Often referred to as simply the pound, the pound sterling is the official currency of the United Kingdom and some of its territories including the Channel Islands and the Isle of Man. As the currency used in the UK, the pound is one of the most important currencies in the world for one of the most important economies in the world, so having a grasp on it is crucial to understanding the FX market.
Fast Facts: Pound
- British Pound Symbol: £
- British Currency Code: GBP
- Coins: 1p, 2p, 5p, 10p, 20p, 50p, £1, £2
- Banknotes: £5, £10, £20, £50
- United Kingdom GDP (nominal): US$3.056 trillion (5th)
- Central Bank: Bank of England
History: Currency used in the UK
The history of the pound dates back centuries. In fact, it is the oldest currency that is still in use today. It traces its lineage back to Anglo-Saxon times, where a pound was equal to 240 silver pennies (a pound of silver). Taking inspiration from Charlemagne’s Frankish kingdom, the pound was introduced during the reign of King Offa of Mercia (757-796). Pennies were distributed throughout the country, using a complex weight and accounting system involving troy grains of silver.
Later in the Middle Ages, the weight and purity of the pennies was reduced. The Tealby penny – introduced by Henry II – was made with 92.5% silver, which would remain the standard for centuries to come. The Tudor period again saw dramatic reductions in the silver content of some coins. During the early days of Britain’s global empire, the country was effectively on the gold standard, due to the huge influx of gold coming into the country and silver flowing out.
The pound as we know it began to take shape with the establishment of the Bank of England in 1694. They, along with the Bank of Scotland that was formed one year later, began issuing paper currency for the first time. The establishment of the Kingdom of Great Britain in 1707 led to the pound Scots replacement by the pound sterling. The same would eventually happen in Ireland over 100 years later.
Following the American War of Independence and the Napoleonic Wars starting in the late 18th century, the UK adopted the gold standard officially in 1816. It was suspended as the country plunged into World War I though a version of the gold standard was later reintroduced in the 1920’s before being abandoned once again during the depression.
After World War II, the pound was pegged against the US dollar in accordance with the Bretton Woods system. When the system collapsed in 1971, the pound was left to float freely. This also marked the end of the ‘sterling area’, which was the group of countries with currency pegs to the pound or ones that used it as their official currency. One of the most significant events in the history of the modern pound was Decimal Day on February 15, 1971. This day did away with the previous system of 1 pound = 240 pence with 12 pence = 1 shilling and 20 shillings = 1 pound. Decimalization replaced this relatively unwieldy system with the well-known single currency (pound) with a single subdivision of 100 (pence).
Notes and Coins
The history and variety of sterling notes and coins offered in the UK is long and complicated, so we’ll focus predominantly on the recent issues. While the Bank of England prints all notes for England and Wales, the situation in Scotland and Northern Ireland is much more complex. In both countries, retail banks, not central ones, issue the notes. This means that they are technically not legal tender anywhere in the UK, but are instead promissory notes (a promise of payment). Notes from Scotland and Northern Ireland can be refused as payment in England and Wales and are usually not accepted outside the UK in any circumstance.
The current Bank of England sterling notes all feature Queen Elizabeth II on the obverse, while the reverse features various other famous Britain’s including; Elizabeth Fry, Charles Darwin, Adam Smith, Matthew Boulton, and James Watt. A £5 note featuring Winston Churchill and a £10 note featuring Jane Austen will be released in 2016 and 2017 respectively. The Bank has stated that polymer notes will start being circulated in 2016 with the £5 and others to follow later.
Now here’s where it gets confusing. In Scotland, there are seven banks allowed to issue notes. Among these, the Bank of Scotland series all feature Sir Walter Scott (who was responsible for ensuring Scotland’s right to print its own money) on the obverse and either different industries (1995 series) or bridges of Scotland (2007 series) on the other side. The Royal Bank of Scotland printed notes in 1987 with Lord Ilay (one of the most powerful men in Scotland during the early 18th century) on the obverse and Scottish castles on the reverse. The Clydesdale Bank on the other hand features a variety of famous Scots along with different Scottish scenes or landmarks.
In Northern Ireland, there are four banks with the right to issue sterling notes. The Bank of Ireland issues uniform notes, with colour the only difference on the otherwise constant design (Hibernia and the shields of Northern Ireland’s counties). The First Trust Bank printed notes with generic people on the front and various designs on the back including the Spanish Armada. Danske Bank (owned by a Copenhagen based group) features various famous Irishmen on the obverse and Belfast City Hall on the other side. Finally, Ulster Bank notes all have a combination of three Northern Irish scenes (Mourne Mountains, the Queen Elizabeth Bridge, and the Giant’s Causeway).
In case you were wondering, the Channel Islands and the Isle of Man also have their own variation on the sterling. In addition, territories including Gibraltar, the Falkland Islands, and Saint Helena print their own currency (also known as the pound), which is on par with the sterling. In the interest of sanity, we’ll leave these designs up to your imagination.
Coins are uniform across the United Kingdom as the Royal Mint produces them all. Queen Elizabeth II is featured on all coins while the reverse usually features a segment (or entirety) of the Coat of Arms of the United Kingdom. If you’ve ever been the UK, you’ll know that the coins come in different sizes that are not always reflective of their value.
The GBP has generally been valued at a high rate relative to the USD and CAD. Prior to 2008, the Bank of England raised interest rates, which caused the GBP to appreciate against other major currencies. This lasted until the Global Financial Crisis caused the GBP to depreciate dramatically. By late 2008, the GBP was almost on par with the EUR. The Bank of England also began quantitative easing in 2009, which was the first use of the process in the country’s history. The ‘Brexit’ vote caused the GBP to fall spectacularly against other major currencies. While it has recovered somewhat, the effects are still being felt.
The British economy is one of the largest, most advanced, and most globalized economies in the world. As the first country to industrialize, Britain assumed the position of the world’s dominant economic power throughout the 19th century. Though the UK is no longer as powerful as it once was, it remains a vital member of the international economic community – with large amounts of trade, membership in a variety of international and regional organizations, and a close relationship with the United States.
The service sector is dominant within the British economy and is responsible for about 77.8% of the total GDP. Among the many ‘service’ industries are creative industries (arts, advertising, architecture, publishing, etc.), education and health, financial services, and tourism. The production sector is also large with manufacturing and North Sea oil reserves among the most important components. Lastly, agriculture is highly mechanized and efficient, though its total share of the GDP is relatively small.
The City of London is a hub for commerce and finance second only to Wall Street. The British government generally ensures that the value of the pound remains strong in order to boost the finance sector – to the detriment of manufacturing.
The pound has always been one of the most important currencies, and it remains a major factor in the FX market today. Though the United Kingdom’s economic standing is no longer as strong as it was during the Victorian age, it remains a powerful player in international political and economic matters (albeit with the remaining uncertainty of ‘Brexit’).
Check out Continental’s Countries to get more information on both countries that use the pound and those that don’t – including Country of the Week profiles and Travel Guides.
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