Scotland doesn’t have to have one currency. It could use four.

I was puzzled when Alex Salmond, during the referendum on Scottish independence, opted to push a particular model for currency in an independent Scotland; it simply wasn’t necessary.  As Iain McWhirter recently argued in the Herald, it’s the sort of decision that can be put off till later, and it’s perfectly possible to change the model if something isn’t working.    In the current debates, I think we’re seeing a reiteration of many of the same arguments.  All of them seem to me to be based on a false premise: that Scotland must choose its currency.  Why?

The Growth Commission, which fell victim to the same elephant trap, starts off its discussion by identifying  three purposes of money:  as a medium of exchange, as a unit of account, and as a store of value.  They could quite reasonably have added a fourth, because it’s most of what their discussion is about: money as an instrument of economic policy.  The histrionic criticisms made by some of the pro-independence commentators have suggested that it is not possible to be independent without an independent currency.  This quotation from Wynne Godley, objecting to the Euro, is going the rounds on Twitter:

the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony.

Have at you, France!  Italy, you are a local authority!  I blow my nose in your direction!

Let’s take some of the heat out of this. Money of all kinds can be used as a unit of exchange.  There are lots of places where currencies of different sorts will be accepted, regardless of what the official currency might be.  I’ve been places where they wouldn’t accept local currency, but asked to be paid in dollars.  As someone told me in Croatia, asking for payment in  pounds:  “Money is money.”  And money can be a unit of account in one currency while it is being exchanged in another.  When I was in Poland, my formal contract was paid in zloty, as the government requires, and tax was deducted in zloty, but the job offer and the pay were in Euros.

Scotland could survive while using the British pound.  Despite some of the nonsense that people come out with – such as George Osborne’s preposterous claim that Britain would “stop” Scotland using the pound  and that there’d have to be trucks crossing the border carrying notes and coins – whether or not Scottish people use the pound, or any other currency, is down to them.  But things don’t have to stop with the pound.  The Scottish economy, for those who haven’t noticed, already uses two currencies.  Most people use the pound sterling in ordinary life, but the oil industry conducts its transactions in US dollars.

In the past, it’s been difficult for buyers and traders working in multiple currencies.  The main issue has been the practice of the banks.  A combination of technology and competitive innovation has already largely overcome that.  Most retail payments in the UK are now made by card, not cash.  I use a bank which offers me parallel currency accounts and transfers without holding or transaction fees.  As transactions are cashless, there’s absolutely no reason why people shouldn’t hold accounts in Euros, pounds, dollars and other currencies at the same time; traders could make their own choices.  Scotland could reasonably have four currencies: a Scottish currency, the dollar, the pound and the Euro.  The main reason for having a separate Scottish currency would be as a unit of account and a tool of economic policy.  Whatever the choice is, we don’t need to get hung up about it.

7 comments

  1. Ian Davidson

    I am not qualified to comment on the currency options but agree the general thrust of your blog. OK, so Brexit was a disaster because people voted for Brexit on the basis of absolutely no firm plans by those proposing it. Clearly indy campaigners have to be more responsible and publish firm plans. However there is a balance to be struck in all of this. I have supported Scottish indy for all of my adult life. I have always viewed the process as something like this (very simplistic):
    1. There is a general campaign on the pros and cons of independence with each side publishing “manifestos”.
    2. If there is a “Yes” for indy then there is a process of transition which could take many different forms, eg:
    a. It could be 100% driven by the “winning side” which would be the SNP/Greens; Or
    b. It could take a more inclusive approach, i.e. if the “Nos” agreed not to contest the principle or resort to legal challenges etc, there would be a more “constitutional convention” type approach involving all political parties and STUC etc;
    c. There would need to be formal negotiations with UK govt on division of assets and this might even involve some form of international oversight/arbitration; inevitably there would be “trade-offs” as in any negotiations:
    d. The overall package may well be put to another ref for approval OR that might be left to Holyrood?
    e. The political balance at Holyrood could change at elections (eg 2021) and in the long term we may see emergence of different political formations?

    So, I don’t “get” why many people seem to think that once a Yes vote is secured, it is then up to the SNP/Greens to “ram through” a new Scottish state with everything absolutely in concrete from day one?! For example: what if the UK government simply refuse to remove Trident from the Clyde and insist on a 10-15 year lease/transitional period to make alternative arrangements?
    What if there are fundamental economic and political disagreements within an independent Scotland as to whether we should go 100% Green and leave NS Oil, Gas where it is or whether we cannot afford, fiscally, to make this unilateral sacrifice if other countries are carrying on as normal?
    In short, if like me you vote for an independent Scotland, you are voting for just that; you cannot predetermine or limit what future Scottish Parliaments and Governments may choose to do in future circumstances (other than via formal Constitution, international agreements, judicial oversight etc).

