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Martin Weale [*]

The article begins with an account of the way in which the value of the pound has changed over the last 1300 years or so. This is indicated in terms of silver and, for the last 7--800 years, also in terms of gold, wheat and Phelps-Brown's general cost of living basket. It is shown, for example, that the whole of the increase in the price of silver since 1000 has occurred in the last 60 years. These prices are used to indicate how the real wage of a building labourer has changed since the 13th century. The article then proceeds to an account of the evolution of the currency itself, from its beginning as a pound of silver cut into 240 pennies (following continential practice) to the move to a gold currency and the introduction of paper money. It concludes with a discussion of whether the whole concept of currency will eventually become obsolete.


The end of the millennium provides a reason for a retrospective account of our currency even though the article which follows is nothing more than a summary of information from secondary sources of which Feaveryear (1963) is much the most valuable. However the topic is given a contemporary interest by the debate over European Monetary Union and the prospect that a monetary system which was imported from continental Europe may be replaced by one of similar origin. The article begins with a very brief summary of movements in prices and living standards since the Middle Ages and follows this with an account of the development of the currency from its earliest days.

The value of the pound sterling

Silver and gold

One estimate of the value of the pound can be inferred simply from the price of silver, which, as is explained later, provides a thread going back to the earliest days of the silver penny. This means it can be calculated directly from the weight of the currency, at least until the coins became tokens in the 19th century. The price of gold offers another perspective going back to the 13th century.

A pennyweight of silver (24 grains) is 1/20th of an ounce troy and there are 12 ounces to the troy pound, giving the traditional figure of 240d to the pound. However Connor (1987) suggests that early silver pennies never weighed as much as one pennyweight. He prefers a weight of 20 grains (1.3gm) giving 24d (l0p) per ounce of silver, also suggested by Spufford (1988). The fact that ancient coins are worn means no exact weight can be established. We also adjust for the fact that coined silver was 925 per mille pure. At today's price, sterling silver is worth [pounds]3 per ounce, or [pounds]36 per pound. By this basic measure, the value of money has fallen to about 1/30th of its value in the Dark Ages, a rate of inflation of 0.3 per cent p.a. However, this record of monetary management appears less satisfactory when one is reminded that at the time of the recoinage after the Napoleonic Wars, the price of silver was about 5/- (25p) per ounce, giving a rate of increase of 1.4 per cent p.a. since then, and even mo re alarming when it is pointed out that silver in 1939 cost less than it had 1000 years earlier.

A second measure is set by the price of gold. The first gold coins, introduced by Henry II, gave gold a mint price of 17/9d (89p) per ounce troy of pure gold. The gold standard fixed by Sir Isaac Newton in 1717 valued gold at [pounds]414/l11/2 ([pounds]4.248) per ounce, giving a rate of increase of the gold price of 0.3 per cent p.a. between the earliest introduction of gold currency and the start of the gold standard. By contrast, the increase in the price of silver over the same period was 0.2 per cent p.a. The gold price was then stable -- apart from the period during which the standard was suspended (1797-1821) -- until 1931. Ownership of gold coin and bullion became illegal in the Second World War and was not permitted again until 1969, when sovereigns were sold for about [pounds]4. The 1970s saw a sharp increase in the price of gold, and its peak of [pounds]400 per ounce was reached in 1979. Since then, the price of gold has fallen, to [pounds]175 per ounce. But even this forty-fold increase since the e nd of the gold standard amounts to a rate of price increase of only 5.5 per cent p.a. Over the same period the price of silver has increased by 3.7 per cent p.a., reinforcing the general tendency of silver to cheapen relative to gold over the second millennium.


The third price we examine here is that of wheat. Data are provided by Beveridge (1939) from sources in Exeter, for the period up to 1818, and as UK averages by Mitchell (1962) and Mitchell and Jones (1971) for the period to 1966. Finally, Agricultural Statistics quotes prices which can be used for the most recent years. On this basis, the wheat rate of inflation has been 0.6 per cent p.a. since 1350 -- a 55-fold price increase.

Despite the inflation elsewhere, the price of wheat today is only four times what it was at the start of the 19th century. That was a period of poor harvests, when England came the closest to famine it had been since 1316 (Thorold Rogers, 1903). Just as with silver, the price fell very markedly between the early 19th century and 1939. Since wheat prices are now sixteen times their 1939 level one can almost say that, in terms of wheat as with silver, the equivalent of a whole millennium of inflation has come in the past sixty years.

Data on bread prices are less extensive, but the effects of the poor harvests at the start of the 19th century can be seen from the fact that bread prices too fell in the 19th century, after the bad harvests at the start of that century, and recovered in the 20th, so that the money price of bread in 1955 was the same as it had been in 1800. Since then, of course, the rising price of the labour involved in its production and distribution has meant that its price has moved way ahead of that of wheat.

Other prices

There is relatively less information on prices of other goods, although a number of observations do emerge from the late 13th century. In Farnham, a house was built by the Bishop of Winchester for a tenant for a price of [pounds]3/12/11/2 ([pounds]3.61); presumably this was on the manor where the Bishop already owned the land. The wine bought in 1290 cost 3 1/2d (1.5p) per gallon, but it is questionable whether it would appeal to today's taste; it was probably much weaker than modern wine. Board nails cost 2d (0.8p) per 100 and larger nails 4d (1.6p) per 100 (Robo, 1934). Today's nails would be made of steel and possibly galvanised, but similar quantities might cost one or two pounds.

