Like The Empire Itself, The British Pound Is Not What It Used To Be

Aug 29, 2019
Originally published on August 30, 2019 3:27 pm

The British pound sterling is the oldest currency still in use in the world, dating to the time when Britain was little more than a collection of warring fiefdoms regularly plundered by Vikings.

Since its first use in the eighth century, the pound has survived revolutions and world wars, the industrial age and Thatcherism, and today it remains a powerful reminder of the glory days of the British empire.

But over the years, the pound has lost a lot of its luster, and in the wake of the Brexit turmoil, some economists believe it will only keep losing value.

For Britain, the pound is a rich cultural symbol. Pound notes have been adorned with pictures of the most illustrious figures in British history, including William Shakespeare, Jane Austen, Winston Churchill and Charles Darwin.

The pound's place in British culture became apparent during the debate over the euro in the late 1990s. The nations of Europe were about to give up their francs, deutsche marks and lire in favor of a new currency they hoped would unite the continent in peace and prosperity and would solidify its political and economic power.

Tourists would no longer have to exchange money each time they visited a new country. Businesses could trade freely across borders, without worrying about currency fluctuations.

Only Britain balked at the change.

"We will not seek membership of the single currency on 1st January 1999," then-Chancellor of the Exchequer Gordon Brown told Parliament.

Today, the U.K.'s decision to stick with the pound — also known as sterling or, more colloquially, the quid — is seen by many economists as a prudent move, one that helped Britain recover faster after the Great Recession.

But Britain's decision was driven as much by culture as by economics.

"We're a very proud nation. Used to rule the waves," says British businessman Cliff Franklin, who lives in New York. "And the pound is dear to British people's hearts. And I'm sure it would have been a cultural nightmare to try to get rid of it and go into the euro."

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Throughout its history, as Britain's power grew, so too did the importance of its currency.

During the reign of Queen Victoria, Britain became a major commercial and industrial center. British capital financed railroads in India and Australia, shipping ports in Asia and cotton plantations in the United States. The pound could be used to buy and sell anywhere on Earth.

"If you go back to the 19th century, the British pound occupied the place in the global economy that the U.S. dollar does today," says Niall Ferguson, a senior fellow at the Hoover Institution and the author of The Ascent of Money.

But the 20th century, with its two world wars, saw a slow, gradual decline in Britain's power and a commensurate drop in the value of the pound.

"It's difficult to maintain a dominant currency if you put yourself through a world war as costly and destructive as World War I was for Britain," Ferguson says.

"The empire is no more," says economist Rex McKenzie of Kingston University in London. "The influence of the country has declined, and that is being reflected in the ... exchange rate."

One of the most dramatic chapters in the pound's long decline was known as Black Wednesday.

On Sept. 16, 1992, deep-pocketed investors led by George Soros made huge bets against the pound, ultimately driving down its value. Soros is said to have made more than $1 billion that day.

Before then, the pound was pegged to a basket of European currencies; afterward, the government was forced to let the pound float freely in currency markets.

Having an independent currency was a big advantage after the financial collapse of 2008, giving the Bank of England more flexibility to respond to a fast-moving crisis.

"The problem with the euro was that the policies that helped Germany weren't necessarily the ones that were right for Greece or Spain or Italy or other places," says Dartmouth College economist David Blanchflower.

Having an independent central bank "turned out to be a smart thing, and having a currency that you could depreciate was a really big deal," says Blanchflower, who sat on Britain's equivalent of the Federal Reserve committee that sets interest rates.

Britain has tried often over the years to prop up the pound, with diminishing success.

"My childhood was in some ways scarred by periodic sterling crises," Ferguson says. "I think they were my introduction to economics as a boy growing up in Britain."

More recently, the government's chronic inability to come up with a Brexit plan has sent the pound tumbling to a record low against the dollar, notes Simon Johnson, former chief economist at the International Monetary Fund.

When Britain voted to leave the European Union in 2016, the pound was worth nearly $1.50. Since then, it has steadily lost value and trades today at just above $1.20. Many economists think it could soon reach parity with the dollar, something that would be unprecedented.

A drop in value is something of a mixed bag for the pound. It makes imported products more expensive inside the country, but it also helps British companies compete by driving down the price of the goods they sell abroad.

Still, the pound's steady decline underscores the shifting fortunes of Britain itself and its diminished place in a global economy dominated by the United States and, increasingly, China.

How much further can it fall? Johnson doesn't want to hazard a guess. While the British economy is "running at a fairly decent clip right now," he says, confidence in Britain's ability to manage its departure from the European Union is waning.

"It depends, really, on how disruptive the Brexit developments are and precisely how that affects British trade," Johnson says.

Dartmouth's Blanchflower says the ongoing Brexit fiasco could send the pound's value falling below that of the euro or the U.S. dollar, something that's never happened before.

"The chaos that sits around a possible no-deal Brexit is scaring the markets," he says. "And so the pound is falling steadily."

