Ireland

Celtic tribes settled on the island from 600-150 B.C. Invasions by Norsemen that began in the late 8th century were finally ended when King Brian BORU defeated the Danes in 1014. English invasions began in the 12th century and set off more than seven centuries of Anglo-Irish struggle marked by fierce rebellions and harsh repressions. A failed 1916 Easter Monday Rebellion touched off several years of guerrilla warfare that in 1921 resulted in independence from the UK for 26 southern counties; six northern (Ulster) counties remained part of the United Kingdom. In 1948 Ireland withdrew from the British Commonwealth; it joined the European Community in 1973. Irish governments have sought the peaceful unification of Ireland and have cooperated with Britain against terrorist groups. A peace settlement for Northern Ireland, known as the Good Friday Agreement and approved in 1998, is being implemented with some difficulties.

The Irish Pound: From Origins to EMU

The Irish pound ceased to be legal tender on 9 February 2002. This brought down the final curtain on a monetary regime which had its origins some 75 years earlier with the introduction of the Saorsta't pound in 1927. Although the Irish pound had ceased to be an independent currency when it was irrevocably fixed to the euro three years earlier in 1999, it was the withdrawal of Irish pound banknotes and coin that marked the currency's departure for most people.

A theme running through the history of the Irish pound is a search for stability — stability in financial conditions and stability in prices. In the first instance, this stability was provided by a fixed one-for-one link to sterling, with the credibility of the new currency being ensured by a full backing with sterling assets in a currency board. The sterling link also provided a stable environment for trade, which was almost exclusively with the UK in the early years and was relatively slow to diversify in subsequent decades. The sterling link remained largely unquestioned for almost half a century. It was only in the 1970s, when high inflation in the UK threatened price stability in Ireland, that alternatives were seriously considered. Before a decision was made on an alternative regime, however, proposals for a "zone of monetary stability" emerged in Europe. The upshot was that the Irish pound joined the European Monetary System (EMS) at its inception in March 1979. S terling remained outside and appreciated sharply; this resulted in a breaking of the sterling link within a couple of weeks.

Origins of the Irish Pound

Although a separate Irish currency, which fluctuated in value against sterling, had existed during the eighteenth and early nineteenth century, the Act of Union in 1800 provided for the eventual assimilation of the Irish pound with that of the UK. This process was completed in 1826, so that by the time Saorsta't E'ireann (the Irish Free State) was established, in December 1922, the fixed link with sterling had been in existence for nearly a century. Given that Ireland's external trade at the time was almost completely dominated by trade with the UK, it is perhaps not surprising that the establishment of an independent currency was not uppermost among the tasks of the newly independent state.

The first tentative steps towards an Irish currency began with coinage. Under the Coinage Act, 1926, the Minister for Finance was authorised to issue token coins of silver, nickel and bronze. The denomination of these coins would be the same as those of British coins already in circulation. All the new coins, issued on 12 December 1928, were to be legal tender for limited amounts (forty shillings for silver coins and one shilling for bronze coins), while British coins issued under the Coinage Acts, 1870 to 1920 also retained legal tender status for the same amounts.

From Currency Board to Central Bank

A further and more comprehensive discussion of the appropriate basis for the Irish currency took place in the Commission of Inquiry into Banking, Currency and Credit, which was established in 1934. Central banks were in vogue at the time, following a recommendation in favour of their establishment by the World Economic Conference in 19334, and the question of whether one should be set up in Ireland was explicitly examined by the Commission. In the end, the recommendations of the majority report might best be described as to "hasten slowly" towards setting up a central bank.

Movement towards the establishment of a central bank did not come until March 1942, when the Central Bank Bill was introduced in the Da'il. This bill gave effect to the enhanced powers and functions recommended by the Commission of Inquiry, and was signed by the President on 4 November. The Central Bank Act, 1942 came into effect on 1 February 1943 and, amongst other things, committed the Bank to "safeguarding the integrity of the currency".

The 1970s: A Decade of Change

The decade began with the decimalisation of the Irish pound, in line with a similar move in the UK. Provision for this was made under the Decimal Currency Acts, 1969 and 1970, and the system formally commenced on 15 February 1971. Prior to this, however, the Central Bank had released 5 and 10 new pence coins for use as one and two shillings, respectively, and a new 50 pence coin for use as ten shillings in order to help the public to become familiar with the new currency. Decimalisation was a much more limited exercise than the later changeover to the euro, since the denomination for larger value transactions — the pound — and the institutional basis for the Irish pound — the link to sterling — did not change.

Nevertheless, decimalisation was seen as a major innovation and a Decimal Currency Board was established to educate and assist the public in making the transition. This Board provided a model for the Euro Changeover Board of Ireland (ECBI), which was established in 1998 with a similar mandate. The public perception of decimalisation was that it gave rise to a substantial rise in prices.

Participation in the EMS

On 15 December 1978, the Taoiseach announced the Government's decision that Ireland would participate in the EMS. At the same time, the Minister for Finance extended exchange controls to transactions between Ireland and the UK. Member States were given the option of 2.25 per cent or 6 per cent margins of fluctuation within the EMS exchange-rate mechanism (ERM). The narrower margins were chosen for the Irish pound; it was feared that the wider margins might attract the attention of currency speculators.

The conversion rates to apply between the euro and the currencies of the eleven Member States joining EMU were irrevocably fixed by the ECOFIN Council on 31 December 1998. The euro was launched on the following day and became the currency of the participating countries. At this stage, the euro existed only in "virtual" or cashless form. Irish pound banknotes and coins continued to circulate and, in common with other national currencies, the Irish pound became a sub-division of the euro.

For further information, contact the Main Office, Central Bank & Financial Services Authority of Ireland, PO Box 559, Dame Street, Dublin 2, Ireland, telephone: + 353 1 4344000, or the Currency Centre, Central Bank & Financial Services Authority of Ireland, Currency Centre, Sandyford, Dublin 16, Telephone: + 353 1 2955666, web: http://www.centralbank.ie/