Alex Salmond, Scotland’s first minister, has stated that if Scotland became independent following September’s referendum, the country would continue to use the pound sterling. George Osborne, the chancellor of the exchequer, with support from the other Westminster political parties, has warned that he would not allow this.
But Mr Salmond has the better of that argument. In today’s world of global business and finance, people make agreements in whatever currency they like and under whatever legal system they choose. In eastern Europe it is common to contract in euros under English law. The parties do not even need to tell Frankfurt or London that they have done so. Mr Osborne does not have the veto power he claims to exercise.
Ukrainians deal in euros and litigate in England because they have little confidence in their own currency or courts. Ecuador and Panama have adopted the dollar as their currency because of their mismanagement of their own. The Scottish case is different. There is no precedent for an advanced country with a sophisticated financial system choosing voluntarily but unilaterally to share another country’s money. The national currency was once as much a badge of statehood as the flag and the anthem; but perhaps it is today as much an anachronism as the national airline.
After independence day Scotland might simply conduct its monetary affairs exactly as before. Scotland could not, of course, print Bank of England notes. But it could print Scottish government notes – as the States of Jersey prints its own. The Bank of Scotland (now a subsidiary of Lloyds Banking Group) already prints its own notes, holding Bank of England notes to the value of its issue. An independent Scottish government should maintain this requirement for a time. In the longer run, it should underwrite a promise that any holder can change a Scottish note for a Bank of England note.
Since the quantity of Scottish notes in issue – about £4bn – is only 3 per cent of Scottish national income, and matched by Scotland’s pro rata share of UK foreign exchange reserves, such a guarantee is entirely credible. An advantage of not having your own currency is that you provide nothing for speculators to short.
The continuing UK government might try to restrict access to Bacs and Chaps – the sterling payment systems – for transactions originating in Scotland. This would not only be petulant but ineffective: setting up your own payment system is not difficult and it might be better to be free of existing legacy infrastructure systems. In any case, all the leading banks operating in Scotland – the 82 per cent UK taxpayer-owned Royal Bank of Scotland, BoS, National Australia Bank’s Clydesdale Bank, Barclays, HSBC and Santander – are part of global groups whose principal operations are outside Scotland.
For that reason, Scotland’s answer to the often-posed question “who would bail out Scotland’s banks after independence?” is, “not the Scottish government or its agencies”. The responsibility of a Scottish government would be to protect Scottish depositors and ensure that Scotland’s payment system functioned effectively. Edinburgh should co-operate with any international operation to resolve failed banks but could not, and should not, lead or fund such an operation. If Europe’s banking union turns out to have sense and substance – an unresolved question – an independent Scotland might wish to take part, and would expect to be eligible to do so.
This unilateral approach means Scotland would have no influence on the determination of sterling interest rates – but the country could never realistically have expected to wield much influence anyway. Nor would Scotland have much freedom in other areas of monetary policy – but again, this was only to be expected. Some observers might ask what is the point of independence for a small country if little is going to change, but that is another argument.
Mr Osborne and Mr Salmond are both indulging in political posturing ahead of a vote. If the result did favour independence, officials would begin negotiations with the aim of reaching a mutually acceptable solution. An agreed currency union would still be the best outcome for everyone – but one even harder to achieve after these bad-tempered exchanges.