The Gold Standard

Sterling unofficially moved to the gold standard from silver thanks to an overvaluation of gold in England that drew gold from abroad and occasioned a steady export of silver coin, in spite of a re-evaluation of gold in 1717 by Sir Isaac Newton, Master of the Royal Mint. The de facto gold standard continued until its official adoption following the end of the Napoleonic Wars, in 1816 (Braudel, p. 361). This lasted until the United Kingdom, in common with many other countries, abandoned the standard after World War I in 1919. During this period, one pound could be exchanged for US$4.87.

Discussions took place following the 1865 International Monetary Conference in Paris concerning the possibility of the UK joining the Latin Monetary Union, and a Royal Commission on International Coinage examined the issues. Although the UK decided against joining, some of the arguments make interesting reading in the context of the current debate on the adoption of the euro.

Prior to World War I, the United Kingdom had one of the world's strongest economies, holding 40% of the world's overseas investments. However, by the end of the war the country owed £850 million, mostly to the United States, with interest costing the country some 40% of all government spending.

In an attempt to resume stability, a variation on the gold standard was reintroduced in 1925, under which the currency was pegged to the gold price at pre-war levels, although people were only able to exchange their currency for gold bullion, rather than for coins. This was abandoned on 21 September 1931, during the Great Depression, and sterling devalued 20%.

In common with all other world currencies, there is no longer any link to precious metals. The U.S. dollar was the last to leave gold, in 1971. The pound was made fully convertible in 1946 as a condition for receiving a U.S. loan of US$3.75 billion in the aftermath of World War II.

Pound sterling was used as the currency of many parts of the British Empire. As this became the Commonwealth of Nations, commonwealth countries introduced their own currencies such as the Australian pound and Irish pound. This evolved into the Sterling Area where those currencies were pegged to sterling.