The Later History Of The Pound Sterling – From The Gold Standard To The Euro

The Later History Of The Pound Sterling – From The Gold Standard To The Euro

The History Of The British Pound
Chapter Three

Story Highlights:
This chapter about the history of the pound takes us from the early 19th century up to the present-day situation with information about:

  • The situation in 1800
  • Free trade and developments in the pound sterling
  • The official adoption of the gold standard
  • Who could issue banknotes
  • The meaning of the idiom “It’s money for old rope!”
  • Sterling and the British Empire
  • The effects of the 1st World War on sterling
  • The Bank of England’s monopoly on printing banknotes
  • Sterling and the 2nd World War – The Bretton Woods Agreement; Operation Andreas and Operation Bernhard
  • Currency restrictions in the 1960s
  • Decimalisation and the demise of the shilling
  • Sterling since decimalisation – Changing banknotes and coins; Sterling and the world of finance; Sterling in the era of the euro

The Pound Sterling – From the 19th to the 21st century

We start this chapter with a description of the situation for Britain and the pound sterling in 1800 before going through the most crucial changes for the currency taking us up to the present day. We explain the reason for the adoption of the gold standard and how much the banking system changed so that only the Bank of England was entitled to issue banknotes for use in England and Wales. We analyse the problems caused by both World Wars and the reasons for currency restrictions for Britons travelling abroad in the 1960s. Decimalisation is explained and we end with a consideration of what has altered for the pound since Decimal Day (1971).

The situation in 1800

Before the 1800s innovations in banking and the pound sterling had generally been driven by Great Britain’s need to be able to finance wars. The establishment of mints to strike coins had ensured England had enough money to fight or bribe Viking invaders. After the Norman conquest, measures to ensure the purity of silver pennies had given rulers the money to pay their soldiers fighting for English claims to the throne of France. Establishing the Bank of England had allowed British monarchs to fund further wars.

The Bank of England, which regulates the Pound Sterling

One consequence of this central bank was that it put in place a strong and trustworthy banking system, which enabled the first banknotes to be issued. Before then, coinage carried its value in the coins themselves – whether they were silver or gold. However, paper banknotes were only desirable if people knew there was a strong bank to reclaim their face value. After all, you wouldn’t accept an IOU from someone you knew was destitute and didn’t have the money to pay, would you?

Politicians had already had a taster of what could happen if their customers ever lost confidence in the Bank of England. During the financial crisis of the 1730s, customers had demanded their notes to be honoured with gold and the bank had only been saved at the last minute by the intervention of London’s merchants giving financial guarantees.

During the financial crisis of the 1730s, customers demanded their notes to be honoured with gold. The bank was saved by the intervention of London’s merchants giving financial guarantees.

Of course Great Britain continued to fight wars during the 19th century but financing wars was no longer the main driving force behind developments in the pound sterling. So what was the motivation behind changes in the period?

Free trade and developments in the Pound Sterling

The 19th century is a period when Great Britain continued its expansionist policies throughout the rest of the world but instead of wishing just to conquer territory/land, its main aim was to benefit trade. It’s no coincidence that many changes in sterling in this period allowed merchants and tradesmen to create wealth.

The first concern to ensure free trade was that the country should have the ability to mint the coins – both efficiently and quickly. For this reason, in 1810 the Royal Mint was transferred from the site where it had operated for centuries in the Tower of London and granted a more spacious area in adjacent Tower Hill. Also, the horse-driven machines were replaced by steam-powered machinery. By the end of the century, the Royal Mint was able to increase its output to an incredible 100 million coins a year.

The official adoption of the gold standard

In 1816 Great Britain copied the example of Germany and officially adopted the gold standard. The sterling silver standard was reduced to 66 shillings so silver coins became a token issue; they were no longer worth their value in this precious metal.

Gold, which was used to back the British currency officially in 1816

A year later, the gold sovereign was introduced. Worth 20 shillings, this 22-carat coin contained 113 grains (7.3 grams) of gold and replaced the guinea as the standard British gold coin.

In terms of trade, the main advantage of adopting the gold standard was that different currencies could be converted easily – and without dispute – by calculating each country’s respective gold standard. In the International Monetary Conference held in Paris in 1867 the United Kingdom was invited to join the Latin Monetary Union. However, after discussions held by the Royal Commission on International Coinage, the UK decided not to accept the invitation.


Before the 1800s most changes in sterling and the banking system had been driven by the need to finance Great Britain’s wars and pay for the army and navy.

After the 1800s the main concern of politicians was to establish a strong currency and banking system to facilitate free trade.

Improved mechanisation and a move to a bigger site allowed the Royal Mint to increase its production of coins.

In 1816 the United Kingdom officially adopted the gold standard to help financial transactions related to trade.

Who could issue banknotes?

