Scottish independence – and a question of currencies

Johnathan Pearce (London) · UK affairs

Jeremy Warner, a columnist at the Daily Telegraph, has a short, thumb-sucker about what happens if Scotland becomes independent, as many Scots (and many English voters and taxpayers) want. Given that the Euro is a partial disaster, no sane Scottish politician would want to campaign to join it, at least not yet. The idea of Scotland staying in the sterling zone is also bit, well, problematic if Scotland breaks free of any fiscal union with the English, or if the English decide to give the Scots the elbow. Could Scotland go back to an old, Scottish currency of its own and would that be viable?

Of course, the land of Adam Smith and David Hume could adopt a gold-backed currency and set a magnificent new trend, but given the socialistic nature of most Scottish politicians seeking independence, that does not seem very likely, but you never know. I always felt that if the SNP wanted to really pull a trick, they should seek to turn Scotland into a sort of northern Switzerland.

Here is an old essay by Lawrence White about Scottish banking.

AndrewWS

January 13, 2012 at 11:09 pm

Surely Scotland couldn’t have a gold-backed currency without its own gold reserves? And where is it going to get those from?

Michael Jennings

January 13, 2012 at 11:12 pm

With all due respect to Mr Warner (ie none – his is the dumbest article I have read in some time) it really isn’t difficult at all.

It is indeed true that two countries with vastly different fiscal policies are going to have difficulty maintaining a currency union for any sustained period, particularly if they have business cycles that are out of phase. It is relatively simple to do, however, if the smaller country thinks that the benefits of using a larger country’s currency are greater than the costs of losing control over and is actually willing and able to adjust its monetary and fiscal policy accordingly. There are lots of examples of this: Montenegro using the Euro, various Carribean and Central and South Merican countries (most notably Ecuador) using the US dollar, various Pacific Island countries using either the Australian or New Zealand dollars. As long as there is no implied guarantee of the smaller country’s debts by the central bank of the larger country, and as long as the smaller country is capable of maintaining parallel fiscal policy, there is no real reason why this cannot be stable. If the smaller country messes up its public finances and is unwilling to undergo the sorts of austerity measures needed to fix them, then that country may have to stop using the common currency, which at that point may be messy. However, if the two economies are similar enough, there is no obvious reason why this must happen. If the Deutsche mark had continued to exist and the Netherlands had unilaterally decided to adopt it as currency, I can’t really see any obstacle to their doing it successfully.

The second (and better) option is to declare that there is a “Scottish pound”, with a one to one exchange rate with the English pound. Savers are free to initially choose which currency their savings are denominated in, and probably also debtors their debts, although interest rates are probably going to be slightly higher for the Scottish pound. (There will be minor issues concerning what to do with fixed rate debt, but the markets can sort this out easily enough. The simplest solution is to continue denominating existing fixed rate instruments in “English pounds” and let the markets decide the price at which these are exchanged to equivalent “Scottish Pound” instruments, assuming this is what people want. If there is confidence that the 1:1 exchange rate can be maintained for a few years, this will be done at prices close to 1:1). In the case of Scotland, there isn’t even a need to print new Scottish banknotes, as these exist already. As the Scottish banks that issue them are required at present to hold equivalent amounts in English notes, there is no problem if people want to exchange them for English notes. The Scottish government starts paying people and collecting taxes in Scottish pounds at 1:1: private employers and merchants should remain free to use whatever they want, up to and including Flavian pobble beads, although most will simply start using Scottish pounds at 1:1

At this point Scotland has its own currency, and most of the benefits of being in the Sterling bloc. If at some point they mess up their public finances in the way the Greeks have, we will see a divergence in Scottish and English interest rates (as has not been possible in Greece, leading to the need for fiscal measures instead). At that point, it may be necessary to revalue the Scottish Pound compared to the English pound, but as the currency already exists, simple. It may just be that there is no crisis but the Scottish economy diverges sufficiently from the English that they decide that the benefits of pursuing their own monetary policy outweigh the benefits of staying in it, and they choose to float align their currency with some other currency, or peg it to gold, or do whatever else they want. This way it is not messy, although the Scots would probably pay slightly higher interest rates in the short term. Even though there were formally two currencies, people would continue using them more or less interchangeably until there was a perceived possibility of the currencies splitting from par, at which point they would move in an orderly way into whichever currency they wanted to use after any such split.

This is pretty much exactly what a huge number of countries that used to be in the Sterling zone have done: the Republic of Ireland, Australia, New Zealand, quite a few more. It really isn’t hard. There are also lots of other places that have joined another currency zone without having necessarily originated in it: Hong Kong essentially using the US dollar for instance. As long as it is understood that you break the link in a crisis and there is no implied promise of a fiscal bailout, no problem. The problem with the Euro is that it does not work like this.

