The history of the Pound Sterling
The pound sterling of the United Kingdom was originally the value of one Troy pound of sterling silver, hence the name: Pound Sterling.
The Pound Sterling was adopted as the Royal Chartered Bank of England's currency in 1694. England's national debt increased exponentially from 1700 to the mid 1790's thus making it extremely difficult to exchange banknotes for gold. The subsequent strain on the nation's financial system led to what was known as the Restriction Period when in order for the bank to play catch up with its' finances, it issued banknotes of one and two pounds in place of the actual coinage.
In further efforts to increase the stability of the pound, the Bank Charter Act of 1844 introduced the Bank of England as the only bank in the United Kingdom allowed to issue banknotes as a legal currency. This meant that all other banks in England and Wales were legally obliged to obtain their banknotes from the Bank of England. In Scotland, however, The Banknote (Scotland) Act of 1845 allowed Scottish banks to continue to issue their own Pound Sterling banknotes.
Having learned from the effects that inflation had on the financial market from the Restriction Period the Bank of England began to control the production of banknotes. This ensured that banknotes were only produced when there were gold reserves to back them. The Bank of England became a major lender to other commercial banks. As it was difficult to keep backing banknotes with gold standard while still lending to other banks the Bank of England had to set interest rates high to maintain the gold standard supply.
Shortly before the First World War, the treasury issued the small and simple cipher watermarked stamp paper 10/- and £1 banknotes. The Bank of England tried to return to gold standard after the war, but gold standard could no longer continue to work in the growing financial market. From 1932 to the present day, the only limitation on issuing bank notes is that of the UK Parliament's approval.
The pound sterling is only used in the United Kingdom of Great Britain and Northern Ireland and the following British dependencies outside the UK: The Isle of Man, the States of Jersey and the States of Guernsey. The Bank of England prints and distributes money for England and Wales. The Bank of Ireland, the First Trust Bank, the Northern Bank, and the Ulster Bank print the notes for Northern Ireland. The Bank of Scotland, the Royal Bank of Scotland, and the Clydesdale Bank print and distribute the notes for Scotland.
Since Pound Sterling bank notes are printed in different parts of the UK, the design differs depending on where they are printed. Regardless of the region where the notes are printed, they should be accepted anywhere in the United Kingdom as legal tender. However, some people often do not recognise a 'different' looking note from elsewhere in the UK and subsequently consider it to be a foreign currency.