  2. Tim Rideout

    I might agree with a little bit of that, but I think overall it is naïve and simplistic. Yes of course people can use whatever currency they like for their personal or business payments, just as you can go into Jenners right now and pay in dollars. But the currency of the State has to be Scottish. So all official payments, so salaries of all civil servants and local government and other staff would be S£, all suppliers would be paid in S£, all taxes, fines, usage fees, parking metres, etc would be S£ only. The state will borrow only in S£, pay interest in S£ and repay in S£. So whatever anyone else might do that guarantees 50% of the economy would be using the official currency. But in practice it would be more like 95% or more. It is not sensible, it is not safe, and it is not real independence if you do not have control over your currency. Monetary and Fiscal policy are not some esoteric ‘nice to have’, even if voters should not normally have to either understand them or worry about them.

  3. Paul Spicker

    You write: “it is not sensible, it is not safe, and it is not real independence if you do not have control over your currency.”. Many contemporary states don’t, and the danger lies in believing they do. More than 95% of the money in the UK is held in demand deposits; the money is virtual, and most of it is created by the banks issuing credit. Beyond that, about one third of the assets in British banks are held in foreign currency – businesses can, and will, choose which currency they are going to deal in. I accept that a Scottish pound would give the government more control and influence than they would have by relying on an external currency – I say so in the blog entry – but I think it’s unwise to assume that an independent currency is sufficient to invest government with power over monetary and fiscal policy.

    • Tim Rideout

      There are very few states with no control over their currency. I think Zimbabwe, Panama and Ecuador are typically quoted. There are some states in a jointly controlled monetary union, so the Euro Zone, and the two Central African Franc zones. There is a big difference between a joint control monetary union and what is proposed for Scotland. While I would agree that the only country with absolute monetary sovereignty is the USA because the dollar is the world reserve currency, not having your own currency guarantees you have zero monetary sovereignty and not much fiscal either. I am aware that banks create money by lending and that it is destroyed when the loan is repaid. The issue is about the state, not the commercial banks. For example with no currency then there is no effective insurance of any Scottish bank deposits, simply because the state would not have the money and would have nowhere to get it from. You would need £30 billion to pay out the Scottish depositors just of a small bank like the Clydesdale. As that would be 50% of SG annual revenues it simply would not happen. With your own currency the Central Bank just creates it and it is not inflationary because it is simply replacing your digital bank currency that was destroyed in the collapse.

      • Paul Spicker

        For the third time: Scotland may well want to have its own currency, and economic policy is one of the reasons. I have not said anything against that. But, pace the priests of Modern Monetary Theory, the powers that an independent currency will confer are limited, because governments, even the governments of countries with large economies, do not have the sole power to determine the use or value of that currency.

        • Tim Rideout

          I agreed with you about that – I said only the United States (and possibly the Euro / China) have absolute monetary sovereignty. The US can export as many dollars as they like and folk will happily accept them more or less for ever. But there are two factors that mean almost all states issue their own currency. There are what you could call the push factors, so I mentioned that not having your own currency is a risky place to be. Lets say a rumour circulated that SG was about to freeze bank accounts in preparation for a compulsory conversion of deposits into a new currency. All existing sterling could leave the country within days (which is rather what happened to Slovakia). You have absolutely no defences against that. The other are the pull factors, so all the things the SG can do with a currency that it can’t do without one. So yes sterling will still be widely used (though not ‘legal tender’), and I would expect essentially all companies doing business with rUK to maintain two bank accounts, so one in sterling and one in S£. Things like shares would stay quoted in sterling and shares ISAs and the like would also stay in sterling. Many people might also choose to keep their sterling bank account / cards rather than close them as part of getting a new S£ account.

  4. Paul Spicker

    An additional note: Tim Rideout’s persuasive case in favour of establishing a Scottish currency, and against the Growth Commission’s tests, is online at https://www.commonspace.scot/articles/14192/watch-tim-rideout-currency-and-independence-snp19 . The differences between us in this exchange are, I think, because we are tilting at different targets. Tim is clearly concerned at those who think that Scotland should use the pound, and only the pound; mine reflects previous discussions with advocates of MMT who have argued that a sovereign currency lifts all barriers and immunises governments against debt.

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