[Dave Birch] I woke up this morning to a story on the Today programme about Scottish independence, this time talking about monetary policy and currency. It was based on a Treasury report on why an independent Scotland could not use the Pound Sterling.

The British government closed the door to a formal agreement with Scotland for its continued use of the pound if it votes to become independent next year, citing the tumult in the 17-nation euro region during the debt crisis.

[From U.K. Scorns Pound for Independent Scotland Citing Euro Lessons – Bloomberg]

It happened that I was working at home this morning, so I heard the Chancellor giving his speech about this live on the wireless. He referred to the difficulties of currency union and spoke about the problems in Ireland, Greece, Portugal and Cyprus. He spoke about the problems of maintaining monetary policy across currency unions between economies with different fundamentals. All true. But he didn’t explain why this is different for the UK. How is the insanity of trying to maintain a currency union between Germany, Luxembourg and Greece any different to the insanity of trying to maintain a currency union between England, Wales and Scotland? The fact that they are in a political union does not alter the facts on the ground: they have fundamentally different economies. The Chancellor was arguing that after independence, it would be impossible to maintain a currency union between England and Scotland. But surely that is true now! The best monetary policy for England is not necessarily the best monetary policy for Scotland, and technology means that what was optimal for commerce at the time of the Napoleonic Wars may no longer best for commerce today. This makes, to my mind, the final column in the Treasury table not the outlier but they way forward.

If the argument for currency union is about transaction costs, then dear old John Major showed us the way forward many years ago with his perfectly sensible alternative to the euro, which was at the time was labelled the “hard ECU”. The idea of the hard ECU was to have an electronic currency that would never exist in physical form but still be legal tender (put to one side what that actually means) in all EU member states. Thus, businesses could keep accounts in hard ECUs and trade them cross-border with minimal transaction costs, tourists could have hard ECU payment cards that they could use through the Union and so on. But each state would continue with its own national currency — you would still be able to use Sterling notes and coins and Sterling-denominated cheques and cards — and the cost of replacing them would have been saved.

What about resurrecting that idea the other way round? Why couldn’t Scotland have a hard e-thistle? Everyone in Scotland could carry on using Sterling notes and coins, which would remain legal tender, but they could open e-thistle bank accounts and have e-thistle credit cards and so forth. The Scottish government would naturally pay its domestic bills (e.g., public sector salaries and pensions) in e-thistles that it would “print” itself, the value of the e-thistle would slide against Sterling and soon enough the situation would sort itself out. English people would start spending money in Scotland, investing in new business there and go on holiday there.

The thistle would never exist as a physical thing, purely as an electronic currency. There is no need for physical currency. It’s a badge of national vanity, just like an airline used to be. It would be no big deal to, over time, to see the prices in shops in thistles but hand over Sterling to pay for them. The Scottish government might want to produce some thistles for ceremonial purposes or for souvenirs, but not to create the circulating means of exchange. After all, one of the Scottish government’s goals would be to increase the efficiency of the economy (and reduce tax evasion, crime etc) by reducing the cash in circulation and increasing the use of electronic payments. Scotland actually has a proud history of innovation in this field and their fantastic inventions in free banking, overdrafts, cheque books and so on ground to a halt, crushed under the English yoke in the 19th century. As Niall Ferguson points out — in “The Money Printers” in “The Cash Nexus”, p.137–162 (Basic, New York: 2001) — Scotland was once more advanced that England.

In 1850, more than 90% of transactions in France were settled in gold and silver coins compared to just over a third in England and only a tenth in Scotland.

My point is that not only could Scotland adopt its own currency if it had to — without having to mess about with notes and coins thanks to the key technologies of the internet and mobile phones — it would be better off doing so. So why wait for independence? Why not do it now? Floating exchanges rates are far more efficient than government transfer payments in bringing economic rejuvenation. Sir Richard Body (rather famously one of the “bastards” who John Major railed against in 1993) gave a memorable talk on this topic at the second annual Consult Hyperion Digital Money Forum back in 1999, arguing not only for national currencies rather than the supranational euro but for regional currencies within the UK.

Why would regions bother to do this? Well, as Sir Richard Body MP has pointed out, this represents a democratisation of currencies. What’s more, allowing the regional exchange rates to float would be a much more efficient and effective tool for economic stimulation than regional aid.

[From We should create an electronic euro | Technology | The Guardian]

It’s time for some truly radical thinking on this front. Technology means that the dynamics around currencies are changing and the connections between the unit of account, means of exchange, store of value and mechanism for deferred payments are being broken apart. They make take our circulating medium of exchange but they will never take our freedom!

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

6 comments

  1. Dave, yet again an excellent post. There is another side to the story which might be of interest. If the Scots vote for independence, they will not need the permission of England to continue to use British currency. One just has to consider how American dollars are used worldwide to understand this. You can pretty much buy anything in US$ anywhere in the world, and even receive change in US$ (even though you do prefer using your phone to do so). Think of how the American dollar has been used as a quasi-official currency in Lebanon for decades, as a practical example. This is just reality, and extra-territorial usage of a currency obeys to the laws of supply and demand, and none other. Supply and demand will drive the unofficial rate of exchange.

    Now, if one wants to delve into the political realm, one could take a look at various comments and studies done over the years in the province of Quebec. Jacques Parizeau, the former independentist Premier of Quebec and a renowned economist (he studied at the London School of Economics), stated publicly that Quebec did not need anyone’s permission to use any currency, should the people of Quebec vote for independence. Studies were executed under the ”Commission d’étude des questions afférentes à l’accession du Québec à la souveraineté”, including one that deals specifically with monetary policy.

    These are complex questions, and I find that politics usually complicates things even more. Having gone through this as a Quebecer, it sounds like déjà vu. The political arguments are more about playing on the people’s attachment to known symbols, like in this case the british pound. Sadly, the Scots have not heard the last of it.

  2. I’m sure we had an exactly matched pound with Eire for quite a long time, including after the end of the gold standard, and even co-ordinated decimalisation. The Cubans used the US dollar for a while, at least for tourists, but the US government didn’t let US citizens use them there, making all-inclusive holidays from Canada popular. Scottish pound notes already have a different exchange rate in Prague. (Better rate buying pounds, worse selling.)

  3. So, you’d have to pay your taxes in eScotBux/thistles too.

    Govt revenue: taxes, (parking, library) fines, fees (for planning permission and such). Govt expenses: public sector salaries (teachers, doctors? the NHS is distinct in Scotland?) welfare/benefits, pensions.

    Oil? Other countries would need to buy eScotBux in order to buy oil. Whisky exporters.

    If private sector workers were still getting paid in Sterling, wouldn’t there be a spike in eScotBux with all the conversions at year end? Or maybe the govt would accept Sterling tax payments at an agreed low rate, in order to get some foreign currency reserves? Or maybe PAYE would smooth this mostly.

    We’d need an app for speediness, probably. Then cabbies and small retailers could switch with one download.

    Would be funny to see Sterling become the black market currency. You’d still pay your cash plumber etc. in Sterling I presume.

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