The cost of living

Phelps-Brown and Hopkins (1955) provide a cost of living index compiled from the prices collected by Beveridge and others. It is weighted heavily towards farinaceous products for most of the period, and therefore its early movement is not very different from the price of wheat. However, the movements are more damped and, in the 19th and 20th centuries as the composition of the retail basket widens, the movements of the index become less and less like those of wheat. On the other hand, they also appear almost totally unrelated to the prices of silver and gold, indicating that, while a metallic standard might avoid the sort of rapid inflation experienced since 1935, there is no reason to expect it to deliver price stability. The price level rose on average by 0.37 per cent p.a. between 1300 and the end of the gold standard in 1931. Since then it has risen 44-fold, giving an overall rate of increase since 1300 of just under 1 per cent p.a. There is, of course, the usual question whether this adequately reflects the benefits of the increasing variety of goods which became available, not only during the industrial period but also earlier with the opening of the New World and the circumafrican trade with India and the Far East. But it is striking that the new monetary framework with an independent Bank of England is intended to deliver an inflation rate faster than the average of Britain's experience since the reign of King Edward I.

Labour costs

A different perspective can be obtained by looking at the rate of pay of a labourer. Shuckburgh-Evelyn (1798) quotes a figure of 2d (0.8p) per day for a labourer in 1050 and we use this to extend the figures provided by Phelps-Brown and Hopkins for the daily rate of a bricklayer's mate. The corresponding figure for a labourer in the construction industry quoted by Pay and Working Time for 1998 is [pounds]156 for a 40-hour week. This is an increase in the daily rate of 4500-fold, corresponding to a growth rate of 0.9 per cent p.a. over the millennium. Once again, most of the increase has come in the 20th century. The wage rate in 1900 was about 25 times what it had been in the 11th century; it has increased 180 times since 1900.

Prices in the 20th century

On the other hand, as the range of goods available has increased, so the disparity of price changes has altered. The bus fare in Central London which cost 3d (l.3p) in 1960 now costs [pounds]1, an 80-fold increase which can have been beaten by few other items (except perhaps the entry fee to Kew Gardens which has risen from id (0.4p) to [pounds]3 over the same period), although a man's haircut at a traditional barber's shop might have increased from 2/- (lop) to [pounds]6 in much the same time. The penny post, established in 1840, had increased to 3d (l.3p) in 1960 and since then has risen to 26p, an increase of over twenty-fold in forty years. On the other hand long-distance telephone calls have become much cheaper. A black and white television set (convertible to receive BBC2 but without the capacity to receive it) in the early 1960s could have cost [pounds]45 to receive two channels; now a receiver bought for under [pounds]100 shows five terrestial channels in colour. The prices of electronic goods such as calculators and computers have fallen very rapidly. These sorts of divergences undoubtedly reflect the disparate nature of technical progress driving the modern economy.

Real wages

The preceding data allow us to calculate four figures for the commodity wage, in terms of silver, gold, wheat and the cost of living basket. These four series are shown in Chart 1 (with the figures for the wheat wage and the wage divided by the cost of living (the real wage) calculated from centred 9-year moving averages). The graph is intended to show only relative price changes. No meaning should be attached to the absolute values of the figures shown except for the building labourer's wage which is in pre-decimal pennies per day. In the period up to the end of the 19th century we observe that the real wage fluctuated but with no obvious trend. These data are the basis of the view that living standards were little different in 1800 from 1350, although it seems more than a little remarkable given the great achievements during the period. We have already noted the question whether it adequately reflects the increasing variety of goods on offer.

The rise in living standards in the later Middle Ages is generally associated with the Black Death, which reduced the estimated population of England from 3.7 million to 2.2 million between the late 1340s and the early 1350s (Russell, 1948). This process was reversed from the mid-16th century onwards when the population of the early 14th century was regained; Brenner (1962) suggests that, between 1550 and 1600, a labourer's wages rose by only 14 per cent while food prices rose by 144 per cent and industrial prices by 60 per cent. The first half of the 17th century saw some recovery, with food prices rising a further 30 per cent while labourers' wages rose by 5O per cent and craftsmen's wages rose by 40 per cent. Brenner gives more weight to climate change than population growth as the cause of the overall decline and this may have been the main factor behind the fluctuations to the end of the 18th century. The graph of the wheat wage may indicate why Malthus (1798) reached his gloomy conclusions about fallin g living standards associated with rising population. On the other hand its movement since then cautions against a general practice of forecasting by extrapolation of recent trends.

Table 1 summarises these findings, showing the commodity/real wage at the end of each period as a multiple of that at the start. The increase during the 20th century amounts to a rise in the real wage of 1.2 per cent p.a. over this period.

From this account of wages and prices, we now present an account of the development of the pound sterling itself.

The origins of pounds, shillings and pence

Roman coinage circulated in Britain as part of the Roman Empire, of course. The green stains in the pavement of the Basilica Aemilia in the Roman Forum, caused by the melting of the money-changers' holdings in the fires which followed the entry of the Goths into Rome, remind us of the need for coinage in any commercial society. But the Roman withdrawal from Britain was followed, by about 435, by the demonetisation of society. Coin continued in use as jewellery but was not used as money again until the 7th century. This change was more abrupt than happened elsewhere in the former Empire; generally the barbarian tribes continued to mint coinage at the Roman mints and in the names of the emperors. The Roman coinage was mainly gold and copper, although silver money was also in use. [1] As society became less urbanised the need for small change died out: only in Sicily is there evidence of low-value copper coinage issued continuously from Roman times to the Middle Ages.

