how much a bag of coins weighed as the standard unit of account.

Sterling. There’s less clarity here. There are three main versions of its origin:

1. Stars. On an old silver penny of about 1300 were embossed three small stars each. They were called “steorling” in Old English.
2. Eastern lands. The material for minting coins was produced in the north of Germany, in an area called “Easterling”.
3. The Steelyard, the place where German merchants who brought in coin alloy met in London, was called “Steelyard”. It is possible that a distorted pronunciation of this word gave the name to the currency.

Penny. All linguists agree that this word is the same root as the German pfennig, Scandinavian penning and Polish fenig. But from what language this root originates and what it means, remains only a guess. The main options are as follows:

1. The weights are pondus (Latin) and the derivation of panding (Frisian).Pawn/pledge – pawn (English), pfand (German), pand (Scandinavian languages).
2. The head is pen (Celtic).
3. The pan is pfanne (German).

Anyway, these words have now become tightly integrated into the English language and are used daily and ubiquitously to refer to monetary currency in the UK.

What symbol is used to represent British pounds?

The traditional designation is the symbol £. Originally there were two horizontal dashes, but the sign has been simplified over time. In fact, it is nothing but the handwritten capital letter L. It, in turn, comes from the Latin word “librae” which meant “scales, balance” and was used as a unit of weight. And as we remember, “pound” also came from the fact that coins were weighed.

Pence also has its own symbol. They’re labelled “p”, which is understandable. It’s just the first letter of the word. Sometimes in speech they say: “50 pi”, not “50 pennies”. But it is important to note that we are talking specifically about modern money. Before the 1971 reform, the pence was worth much less. It was then denoted by the sign “d” — from the Latin word “dinarium”, after the ancient Roman small coins.

In literal terms, the pound sterling is denoted as GBP — Great Britain Pound.

How many pennies are in the English pound?

You are probably used to saying that 1 dollar = 100 cents yu. By analogy, you would say that 1 pound = 100 pennies. And you’d be right! But it wasn’t always like that. The British came to such a system only in the second half of the XX century. Before that, it was much more complicated.

Many Europeans then used dozens and the ternary system of calculation. France: livre — sous — denier. Spain: escudo — real — maravedi. Some German states: thaler — groschen — pfenning.

In England there were: pound — shilling — pence. But the British monetary system was not limited to this. There were also farthings, florins, crowns and other denominations of coins.

Farthing	¼ pence
Heypenny	½ pence
Penny	1p
Tapens	2 pence.
Threepence	3 pence.
Grote	4 pence.
Sixpence	6p.
Schilling	12p.
Florin	2 shillings
Half-crowns	2 shillings and 6 pence
Crone	5 shillings
Pound sterling	4 crowns

In addition, the sovereign was also minted, which was the analogue of the pound sterling and the guinea in value. They were made of gold.

What were the coins made of?

Once again, let’s dive back into history. Initially they were made of pure silver. However, by the middle of the XII century for this purpose began to use a silver alloy of 925th standard — it was stronger and the coins did not wear out so quickly. In addition, it was heavier, which increased the benefits.

Subsequently, the specific weight of silver in the pounds decreased more and more. And by 1544 it was only 33% of the total mass, making the coins look like copper. It was decided to fight this. Therefore, the 925th sample of silver was returned, but reduced the weight of coins.

At the same time, gold coins were introduced into circulation — quoins and guineas. Gradually, they became more and more important. Merchants tried to buy foreign goods for silver, and when selling their goods, they demanded gold. Thus the foundations of the gold standard were laid in England. In 1816 it was officially adopted in Britain. Later other European countries joined it.

What was depicted on ancient coins?

Of course, each ruler minted his own profile on them. An interesting tradition developed with this. Each successive king turned away from his predecessor. That is, if George I looked to the right on the obverse, George II was printed turned to the left, and George III again looked to the right.

A mishap happened only once. In 1936, Edward VIII abdicated before his coronation. Accordingly, coins with his profile were not put into circulation. So for some time it was decided in which direction George VI would look after him — to the right, as if Edward was not there at all, or still to the left, paying tribute to the order. In the end, the second option won out.

What do UK coins look like now?

Today there are eight denominations of coins: 1, 2, 5, 10, 20 and 50 pence, as well as £1 and £2. As the country was ruled for 70 years by Queen Elizabeth II, it is her portrait that features on most of the coins currently in circulation. A 50p coin has been issued with the new King Charles III. It will go into circulation in December 2022.

