It’s fairly widely acknowledged that one of the weaker aspects of the 2014 Scottish Independence debate was that surrounding currency. I still hold to my long-standing view that all options open to us were and are equally viable. All come with unique benefits, all carry characteristic risks. All that was required was the will to manage those risks. Scottish Independence should never have even been about the question “Which currency should we use?”. I believe that instead, the real question was “Should we, in Scotland, have the right to ask that question?”
Recently though, the catastrophic circumstances facing Greece have focused minds back to this first question and many are now convinced that before we go into another debate on independence we must be able to answer the questions we failed to answer last year. So let us take a scenario where Scotland is faced with setting up its own currency. Just what would that involve?
Reflections on the Indyref
I was rather disappointed with the way the argument was handled from both sides. Neither really seemed to get to grips with the issue (and one of them had a vested interest in not doing so).
On the Yes side, the prevailing argument was that a formal currency union in which basically the current currency arrangements were maintained was the best, most sensible option for Scotland and the remainder of the UK hence, even in the face of the pre-election rhetoric, calm heads would prevail in the aftermath. Currency unions can work. But ONLY if both sides want it to. I completely understand the argument that if you let your opponent force you to disclose “Plan B” then they’ll stop talking about your preferred “Plan A” but if we were committing to taking this line then we should have turned the line of attack around. It should have been up to the No campaign to tell Scotland why our contribution to a currency union was valuable enough for us to want one. We always had other options. That should have been our strength, not our weakness.
On the No side, the party line was to maintain, in the face of all evidence, a charade of that rhetoric which not only (predictably) denied that such a union was possible but also, until the last few days of the campaign, denied that the question had even been addressed. This was combined with a wave of fear and doubt from George Osborne’s Chancellery which triggered a flood of capital flight out of the UK which would cause a crash in the value of the Sterling from which it is, as of July 2015, is both yet to recover and what recovery is occurring is now dramatically more volatile than it was before.
It’s interesting to note that in the very week of the start of that capital flight Osborne was issuing increasingly dire warnings about the consequences of voting Yes (For example: “Cash Predicted to Flow Out of Scotland After Yes Vote” – Financial Times, 9th July 2014).
Of course we now know that the Bank of England did indeed have stabilisation plans drawn up so that it could cope with any outcome of the separation negotiations. We also now know that far from fleeing Scotland, investment was and still is pouring in. Within the financial world, the fear never actually left London.
This is all past now though so let’s look forward to what needs to be understood for next time.
How to Start a Currency From Scratch
We’ll envisage the scenario of Scotland having just voted Yes. We’re still 18 or so months away from formal independence but the course is clear and agree. The negotiations have begun. In this scenario, either Scotland has chosen to not seek a formal currency union or the rUK government has repeated their stance that it is not to happen and show no signs of changing their mind. There shall be an independent Scottish currency.
One of the foremost authorities on setting up new currencies is Warren Coats of the IMF who has helped several countries such as Kyrgyzstan, and Bosnia and Herzegovina set up their own currencies. He has described the three basic stages of the process which I shall apply to our case here.
Design and Printing
First, a design for the new currency should be agreed include who or what should be depicted on the notes and coins. This has, in the past, been an issue of notorious politiking. Negotiations over a united Yugoslav currency resulted in months of division along ethnic grounds. Infamously, the Euro ended up not with a representation of famous buildings across the continent but with rather generic images of bridges and gateways which, and this is crucial, do not actually exist.
Of course, Scotland has an immediate advantage here. We already have our own issues of bank notes. Indeed, we’re already quite familiar and comfortable with handling money with identical value but different designs. There may well be a desire to form a complete and separate break with the GBP but, for reasons about to be explained I rather think there wouldn’t be.