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RACHEL MARTIN, HOST:

It's been some time since Britain's empire extended around the world. But the British pound, long a symbol of Britain's global power, is still a source of great pride in the country. Over the years, though, the pound has lost a lot of its luster. And the turmoil surrounding Brexit has hurt its stature even more.

Here's NPR's Jim Zarroli.

JIM ZARROLI, BYLINE: In the late 1990s, Europe embarked on a radical experiment. It got rid of Italy's lira, Germany's deutsche mark and the French franc, among others, and replaced them with a single monetary unit, the euro. Only one major country refused to get on board - Britain.

Here is then-Chancellor of the Exchequer Gordon Brown.

(SOUNDBITE OF ARCHIVED RECORDING)

GORDON BROWN: We will not seek membership of the single currency on 1 January, 1999.

ZARROLI: The decision was driven by much more than economics. The pound, also known as the quid or sterling, is a rich cultural symbol, a powerful reminder of the past glory of the British Empire. Pound notes have been adorned with some of the most illustrious figures in British history - Shakespeare, Dickens and Darwin.

Today people such as Jacqueline Kupfer (ph), a pharmacist's assistant in London, say giving up the pound is almost unthinkable.

JACQUELINE KUPFER: I think it's because it is so old. You know, you've got it in old books and literature and everything that talk about the pound. And it's part of our kind of culture, really. I think anything that you try to replace it with wouldn't - I don't know. It'd be a bit tacky, I think.

ZARROLI: The pound is encrusted with centuries of British tradition. One pound was long equal to 240 pence. It bewildered tourists. In 1971, the government decided to simplify things. One pound would now be worth 100 pence. It took some getting used to. Even students had to take classes in the new money.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED PERSON #1: Can anybody tell me how many new pennies we're going to have in one pound? Gordon.

GORDON: A hundred.

UNIDENTIFIED PERSON #1: It's a hundred new pennies.

UNIDENTIFIED PERSON #2: My mom doesn't like the 50 pence, but I do.

(SOUNDBITE OF SONG, "DECIMALISATION")

MAX BYGRAVES: (Singing) Gone are the days when 12 old pence added up to make a shilling - not much sense. The half-crown, too...

ZARROLI: The singer Max Bygraves even put out a song about the new pound.

(SOUNDBITE OF SONG, "DECIMALISATION")

BYGRAVES: (Singing) Now some people who were feeling very bright have put their heads together just to make things right. They have made it easy for every citizen because all we have to do is count from one to 10.

ZARROLI: Through all the changes, the pound has long symbolized Britain's economic might. At one time, the pound was used to buy and spend all over the world. It paid for roads in Africa and railroads in India. It financed cotton fields in the American South. Niall Ferguson is a senior fellow at the Hoover Institution and the author of "A History Of Money" (ph).

NIALL FERGUSON: If you go back to the 19th century, the British pound occupied the place in the global economy that the U.S. dollar does today.

ZARROLI: But as Britain's power waned, so did the pound. The government tried to stem the decline. After the Second World War, travelers were barred from taking pounds out of the country.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED NARRATOR #1: Hey. You can take your holiday or business allowance in traveler's checks but not more than 5 pounds in sterling notes...

ZARROLI: Efforts like these notwithstanding, Britain, over the years, would have trouble controlling the pound's volatility. Niall Ferguson remembers living through it.

FERGUSON: My childhood was, in some ways, scarred by periodic sterling crises. I think they were my introduction to economics as a boy growing up in Britain.

ZARROLI: In 1992 came what was perhaps the worst crisis of all. It was known as Black Wednesday. Deep-pocketed investors, led by George Soros, made enormous bets against the pound, and the whole world watched as the pound collapsed.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED NARRATOR #2: The most dramatic U-turn in government economic strategy for 25 years was forced on the prime minister and chancellor by the overwhelming pressure of billions upon billions of pounds being sold in the foreign exchange markets.

ZARROLI: Soros was said to have made a billion dollars in just one day. Since then, the pound has only lost more ground. Today it's worth just $1.20, a fourth of what it was worth almost a century ago. One big culprit lately has been Brexit. Britain's decision three years ago to leave the European Union sent the pound tumbling. The government's chronic inability to come up with an exit plan has driven it even lower.

David Blanchflower is an economist at Dartmouth College.

DAVID BLANCHFLOWER: The chaos that sits around a possible no-deal Brexit is scaring the markets, and so the pound is falling steadily.

ZARROLI: Blanchflower says the pound could soon be worth one dollar. In the history of the pound, that's never happened. Today the British pound, with all its glorious tradition, endures. But like the empire itself, it's not quite what it used to be.

Jim Zarroli, NPR News, New York.

(SOUNDBITE OF HANDBOOK'S "IN MY THOUGHTS (REMIX)") Transcript provided by NPR, Copyright NPR.