The world’s first true coins are widely believed to have been minted in Lydia in Asia Minor around 640BC. They were made of an alloy of gold and silver called electrum and were probably made in order to guarantee the purity of the constituent metal.
The next phase in the evolution of currency was the invention of paper money. The first banknotes were issued in China during the reign of Emperor Hien Tsung (AD806-821), but not as a result of any great financial insight. The sole reason for their introduction was an acute copper shortage that precluded the striking of new coins. Eventually, China got carried away with the ease of producing this new form of cash. Too much of it was printed and this led to inflation. In 1455, the Chinese abandoned the use of paper money and did not return to it for several centuries.
The Chinese experience was repeated when Sweden became the first European nation to experiment with paper money. In 1661, a banker named Johan Palmstruch began to issue credit notes that could be exchanged at his Stockholm bank for stated numbers of silver coins. Unfortunately for Palmstruch, who had consulted the Swedish government before launching the scheme, he got carried away with his licence to print money. He issued more notes than his bank had silver deposits to redeem, and in 1668 was prosecuted for fraud. He was initially sentenced to death, but the penalty was later commuted to imprisonment.
As economic activity increased in Europe, it became apparent that the money supply needed to be expanded beyond the limits imposed by holdings of precious metals.
This recognition led to the establishment of the first national central banks. People were much more likely to trust notes backed by government reserves than those issued by private institutions. They even proved willing to accept temporary governmental bans on the redemption of banknotes for silver, as happened in Britain during the “Restriction Period” of 1797 to 1821.
The first mention of sterling is in 1078 as “sterilensis”, and by the 13th century the term was in common usage. England had a uniform national currency 600 years before France, and 900 years before either Germany or Italy.
The pound was established in 1560 by Elizabeth I and its value was one Troy pound (373.2417216 grams) of sterling silver.
Until decimalisation in 1971, a pound was made up of 20 shillings – each shilling worth 12 pence. After decimalisation, the system was simplified, so that 100 “new pence” made up a pound.
Today, pound sterling is used in the United Kingdom of Great Britain, Northern Ireland, the Isle of Man, the states of Jersey and the states of Guernsey.
It is the world’s oldest currency still in use.
More: The pound in your pocket.