American Dollar Vs. British Pound
Once the worldwide currency standard, the British pound has gradually diminished in value and influence in relation to the rising American dollar. The exchange rate between the two currencies has fluctuated greatly over the last century as this transformation took place. There are a number of historical events that caused changes in the relative values of the two most dominant currencies of the last century.
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The Gold Standard
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Long before there was a need for exchange rates, currencies were stabilized by being tied to gold. They had relative values that were set by the price of gold in their respective countries. Before the 1930s the price of gold was set in Britain as well as the United States and the relative values of the currencies was fixed at $4.80 per British pound. This was a time when Britannia still ruled the waves and Sterling was the world's standard reserve currency.
The Great Depression
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Severe economic pressures caused Britain to abandon the gold standard in the 1930s and allow the value of its currency to float. This produced a relative value of about $3.70 for the pound. In 1933 the United States was forced to devalue the dollar and the pound rose to an all-time historical high of $5.
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WWII
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As a consequence of World War II and the aftermath when monumental debts between nations were being settled, there were once again severe economic pressure on the two currencies. By this time there were fixed exchange rates between the two monetary systems. Initially the rate was set at $4 for each pound but economic conditions forced Britain to devalue it to $2.80.
Post-war Pressure
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The Bretton Woods conference of 1944 established the U.S. dollar as an alternative means for the repayment of war debt. America was expanding at a greater rate than Britain and as the two countries recovered and prospered during the post-war period, price pressure continued to weigh on the pound. In 1967 Britain was obliged to devalue the pound again to a fixed level of $2.40.
The Free Market
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In 1971, the United States finally discontinued its use of gold standard and soon after Britain removed its fixed exchange rate relative to the dollar. The currencies were allowed to float as they do today with their relative values being determined by free trade on the open market. The exchange rates varied widely from the starting level of $2.40 down to an all-time low of nearly 1-to-1. Currently, the relative value of the pound is around $1.50, or conversely the dollar is valued at about two-thirds of a pound Sterling. Today, the U.S. dollar comprises about 70 percent of the world reserves of foreign currency while the pound makes up about 4 percent.
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References
- Photo Credit exchanging us dollars and british pounds image by Kirill Kurashov from Fotolia.com
