Friday Flashback: Parliament to Scottish Nationalists: "Get Your Own B__y Money!"

Brexit, Dollarization, Eurozone, Pound, Scotland
Howard Lake, "Scottish Five and Ten Pound Notes," CC BY 2.0 https://www.flickr.com/photos/howardlake/3411121147

Scottish Pounds(Originally published on November 27, 2013 .)

There are, I'm sure, some parts of the Scottish National party's recent blueprint for an independent Scotland to which the British government might reasonably take umbrage.   But the plan's call for Scotland's continued use of the pound sterling, which has drawn the most criticism, isn't one of them.

The pound sterling has been Scotland's monetary unit since 1707, when the Act of Union led to its adoption in place of the Pound Scots.  Scotland's actual paper currency, on the other hand, has mainly consisted of sterling-denominated notes supplied by several of its own commercial banks.  The nationalists' proposal is therefore  largely (though not entirely) a call for adhering to the status quo, and a rejection of the alternatives of either adopting the Euro or having Scotland once again establish an independent monetary standard.

How has such a seemingly reasonable and innocuous plan managed to ruffle Parliament's feathers? According to The New York Times, the British government

says it is unlikely to agree to share the pound with an independent Scotland, citing the problems experienced by the 17-nation euro zone to illustrate the dangers of a common currency without political union. London says it would be difficult to have the Bank of England act as guarantor of the pound if Scotland had a different fiscal policy from Britain, for example. Nationalists hint that if Scotland cannot keep the pound, it will not accept its share of Britain’s debt.

Now I've no dog in the fight over Scottish independence, but it seems to me that the folks who are saying this hae git thair bums oot the windae. For starters, an independent Scotland would hardly need the British government's permission to go on using the pound sterling: it's hard to imagine how the U.K.-sans-Scotland could prevent Scottish citizens and banks from continuing to use the pound without resort to such Draconian legislation as would make U.S. money-laundering laws seem toothless in comparison. In both England and Scotland today, for example, it's perfectly legal for banks to offer foreign currency demand deposit accounts, not to mention other sorts of foreign currency services. Just how would a truncated British government contrive to prevent, and to justify preventing, an independent Scotland from continuing to enjoy the right to offer such services, while adding the pound sterling to the list of "foreign" currencies to which the right pertains?

If the Brits were really willing to play hardball, I suppose they could try placing an embargo on shipments of Bank of England currency to Scotland, like the one the U.S. imposed, as part of its effort to topple Manuel Noriega's government, on shipments of fresh Federal Reserve notes to Panama. But whereas Federal Reserve notes had long been the only form of paper currency known in Panama's dollarized economy, the Scots, as I've already observed, have long managed without Bank of England notes, and could easily continue doing so, especially once freed from British-imposed banking regulations. Settlements and redemptions of Scottish bank balances would presumably have to be done using London funds. But unless the Brits wanted to impose severe exchange controls, which besides being embarrassing would harm English citizens no less than Scottish ones, that option would pose no great difficulty.

And the Eurozone comparison? A load of mince! The reason the Eurozone is a mess is because the Euro isn't the German mark–that is, because it's a multinational currency supplied through a multinational central bank, rather than a national currency that happens to be employed by several nations. Creditors to profligate Eurozone nations, or to irresponsible Eurozone banks, have therefore had reason to hope that the ECB might ultimately come to their aid, and especially so since the Growth and Stability Pact became a dead letter in 2003. Creditors to dollarized countries, on the other hand, have no reason to count on Fed bailouts. Were either Ecuador or El Salvador unable to service its debt, or were a Panamanian bank teetering at the brink of insolvency, it would be of no concern to the Fed, or the FDIC, or any other U.S. government agency. Dollarized or not, Ecuador, El Salvador and Panama have to manage on their own.

And how have those countries been doing despite having no lender of last resort to turn to in a crisis? Just dandy, as a matter of fact. Indeed, it seems that not having a lender of last resort has proved to be something of a boon to dollarized economies, because, by doing away with, or at least greatly limiting, any prospect of a bailout, it has caused creditors and banks to behave more prudently.