Meantime, the use of gold gravitated to the Eastern Roman empire to pay for the produce of Asia Minor. Thus, although the Anglo-Saxons resumed the use of coinage in the mid-7th century (Spufford, 1988), minting of gold stopped by about 670. The silver denarius was minted in the 670s in East Kent at much the same time as it appeared in the Frankish Kingdoms. Like the Frankish money, the denarii were minted to the same pattern and size as the gold [2] triens which they effectively replaced. The source of the silver used in East Kent is unknown; Spufford rejects the view that it came from Roman plate and suggests instead that it was mined in France. [3] It is unclear whether a pound of silver was cut into 240 denarii from the beginning, but it is plain that this happened at a very early stage, creating the accounting system with which readers in their mid-30s and older will be familiar. The modern shilling is equally venerable. In 745 a letter from Pope Zacharias makes clear that a solidus, the gold coin of the Roman Empire, was generally recognised to be worth 12 denarii. However during Anglo-Saxon times a smaller shilling, worth only 4d or 5d, was treated as a unit of account. The Franks and those who traded with them used the modern shilling of 12d.

A silver currency

The 8th century saw renewed international standardisation. French currency had declined in weight following the chaos of the Moorish invasion, but Charlemange set a new standard and, around 792, King Offa of Mercia brought the weight of his pennies in line with those of the Franks. [4] The quality of the coinage was of course very different from what we are used to. Although the silver pennies weighed about 1.3g, as mentioned above, and were about 20mm in diameter, the minting equipment available meant that the weights of individual coins varied considerably. The coinage was further affected by wear and by the activities of people who filed, sweated and clipped it. This last problem was not resolved until the 17th century when the edges of coins were milled, making clipping and filing obvious.

Coinage played its part in the national finances. Charges were made for minting currency until 1666. These varied between 2 per cent and 12.2 per cent of the value of the money coined. Once kings had the authority to insist that taxes be paid in money, this created a demand for currency which, on the one hand increased the general level of monetisation and on the other hand added to the king's revenue. From time to time additional revenue could be raised by demonetisation and re-coinage. If the old coin became worn or badly clipped, the king could oblige holders to sell it to him for re-coinage, by weight and not face value. The holders of the currency thus suffered twice: first, because the value of the currency by weight was less than its face value and second because they had to pay for its re-coinage. Re-coinages were relatively rare in Britain but some kings of Bohemia enforced them up to twice a year. Export of currency is, of course a means of avoiding the costs of re-coinage. In the 14th century this was punished by the death penalty, with the implication that the benefits of money as a medium of exchange in the domestic economy were to be denied in foreign trade - a situation which continued in some form until the end of exchange control in 1979.[5]

We have already seen that the link between British and continental currency was broken almost as soon as it was established. But continental coinage was subject to debasement, leading to the effective re-emergence of a copper coinage for the first time since the Roman Empire. No such process took place in Britain and the first copper coins did not appear until the 15th century. Instead, the silver penny was cut into halves and quarters in order to provide coins of lower value. Nevertheless, at a time when a silver penny would buy about five litres of probably undrinkable beer (by modern standards), one has to wonder what people in England after the Norman Conquest used for small change.

Gold coinage

Gold coinage was minted again in Europe in the 13th century. The coins of the Eastern Roman Empire had retained a function as an international currency, but the circulation of these was much reduced after the sack of Constantinople in 1204. In 1252 the Florentine merchants began to mint a gold coin, [6] known as the florin, and in 1257 Henry III minted his own gold penny with a weight of two silver pennies and valid at 1/8d [8.3.sub.p]. This undervalued the gold and it was not until an augmentation to 2/- [l0.sub.p] that they became acceptable, but only on a small scale; all trace of the gold pennies was eventually lost. The Florentine florin however, was a success. Its gold content was worth only 2/61/2d [12.7.sup.p] but the Florentines persuaded the world to value it at 3/- [15.sup.p].[7] In 1343 Edward III decided to emulate this, minting a florin with the weight of two Florentine florins to be legal tender at 6/- [30.sup.p]. But the coin did not circulate; neither the King nor the English merchants had th e power required to circulate a coin so much above its market value. Two years later the King dealt with his financial problems in a simpler way; he repudiated the debts to the Florentines which he had incurred to pay for the war in France. A significant issue of gold coinage was made only in 1351 on a basis much closer to the market price.

In the later Middle Ages the problems of a balance of payments deficit leading to a shortage of currency remained. In 1402 an Act of Parliament required that the whole of the proceeds from the sale of imports should be used to buy English goods for export. Periodic but modest debasement of the currency, however, occurred with the weight of both gold and silver coins being reduced. Henry VII introduced a gold coin known as a 'soveraigne' valued at 20/- ([pounds]1) and a silver shilling [5.sup.p], both familiar until the 20th century. He also reduced the mint charges to the lowest level recorded until their final abolition.

The debasement

it was Henry VIII who treated the management of the currency as a source of personal enrichment on a scale not seen before or since. In the early years of his reign the mint price of gold was fixed at [pounds]2/1/71/2d ([pounds]2.081) per troy ounce, as compared with the value of [pounds]4/4/11 1/2d ([pounds]4.248) fixed in 1717 by Sir Isaac Newton and in use at least notionally until the end of the gold standard in 1931. Sterling silver (925 per mille pure) was rated at 3/8d [18.3.sup.p] per ounce giving a price ratio of pure gold to pure silver of 12.3. At this time the flow of bullion from the New World had begun and one might have expected a general increase in the world money stock to lead to a rise in the prices of commodities. But the King remained short of money despite the dissolution of the monasteries. By 1540 he bought in silver at the mint price and used it to make debased coinage. An ounce of gold was valued at [pounds]4 and silver at 4/- [2O.sub.p]. The King made a profit of [pounds]30,000 in 1 542 from the issue of debased currency. In 1545 a brief war with France worsened the King's financial position. The price of silver was raised to 4/4d [2l.7sub.p] and of gold to 50/- ([pounds]2.50) per ounce, with further debasement in 1546. The profit from the mint in 1545/6 was [pounds]84,000.

