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Currencies
GREAT BRITAIN POUND
Introduction | Overview | Structure | History | Factors affecting change in exchange rates | Daily trend of British pound | Weekly trend of British pound
Introduction


British pound, having the currency code GBP and numeric code 826 as per the ISO 4217 standard, is the official currency of the countries England, Scotland, Wales and Northern Ireland that form the Great Britain. The other names by which the currency is known as are sterling, British pound sterling and pound sterling, the last one being the official full name of the currency. "£" sign is used to denote the currency which is taken from the Latin word ‘Librae’ that was used for pound in the duodecimal monetary system. The British pound is divided into 100 equal pence.

The pound sterling is said to be the oldest currency that is being used currently. It is also ranked among the top most important currencies of the world along with United States dollar, Euro and Japanese yen. Another important fact about the currency of United Kingdom is that it bears the highest value among the major currency units of the world. Scottish pounds are often confused as a separate currency but British pounds and the Scottish pounds are interchangeable, posses equal value and are accepted throughout the Great Britain. That’s why it can be said that they are one and the same.

Overview


British pound is one of the most important currencies in the world. The facts that it is the oldest currency currently being used and also a highly valued currency among the major currencies of the world help it earn a third place with Japanese yen in the list of the most heavily traded currencies of the world. Few economies also tend to peg their currencies like Falkland Islands pound, Gibraltar pound and Saint Helenian pound to the pound sterling. One of the reasons for the heavy trade in the currency is the location of the largest foreign exchange trading hub i.e. London in the area where pound sterling is used as a currency. The currency uses a floating rate regime and can be easily traded in the foreign exchange markets.

The laws of legal tender regarding pound sterling often create confusions as they are complicatedly formulized. The banknotes of the currency issued by the bank of England are accepted in England and Wales but in Scotland and Northern Ireland, no banknotes are accepted and the use of promissory notes is done for the normal transactions. The contraction of the British economy has led to a highly volatile monetary system and that is why the value of the currency fluctuates frequently in comparison with the United States dollar and Deutsche Mark. This attracts the attention of the investors resulting in more of investment and more of hedging in the currency.

Structure

The structure of pound sterling was very different from the one prevailing currently until the decimalization concept was adopted into the British monetary system in 1971. In the times prior to 1971, a much complex system of subdivision was made use of in which one pound consisted of 20 shillings that were further subdivided in 12 pence each. That made one pound equal to a total of 240 pence. The shillings were denoted with the sign 's' that was derived from the Latin word 'solidus' and penny was denoted as 'd' that was again taken up from a Latin word 'denarius'. After the decimalization of the currency, one unit of the pound is divided into 100 equal pence instead of 240 pence.

Now, the symbol for a penny has been changed from 'd' to 'p' and coinage for 9 denominations is minted that are 1 penny, 2, 5, 10, 20, 50 pence and 1, 2, 5 pounds. The Royal mint performs the minting function for the British pound. These coins are accepted as legal tender only for a certain amount limit and are not used for the amounts exceeding that limit. Mentioned below are the amount limits for different denominations of coins

  • 1 penny coin - used for the amounts up to 20 pence

  • 2 pence coin - used for the amounts up to 20 pence

  • 5 pence coin - used for the amounts up to 5 pounds
  • 10 pence coin - used for the amounts up to 5 pounds
  • 20 pence coin - used for the amounts up to 10 pounds
  • 50 pence coin - used for the amounts up to 10 pounds
  • 1 pound coin – accepted as a legal tender for any amount
  • 2 pounds coin - accepted as a legal tender for any amount
  • 5 pounds coin – not frequently used

The bank notes for the currency are being issued for over 300 years now. Currently, the notes are issued for the just 4 denominations that are 5, 10, 20 and 50 pounds. These notes show the portraits of 4 historical characters from the history of the Great Britain namely Elizabeth Fry, Charles Darwin, Sir Edward Elgar and Sir John Houblon on the backside of the note and the portrait of the queen on the front side. The Bank of England plays the central bank but the printing function is performed by different banks for different notes i.e. Bank of England for the English notes, Bank of Scotland, Royal bank of Scotland and Clydesdale bank for Scottish notes, Northern bank, First trust bank, Ulster bank and Bank of Ireland for the notes in Northern Ireland, States of Jersey, Isle of Man.

History


The British pound sterling is arguably the oldest currency that is still in use. The word pound comes from the unit of mass called 'troy pound' and sterling is taken from the term 'sterling silver' used to identify high purity silver. For the first time in history, sterling (high purity silver), as a currency was introduced, by King Henry II in as early as 1158 though it wasn’t called sterling at that time and had 'Tealby penny' as the currency unit. Elizabeth I and her group of advisors launched pound sterling as a currency in 1560-61 to counter the inflation that arose due to the debasement of the silver coins that had been hampering the value of the currency.

Prior to the sterling, in the early medieval time, coins made of silver known as sceats were used as a currency and formed the basis of exchange. In that Anglo-Saxon period, the standard used as a measure of silver was tower pounds that weighed around 349.9 grams. Troy pound that is equivalent to 373.242 grams replaced the previous standard measure in 1526.

After pound sterling came into existence as a currency, the disarray in the British monetary system got efficiently cured up as it had the required strength to serve as unified and accepted currency. It held its value even during the situations of financial crises such as Civil wars and when the country adopted gold standards in context of valuation in 1816 during Napoleonic wars. Until World War I, the economy of the United Kingdom was going strong with a possession of 40% of the world’s total investment overseas. The war turned around the whole scenario making even the strongest economy go instable. The gold standard was readopted in the year 1925 in order to stabilize the economy. The great depression during the 1930s saw the steep decline in the value of the already recovering currency and after this phase was over, many attempts of making pound sterling peg to other currencies were made. Decimal system was adopted in 1971.

Factors affecting the exchange rates between two countries


The volatility in the foreign exchange rates depends upon a numerous macro economic factors that have different degrees of importance to different economies of the world. Some special and exceptional factors affecting the rates may also exist in the case of different countries. Following are shown the common factors on which the foreign exchange rate depends

  • Flow of imports and exports between the countries
  • Flow of capital between the countries
  • Relative inflation rates
  • Fluctuation limits on exchange rate imposed by the governments of the countries
  • Merchandise trade balance
  • Rate of inflation in the country
  • Flow of funds between the countries for the payment of stock and bond purchases
  • Relative growth
  • Short term and long term interest rate differentials
  • Cost of borrowings
 
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