Nowadays when banks are practically the same on every High Street, it’s difficult to comprehend how different the situation was in the 19th century when people tended to choose a local bank for reasons of security and/or familiarity. However, it also meant that privately-held banks were also able to issue their own banknotes. With gold shortages affecting the supply of money and the lesson learnt from the run on the Bank of England in the 1730s, politicians were concerned that such local banks wouldn’t be able to honour their financial commitments. This would have had disastrous results for the entire banking system.

The Bank Charter Act of 1844 restricted the issue of banknotes

As a result, the Bank Charter Act of 1844 restricted the issue of banknotes to the Bank of England within England and Wales. It was a limited monopoly because there were some exceptions such as banks which were situated 65 miles from the capital. Also, the rights of banks in Scotland and Ireland to issue their own sterling notes were retained in the Bank Notes Act of 1845. Ten years later, sterling notes were machine-printed for the very first time and were made payable to the bearer.

“It’s money for old rope!”

You’ve probably heard people use this expression when talking about getting something for nothing but do you know why we say it?

Nobody knows the exact origins of this idiom but one theory is that it comes from the 19th century workhouses where the inmates were expected to work on oakum. In other words, to separate the strains of old rope so that it could be re-sold as new.

Another possibility could be that the expression has a sea-faring past when old rope was used to caulk leaky ships. A more macabre suggestion is that it comes from the days of public executions when hangmen could supplement their income by selling off the rope used in hangings as souvenirs to a public that was less squeamish than we are today.

Sterling and the British Empire

With the exception of the American colonies (whose settlement coincided with the shortage of silver and who used the Spanish milled dollar as the main currency), the spread of the British Empire meant that sterling was often used alongside local currencies where it was recognised as legal tender.

The spread of the British Empire meant that sterling was often used alongside local currencies where it was recognised as legal tender.

Have you ever heard Londoners refer to £25 as a ‘pony’ or £500 as a ‘monkey’? It’s believed that this came from British soldiers who returned from service in India with 25-rupee notes (with a picture of a pony on it) and 500-rupee notes (showing a monkey) as part of their pay packet.

The effects of the 1st World War on Sterling

During the First World War the gold standard was suspended. Apart from its cost in human lives, the war had disastrous financial consequences for the United Kingdom. Before 1914, the country had 40% of the world’s investments but by the end of the war in 1918, it had £850 million in debts – mostly owed to the United States. The interest payments alone on these debts made up nearly half of all government spending.

In an attempt to stabilise the currency, the gold standard was readopted in 1925 but was set at the pre-war level. It had to be abandoned once again in 1931 as the impact of the Wall Street crash of 1929 began to make itself felt across the whole of the world during the Great Depression.

The Bank of England’s monopoly on printing banknotes

With the exception of Scotland and Ireland, successive bank mergers and/or closures in England and Wales meant that the Bank of England strengthened its monopoly over the issue of banknotes. The last Welsh note was printed in 1908 while the last private English banknote was issued in 1921 when the Bank of Fox, Fowler & Co. closed down in Somerset.

Banknotes themselves began to resemble modern notes too since in 1928 there were coloured banknotes for the very first time and they were also printed on both sides.

In the same year, the newly-established Irish Free State created the Irish pound (punt Eireann) and it was pegged to sterling until 1979.


In the mid-19th century Acts of Parliament specified which banks could issue banknotes giving the Bank of England a limited monopoly.

Sterling was used in parallel with local currencies in the Crown colonies.

During the 1st World War the UK came off the gold standard and efforts to reinstate it were hampered by the Depression.

In the early 20th century the Bank of England became the only bank entitled to issue banknotes in England and Wales and the notes themselves began to resemble modern banknotes.

Sterling and the Second World War

London heavily bombed during World War 2

The Breton Woods Agreement

In 1940 the United Kingdom made an agreement (the Bretton Woods Agreement) with the USA which pegged the pound sterling to the dollar at a rate of £1=$4.03. This enabled the pound to remain stable all through the duration of the Second World War (and right up to 1949). However, the threat was more real than they could possibly have imagined since the Nazis had plans to destabilise sterling as part of their efforts to win the war. Have you ever heard of Operation Andreas or Operation Bernhard?

What were Operation Andreas and Operation Bernhard?

Operation Andreas was the codename for the Nazi plan to forge British banknotes and to drop the counterfeit currency by plane over Britain so that the economy would collapse and hamper the war effort. Operation Andreas began in 1940 and almost immediately the plan was revealed to the British ambassador to Greece.

The Bank of England must have taken the threat seriously since during the war, it released an emergency blue pound note, which contained the extra security of a metallic strip. They also banned the import of pound notes from abroad, stopped the production of new five-pound notes and warned the public of the danger of counterfeit currency.

