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The British pound is the informal name of the pound sterling, the unit of currency for Great Britain and its territories. It is the fourth most traded currency worldwide following the U.S. dollar, Euro, and Japanese yen, and it is third largest reserve currency after the U.S. dollar and the Euro. Because it is a freely traded currency, the value of the pound changes relative to other currencies.
Coins for the British pound first appeared around 1489, and the shilling was introduced two years earlier. Originally the British pound was divided into twenty shillings, and each shilling was worth twelve pence (or pennies). In 1971, Great Britain decided to eliminate the shilling and decimalize the British pound so that one pound was equal to one hundred pennies. The decimalized penny was minted as the “new penny” until 1981.
The value of the British pound was tied to gold until 1946 when it became completely convertible as a condition of a loan offered by the United States. After cutting ties from the gold standard, the British pound has been floated to several currencies including the U.S. dollar and the German Deutschmark. In 1992 the British pound was set at a value of DM 2.95 when it joined the European Exchange Rate Mechanism (ERM), but the government had to sever the agreement when the exchange rate proved untenable. In 1998 the government again floated the British pound to the Deutschmark with better results. Since the exchange rate was set lower, Britain was able to export more goods. As a result of Britain’s economic success in the late 90s, the value of the pound rose, and export rates fell again.
Since joining the European Union, Great Britain has had the option of using the Euro instead of the British pound, but the decision has been unpopular with the majority of the British public. Many British citizens have resisted losing a national symbol, while others are concerned that the move to the Euro will cause economic hardship, because their interest rates would rise once their currency is linked to the Second European Exchange Rate Mechanism (ERM II). For the moment the British pound is protected from the Euro through an opt-out agreement, but eventually all European Union nations are expected to use the Euro as their currency.
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