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British Monetary System Essay

1412 words - 6 pages

British Monetary SystemForeign monetary systems are often not unlike our own. Different countries use policies that they decide upon and create institutions that help their government supply money to the economy. Sometimes these money systems are based on commodities like gold or silver, in which paper notes may be presented and then converted for the element on demand. Another money system is a fiat system where the government or a central bank defines the value of the money. No matter what system another country is on, there are influences and obstacles that must be comprehended in order to master a foreign monetary system. The British system is one that is much like ours, yet it has existed a lot longer, and is just as complex. The core focus of this investigation is to learn the history of Britain's monetary system, scrutinize its major components and significant influences, learn about its financial organizations, and reveal incidents that helped form its current system.The history of Britain's monetary system stretches back through the centuries. In the 1640's many people wanted to keep their gold safe, so they entrusted their wealth to goldsmiths. In exchange for the gold, people would receive "promissory notes" which entitled the bearer to the full amount in gold. This was far easier to carry around than heavy bags of coins, and they became very popular and were soon used as currency. When the goldsmiths realized that almost no one was redeeming their notes for gold, they started to issue more notes than the gold they had to back them, thereby creating money. This creation of money went on for a few decades with no one the wiser until it was officially authorized. "In 1694 the practice of creating money was legitimized with the founding of the Bank of England". (Chown, 1997) Not long after this founding, the bank started to issue the, "pound sterling" which is still the official currency today. As the British Empire expanded around the globe, so did the pound sterling. Because the notes were as good as gold, by the 18th and 19th centuries other countries had adopted the gold standard and London had become the world center for gold, money, and financial markets. "The mid-century inception of Britain's becoming the world supplier of capital provided new opportunities for merchant banks, both established houses and newcomers to the city of London. The accumulation of further foreign capital assets also had direct and indirect effects for British overseas and domestic corporate banks". (Cottrell, 2009) World War I had a major effect on the pound sterling because the gold standard was suspended and by the end of the war the country was deeply in debt. It was completely abandoned in 1931, and became part of the Bretton-Woods system in the 40's. When the Bretton-Woods system broke down, the pound floated from the 1970's onwards.Britain's monetary system has five important components. They include; the base of the monetary system, categories of...

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