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!
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