Interestingly, the reverse of modern pence coins shows fragments of the British coat of arms. If you put them together, you can, with a certain degree of conventionality, see the picture in full. Interestingly, when the one pound coin first came into use, the entire shield was minted on its reverse. However, in later issues it was replaced by floral and other motifs. The same is true of the two-pound coin – the design on it changes with each new batch.

Paper money

Coins used to be made of silver and gold and were quite a popular currency. Now they are mostly made of base metals and are synonymous with pennies. And the main money circulation is in paper banknotes.

When did the UK start printing money notes?

The prototype of government paper money appeared in England in 1694. At that time it was just receipts issued by banks. They were issued only for amounts over £50, which was a lot at that time.

In 1725 the receipts became standardised and even partially printed. The figures were still handwritten. But it was still about large sums, so only noble people used such money.

Fully printed banknotes appeared in 1855. At that time the denomination was reduced first to £10 and then to £5. This made paper money more popular.

What kind of banknotes exist in Britain now?

The British Bank issues paper money in denominations of £5, £10, £20 and £50. Because of the high purchasing power of this currency, the 100-pound note, although in use for a time, was abolished. Even 50-pound notes are disliked by the British for fear of counterfeiting.

The Queen is still depicted on the front of the paper money. Charles III is in no hurry to place his portrait on the front of the paper money. His profile will appear gradually as worn-out notes are withdrawn from circulation and new ones are printed to replace them.

And the reverse side of the English pounds depicts great people born in the territory of Great Britain. At different times there were portraits of Charles Darwin, Adam Smith, Charles Dickens, William Shakespeare, Isaac Newton and other famous personalities.

Now a new era has dawned in the history of UK banknotes. They began to be issued not by paper, but by polymer. The introduction of new banknotes into circulation took place from 2016 to 2022. And today the old-style money can only be exchanged in the bank or deposited in your account. You cannot pay with them in shops.

The Queen’s portrait has been retained on all banknotes so far. But the list of persons immortalised on the reverse side has changed once again:

£5 – politician Winston Churchill;

£10 – writer Jane Austen;

£20 – painter William Turner;

£50 – mathematician Alan Turing.

Plastic banknotes are much more durable. They do not tear, are virtually unbreakable and are not afraid of water. They are also much harder to counterfeit.

How is currency in the UK protected from counterfeiting?

The security principles are similar for both paper and polymer banknotes. Although the mechanisms of their creation are, of course, different. First of all, these are special chemical compositions that glow in ultraviolet light in a certain way. The second important method: thin metal applications that appear or change the image when viewed from different angles.

Who issues UK banknotes?

It is logical to assume that a state-owned bank should be in charge of this. But as we remember, the United Kingdom consists of four parts. Accordingly, the banks of England, Scotland and Northern Ireland have the right to produce money. And only Wales does without the production of its notes. But the Royal Mint is located there, where coins are minted for the whole country.

Legally, money is of equal value and should be freely accepted throughout the state, regardless of which part of the country it is issued in. But in practice, Scottish banknotes are mainly used in Scotland. And Northern Irish ones, respectively, in Northern Ireland. If you try to pay with them in another part of the country, you may be refused. English pounds are accepted everywhere without any problems.

Which other countries have a British currency?

As is known, in the 19th century the British Empire possessed vast territories. Even now, the king formally remains the ruler of some of them. Not surprisingly, a number of such regions retain English attributes — in particular, the currency. Such lands include:

• Channel Islands;
• Isle of Man;
• Falkland Islands;
• Gibraltar;
• South Georgia and the South Sandwich Islands;
• British Antarctic Territory;
• Britain’s overseas territories in the Indian Ocean.

It is true that in half of the cases it is the local pound sterling. It is printed inside these countries, is equal in value to the British pound, but is used only among the local population. Abroad, and even in the UK itself, paying with them is a problem. Although English banks accept such notes for exchange.

It is interesting that another part of the British territories, although formally under the protectorate of the English crown, uses not the pound sterling, but the dollar. Somewhere it is its own, issued for domestic use only. And somewhere, for example, in the Virgin Islands, it is the US dollar.

The gold standard and the Bretton Woods system

The gold standard had become established in the West by the middle of the 19th century. England adopted it as early as 1816. Later it was joined by Germany, France and other countries. The essence of this scheme is simple: each issued paper banknote must be provided with an equivalent amount of gold. Conventionally speaking, a person could go and exchange his paper pound for a pound of gold at any time. Same with the rouble, the mark, the franc, etc. In reality, things were a little more complicated. Nevertheless, the idea worked.