(Another nice example. The British possessions in South East Asia used to have a currency called the Malayan and British North Borneo dollar. These places at independence became three countries – Malaysia, Singapore, and Brunei. The currency broke up into three: the Malaysian ringgit, the Singapore dollar, and the Brunei dollar/ringgit. (Ringgit just means “dollar” in Malay. Brunei is theoretically bilingual in the two languages). These three currencies were interchangeable at 1-1 until 1973, but at that point Malaysia devalued, and the Malaysian ringgit has been a separate currency ever since. The Singapore dollar and the Brunei dollar are still exchanged at par, however, as Brunei has been willing to adopt policies that keep it in the Singapore Dollar Zone).

This is all really obvious, and there are vast numbers of prior examples to copy. There are lots of obstacles to Scottish independence, but excessive difficulty in moving to their own currency isn’t one of them.

Scotsfox

January 13, 2012 at 11:31 pm

I wouldn’t assume that Scotland will necessarily return a perpetual Govt of the Left after Independence. I for one will be looking for a right of centre party to vote for. The SNP exists to achieve Independence. Once achieved they will split into their constituent parts. The Scottish Democratic Alliance will stand candidates AFTER Independence for example & I’m very open to their vision. Scottish Democratic Alliance On currency I’d go for our own Merk which I believe would be a pretty hard currency. Saor Alba!

Hmm

January 14, 2012 at 12:45 am

Scottish currency = The Dram

John Galt

January 14, 2012 at 9:35 am

I like the idea from the Mainly Fail of naming a new Scottish currency “The Groat”.

MajikMonkee

January 14, 2012 at 11:51 am

They Gave us Adam Smith….They also gave us John Law the inventor of inflation! I for one think we should get a vote about kicking them out of the UK and letting them enjoy changing there cash machines, embassies and propping up their bloated welfare state etc

January 14, 2012 at 11:54 am

Alisa

January 14, 2012 at 12:31 pm

Isn’t a breakup of larger states into smaller ones a good thing in general?

Plamus

January 14, 2012 at 12:33 pm

Forgive my ignorance, but do the proponents of Scottish independence propose that Scotland take on a proportion of UK debt? And if so, on what basis – % of GDP, % of population? What will they do if they find themselves independent, and instantly broke (as I guess would be the case)? Or is it a case of “I’ll take the assets, you keep the liabilities”?

January 14, 2012 at 1:14 pm

If Scotland voted to leave the UK -by the time of the second subsequent vote after independence the largest political party in Scotland would be a “Re-UK” party. By which time a large percentage of Scots would have moved south into England anyway and a large percentage of English would have bought new cheap land in Scotland.

RAB

January 14, 2012 at 1:53 pm

Egregrious Alex was asked that on TV the other night Plasmus. The answer seemed to be… Debt? what debt? That’s English debt (as if the RBS crash never happened), nothing to do with us Scots. The oil though is all Scotland’s.

Oily Al thinks they can sit with their feet up and live on the oil revenues. Trouble is, we keep getting told that it’s practically run out. What then SNP?

wh00ps

January 14, 2012 at 2:45 pm

Alisa: if not for the existence of large and powerful transnational organisations and governments, yes.

January 14, 2012 at 5:03 pm

wh00ps, if your point is that upon leaving the GB Scotland will join the EU instead, then yes, I take it. It’s just that I happen to think that the EU days are numbered.

January 14, 2012 at 6:00 pm

I hope and pray you are right Alisa, but the Merkozy Monster has a Bunker mentality, it will not give up it’s political fantasy for economic reality, until the whole of Europe is a bankrupt pile of ashes.

Scotland is just the same. Smart Alex thinks that by cherry picking the good bits and chucking the bad bits, that with one bound, Scotland will be free!

If Scotland gains full independence then we should kick them out of Sterling. Let them set up their own currency or join the Euro.The Scots aint stupid, they can see how disasterous that will be, and that will inevitably be what will happen if they leave the UK. They will have to re-negotiate their position within the EU, and the prime condition will be joining the Euro, France and Germany will allow nothing less.

If this situation had occurred at the end of 19th century, or even as late as the 1950s, when Scotland actually had some industries, like Shipbuilding, Coalmining, Steel making (my uncle designed and built Ravenscraig) then perhaps they could have made a go of it, but now what are they going to live on, except English subsidy with 70% of the population on the Public Teat, being Civil Servants, MEP’s, Local Govt wallahs or just on the fuckin rock n roll?

Aberdeen Angus, Haggis and Whiskey just isn’t going to cut it, is it?

January 14, 2012 at 7:44 pm

Alisa, yes, the EU as well as others. Sovereignty always seems to travel upwards even when it may appear to the naked eye to be travelling downwards to the individual.
A technically independent Scotland with her fiscal decisions being taken for her by the IMF, for example.