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.

George Osborne injects further silliness into the independence debate

I’ve commented before about the silliness of some of the arguments that have been made in the independence debate.  For the ‘yes’ campaign, we’ve been told that everyone beyond Scotland is only waiting for the opportunity and they will roll over and invite the Scottish Government to tickle their tummies.  For ‘no’,  we’ve been told that there will be border guards patrolling with dogs, that Scotland will offer open season to terrorists and that Scottish televisions won’t be able to view Doctor Who.  George Osborne, reported in the Scotsman,  has just come out with a staggeringly silly idea of his own: that if Scotland tries to use sterling it will run out of ready cash. Scottish pound notes “wouldn’t exist any more”.

… for every pound the Royal Bank of Scotland issues as a banknote, it would be like a kind of IOU against the pound they have kept in their bank vault.  … it would be a situation where you would wait for coins and notes to come across the Border, either people bringing them or through transfers of money electronically because of a business deal or something like that, and then you want to try to hold that money in the country or at least make sure you haven’t run out of it.

Money is a means of exchange, and Scottish money is no different. Most of these exchanges are based on trust; Scottish pound notes no more have to be backed up by a stock of English pounds than English pounds have to be backed up by the memory of gold held in the vaults; and  banks have a wide-ranging capacity to issue money as they think fit.  It seems, then, that the current Chancellor of the Exchequer doesn’t understand what money is or how banking works.  Come to think of it, that may not be so much of a surprise.

Mark Carney on currency union

The first part of Mark Carney’s Edinburgh speech was a clear and helpful summary of the pros and cons of monetary union.  In favour of monetary union, there are

  • reduced transaction costs,
  • lower borrowing costs,
  • opportunities for investment  and
  • greater economic integration.

Against, there are

  • the loss of the capacity to form an independent monetary policy,
  • a reduced ability to use exchange rates to absorb shocks – the burden is liable to be  on in prices and wages
  • the possibility that the dominance of monetary policy will lead to ‘pro-cyclical’ economic policy – making slumps and recessions worse.

The second part was a review of the conditions for such a union, which he identifies as

  • free movement of labour, capital and goods
  • a banking union, and
  • fiscal integration.

I was less convinced of his arguments here.  The Crown Dependencies (the Channel Islands and the Isle of Man) are recognised as part of the sterling area without meeting any of those conditions.  These conditions seem to be part of a negotiating position, rather than essential requirements.

The euro or the pound? Both, please

There’s a continuing controversy in Scotland as to whether an independent Scotland could or should be part of a ‘currency union’ with England. The assumptions are invalid; England cannot ‘stop’ Scotland from using the pound. The EU’s position is more complex – negotiations on entry to the Euro might be part of a negotiation about EU membership – but this seems unlikely to be a sticking point.

There’s another option, however, and it’s an option for the UK as well as Scotland. It’s not necessary to sign up to anything, or to be part of a currency union, to use a currency. For example, by convention oil production in Scotland, and I assume in the rest of the the UK, is traded in dollars. What’s important is to have the facility to hold, spend or trade the currency, and that’s currently not possible for most of us – the UK banks don’t let customers hold Euro accounts on the same terms as sterling. Why ever not? A rule that provided for banking in Euros would open the possibility for people to use either currency, or both, at their convenience.

A currency union

We’re told again that England is “unlikely to let a separate Scotland use the pound”.  I’ve made the point before in this blog, both in relation to Scotland and about comments made about “forcing” Greece to leave the Euro, that this is not something that a government can stop.  Despite the bluster, the Treasury paper on currency union makes a central point clear: if Scotland decides unilaterally to use the pound, it can.  When George Osborne asks, then, why the UK should accept a formal arrangement with an independent Scotland, the answer is plain: because that way you have some say, and otherwise you have none.