Edward VI had little choice except to continue the debasement in order to clear his father's debts. Silver was bought at 6/6d [32.5.sub.p] per ounce but minted into coins with a face value of 12/- [60.sub.p] per ounce and the price of gold was raised to [pounds]3/1/10d. With [pounds]lm minted between 1549 and 1551 there was a profit of over [pounds]400,000. But prices rose by around two-thirds between 1547 and 1551 leading to great discontent. The debasement ended in 1551; Bloody Mary seems to have been more interested in Calais than in monetary matters and a successful currency reform had to wait for Queen Elizabeth. The task was much facilitated by the flow of silver from the New World. Restoring the currency was obviously practical but the key issue was how to do so without involving the Queen in any expense or loss. Eventually the price of sterling silver was fixed at 5/- (25p) per ounce, valuing the worst of the debased shillings at 2[frac{1}{4}]d (0.9p). These prices allowed for the expenses of re-minting and for wear and tear. The operation was a success and the Queen made a profit of [pounds]40,000 from the recoinage. The change served only to stabilise the general price level, no doubt because of the much increased supply of silvei; but the mint price of silver then established rose only to [frac{5}{6}]d (27.Sp) per ounce in 1816 at which level it stayed until 1920.

The Bank of England and the banking system

The development of modern banking was helped by an easing of the usury laws. In 1572 a maximum rate of interest of 10 per cent p.a. was permitted. The 17th century saw the development of the cheque, the bill of exchange and the promissory note. At much the same time goldsmiths began to offer safe deposit facilities for which they charged. The Civil War simulated the demand for such services. By 1645 small sums were being lent, but in 1656 the government began to borrow this deposited money and the business grew after the Restoration. The receipts the goldsmiths issued were negotiable, creating the first bank notes. These were, by modem standards, for large amounts of money. The first record of a transaction, by Peyps in 1668, was of a note for [pounds]600.

The monetary system took on another aspect of its modern form with, in 1694, the founding of the Bank of England. This was set up with the express purpose of lending money to the Government at 8 per cent per annum. In return it was incorporated as a joint-stock bank allowed to receive deposits and create a credit currency, which it did mainly by discounting further public sector debt. By late 1696 its balance sheet had expanded to just over [pounds]2.lm.

Establishment of the Gold Standard

During the period of the Restoration the credit expansion had the effect which might be expected. Prices rose. The silver currency was the main reference point, so the gold guinea which had initially been valued at [frac{21}{2}]d ([pounds]1.05 8) rose in price to reach 30s ([pounds]1.50); the rise was helped by the poor condition of the silver coinage and alleviated by recoinage of the latter. The price of a guinea fell to [frac{21}{6}]d ([pounds]1.075) by 1699. Newton, the Master of the Royal Mint, showed that, even at this level, the price of gold was too high, as compared with the ratio of gold to silver on the continent. The price of a gold guinea was reduced to the familiar level of 21s ([pounds]1.05) in 1717, giving the mint price of 22 carat gold of [pounds]3/17/10[frac{1}{2}]d ([pounds]3.894) and of pure gold of [pounds]4/4/11[frac{1}{2}]d ([pounds]4.248) per ounce troy. At this level the price of gold was still high relative to that of sliver. An inflow of gold coin took place while full-weighted sil ver disappeared from circulation.

It is worth drawing a contrast with the experience of Edward m. He tried minting coins with a face value above their bullion content and found they did not circulate. Now, the same situation simply led to a large inflow of gold. The mint price of silver was below the market price while that of gold was above its price on the continent. The gold coin became the reference value for the currency while the full-weight silver coinage was exported by the East India Company.

The circulating silver was often in such poor condition that one could not see whether it was British coin or not; indeed by the late 18th century a variety of tokens issued by tradesmen were supplemented by 3/- (15p) and [frac{1}{6}]d (7.5p) tokens from the Bank of England, together with old French twelve and twenty-four sous coins. The latter were by this stage in France worth only ten or twenty sous but gave a profit of 20 per cent when circulated in Britain as 6d (2.5p) or 1/- (5p). The problem was not resolved until 1816 when the mint value of sterling silver was raised to [frac{5}{6}]d (27.5p) per ounce, but silver was bought in at the market price. This had the effect of reducing the silver to a token coinage and functioned efficiently until the market price of silver rose briefly above [frac{5}{6}]d per ounce in 1920. Thus, although the gold standard was established almost accidentally at the start of the 18th century, it took another hundred years before its consequences for the silver coinage were p roperly recognised. More by luck than anything else Britain avoided the problems caused by a bimetallic system -- an attempt to maintain a fixed price of silver in terms of gold.

Credit money

The 18th century also saw the development of credit money. Notes issued by private bankers were supplemented by a range of other media. These included Bank of England bills and notes, malt tickets and lottery tickets. Malt tickets were interest-bearing debt, issued by the government to be repaid out of a tax on malt. Exchequer bills circulated, payable on demand at the Bank of England, but also commanding an interest of 1d per cent per day or 11/2 per cent per annum. The denominations of paper money were initially large, with coin being used for paying wages and everyday transactions. But as the 18th century progressed, the shortage of silver coin made notes with a value as low as 6d more common. Poor and illiterate people could not be expected to assess the soundness of every low-value bank note they received and in 1765 the issue of notes with a value of less than [pounds]1 was therefore prohibited in Scotland, with the ban extended to England and Wales in 1775. In 1777 English notes with a value of less th an [pounds]5 were required to be made out to the order of an individual and endorsed with a witness' signature each time they changed hands. In Scotland, however bearer notes of less than [pounds]5 remained legal.

