A Brief History of the British Pound

The British Pound (GBP) has a long and storied history that stretches back more than 1200 years. In addition to its credible claim of world’s oldest living currency,[1] the pound plays a major role in the global foreign exchange, a market valued at $5.3 trillion per day.[2] While the pound is a symbol of British pride, it traces its roots back to continental Europe during the time of King Offa of Mercia, who introduced the silver penny that would quickly spread throughout the Anglo-Saxon kingdoms.[3]

GBP: A Brief History of Devaluation

The history of pound sterling stretches back more than a millennium, a period that has been described by historians as “one thousand years of inflation.”[4] As an interesting aside, the pound would not be referred to as “sterling” until after the Norman Conquest (the word originally referred to pennies, not pounds).

As one would expect, the value of the pound has declined significantly over the ages. According to David Sinclair’s The Pound: A Biography, one sterling coin bought you 15 head of cattle in the year 980. Since the 15th century, the pound’s value has declined four-hundred fold, according to Sinclair. Other estimates have shown that the value of Britain’s currency has declined 118 times between 1750 and the turn of the 21st century.[5]

The purchasing power of the pound isn’t the only feature of the currency that has declined over the centuries. In 1158 King Henry II reduced the coin’s silver content from 100% fine silver to 92.5% silver.[6]

GBP: A Brief History of Crisis

Like other currencies, the British pound has experienced its fair share of crises. In 1976 the pound declined 25% against the US dollar over nine months, forcing British lawmakers to approach the International Monetary Fund (IMF) for a loan. The IMF lent big, granting Britain a £2.3 billion loan in exchange for spending cuts. The loan amount seems small today, but was actually the biggest the IMF had ever made at the time.[7]

Who can forget investor George Soros’ famous shorting of the British pound in 1992? Betting that the Bank of England would be forced to abandon its peg of the German mark due to sky-high inflation, Soros began shorting the pound. When the British government finally gave up trying to prop up the pound artificially, the currency plummeted, netting Soros $1 billion. He has since been referred to as the man who “broke the Bank of England.”[8]

The pound is facing a new crisis in the early part of 2016, just months before Britons head to the polls to vote on whether to quit the European Union. The so-called “Brexit” vote has divided British voters, who are carefully weighing the pros and cons of EU membership. According to latest polls, 55% of voters wish to remain part of the EU versus 45% who want to leave.[9]

On February 21 the pound plummeted to its lowest level against the dollar in nearly seven years. When the dust settled, sterling lost at least 1% against all 16 of its major trading peers.[10]

The pound-to-dollar exchange rate declined more than 5% through the first two months of the year and is down nearly 20% since the July 2014 high of 1.7159.

GBP: Its Place in the Global Currency Market

The British pound reached its zenith during the nineteenth and first half of the twentieth centuries, when it was the preferred currency for both international trade and financial settlements.[11] In light of the economic consequences of World War II and the gradual breakup of Britain’s global empire, the pound began to lose its supremacy in the 1940s.[12] While sterling is still considered one of the five Majors, along with the US dollar, euro, Japanese yen and Swiss franc,[13] its role as an international currency has declined over the decades.

Today, the vast majority of global currency exchange involves the US dollar and euro. As of April 2013, the dollar was on one side of 87% of all currency trades, compared with 33.4% for the euro, 23% for the Japanese yen and 11.8% for the British pound. The dollar-to-euro (EUR/USD) exchange rate was responsible for 24.1% of daily turnover. This was followed by the dollar-to-yen (USD/JPY) at 18.3% and dollar-to-pound (GBP/USD) at 8.8%.[14]

Despite conflicting economic signals and fears about Brexit, the British pound remains the fourth most actively traded currency in turnover and third-most widely held reserve currency among world governments.[15] Since Britain is a major centre of global finance, demand for the pound remains relatively high. After all, London is one of the most favoured alternatives to New York for raising capital[16] and is home to one of the world’s biggest stock exchanges. While the short term outlook on sterling isn’t favourable, it is unlikely to lose relevance on the world scale anytime soon.

[1] Ed Lowther (February 14, 2014). “A short history of the pound.” BBC News.

[2] Bank for International Settlements (September 2013). Foreign exchange turnover in April 2013: preliminary global results. Bank for International Settlements Triennial Central Bank Survey.

[3] Currency Information and Research for the Foreign Exchange. The History of the British Pound.

[4] Ed Lowther (February 14, 2014). “A short history of the pound.” BBC News.

[5] Ed Lowther (February 14, 2014). “A short history of the pound.” BBC News.

[6] Currency Information and Research for the Foreign Exchange. The History of the British Pound.

[7] Cathy Newman and Chris Giles (December 9, 2005). “1976 sterling crisis details made public.” Financial Times.

[8] Andrew Beattie. “How did George Soros “break the Bank of England”?” Investopedia.

[9] The Week UK (February 26, 2016). “EU referendum: latest poll figures gives In camp ten-point lead.” The Week UK.

[10] Eshe Nelson (February 21, 2016). “Pound in Worse Day Since Banking Crisis as ‘Brexit’ Fears Bite.” Bloomberg Business.

[11] Patricia S. Pollard. The Creation of the Euro and the Role of the Dollar in International Markets. Federal Reserve Bank of St. Louis.

[12] Stephen D. Simpson (June 28, 2011). “The British Pound: What Every Forex Trader Needs To Know.: Investopedia.

[13] Investopedia. Forex Currencies: The Four Majors.

[14] Bank for International Settlements (September 2013). Foreign exchange turnover in April 2013: preliminary global results. Bank for International Settlements Triennial Central Bank Survey.

[15] Stephen D. Simpson (June 28, 2011). “The British Pound: What Every Forex Trader Needs To Know.: Investopedia.

[16] Stephen D. Simpson (June 28, 2011). “The British Pound: What Every Forex Trader Needs To Know.: Investopedia.

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