What is Money? What is GBP £ Pound Sterling?

Published / Last Updated on 23/02/2024

Money can be defined as an accepted medium for exchanging the value of goods and services.  In modern times, these are usually with notes and coins (those things in your wallet/purse) that have a perceived value underwritten by a central bank or during the industrial revolution by large companies via tokens to their employees to spend in the 'company' shop (a closed market for the employer and good 'con').

We have all had £20 notes in our wallets or purse.  On a £20 note, the Chief Cashier of the Governor and Company of the Bank of England states “I promise to pay the bearer on demand the sum of twenty pounds”.  Technically 'promissory' notes.

Money is therefore a promise.

Historic Sterling

Historically, this means the chief cashier promises to pay the bearer on demand twenty pounds in weight in sterling silver.   Sterling silver takes us back to Anglo Saxon times where a sterling was a little silver coin and 240 sterlings weighed 1 lb in weight.  Hence, the term twenty pounds sterling.  As mentioned earlier, a £20 note is a promise by the Bank of England to give you 20 lbs in weight of silver sterlings.

Even in Roman times, silver sestertius, denarius and argenteus were issued as well as gold aureus and quinarius aureus coins.  At that time and all through the ages (and until the 20th century) silver and gold coins were issued in the UK for guineas, sovereigns, crowns, half crowns, florins, shillings, sixpences, threepenny bits and early on for 1d pennies.

Gold and Precious Metals

The strength of a country’s currency is therefore measured by its reserves of precious metals.  Many of you may have heard of the ‘Gold Standard’, this was where central banks could not issue promissory notes (money to you and me) unless it had the equivalent reserves of precious metals.  The UK abandoned the Gold Standard on 21 September 1931 as it technically created a fixed rate of exchange on currency (linked to gold prices)  meaning that currency exchange values became volatile and restricted the government in capital raising (public sector borrowing) to fund economic stimulus and  expansion to get the economy moving and reduce unemployment during the Great Depression.  The US officially abandoned the Gold Standard in 1933 but was not until 1971 that the system was totally abandoned by all countries.

In simple terms, your £20 note or $20 bill is not worth the paper it is written on.

Money is Crypto in All But Name

Money is now technically backed by the economy i.e., the ability of say the UK or US government to pay its debts.  When the Bank of England needs more money to pay debt interest etc, it simply ‘invents’ more numbers to be placed on bank notes (usually though electronically rather than on a note) and issues it via the banking system.  You may have heard the term Money Supply?  Money supply has 4 measures M1, M2, M3 and M4.

  • M1 = coins and currency.
  • M2 = M1 + small savings accounts, smaller money market funds and short-term deposits.
  • M3 = M2 + longer term deposits, larger money market funds and repurchase agreements.
  • M4 = Cash not in a bank, in circulation with the public and non-banking firms, high street bank and building society deposits, commercial merchant/wholesale bank and building society deposits and certificates of deposit.

Does all this ‘electronic’ money and paper promissory notes with no tangible backing (gold) seem familiar?  Yes, that is exactly what cryptocurrency is too, the only difference is money is backed by a government and crypto is not.

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