The British pound sterling, commonly known as the pound, is a fixture in the world of global finance and the world’s fourth most traded currency as of 2023. The pound is extensively involved in international trade and finance operations and is a key player in foreign exchange markets due to the United Kingdom’s historical and current economic policies and London’s status as a global financial hub. The UK’s dominant role in global financial services such as banking, insurance, and asset management means that fluctuations in the pound’s value can have widespread implications for global financial markets and investment flows.

For businesses, the pound is a stable and reliable vehicle for conducting trade, making investments, and pricing international contracts. For companies operating within and outside of the UK, transactions in pounds reduce the need for currency conversion, lowering transaction costs and simplifying accounting.

This guide will cover a brief history of the pound and all the countries where it’s currently used.

What’s in this article?

• History of the British pound
  
• Importance of the British pound in the world economy
  
• Which countries use the British pound?
  

History of the British pound

The British pound, officially known as the pound sterling, is the oldest currency still in use today and has a history that spans over 1,200 years. The pound sterling was first introduced by the Anglo-Saxons around the year 775 as coins minted from sterling silver, and 240 of these coins equaled one pound in weight, hence the name “pound sterling.” In 1066, the Norman invasion introduced the feudal system, and the pound started being used as a standard numerical monetary unit. The terms “shillings” and “pence” were also introduced during this time.

During the reign of Henry VIII (the Tudor period) in the 1500s, the pound underwent major changes including debasement to allow more coins to be made from the same amount of precious metal. Following the restoration of the Stuart monarchy in 1660, Charles II aimed to stabilize and improve the coinage quality, including the introduction of the gold guinea in 1663 that amounted to one pound. Over a century later, The Coinage Act of 1816 established a single gold standard for transactions, making the pound a stable and powerful currency and contributing to London becoming a major financial capital.

In the 20th century, the economic consequences of the World Wars and the end of the British Empire took a toll on the pound sterling. England abandoned the gold standard in 1931 and the pound underwent several devaluations, notably in 1949 and in 1967. On February 15, 1971, the pound was decimalized, moving away from the old system of pounds, shillings, and pence and establishing a simpler system where one pound was worth 100 new pence.

In the late 20th and early 21st centuries, the pound has faced competition from the euro, but it remains an important global reserve currency. The United Kingdom chose not to adopt the euro in the 1990s, reaffirming the pound’s symbol of British sovereignty. Throughout its history, the pound sterling has symbolized economic power and political and cultural influence in the financial realm.

Importance of the British pound in the world economy

As the oldest currency still in use, the British pound carries a prestigious historical significance and enjoys strong public trust in international finance. Its long history as a stable and reliable medium of exchange has contributed to its strong standing in global markets, and it influences many aspects of the world economy today.

• Reserve currency: The pound sterling is one of the world’s leading reserve currencies. This means that many governments and institutions hold large amounts of pounds as part of their foreign exchange reserves. The stability and liquidity of the pound make it a safe choice for storing value, which in turn supports its use in international trade and finance.

• Highly traded currency: The UK has a major role in international trade and investment, and the pound is used in international transactions across the Commonwealth and other regions historically linked to Britain. The pound is one of the most traded currencies after the US dollar, the euro, and the Japanese yen. This ensures continuous demand for and influence of the pound, and its role in global trade supports its strength and stability.

• Monetary policy indicator: Investors and economists worldwide closely watch policies set by the Bank of England, including interest rate decisions and other monetary policies. Changes in these policies can have far-reaching effects on global markets, influencing economic activities well beyond the UK.

• Economic indicator: Given the size and openness of the UK economy, the pound often acts as a barometer for broader economic trends in Europe and across the globe. Movements in the value of the pound can reflect changes in economic expectations and shifts in investor sentiment.

Which countries use the British pound?

The British pound, also known as pound sterling, is the official currency of the United Kingdom and nine additional territories.

• United Kingdom: The UK includes England, Scotland, Wales, and Northern Ireland.

• British Antarctic Territory: The British Antarctic Territory, a British Overseas Territory, uses the British pound.

• British Indian Ocean Territory: The British pound is the official currency of the British Indian Ocean Territory, a British Overseas Territory, though the US dollar is more commonly used.

• Falkland Islands: The Falkland Islands, a British Overseas Territory, uses the Falkland Islands pound, which is at par with the British pound. Both currencies are used interchangeably.

• Gibraltar: The British Overseas Territory of Gibraltar issues its own Gibraltar pound, which is at par with the British pound. British pounds are also legal tender.

• Guernsey: Guernsey, a self-governing British Crown dependency, uses the British pound and the Guernsey pound, which is at par with the British pound.

• Isle of Man: British pounds are legal tender in the Isle of Man, a self-governing British Crown dependency. It also uses its own version of the pound called the Manx pound, which is at par with the British pound.

• Jersey: Jersey, a self-governing dependency of the United Kingdom, uses the British pound and the Jersey pound, which is at par with the British pound.

• Saint Helena, Ascension, and Tristan da Cunha: Saint Helena, Ascension, and Tristan da Cunha, a British Overseas Territory, uses the British pound and the Saint Helena pound, which is on par with the British pound.

• South Georgia and the South Sandwich Islands: As a British Overseas Territory, the South Georgia and the South Sandwich Islands use the British pound.