The image that comes to mind is of schoolboys squabbling in the playground. Alex Salmond, the Scottish first minister, proclaims that the pound sterling is the common property of both Scotland and England. George Osborne asserts that the pound belongs to him and the UK chancellor will not let it go. Both claims have some merit and both are irrelevant. If Scotland did vote Yes to independence, that would be the time at which sensible negotiations would start, preferably between grown-ups.
A continued currency union between Scotland and the rest of the UK would be a rational outcome but one hard to reconcile with the Scots’ pursuit of independence. The residual UK, making up 91½ per cent of any monetary union, would want to exert oversight of Scottish fiscal and financial policy, which it would not be prepared to reciprocate. Whatever Mr Salmond may say, there has to be a plan B.
The obvious plan B is for an independent Scotland to have its own currency. That is what independent states do. If we look outside the troubled monetary union that is the euro, the countries with no money of their own are microstates too small for currency issue to make sense, such as Monaco, or those, such as Ecuador, whose history of monetary management is so dismal they would rather leave it to someone else.
So we should contemplate the re-emergence of the Scots pound; my own preference is to restore the groat or the bawbee. With its own currency, Scotland could pursue independent economic policies as economic realities and EU obligations would allow.
What would a Scots pound be worth? Parity with sterling is about the right exchange rate. Scottish exports make up a greater fraction of Scottish output than overall UK exports do of UK output, a consequence of oil and whisky. It is argued that this would justify a higher value for the Scots pound. But both industries depend heavily on imports of everything from whisky barrels to drilling rigs. Most of the profit goes to investors outside Scotland. Furthermore, an independent Scotland would run a large trade deficit with the rump UK.
One option, then, is to peg the Scots pound to the pound sterling. Bank of England notes would circulate in Scotland, and Scottish pounds less freely in the rest of the UK. Ireland did this for the first 50 years after its independence.
In the modern world other currency pegs have been successfully sustained over lengthy periods. Hong Kong’s link to the US dollar has been maintained since 1983, and the exchange rate between the Danish krone and the euro has been fixed since the formation of the eurozone.
But both the Hong Kong dollar and the Danish krone would certainly rise in value if they were not pegged, and the Hong Kong Monetary Authority, in particular, has accumulated massive reserves. The Scottish situation would be different.
Scotland could presumably expect to receive a pro rata share of Britain’s gold and foreign exchange reserves (independence negotiations would have the division of UK assets and liabilities as a central issue; the suggestion Scotland might walk away from UK debt is another example of playground bluster). But the £10bn or so that Scotland might expect is hopelessly inadequate to defend a fixed exchange rate from speculative attack. The likely outcome of a commitment to a fixed peg for the Scottish pound would be that these modest reserves would be handed over to a group of macro hedge funds as the Scottish central bank suffered its own black Wednesday.
But a variable exchange rate between Scots and English pounds would be a nuisance for individuals and business even if, as would be likely, the rate did not fluctuate much. The queues at the bureau de change at Edinburgh’s Waverley railway station would be the most visible manifestation, but the commercial consequences are more significant. Both households and companies would have to decide how to denominate their assets and liabilities, and choose the currency in which they wished to trade. Many holders would probably prefer the familiarity of the pound sterling to the untested promise of the pound Scots.
That preference for a known present over an uncertain future is the trump card in the No campaign’s hand.