From its earliest days the intention had been to give the Bank of England a monopoly of joint-stock banking. Other banking operations in England were limited in size to no more than six people. This law did not, however, apply in Scotland where three joint-stock banks (the Bank of Scotland, the Royal Bank of Scotland and the Clydesdale Bank) were set up. At this time, of course, none of the bank notes were legal tender - meaning that people were not obliged to accept them in settlement of any debts. Indeed the customers of the country banks would probably have refused to accept Bank of England notes which circulated only in London. On the other hand in the capital the private bankers found they could not compete with the Bank of England in terms of note issue, and focussed their business instead on a deposit system, with cheque book accounts and a clearing arrangement: the first permanent clearing house for cheques was set up in 1775. [8] The country banks deposited their reserves with the London banks rather than with the Bank of England directly.

The 18th century banking system was affected by periodic crises. The beginning of the war with France in 1794 led to a banking stoppage which started in Newcastle and spread throughout the country. The government resolved the situation by making a special issue of Exchequer bills, lending at 5 per cent p.a. money it had itself borrowed at only 33/4 per cent p.a. to those who were in difficulties. The mere announcement of this plan eased the situation, but a total of just over [pounds]2m was lent out. Everything was repaid and the government made a small profit from the transaction.

Suspension of gold payments

The demands of the war led to a gradual loss of gold from the Bank of England. In 1797 concern about a French invasion increased and 'timid people everywhere began to withdraw guineas from their banks and bury them' (Feaveryear, 1963). On 21 February a rumour circulated that a large fleet of French transport ships had been sighted off Beachy Head and on 25 February the news reached London that the French had landed in Wales. Although the invasion force was small enough to be pointless, there followed a general run on the banks and the Bank of England's reserve of coin was exhausted. The next day an Order in Council prohibited the Bank from issuing cash and so suspended the gold standard.

Without gold coin it was obvious that lower value notes were needed and the issue of low-value notes was permitted within a few days. At this stage the only legal tender was the badly-worn silver and copper coinage. Nevertheless, the public became happy to accept country bank notes which were convertible only into Bank of England paper; the main currency was one which had no basis for its value except (i) the expectation that it would continue to hold its value and (ii) the fact that it could be used to settle payments of tax to the government. On 3 May, however, Bank of England notes did become legal tender. A year later, there was a fall in the price of silver which made minting attractive once again. As this threatened to take the currency back from a (suspended) gold standard to a silver standard, the mint was closed, doing nothing to alleviate the shortage of silver coin, but preventing the return to a silver standard.

Although there were a number of occasions soon after the suspension of 1797 when the Bank felt itself ready to resume payments of cash, the government refused permission. Instead the country had a paper currency which no one had any real idea how to manage. Given this state of affairs, it is perhaps remarkable not that inflation took place but that, by 20th century standards, it was so modest. The Bank of England maintained that it could not be responsible for excessive credit; it merely supplied public demand. Modern monetary theory teaches us that such a policy is inflationary if the term on which credit is supplied - the interest rate - does not respond either to the amount of credit outstanding or to some more general monetary indicator such as the inflation rate. The price of gold rose to [pounds]4/6/Od ([pounds]4.30) per ounce in 1799. It then fell back but there was renewed inflation towards the end of the first decade of the 19th century with gold rising to [pounds]4/12/0d ([pounds]4.60) per ounce. Go ld coin was believed to change hands at a premium, but there was no established market because it was widely believed that a law from the days of King Edward VI prohibited trading in gold coins at more than their face value. Eventually a prosecution was brought, but it resulted in acquittal on the grounds that, since paper money had not existed in Tudor days, the law could have nothing to say about the price of gold coin in terms of paper.

In 1809 Ricardo argued that excessive issue of bank notes was the cause of the rise in the price of gold and the House of Commons set up a committee to investigate the cause of the high price of gold bullion and the depreciation of sterling on the foreign exchanges. This came to the same conclusion as Ricardo, although the Bank of England stuck to its argument that it had issued paper only to meet public demand. A director, Jeremy Harman, stated "I must very materially alter my opinions before I can suppose that the exchanges will be influenced by any modifications of our paper currency". The Committee recommended a return to the gold standard but this was rejected by the House of Commons.

The price of gold remained high during the Napoleonic wars, reaching [pounds]5/7/0d ([pounds]5.35) per ounce at the time of the Battle of Waterloo. Peace was, however, followed by a general fall in prices and in 1816 the Bullion Committee of the Commons, which had remained in session, produced proposals for reforming the currency. Silver coins were to become tokens, with the silver in them priced at 5/6d (27.5p) per ounce, but they were to be legal tender only for amounts up to [pounds]2. The law also gave scope for the Royal Mint to be obliged to buy silver at the price of 5/2d (25.8p) per ounce. This implied that the price of silver was to be bounded between these two limits, a policy which was bound to face difficulties if the market price fell below 5/2d. However, the problem was obviated because the requirement for the Mint to buy silver was never exercised and, for the next hundred years, it simply bought silver at the market price. Had the provision with regard to the purchase price of silver been impo sed the country would have moved back to the silver standard. 1816 saw the introduction of the silver coinage which was so familiar to our older readers; the silver 3d (replaced by a brass coin in 1937), the 6d, the 1/- and the half-crown (2/6d). The silver florin (2/-) was introduced in 1849 and bore the legend 'One tenth of a pound' marking the first tentative step towards decimalisation.

Gold coin was to be legal tender at any amount at the standard fixed 100 years earlier by Newton. New coins, sovereigns worth [pounds]1, were minted with a weight of 20/21 of that of the guinea and the new coin was announced current in 1817. The Bank had however anticipated this, and bought gold in the market at a price above mint price in order to resume gold payments. Initially this happened at a loss, but the Bank doubtless felt that, with adequate supplies of gold, it would be able to maintain the standard. They offered gold, initially only for the small notes dated before 1812 and later for more recent small notes. But by now the public had become accustomed to the convenience of notes. Those coins which did reach the public were returned to the banks in exchange for paper and the gold did not circulate initially. So much for the view that money with an inherent 'value' is preferred to a mere token.