At the beginning of the 20th century, this approach became untenable. The world economy demanded more and more money. Gold mining could not keep up with the demand. In addition, the system did not take into account oil and gas reserves, income from industry and other sectors that supported the stability of the currency. So by World War I, adherence to the gold standard was already on hold. After the war, when the economy was destroyed and could no longer provide anything, it was tried to return. Although now paper money was supposed to be exchanged for gold bars instead of coins. But soon this idea had to be abandoned as well.

The Second World War led to a new economic crisis around the world. In 1944, a UN conference was held in Bretton Woods, where it was agreed that the dollar would now be the measure of international settlements. In order to change, for example, francs into liras, it was necessary first to convert francs into American currency and then to convert it into liras. There was no direct exchange rate between the other currencies. The dollar was still backed by gold and at the same time served as the guarantor of all other money in the world. Of course, this exaggerated importance made the dollar king in the world of currencies, while the pound sterling temporarily went into the shadows to recover from two devastating wars.

The Bretton Woods system did not last long. It gave up its position even faster than the gold standard. The U.S. simply could not provide such a huge number of financial transactions and because of the need to constantly reprint money, the country experienced rapid inflation. At the same time, the gold backing the dollar became scarce. Its reserves were not growing at the same rate as the printing press. The dollar began to depreciate. And by 1971, the system was abandoned.

The world now has the Jamaican currency system, according to which the exchange rate is set by market mechanisms rather than by government regulation. Gold has ceased to play a decisive role in these processes. Today, none of the world’s currencies, including the pound, is fully backed by gold.

The rise and fall of the pound sterling in the twentieth century

The past century has been a tumultuous one for all countries. Britain was no exception. Despite the fact that we used to think of its economy as one of the strongest in the world, it also had its dark days. But it has always recovered and regained its position.

World War I

The beginning of the 20th century was a period of prosperity for Britain. Production was gaining unprecedented momentum, the treasury was getting full, the colonies were supplying London with money and goods. Naturally, sterling also strengthened. And its exchange rate against the dollar was equal to: £1 = $4.88.

The First World War hurt the country’s welfare, causing huge losses. Britain went from being a financial donor to a debtor. Payments on interest alone amounted to about 40% of the national budget. And the debt itself reached £850 million. The main creditor was the USA. The purchasing power of the British currency fell by more than 60 per cent.

However, the country recovered financially quite quickly. Foreign capital was sold, production was restored, and England received reparations from defeated Germany. Under the Treaty of Versailles, Britain was given a protectorate over the new territories. Thanks to this, the country reached the maximum of its possessions.

Accordingly, sterling grew and expanded. A whole range of pounds appeared: Australian, Fijian, South African, Irish, New Zealand, Cypriot, etc. Not all of them were equal in value to the English pound. Nevertheless, they formed a common payment system within the state.

World War II

The Second World War dealt a new blow to the British economy. The results were even more deplorable. The Treasury was empty. The foreign debt was £3bn and, most importantly, many colonies had become independent. The country had to learn to live again, no longer relying on the rich resources of the controlled lands. All this significantly weakened the pound sterling. The leading position was ceded to the dollar. The Bretton Woods system, which replaced the gold-coin standard, put a final stop to this.

“Black Wednesday.”

The last decades of the 20th century have been a mixed success for the UK’s national currency. In 1981, the pound was worth $2. In 1984, it fell to a record low of $1.05. But by the early 1990s it had regained its position.

Britain even managed to enter the system of the European Exchange Rate Mechanism. This economic union was designed to regulate the value of currencies and prevent sharp changes in their price. However, this did not save London from the “Black Wednesday”, when on 16 September 1992 the pound sterling collapsed to a record and continued its peak for several weeks.

American financier George Soros is often blamed for this fall. According to the generally accepted version, he had been buying pounds in small batches for a long time, and then sold more than £5bn at a time, exchanging them for German marks, which collapsed the British currency. He then bought back the depreciated pound again, thus earning between $1bn and $1.5bn.

Some economists dispute this view. They believe that Soros was not a pound killer, but simply a successful player who was able to take advantage of the situation. The real reason they cite is the inability of the British government to keep the bar set too high for the British currency. Either way, Soros did make a huge amount of money from this operation. Other financiers also profited.

