Pound Sterling

POUND STERLING. Immediately prior to the outbreak of the World War the pound sterling circulated in the United Kingdom in two main forms, namely, gold sovereigns and Bank of England notes. Both were legal tender for any amount, but the latter were not issued in smaller denominations than five pounds. In addition, certain banks, mainly Scotch and Irish, issued their own notes.

The relative purchasing power of the pound in Britain is shown in the table below. Abroad, it would purchase $4.87; 25.22frs., and 20.43 marks. The Bank of England had a note issue of £55,000,000, of which £30,000,000 was in circulation and the re mainder held in the Bank's own "Reserve." L38,000,000 in gold was held by the Bank, and an unknown number of sovereigns and half-sovereigns were held by the banks and the public. Gold was free to leave the country and the Bank was bound to redeem its notes in gold on demand.

War

the outbreak of the war, British bankers and financiers called their foreign funds home, and in so doing forced the American exchange for a day or two to above $5.00. Secondly, the public demand for gold ran the Bank's stock down from 38 to 27 millions, and its "reserve" of notes from 25 to 8 millions. Thirdly, a new form of pound had to be instituted to meet the public demand for currency. This was the currency note, issued by the treasury in denominations of one pound and ten shillings, which, like the sovereign and the bank-note, wa! legal tender for any amount.

The rise of the pound against the dollar was short-lived, wai expenditure, Government borrowing, and heavy purchases 01 munitions from abroad having their inevitable effect. The chect upon inflation imposed by the Peel's Bank Act had been abolishes by the institution of the currency-notes, which could be issue( without limit. Artificial means were adopted to maintain gok stocks and the pound against foreign currencies. The export of gold and even its withdrawal from the Bank was discouraged, anc the exchange on New York was "pegged" at parity. (See PEGGINC THE EXCHANGE.) Foreign securities were mobilized and bought up by the British Government to pay for imports of food anc munitions, and luxury imports were checked. At home, com modity prices were "controlled."

Great Britain came out of the war with over L320,000,000 in currency-notes and a huge floating debt, much of which was pure inflation, and when the props were removed from the pound the inevitable collapse followed, the relative purchasing power of the pound, wholesale, being as shown below:— In round figures, in early 192o, the pound had lost two-thirds of its value, measured in its internal purchasing power, and one third of its value as against the dollar. Furthermore, in 1919, when the exchange was "unpegged," the export of gold had to be pro hibited, or else all Britain's gold stocks would have been lost within a short space of time.

Post-war Recovery.

April 1920 to April 1925 was a period of such drastic deflation that at the latter date the gold standard could be restored; but the currency note remained part of the monetary system ; currency notes and bank-notes were made irre deemable in gold on demand; and the Bank of England was not required to sell gold in less quantities than 400 oz. fine (then equal to £5,700 in value). In 1928, the currency-note and bank note issues were amalgamated under the Bank of England, and the normal fiduciary note issue was fixed at £260,000,000.

Between 1925 and 1931 world prices gradually fell while British costs failed to follow. The result was that British prices stood some io per cent above the world level, causing an unbalanced trade position and a steady drain of gold. Through this and other causes, accentuated by the crisis of 1931, Great Britain aban doned the gold standard on September 21, 1931.

Thereafter the Bank of England was not obliged to sell gold at all, and the pound was free to vary in terms of foreign currencies. After many vicissitudes, including the devaluation of the dollar in 1934, the pound settled down at approximately its old parity with the dollar, but at about 6o per cent of its 1925-31 parity with the franc. In 1932 the government established a special Exchange Equalisation Account to minimise fluctuation in the exchange value of the pound. In 1935 there was no prospect of an early return to gold, but British prices had ceased to be above the world level. (See also MONEY; CURRENCY.) (N. E. C.)