Operation Andreas ran for 2 years from 1940-42 and came to a halt because of disagreements among Nazi High Command. However, the plan was taken up again later in 1942 and given the codename Operation Bernhard. The plan was changed so that prisoners from Sachenhausen concentration camp were responsible for the forgeries and the counterfeit money would be used to finance German intelligence operations on the continent. The fake sterling was used to pay agents; bribe officials to sell British war plans; even to free Mussolini and simultaneously was intended to devalue the pound. Nobody knows how much was printed but estimates range from £132.6-£300 million.

Towards the end of 1945 a lot of the money was dumped in lakes (and some was later retrieved after the end of the war) but enough went into circulation so that the Bank of England took the matter seriously. They stopped releasing new banknotes for a time and issued a new design for sterling notes immediately after the war.

Currency restrictions in the 1960s

Because of worries about the falling pound and as the exchange rate of the pound against the dollar was considered too high, Harold Wilson’s government put exchange controls into effect limiting how much money Britons could take out of the country. This was set at £50 in travellers’ cheques and £15 in cash.

There had been calls for decimalisation from as early as the 19th century

Your first reaction might be shock at the idea of being told how much money you were allowed to take on holiday. Of course this measure would be impossible to implement nowadays with the availability of internet banking and credit cards. Your second reaction might be shock at the low limits; would it surprise you to learn that the modern equivalent is £650 and £195 in today’s money?


The Bretton Woods Agreement in 1940 pegged the rate of the pound sterling to the dollar and provided stability throughout the 2nd World War.

Operation Andreas was the code name for an unsuccessful Nazi plan to destabilise the British economy by dropping counterfeit money over Great Britain.

Operation Bernhard (1942-45) used the counterfeit sterling banknotes to finance German intelligence operations and to devalue the pound.

Currency restrictions in the 1960s restricted how much money Britons could take abroad with them.

Decimalisation – The demise of shillings

There had been calls for decimalisation from as early as the 19th century and the creation of the florin (the equivalent of a tenth of a pound) in 1849 had been a concession towards a decimal currency. However, the hostility of some bankers and the governor of the Bank of England meant that the Royal Commission on Decimal Coinage concluded that there was no merit to the plan. As a result, the idea of decimalisation was shelved for over a century until the proposal for a decimal sterling currency was revealed in the Queen’s Speech of 1966.

To make the transition easier for the British public, the first two decimal coins the 5-pence piece and the 10-pence piece were minted early in 1968 and were made the same size and composition as 1 and 2 shillings.

Preparations for Decimal Day (as it came to be known) began weeks before with informative TV programmes, songs and lessons in school to make sure everyone was aware of the changes. Decimal Day was on 15th February 1971 and for a time items in shops were priced in both currencies. Also, during this transition period goods could be paid in old pence but any change would be given in new.

It was the end of an era; the system of 12 pennies to a shilling and 20 shillings to a pound came to an end after over a thousand years. Gradually, the older coins, such as the sixpence, were removed from circulation.

Changing banknotes and coins

Since 1971 there have been changes in the appearance, size and composition of both sterling coins and banknotes. Some moves like the disappearance of the half-pence coin have come about because price rises have made the coins unnecessary. Other changes such as the replacement of the paper five-pound banknote with a polymer one have happened in order to ensure the currency is more durable. Featuring famous Britons on banknotes serves a dual purpose; not only are the notes more difficult to counterfeit but their appearance is also more attractive.

Picture of one Pound and Euro coins

Sterling and the world of finance

After the sterling crisis of 1976 and the decision to allow the pound to shadow the old German Deutsche Mark (1988), the pound is now allowed to float and is closely monitored by the Bank of England. It’s regained much of its former power and is now the 4th most traded currency (after the dollar, euro and yen). It’s also the 3rd most-held reserve currency in global reserves.

Sterling in the era of the Euro

In 1990 the United Kingdom joined the ERM (European Exchange Rate Mechanism) but this only lasted 2 years until it was forced to withdraw since economic problems made its membership unsustainable. In the same year, an opt-out clause was added to the Maastricht Treaty allowing the country to retain sterling when other member states adopted the euro. It was felt that the UK would be unable to meet the convergence criteria to join the euro without it affecting the economy. Also, there were questions raised about what the situation would be for areas in the ‘sterling zone’ (such as the Falklands).

The idea of joining the euro was found to be extremely unpopular in successive opinion polls since the pound sterling was seen as a symbol of British sovereignty. Bearing in mind the results of the 2016 referendum to leave the EU, the decision not to join the euro was probably, in retrospect, the right one. Imagine how much more complex the exit process would be if it also involved reinstating sterling.


Decimalisation took place in the UK on 15th February 1971 although the public had been prepared beforehand by an information campaign and the early minting of some of the decimal coins.

Since decimalisation there have been changes in sterling coins and banknotes for a variety of reasons.

Sterling has retained some of its former eminence in the world of finance since the crisis of 1976.

The UK’s decision not to join the euro was because of economic reasons but also because politicians knew it was massively unpopular with the public.


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