The initial resumption of gold payments was ended for more traditional reasons. The price of gold rose again, and gold began to leave the country to be minted in more favourable circumstances abroad. An Act was passed allowing the Bank to suspend payments until February 1820. It then obliged the Bank to pay gold at prescribed but falling prices, leading to a full return to the gold standard at the old value in May 1823. The Bank was allowed to reduce the gold price faster by giving three days notice, but having reduced it, would not be allowed to raise it again. Finally, following a long history of unsuccessful attempts to prevent the melting or exporting of coin, these were legalised.

The return to gold and the regulation of paper currency

In fact the Bank was carried away by its deflationary enthusiasm. The price of gold fell to the gold standard level later in 1819 and large inflows of gold allowed it to resume full payments two years earlier than planned. The drawback of this policy was a general fall in the level of prices and a decline in economic activity. This deflation of course raised the real burden of the National Debt, which had reached a high level following the Napoleonic Wars.

Despite the fact that the gold standard was re-established, it was unclear how to regulate the issuance of notes. A banking crisis in 1826 was believed to have been caused by the excessive issue of notes by hundreds of small banks, and in 1826 values of below [pounds]5 were no longer allowed to be issued. The intention was to extend the ban to Scotland, but a multitude of petitions left

Scotland with its [pounds]1 notes. The real difference was that in Scotland there were the chartered banks while in England large-scale banking was prohibited. A second Act in 1826 ended this prohibition, with joint stock banking and associated note issuing permitted more than 65 miles from London. A number of other Acts regulating banking followed. In 1833, Bank of England notes were again made legal tender for amounts of above [pounds]5. The Bank Charter Act of 1844 finally established the monetary arrangements in the UK which lasted until the outbreak of the First World War. The fiduciary issue of the Bank of England was limited to [pounds]14m. Extra notes could be issued only as a counterpart to an increase in the Bank's gold reserves or when private banks of issue gave up their own issue.

The Bank of England thus provided the model for the sort of currency board arrangements which were used as the basis for currencies in parts of the Colonial Empire and the Dominions and, more recently, in the Baltic States after the end of the Soviet Union. At the same time the note issue of other banks was limited to what it had been on 6 May 1844 and banks with fewer than six partners lost the right to issue notes if they acquired more than six partners. Joint stock banks of issue retained the right of issue, but the restrictions were adequate to ensure the gradual decline in note issue by private banks in England. The last country bank of issue, in Somerset, merged with Lloyds Bank in 1921.

Scottish banking was not affected by these provisions. Acts in 1845 and 1846 made clear that Bank of England notes were not legal tender in Scotland or Ireland although the other provisions were extended throughout the United Kingdom. With large scale joint stock banking already well established in Scotland, the Act did not have the same effect of removing the private sector note issue and Scottish bank notes have remained with us. They are of course not legal tender in Scotland or anywhere else (although Scottish and Irish notes did become legal tender in Scotland and Ireland for the duration of the First World War).

These arrangements proved reasonably satisfactory for much of the 19th century. There were three occasions when financial crises led to demands for Bank of England paper which the Bank was unable to meet within the provisions of the 1844 Act-- in 1847, 1857 and 1866. In response, the Chancellor of the Exchequer promised an Act of Indemnity in order to ensure that adequate liquidity could be made available. Nevertheless, with the benefit of hindsight one has to wonder how well the gold standard would have functioned without the big gold discoveries of the 19th century, first in California and then on a much larger scale in South Africa. Would commodity prices have been much lower? Would the world simply have been short of gold and relied on forms of paper which somehow managed to retain their convertibility? Or would the era of sound money have anticipated President Roosevelt's raising of the gold price as a means of dealing with the shortage?

The First World War

The Victorian financial system was not tested severely until the outbreak of war in 1914. On 1 August the Chancellor promised to introduce a Bill of Indemnity should the legal note issue be exceeded. On 4 August the Great War broke out. On 6 August an Act passed allowing the Treasury, not the Bank of England, to issue [pounds]1 and 10/- notes. These currency notes were legal tender in Scotland as well as in England and were payable in gold at the Bank of England. Feaveryear (1963) suggests however that, because the right was not stated on the notes, few people knew about it. Gold itself was gradually withdrawn from circulation from 1915 onwards, but the overall value of the currency in circulation rose from [pounds]200m in 1914 to [pounds]580m at the end of the war; the stock of currency notes accounted for [pounds]321m of this.

The gold standard fixed the exchange rate between sterling and other countries also on the gold standard, through arbitrage. When the exchange rate fell to the lower gold point, it became profitable to export gold and at the higher gold point bullion would be imported. But this mechanism stopped working during the war because the government refused to include gold in the warrisk insurance scheme and the U-boat menace made the risk of shipment to North America prohibitive. Thus a form of the gold standard was maintained during the war years even though the substance -- free export of gold and circulation of gold coins-- ended.

Prohibition of gold exports

The end of the Great War meant that it was no longer possible to rely on German submarines to keep Britain on the gold standard, and on 1 April 1919 the export of gold was prohibited. Melting down of gold coin had already been prohibited in 1916. After the First World War, the United States continued to maintain a gold standard so that the price of gold could be inferred directly from the US dollar exchange rate. It was a fall of the sterling/dollar rate after a war-time peg was ended which led to the prohibition of gold exports so as to prevent arbitrage between gold and dollars. Nevertheless, the convertibility of bank and Treasury notes into gold was not suspended and in that sense the most fundamental aspect of the gold standard was maintained between 1919 and 1925 (Hawtrey, 1947).

