Purpose of Guinea in British monetary history

Question

I read about Guinea itself, how it was made, but I don't really understand why would anybody keep a money worth 5% more than an existing denomination like Pound.

I can accept the 1/20 and 1/12 concept even though it is not as comfortable as the decimal system, but 21/20, furthermore because of the gold content the value of the coin wasn't fixed in all time, but in 1680's it's worth moved away from Pound, and it was replaced by Sovereign in the recoinage of 1816.

I don't really understand the reasons why the empire kept it for over a century?

Personally for me it looks messy without a central concept how a monetary system should be regulated within the empire. Maybe there are good reasons keeping it, but I don't see them.

UPDATE

To make my point more clear: I see a similar pattern in Hungary, when we introduced a .500 fine silver coin in 1993-1994 after collapsion of socialism into circulation with 200 HUF face value, shortly because of silver content it became more valuable, so people just collected them and kept it as more inflation proof money, it actually revoked itself from circulation and it was officially revoked by the government too. This was a clear failure of issue a different based money, and both people and government corrected the mistake naturally, why didn't this happen in British Empire for over 100 years? I can say the value distortion was smaller between Silver and Gold price than Silver and fiat money. But this system in the British empire seems deliberately kept up for some reason.

Answer 1

Financial

Wikipedia answers:

The guinea is a coin that was minted in the Kingdom of England and later in the Kingdom of Great Britain and the United Kingdom between 1663 and 1814. It was the first English machine-struck gold coin, originally worth one pound sterling, equal to twenty shillings; but rises in the price of gold relative to silver caused the value of the guinea to increase, at times to as high as thirty shillings; from 1717 until 1816, its value was officially fixed at twenty-one shillings. Following that, Great Britain adopted the gold standard and guinea became a colloquial or specialised term.

So: pound sterling was silver; guinea was created as a gold coin equivalent to it, but then the commodity prices diverged.

See also Bimetallism.

Social

Guinea was used to quote doctor's fees et al:

Even after the coin ceased to circulate, the name guinea was long used to indicate the amount of 21 shillings (£1.05 in decimalised currency). The guinea had an aristocratic overtone; professional fees and payment for land, horses, art, bespoke tailoring, furniture and other luxury items were often quoted in guineas until a couple of years after decimalisation in 1971. It was similarly used in Australia until that country went to decimal currency in 1966.

It is still quoted in the pricing and sale of livestock at auction and racehorses, where the purchaser will pay in guineas but the seller will receive payment in an equal number of pounds. The difference (5p in each guinea) is traditionally the auctioneer's commission. Many major horse races in Great Britain, Ireland, Canada, New Zealand and Australia bear names ending in "1,000 Guineas" or "2,000 Guineas", even though the nominal values of their purses today are much higher than the £1,050 or £2,100 suggested by their names.

Update

This social use was, actually, the reason for guinea's endurance. The British society is very stratified and social status clues are important. Quoting the price in guineas (gold coins) conveyed the "high society" image, so people keep doing it even now (see above).

Answer 2

The reason for this involves the difference between wholesale and retail trade. Wholesale trade and banking was conducted in gold (guineas), retail in silver (pounds sterling). The reason for the price difference was to provide a commission. A common practice in England was to conduct wholesale business in trade auctions. The price would be quoted in guineas, but tendered in pounds. The auctioneer pocketed the difference as his commission.

In other words what happens is this:

1) auctioneer puts a lot of hides up for sale which closes at 5 guineas

2) wholesale buyer pays auctioneer 5 guineas and receives hides

3) auctioneer pays merchant 5 pounds

The difference between the two payments is the auctioneer's commission.