The pound sterling of the United Kingdom was originally the value of one Troy pound of sterling silver, hence the name: Pound Sterling.
The Pound Sterling was adopted as the Royal Chartered Bank of England’s currency in 1694. England’s national debt increased exponentially from 1700 to the mid 1790’s thus making it extremely difficult to exchange banknotes for gold. The subsequent strain on the nation’s financial system led to what was known as the Restriction Period when in order for the bank to play catch up with its’ finances, it issued banknotes of one and two pounds in place of the actual coinage.
In further efforts to increase the stability of the pound, the Bank Charter Act of 1844 introduced the Bank of England as the only bank in the United Kingdom allowed to issue banknotes as a legal currency. This meant that all other banks in England and Wales were legally obliged to obtain their banknotes from the Bank of England. In Scotland, however, The Banknote (Scotland) Act of 1845 allowed Scottish banks to continue to issue their own Pound Sterling banknotes.
Having learned from the effects that inflation had on the financial market from the Restriction Period the Bank of England began to control the production of banknotes. This ensured that banknotes were only produced when there were gold reserves to back them. The Bank of England became a major lender to other commercial banks. As it was difficult to keep backing banknotes with gold standard while still lending to other banks the Bank of England had to set interest rates high to maintain the gold standard supply.
Shortly before the First World War, the treasury issued the small and simple cipher watermarked stamp paper 10/- and £1 banknotes. The Bank of England tried to return to gold standard after the war, but gold standard could no longer continue to work in the growing financial market. From 1932 to the present day, the only limitation on issuing bank notes is that of the UK Parliament’s approval.
Participating Members
The pound sterling is only used in the United Kingdom of Great Britain and Northern Ireland and the following British dependencies outside the UK: The Isle of Man, the States of Jersey and the States of Guernsey. The Bank of England prints and distributes money for England and Wales. The Bank of Ireland, the First Trust Bank, the Northern Bank, and the Ulster Bank print the notes for Northern Ireland. The Bank of Scotland, the Royal Bank of Scotland, and the Clydesdale Bank print and distribute the notes for Scotland.
Since Pound Sterling bank notes are printed in different parts of the UK, the design differs depending on where they are printed. Regardless of the region where the notes are printed, they should be accepted anywhere in the United Kingdom as legal tender. However, some people often do not recognise a ‘different’ looking note from elsewhere in the UK and subsequently consider it to be a foreign currency.
Use in the Empire
Sterling circulated in much of the British Empire. In some parts, it was used alongside local currencies. For example, the gold sovereign was legal tender in Canada despite the use of the Canadian dollar. Several colonies and dominions adopted the pound as their own currency. These included Australia, British West Africa, Cyprus, Fiji, Irish Free State, Jamaica, New Zealand, South Africa and Southern Rhodesia. Some of these retained parity with sterling throughout their existence (e.g. the South African pound), whilst others deviated from parity after the end of the gold standard (e.g. the Australian pound). These currencies and others tied to sterling constituted the Sterling Area.
Bretton Woods
In 1940, an agreement with the U.S.A. pegged the pound to the U.S. dollar at a rate of £1 = $4.03. This rate was maintained through the Second World War and became part of the Bretton Woods system which governed post-war exchange rates. Under continuing economic pressure, and despite months of denials that it would do so, on 19 September 1949 the government devalued the pound by 30.5% to $2.80. The move prompted several other currencies to be devalued against the dollar.
In the mid-1960s, the pound came under renewed pressure since the exchange rate against the dollar was considered too high. In the summer of 1966, with the value of the pound falling in the currency markets, exchange controls were tightened by the Wilson government. Among the measures, tourists were banned from taking more than £50 out of the country, until the restriction was lifted in 1979. The pound was eventually devalued by 14.3% to $2.40 on 18 November 1967.
The free-floating pound
With the breakdown of the Bretton Woods system — not least because mainly British currency dealers had created a substantial Eurodollar market which made the U.S. dollar’s gold standard harder for its government to maintain — the pound was floated in the early 1970s and so became subject to a market appreciation. The Sterling Area effectively ended at this time when the majority of its members also chose to float freely against the pound and the dollar.
A further crisis followed in 1976, when it was apparently leaked that the International Monetary Fund (IMF) thought that the pound should be set at $1.50, and as a result the pound fell to $1.57, and the government decided it had to borrow £2.3 billion from the IMF. In the early 1980’s the pound moved above the $2 level as interest rates rose in response to the monetarist policy of targeting money supply and a high exchange rate was widely blamed for the deep recession of 1981. At its lowest, the pound stood at just $1.05 in February 1985, before returning to the US$2 level in the early 1990s.
Source From : Wikipedia.org, www.advfn.com