The authorities now thoroughly absorbed the doctrines of 100 years earlier, that sterling was depreciated because of an excessive issue of money. The issue of Treasury notes for 1920 was limited by its maximum for 1919 and in subsequent years the legal maximum was set by the actual maximum of the previous year.

The silver currency was also affected by the war. Between 1894 and 1913 the market price of silver averaged 2/3 1/2d (ll.5p) per ounce, from which the mint produced coin of value 5/6d (22.5p) but in August 1920 it rose to nearly 7/6d (37.5p) per ounce. The difficulty was only brief. In 1920 the average prices of silver remained below the mint value, and from 1921 onwards the price of silver fell back. However the historic link with the silver penny of Saxon days was ended. The purity of the silver was reduced from 925 to 500 per mille.

The end of convertibility and of silver coinage

During the period of suspension the pound was of course floating freely on the foreign exchanges without the reference point of any monetary target, although the note issue was, as noted above, controlled. But it is wrong to argue as Alogoskoufis and Smith (1995) do, that this left the level of prices in general without any anchor. The monetary policy was to return to the prewar dollar exchange rate and, in so far as prices are influenced by future expectations of monetary policy, this should have provided all the anchor that was needed. In February 1925, sterling recovered to $4.75, as compared with the gold standard parity of $4.86 2/3 and in April Mr Churchill, as Chancellor of the Exchequer, announced that the prohibition on the export of gold was to be ended. The Gold Standard Act of 1925 ended the prohibition on export of gold, but at the same time ended the Bank's obligation to pay out gold coin in exchange for bank notes. Instead, the Bank of England was obliged to sell bars of 400 ounces of gold at N ewton's price of [pounds]4/4/11 1/2d per ounce of pure gold. There was, by now, no pretence that a gold standard meant the ability to exchange individual Bank of England notes for gold coin. 1928 saw the Bank of England take over the Treasury note issue but the arrangement lasted only until the crisis of 1931, when gold convertibility finally ended.

From the point of view of the ordinary person worried about the 'pound in your pocket', the ending of the gold standard in 1931 was an irrelevance. The paper currency took the structure which lasted until the withdrawal of the 10/- note in 1969, in advance of decimalisation. There was, however, one important change to the coinage which took place in this period. During the Second World War the government borrowed from the United States the silver needed to maintain the 1920 purity of the silver coinage. After the war this had to be repaid and the necessary silver was found by replacing the silver coinage with a cupro-nickel substitute. Thus in 1947 for the first time UK coins were minted without the use of any precious metal. The new cupro-nickel coins were, however minted to the same size and weight as the old silver currency and it remained the case that all silver coins minted following Lord Liverpool's reform of 1816 were legal tender.

In 1957 the Bank of England withdrew its traditional white [pounds]5 notes, because they were too easy to forge. They were replaced by more intricately-engraved blue notes. In 1960 the [pounds]1 and 10/- notes were replaced by designs which showed, for the first time, the Queen's head on them. As methods of copying bank notes improved, so it became necessary to make them more and more intricate. Eventually, the metallic thread, which had been introduced in 1940, became visible and the notes were redesigned using colours which were particularly difficult to reproduce.


When the UK changed in 1971 to a coinage based on the decimal system, the shilling and two shilling pieces survived, as 5p and l0p. Again, they were minted to the 1816 weight and into the early 1990s one found both decimal and pre-decimal coinage in daily change. Decimalisation proceeded in stages. Coins marked 5p and l0p were first minted in 1968. As a response to the effects of inflation the decimal 50p coin had replaced the 10/- note in 1969. In 1971 the new copper coinage of 1/2p, 1p and 2p was introduced and the currency finally became decimal. The old penny, the brass 3d and the half-crown disappeared from circulation almost immediately. The old 6d, worth 2 1/2p, continued for a few years, but it is fair to say that the overall change was achieved faster than expected.

As the ravages of inflation continued, in 1983 a [pounds]1 coin was introduced and in 1984 the 1/2p was demonetised. Initially the [pounds]1 coin was unpopular but, as with any monetary change, people soon became used to it. In the 1990s it was decided to address the problem that, with prices several times higher than they had been in 1971, the coinage was heavy and inconvenient for the sort of transactions for which it was needed. In 1982 a 20p coin was introduced and in the early 1990s the 5p, 10p and 50p coins were reduced in size. Only at this stage did the last remnants of the 1816 currency, the old shilling pieces, and the slightly newer florins cease to be legal tender. Finally a [pounds]2 coin was introduced in 1997. The bronze coinage suffered from the problem which had plagued the silver currency periodically. In the late 1980s the cost of producing the coins rose above their face value. Rather than make them smaller an ingenious alternative was copied from the United States where it had already bee n successfully introduced. Coins were made of steel and coated in copper, using the method first tried with silver by Henry VIII to improve the appearance of his debased silver currency. The replacement of the 10/- and [pounds]1 notes by coinage had a peculiar side effect. Bank of England notes of [pounds]5 and higher never became legal tender in Scotland or Northern Ireland, leaving them as probably the only countries in the world which conduct their financial affairs without the use of paper money as legal tender.

Commemorative currency

Inflation had another effect. The crown, worth 5/- (or 25p), disappeared from general circulation at the start of the 20th century but continued to be minted for commemorative purposes in the 20th century. Thus there was a crown for the King's Jubilee in 1935 and for the coronations in 1937 and 1953 and the Festival of Britain in 1951. In 1965 for the first time a commoner was shown on the coinage, when crowns were minted in memory of Sir Winston Churchill. As the 20th century progressed the range of events worth commemorating expanded (e.g. Royal Weddings and the 80th birthday of the Queen Mother). But by 1990 the crown seemed an inappropriate medium and it was replaced by a coin, also called a crown, with a value of [pounds]5, the issue of which continued unabated in the 1990s; it was used to mark events such as the death of the Princess of Wales and the year 2000. However the need to commemorate was not sated by the issue of special coins which were legal tender but did not enter general circulation. Brita in's entry into the European Community in 1973 was marked by the minting of a special 50p coin. Perhaps tactlessly, the next special 50p marked the 50th anniversary of the Normandy invasion. In 1998 another special 50p marked the 50th anniversary of the National Health Service. The [pounds]2 coin was seen as an appropriate medium to mark the Rugby World Cup which was played in the UK in 1999.

