Last Updated on October 7, 2024
The longest lasting fiat currency in history is the Great British Pound.
The pound dates back to 928, making it the oldest currency still in use, although it has only been a fully fledged fiat currency since 1971.
Initially defined as a weight of silver, the pound became a fiat currency briefly in 1745 due to the Jacobite rising and again from 1797 to 1821 during and after the Napoleonic Wars.
In both cases, the pound’s status as a fiat currency was short-lived. While the British government suspended convertibility during the crisis, they restored it when circumstances allowed.
The pound became a fully fledged fiat currency in 1971. When Nixon took the U.S. off the gold standard, Britain depegged the pound from the dollar and allowed it to freely float.
The Origins of Pound Sterling
After the fall of the Roman Empire gold and silver flowed east into the Byzantine Empire and the Arab world.
Medieval Europe suffered from a lack of precious metal coinage. While silver and copper coins did circulate in small numbers the feudal system meant economies were closed and self contained without the need for a national currency.
Things began to change in England in the late 8th century with the re-emergence of silver coinage.
In 775AD the Saxon Kingdoms began to issue silver coins called sterling.
240 sterlings could be minted from a pound of silver, which is where we derive the name pound sterling.
In 928, King Athelstan, the first king of all of England, adopted the pound sterling as the national currency.
The Pound Sterling in Modern History
The Bank of England was established in 1694 as a private bank to make loans to the government.
The bank was incorporated as a private company and given the right to issue banknotes. These early banknotes were issued in exchange for deposits and were initially done for irregular amounts.
The notes were issued in exchanged for a deposit of gold or silver and could be redeemed on demand back into gold or silver.
This free convertibility was suspended twice in the 18th century and the pound became a fiat currency. First in 1745 because of the Jacobite Rising and secondly from 1797 to 1821 due to the Napoleonic Wars. In both cases free convertibility was eventually restored.
A significant moment in the history of the pound occurred in 1717 when it was first defined as a weight of gold rather than a weight of silver.
This was actually done by accident as Isaac Newton, master of the mint, fixed the gold/silver ratio such that gold was slightly overvalued and silver was slightly undervalued.
This led to an inflow of gold and an outflow of silver, as British owners of silver would get a a better price offshore, while foreign owners of gold would get a better price in Britain.
This had the effect of putting Britain on a de facto gold standard even though formally the country was on a bimetallic standard.
The Pound Sterling in the 20th Century
Britain maintained the gold standard until the outbreak of the Great War in 1914.
Once again convertibility of paper currency was suspended and once again the pound became a fiat currency. The pound was devalued by large amounts of currency creation to finance the conflict.
In 1925 the pound was once again fixed to gold. But it was fixed to gold at the pre-war price with no consideration of the massive inflation that had just occurred.
Convertibility was only available for 400oz or more and only to non-British residents. This post-war gold standard is known as a gold-exchange standard as without free convertibility it is not a true gold standard.
In 1931, the pound once again went back off the gold standard. Conventional wisdom suggests this was in response to the Great Depression, which is partially true.
However both Jim Rickards and Murray Rothbard both argue that the Great Depression was largely caused by the UK’s mismanagement of the pound sterling’s gold price.
So rather than abandoning the gold standard due to the depression it might be more accurate to say that they abandoned the gold standard due to the devastating consequences of their failure to manage it correctly.
In 1940 the value of the pound dropped significantly, as Britain became embroiled in World War Two. The pound was pegged to the U.S. Dollar at a ratio of £1 equivalent to $4.03.
This would form the basis of the post war Bretton Woods agreement, with the U.S. Dollar tied to gold and the British Pound, and all other major currencies, tied to the U.S. Dollar.
In 1967 Prime Minister Harold Wilson devalued the pound by 14.3%, famously stating:
“From now on, the pound abroad is worth 14% or so less in terms of other currencies. That doesn’t mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.”
In 1971 the United States President Richard Nixon ended the convertibility of U.S. Dollars into gold, which meant the British Pound, which had been pegged to the U.S. Dollar no longer had any tie to gold.
The British then freely floated the pound and it became a fully fledged fiat currency and it has been that way ever since.
Conclusion
The pound sterling has only been a true fiat currency since 1971, making it the same age as the U.S. Dollar and all the other national currencies that became untethered to gold at the collapse of the Bretton Woods Agreement.
However, the pound sterling has the longest history of any fiat currency in use today, with its origins dating back to 928.