After this blow, Britain withdrew from the European Exchange Rate Mechanism. In 1998, it itself ceased to exist, as almost all European countries abandoned their national currencies and switched to the euro.

Why did London refuse to swap the pound sterling for the euro?

The reasons for this were both economic and political. Despite all the cataclysms, the national currency of the United Kingdom remained quite strong. Giving it up was seen as a partial loss of sovereignty.

Gordon Brown, then British finance minister, devised a test consisting of five questions. In his view, only by answering each of them positively could a country consider switching to a European currency. These questions are:

1. Is the UK ready to live with EU interest rates?
2. Does the euro-based monetary system have sufficient flexibility to deal with both global and local difficulties?
3. Will Britain’s switch to the euro have a positive impact on attracting overseas investment?
4. Would the financial services market in London remain competitive if the country switched to the euro?
5. Will the single currency stimulate growth in the English economy in the long term?

Some analysts believe that the bar was thus set too high, so that, guided by it, the abandonment of the pound sterling would never have happened. It may even have been done intentionally to justify Britain’s desire for independence and leadership, which was also provided by the national currency.

However, sceptics argue that the reason lies in the exact opposite — it was not the EU failing to reach the high British standards, but on the contrary, the UK was not prepared to meet the conditions set for countries switching to the euro.

Probably, we are talking about the Maastricht criteria, among which are the requirements of no deficit in the annual state budget, external debt of the country — not more than 60% of GDP, inflation rate and other economic indicators. However, it should be borne in mind that these parameters must be observed by those countries that want to join the European Union. Britain has been a member from the very beginning. So it did not have to fulfil these requirements in order to switch to the euro.

As we know, the UK left the European Union on 1 February 2020, so now the issue of switching to the euro has lost its relevance.

Interesting fact: the “eurozone” is not the only project to unite currencies, where the UK was invited to join with its subsequent refusal. Back in 1865, the so-called “Latin Coin Union” was founded. However, a single currency was not introduced then, but standards of gold and silver coins were defined for all countries participating in the Union, so that it was possible to pay each other with these coins. That is, a merchant from Italy could pay for goods in Greece in lira, and a Greek could give a Frenchman drachmas, without having to first acquire the necessary currency. However, Britain was against anyone dictating to her what her money should look like. It was therefore decided to abandon the proposal.

What does the pound sterling exchange rate depend on?

Today it is the fourth most popular currency in the world. Previously, only the dollar and the euro were ahead of it. Recently, however, it has also been overtaken by the Japanese yen. Nevertheless, the level of popularity remains very high. Many players use sterling to diversify their currency risks and consider it a good investment.

In general, all currencies react to roughly the same factors. Among them, the following six can be distinguished:

1. Bank interest rate. The Central Bank of England changes it every 30 days, usually on the first or second Thursday of the month. And even the rate is important here, not in itself, but in its interaction with the rates of other central banks. If it is higher in England, the pound will strengthen. If the difference between the rates decreases, it will lead to a weakening of the English currency.
2. GDP. The higher the figures, the better the conditions for industry, trade and services, which in turn attracts investment into the country. Since sterling is needed for investment, the value of this currency is always growing. If the economic situation in the country shows a stable negative, investors rush to leave the country, selling the pounds for which they sold their assets, which leads to a depreciation of the currency.
3. Inflation and unemployment. Economists mainly focus on the consumer price index. In addition, oil and gas prices are considered important indicators. If inflation exceeds the planned threshold of 2%, the key rate is raised. And as we have analysed above, this most often strengthens the currency rate.
4. Balance of Payments and Balance of Trade. They show the ratio of exports and imports. From this data, you can judge what the inflow and outflow of currency was. If the trade balance is higher than expected, the currency appreciates.
5. Public debt. If it is kept within reasonable limits, it doesn’t affect rates too much. Unfortunately, England has already crossed that barrier. Its foreign debt has reached a record 99.2 per cent of GDP. Of course, such figures have a negative impact on the purchasing power of the UK currency.
6. Foreign Policy. Depending on what spending or revenue it promises the country, it strengthens or weakens the exchange rate. The worst effect is uncertainty. For example, the news of Brexit has seriously collapsed the British pound. Although the country is struggling to claw its position back, it is still a long way from historic highs.

There are also more specific factors affecting the pound exchange rate, but these are dealt with by specialised economists.