Money, like hat-wearing, depends on convention, not laws

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The Scottish pound already exists. Royal Bank of Scotland, Bank of Scotland and Clydesdale Bank issue their own notes. These notes circulate widely in Scotland, alongside those of the Bank of England (those signed by the former Sir Fred Goodwin are especially prized). These Scottish bank notes are not legal tender in Scotland or anywhere else. The Bank of England notes are not legal tender in Scotland either.

The only legal tender for the settlement of a debt in Scotland is coins from the Royal Mint. But if you try to buy a house in Scotland with pound coins, your offer will not be well received. Legal tender is a concept with no practical relevance. The currency that is accepted is the currency people are willing to accept.

The issue of legal tender in Scotland was clarified when a Scotsman, presumably trying to make a point, attempted to pay a local authority in Scottish banknotes. The local authority, presumably also trying to make a point, rejected his offer. The court told them all not to be silly. A debt can be settled by an offer any reasonable person would accept. This is the practice, and probably the law, everywhere, including Scotland.

Scottish banknotes are widely accepted in London, because Marks and Spencer – and cabbies – knows what they are and can treat them as cheques, which their bank will readily accept. But they are not a medium of exchange because many people, unfamiliar with or suspicious of the signature, are reluctant to accept them. The currency that is accepted is the currency people are willing to accept.

Nice people in Lewes – a town in the English county of Sussex – trade in the Lewes pound, which is actually a voucher valid to spend in a few Lewes shops. It is not accepted outside Lewes, nor in the chain stores of Lewes. For the sponsors of the project, Tesco’s refusal to accept it positively enhances its value.

The Lewes pound is tolerable as harmless eccentricity. In the 19th century, private banks were prohibited from issuing their own money as governments asserted a monopoly over monetary policy. The Scottish banknote issue – which must be backed by BoE notes – is an anachronism, which the banks exploit for free advertising and a technical advantage derived from loopholes in the deposit obligation.

Professor Charles Goodhart is right when he says that the value of a currency depends on the confidence people have in the issuer. It is easy to trade US dollars or Swiss francs because of the stability of the US and Switzerland. There will always be valuable goods you can buy with these currencies and the relevant governments will not mess you around. But it is increasingly hard to deal in euros in Greece because no one can be confident any longer that the basis on which they trade will not be changed tomorrow.

A theory called chartalism, which sounds cranky, or modern monetary theory, which sounds better, argues that money derives its value from the willingness of governments to make payments and accept taxes in it. But this is easily refuted. Suppose the Scottish government would only accept payment in highland cows. There would be an active trade in highland cows to meet tax payments, but people would continue to take their banknotes – English pounds, euros, or US dollars, as Tesco preferred – not cattle to the shops. The ingenious folk at RBS would quickly create tradeable highland cattle certificates. The only cows you would see would be those grazing outside the Scottish parliament in the fields rented by RBS.

There is a widespread reluctance to accept that behaviour is governed by social norms rather than legal rules or abstract principles. I wear a tie today not because I want to, or because anyone requires me to, or because I think that it is right that I should do so, but because of a shared convention that I will. And as Barack Obama appears without a tie, he may change that convention – as John F. Kennedy helped destroy the convention that men wear hats on public occasions.

I tip in restaurants or cabs, but not post offices or doctor’s surgeries. Often there is some underlying reason for these practices, although I cannot think of one that applies to the habit of tie-wearing. But in any event it is custom, not reason, that leads me to do it. The Scottish pound is accepted where it is accepted, and not where it is not. There is really no more to it than that.

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