If the experience of dollarized countries can be relied upon, Scotland, besides not needing England's permission to go on using the British pound, would be better off not having such permission. It stands to benefit, in other words, by steering clear of any formal arrangements that might appear to make the Bank of England, or any other non-Scottish authority, responsible in any way for the safety and soundness of Scottish bank liabilities or government securities. Let the Scots follow the example of Ecuador and El Salvador, and "poundize" unilaterally. If the British Parliament refuses to cooperate, so much the better. Who knows: Scotland could even end up with a banking system as good as the one it had before 1845, when Parliament, which knew almost as little about currency then as it does now, began to bugger it up.

  • The U.K. Pound and a currency board or the Euro or a new, Scottish national standard with its own monopoly issuer? What about no national standard? Can an independent Scottish state not accept any currency, in payment of taxes, that an individual Scot chooses to earn? Presumably, if the U.K. doesn't impose excessive costs on using the Pound out of self-destructive spite, most Scots might choose the the U.K. Pound, in the short run at least, but why must a Scottish state make this decision for every Scot? If Scots may choose a currency, without the state picking a winner by decreeing a legal tender, doesn't this problem solve itself?

    Amazon.com accepts many currencies, and its revenue ($61 billion in 2012) is comparable to the revenue of the Scottish public sector's revenue ($76 billion in 2012).

    http://www.marketwatch.com/investing/stock/amzn/financials

    http://en.wikipedia.org/wiki/Government_Expenditure_and_Revenue_Scotland

    If Amazon can do it, can't a Scottish state do it? For that matter, if Amazon can do it, can't individual Scots do it? I'm sure Amazon would sell the necessary accounting software. Even if many currencies play a significant role in Scottish transactions, individual Scots may imagine other Scots using the currency of their choice. The accounting is only a nightmare if individual Scots themselves must do the accounting. Computers don't have nightmares.

    • M. Camp

      If you had an income tax liability of 100 GBP on your GBP income, but chose to pay in Bitcoin, do you mean that the government would publish a conversion rate table, based on the market rate on some pre-specified annual date?

  • Flavian

    For Scotland to return to free banking would be easy provided that Scotland becomes independent.

    The only things an independent Scotland would have to do would be to abolish the capital gains tax and the deposit insurance and to allow people to use whatever currency they might prefer.

    However, the government would still have to legislate concerning in which currency taxes are to be calculated and how and where to pay taxes.

    • M. Camp

      Depending on the specifics of the kind of free banking you propose, I think they might also have to resolve the issue of who owns commercial banks' credit account balances, especially checking accounts and savings accounts. Is this correct?

      I know it comes up in the case of switching, not to free banking but to 100% reserve banking, which you are not specifically proposing.

      In any case, Rothbard and Huerta de Soto each had proposals, as did the Chicago Plan of Friedman and others if I remember well.

      Rothbard's if I remember was to give the commercial banks a one-time gift of their [reserve and ?] customer credit accounts in specie. Heurta de Soto's idea was to offer account-holders (so-called "depositors") a choice on whether they wanted their balances to continue to be loans under law (except that now the banks would probably have to stop calling them "deposits" and disclose what they really are) or to be converted to mutual fund shares.

      But again, I don't know that the issue comes up at all in your proposal.

  • M. Camp

    This is a very educational and all-around fantastic little paper, for laymen like me! Thanks, Professor.

    NB: By coincidence, the question just popped into my head a few days ago, 'can and do banks have foreign-currency credit accounts such as checking and savings accounts (called "deposits" by the banking community)?'

    For example, can (and does) the BOE offer checking or savings accounts denominated in USD?

    The answer is in the article. Scots banks DO have foreign-currency checking and savings accounts.

  • Thank you, again, for a very informative piece. So I can walk down the street in the US and open a checking or savings account with Pound Sterling, Euro or Yen (as long as the bank offered it), but just can't use for payments to merchants, and they cannot accept, is that correct?

    • M. Camp

      Do you mean in the US today? I don't know the answer to whether US banks are permitted to offer foreign-money checking or savings accounts, or which ones do if they are allowed. But there is no reason two US citizens (you and a merchant, say) cannot trade any items of your respective property that you agree to. Including foreign currency or other foreign money, not just USD.

      • Interesting, thanks!

        "I don't know the answer to whether US banks are permitted to offer foreign-money checking or savings accounts, or which ones do if they are allowed." US and foreign banks can and do, though not very widespread.

  • Somebody needs to tell Scotland that eventually, Eurozone members will have to use the Euro. I don't think the UK and Scotland are suited for that change. Let Europe do it but it isn't for the British Isles.