British pound: a historical overview
Currently, the British pound stands as the fourth most-traded currency in foreign exchange only surpassed by the U.S dollar, the euro and the Japanese yen. However, before the disastrous consequences of the Second World War, the pound sterling was, in fact, the most financially important currency across the world.
After the events of the Great Depression and the discontinuation of the Bretton Woods system which linked all currencies to the dollar and the dollar to the value of gold – the pound sterling started losing its shine and the U.S dollar replace it as the largest and most valuable currency instead, taking over in global trade transactions.
The pound has survived throughout the centuries and multiple conflicts both internal and external and while it doesn’t enjoy the spectacular performance of yesteryear, it still holds its own in the international financial landscape.
The genesis of the pound
When the currency first came to be, in the 8th century, it was in the form of pennies which were struck from fine silver. In fact, 240 of these silver pennies amounted to a whole pound of silver or approximately half a kilogram of silver.
However, while the first pennies were struck from pure silver, in 1158, King Henry II introduced a new coin that was struck from 92% silver which came to be known as sterling silver. Sterling silver coins were much more durable due to the addition of other metals into the mix.
If you are still wondering, this is where the pound sterling got its name from, even though back then, a whole pound would buy you a lot more than a can of coke and bag of crisps.
Unfortunately, however, the constant increase in demand for precious metals was a factor to consider and eventually the silver had to be abandoned for a cheaper alternative. Today a penny consists of steel with a copper coating.
The first central bank
The next big development for the British Economy came when the Bank of England was established in 1694. The Bank of England’s was the first central bank but ostensibly, its purpose was to fund the war with France by issuing promissory notes against gold deposits.
It was by that time that the value of the pound was derived from gold instead of silver and Sir Isaac Newton who was appointed Master of the Mint, priced it at 4.25 GBP per gold ounce.
As other countries adopted the gold standard, international trade started booming, facilitated by the easier conversion and exchange of currency.
The British economy was thriving and quickly started on the path from strength to strength leading to its domination of the global economy up to the 19th century. By pegging the pound’s exchange rate to the gold standard, the British economy offered confidence for traders and investors across the world.
The first world war
1914 was a turning point for the pound as the logistics of the war translated to increased inflation and the need of further banknote printing to stimulate the struggling economy. The gold standard was abandoned but it was re-established later in 1925 at the going rate of $4.86 per pound.
Before the pound could get a breather for the devastating consequences of the war, the global scale economic recession of the 1930s had already begun.
The downturn was the largest in Britain’s history and had a severe impact on the British economy which struggled to stay afloat after suffering exceedingly high unemployment rates and the loss of revenues across all industries. By 1931 the exchange rate vs the U.S dollar was $3.69 per pound.
World War 2
Leading up to the second world war, the pound actually started soaring against the dollar – climbing to the remarkable rate of $5. This wasn’t meant to last, however, since the war once again obliterated any of its gains.
In the aftermath of the war, the USA was the only country still under the gold standard which led to the dollar’s preeminence as the most valuable currency in the world and the rise of the U.S as the largest economy.
In 1944, according to the Bretton Woods system, the pound and the dollar were to be accepted by all countries as reserve currencies for debt settlement. However, in the period that followed, the pound continued sliding in popularity while the dollar only became stronger.
The national downslide continued well into 1967 where the government had to heavily devalue the currency in order to make exports more competitive, but inflation became even more pronounced and the exchange rate against the dollar started dropping well under $2.
Pounds to dollars
Taking a look at the historical performance of the GBP/USD pair’s exchange rate – the pound took a nosedive in 2019 dropping almost to 1.30 against its nemesis. Followed by a few years of slow recovery, the Brexit referendum was the impetus behind another devastating selloff.
The consensus among analysts is that if the ongoing Brexit drama doesn’t lead to an amicable divorce from the EU, the pound could very well be on its way to hit parity with the dollar.
GBP traders are currently playing it safe amid the uncertainty caused by the global tensions, sanctions, and trade-wars and therefore price action is becoming increasingly stagnant until further progress is made with the EU negotiations.