April 27, 2013

Horse 1472 - Independent Scotland and its Currency

Among the many issues facing Scotland should it decide to leave the United Kingdom, is the vexed question of what to do about the currency. Currently, Scotland as indeed the rest of the UK uses the Pound Sterling; nominally issued by the Bank of England. Owing to legal allowances, left over as a result of the Act of Union in 1707, Scottish banks retained the right to issue currency and that in itself creates all sorts of issues.

George Osbourne, the current Chancellor of the Exchequer pretty succinctly states four options which Scotland could choose, should they become independent. This is taken from the UK's Press Association:

These are the four options:

1. Adopt the Pound Sterling Unilaterally
This has all sorts of underlying issues; most obviously that Scotland would be at the mercy of a another country's central bank (in this case the Bank of England) and wouldn't really be able to make major changes with regards monetary policy. It couldn't for instance either restrict the money supply to sure it up or if it wanted to promote the velocity of money, it could not suddenly issue new money.

2. Seek To Form a Pound Sterling Currency Zone
Admittedly it would then still be subject to the decisions of the Bank of England, but at least it might be able to arrive at some degree of control. I very much doubt though that the Bank of England would want to pursue this option because it would be like trying to invent a mini version of the Eurozone; this leads me nicely to option 3.

3. Agree To Adopt The Euro
I'm reasonably sure that an independent Scotland would have no trouble meeting the fiscal requirements to join the Euro but would it want to? Given that members of the Euro (especially Germany and France) resent having to bail out nations like Greece and Cyprus, would Scotland also want to share in the troubles of 2000 miles away?
I'm also reasonably sure that the European Central Bank would most certainly not allow the three Scottish trading banks which currently issue physical currency in Pounds Sterling to issue notes denominated int Euro. I'd assume that the banks themselves would probably be forced to engage in some sort of buy-back scheme of their own currency which would take existing cash out of circulation; to be honest, I'm not really sure that the banks themselves would want to agree to that as it would mean an immediate loss in liquidity.

4. Introduce a New Scottish Currency
It's interesting that Osbourne doesn't really expand on this because quite frankly, I think that this scares him deeply. I don't really know to what degree that the Pound Sterling is held aloft by the revenues of North Sea oil but Scotland by itself would no longer be paying those sorts of royalties to Whitehall but to Holyrood.
Almost overnight, the new Pound Scots which I assume would be initially issued at parity to the Pound Sterling would become the hardest currency in Europe. The three issuing banks, Bank of Scotland, Royal Bank of Scotland and Clydesdale Bank, would continue to issue currency on precisely the same basis as they do now. There wouldn't even need to be any change over from one fiscal year to the next.
The obvious thing to do would be to set up a Central Scottish Bank and issue replacements for the notes taken out of circulation and the coins. It would make sense for coins of the new Pound Scots to be a different weights and sizes to the coins of the Pound Sterling, just to emphasize the difference. Plenty of mints around the world would be capable of doing it too, the Royal Canadian Mint or the Royal Australian Mint for instance.

Of the four, option four seems like the most sensible and in the best interests of Scotland. A floating exchange rate would allow an independent Scotland to have its own independent monetary policy and flexible exchange rate adjustment; it could raise taxation and spend in order to enact proper fiscal policy. And from a numismatists' point of view, it gives us something new to look at - maybe bring back the Merk and the Noble.

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