The future of money

Looking ahead one must wonder what are the prospects for the currency in the new millennium. The most obvious one is abolition. Should Britain decide to join the European Monetary Union, the pound sterling will finally disappear from our pockets. King Offa's aim, of giving Britain the same currency as that on the continent, will finally have been achieved only 1200 years after his initial attempt.

It is perhaps more interesting to speculate whether the whole concept of currency will fade away (see King, 1999). Or rather, whether the role of a generally acceptable medium of exchange will disappear. Some sort of unit of account is always going to be needed. But with the spread of computing devices which are linked to each other, the need for a residual currency as a means of settlement may no longer be necessary. At the moment it is not possible to pay for a newspaper with government stock. The price is uncertain, the denomination is large and dealing costs are an obstacle. But it is just about possible to imagine a fully-computerised clearing system in which financial markets are liquid enough for the security the shopper wants to sell in order to buy a newspaper to be traded for the security which the newsagent wants to buy. When this becomes possible, currency will be unnecessary and expensive to hold. Money will finally die away and be replaced with a form of barter; the main difference from the syst em of barter which money replaced will be that the transactions costs associated with traditional barter will be avoided by an instantaneous clearing system.

On the other hand, even in such an environment there are bound to be some means of settlement which have special status. The range of media in which one can make payments to the government or to the courts is likely to be determined by law and therefore narrower than those with which private individuals can settle. As we have seen, Scotland manages without the concept of legal tender and even in the rest of the country, most debts are settled through bank accounts without any currency being involved, but equally without money having lost its importance as a reference point. If currency disappears from our daily lives, it seems unlikely that it will retain that role.


An article of this sort is not needed to demonstrate just how different the 20th century and, to a lesser extent, the 19th century, have been from the rest of the millennium. However, the rate of economic progress displayed in the data on real wages is even more remarkable than the fact that the inflation of the 20th century has no counterpart in the rest of the millennium. Whether the pound sterling will survive far into the new millennium is difficult to judge. Even if an obituary is premature, one should perhaps conclude by comparing its record with those of other currencies.

Despite the inflation since 1945, the pound has a much better long-term record than many of its competitors. Since the mid-l9th century there are three major currencies which have fared better than sterling. The US dollar has appreciated from $4.87 under the gold standard to around $1.60 today, with the Canadian dollar showing a smaller appreciation to $2.30. The Swiss Franc (which was originally the same as the French Franc) has risen from SFr 25 under the gold standard to around SFr 2.5 today. Its parent, on the other hand, has depreciated to around 1070 francs (10.70 New Francs) to the pound. The experience of the Italian Lira, which also started life as a Franc, has been worse, while the 19th century currencies of Germany, Austria and Russia became completely valueless.

It is likely that, whether sterling joins the European Monetary Union or not, money values will, as long as the concept exists, be more stable in the coming millenium than they have been over the last seventy years; nevertheless, the inflation targets adopted by both the Bank of England and the European Central Bank guarantee that the currency will continue to depreciate. As is suggested above, if money is to become obsolete in the new millennium, the question whether Britain should join EMU may, with hindsight, appear to be purely political (or, as some would say, academic) instead of an important discussion about a matter central to people's lives.

(*.) I am grateful to Ray Barrell, Neil Miliward and Sig Prais for their comments. This research has been supported by the ESRC under its 'Evolving Macroeconomy' programme.


(1.) Matthew XXVI. 15.

(2.) But the gold was debased and consisted of two-thirds silver at this stage.

(3.) It had earlier been believed that the mining of silver had died out at the end of the Roman Empire and had not resumed until the 10th century in the Harz mountains and at Kutna Hora and Joachimsthal. The mint in Joachimsthal in the Sudetenland produced a coin known as the thaler which was corrupted to dollar.

(4.) The path to monetary union is not easy. Within two years Charlemagne raised the weight of his pennies to 1.7g.

(5.) But trade in bullion was permitted between 1819 and 1919, and from 1925-1939.

(6.) Gold coin was minted at much the same time in Genoa and Messina.

(7.) An experience which must cast doubt on the claim by Rolnick, Velde and Weber (1996) that "gold coins were valued in circulation by their intrinsic content (circulation by weight) rather than by their legal tender value".

(8.) An interesting comparison can be made with the United States. There, one of the main functions of the Federal Reserve System is to provide cheque clearing facilities. In Britain this has never been in the ambit of the public sector.


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Malthus, T. (1798), An Essay on the Principle of Population and its Effects on Human Happiness, reprinted by Ward Lock, London, 1890.

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Thorold Rogers, J.E. (1903), Six Centuries of Work and Wages, London, Swan Sonnenschein and Co.
 The increase in the commodity and real
 wage of a building labourer
 1350-1800 1800-1900 1900-1998
Wheat wage 1.2 5.7 10.6
Silver wage 5.1 4.9 6.8
Gold wage 3.9 2.2 3.4
Real wage 1.2 2.8 3.4
The table shows the wage at the end of the
period as a multiple of that at the start.
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Author:Weale, Martin
Publication:National Institute Economic Review
Article Type:Statistical Data Included
Geographic Code:4EUUK
Date:Apr 1, 2000

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