A currency is anything that two people agree is a currency


Loyal readers of this column, if there are any, will know that a few weeks ago I was in the Galápagos Islands, part of Ecuador. As is inevitable, I came back with a handful of small change. There is a US dollar coin, and another coin that simply states on its face “fifty cents”.

The 50 cent coin is minted for the government of Ecuador, but there is no Ecuadorean currency, and the cents referred to are therefore not Ecuadorean cents. Ecuador is the largest country in the world to have chosen the route commonly known as “dollarisation”.

A decade ago, its government made a unilateral decision to adopt the currency of another country: it uses the US dollar with the acquiescence, though not the agreement, of the American government and Federal Reserve. The coin in my pocket represents 50 US cents, but the US does not issue 50 cent coins, only quarters, nickels, dimes and pennies. While everyone in the Galápagos or the national capital Quito would accept my 50 cent coin, no one in Washington would. Curiously, genuine dollar coins, minted for the US Treasury, have not proved popular in the US but are widely circulated in Ecuador.

You can dollarise without the dollar. Montenegro, a pretty Balkan state straddling beaches and mountains, also has no currency of its own. Montenegro uses the euro, although the country is not a member of the EU (and is not likely to be in the foreseeable future) and has no permission from the European Central Bank. Like Ecuador, Montenegro does not print its own currency, but imports one solely for its face value.

I took a closer look at my 50 cent Ecuadorean coin when Alex Salmond, first minister of Scotland, made a speech in the Isle of Man extolling the virtues of the island’s relationship with the UK. This is a complex construction. Like the Channel Islands of Jersey and Guernsey, the Isle of Man is not part of the UK, nor the EU, is not a British dependency or colony and has its own government.

But no country recognises these islands as separate states; their residents carry British passports, and Britain accepts responsibility for defence (not very effectively: the Channel Islands, which sit just off the coast of Normandy, were occupied by the Germans during the second world war and even after the liberation of France, German troops remained in control until the armistice was signed. The Third Reich never incorporated the Isle of Man: I don’t suppose the island and its population of fewer than 100,000 in the middle of the Irish Sea figured very highly in Adolf Hitler’s plans for global domination.)

The Isle of Man, in common with Jersey and Guernsey, prints its own banknotes. These notes say “one pound” on their face but, as with that Ecuadorean coin, there is ambiguity about what that means. Banks on the island will, but need not, give you Bank of England notes in exchange if you ask for them. As with the Ecuadorean coin, Manx notes are generally accepted within the Isle of Man, but not elsewhere.

What do these pieces of paper signify? Are they denominated in Manx pounds, or British pounds, or are these the same thing? No one asks these questions because the answers do not seem to matter. And, as with the Ecuadorean 50 cent coin, the controller of the parent currency is not concerned because the amounts involved are so small.

There are Scottish bank notes, but these are different from the ones issued by the Isle of Man or Jersey. The Scottish notes are issued by Bank of Scotland, Royal Bank of Scotland and Clydesdale Bank. They say “one pound sterling” on their face (the Manx and Jersey notes say only “one pound”) and their issue is backed by Bank of England notes of similar value. But when the two largest Scottish banks collapsed in 2008, holders faced the possibility that the money in their purses and wallets was only a claim to be an unsecured creditor in a liquidation. Today, the value of these notes is guaranteed by the UK government.

But the meaning of that assurance is simply that the Financial Services Compensation Scheme will give you a Bank of England note in exchange if a Scottish bank fails to honour its promise to pay. Money is a confidence game; its value depends entirely on the willingness of other people to accept it. Money is what you choose to make it. And so, perhaps, is independence.

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