These notes need then to be printed and this could cause issue for some countries, like Greece which no longer has its own printing facilities, or Iraq, where the Americans mounted a fairly epic campaign to replace the Saddam Hussein emblazoned dinar with a post-regime one. Again, in Scotland, we have far less need of a complete replacement as our existing Scottish notes (which make up fully half of all notes in circulation in Scotland) are already distinct enough that even in the worst case a simple stamp on the note re-denominating it as an “officially Scottish pound” (as was done in Croatia when they declared independence. And that transition was made while they were fighting an actual shooting war!) would be sufficient in the transition. (I’ll ignore that cry from the back of “It’s not like we can spend them down south anyway”…)
Exchange Rate and Launch
The second stage of launching a new currency is setting the exchange rate. Again, our familiarity with our own Scottish issued notes come to our advantage. The obvious transitional step for a Scottish currency is to set or peg it at parity with the pound on a 1:1 ratio. Essentially, we’d simply just keep using our own money as it is now. There might be a lot of high-financial and macro-economic stuff going on behind the curtain but that’s more or less the case now too. We on the ground floor needn’t notice much at all.
Unless someone is seriously suggesting an independent currency which doesn’t take the form of 100 pence to 1 pound and denominations of notes and coins similar to what we’re already used to then almost all of our work is already done. Just as if Panama can exist without its own currency then Scotland can then so if Kyrgyzstan can maintain its own currency then so too can Scotland.
Education and Distribution
Finally, there is the issue of distribution via banks and shops. The UK has already been through this process itself within the past few decades so to say that Scotland alone wouldn’t be capable of it is beyond comment. It’s a little before my time but a good proportion of readers will remember when the UK launched its own brand new currency and replaced the centuries old system of pounds, shillings and pence with the weird, new decimal system.
Some of the names might have been the same but make no mistake, this was an exercise in rendering every single coin in the country obsolete and replacing it with not only new ones but with an entirely new system of denominating them. Much effort went into educating the public into how to count in and how to convert into the new system. Public information films such as ITV’s “Granny Gets the Point” or documentaries by British Pathé were shown repeatedly with the result that, despite woe and dire warnings from some, largely the transition went smoothly. Certainly, no-one now would want to change back!
I highly doubt a campaign of even a fraction of that magnitude would be required and, in practice, so long as relations with the rUK remain close enough or the currency peg holds reasonably well or the exchange rate simply remains reasonable (The GBP could still crash without Scotland’s positive balance of trade after all) then I can see a kind of parallel currency use forming whereby many shops, especially near the border or in larger cities, simply price goods in and accept both GBP and the Scottish pound without issue. I’m recently returned from a trip to Geneva where the proximity of the French border and the fact that many workers (and especially students) actually live in the relatively cheaper French towns there mean that the Euro is accepted more or less as readily as the local Swiss Franc. In an interesting side note, when the Swiss Central Bank dropped the formal currency peg with the Euro back in January this year the franc appreciated against the euro by about 20% within minutes. This resulted in virtually everyone in Switzerland becoming an overnight forex expert. Everyone I spoke to could readily tell you the exchange rate between the two and hence the best places to spend either currency. If a divergence did become apparent between the Scottish Pound and GBP then the same thing would happen here. Again, if the Swiss can do it, then why not Scotland? (Incidentally, they think we’re weird for having four different £10 notes. Each to their own, eh?)
It’s perfectly clear that an independent Scotland could go hand in hand with an independent Scottish currency. Many other countries, including the UK, have launched one without catastrophe and confusion. Whilst I’m quite happy to still discuss the various merits and demerits of a currency union the idea is now far less attractive to me than was before not for economic reasons but for political ones. No matter how attractive such a union may be in optimal circumstances the indyref experience and, latterly, that of Greece and the Eurozone have displayed most graphically the downsides to allowing an obstinate and economically illiterate opposition to control that debate. On the other side, going into the debate on a stance of being able to use our own currency puts the onus of co-operation on the other side. If they want to avoid financial turmoil it’ll be up to them to convince us to maintain ties. I would like to see them sit under that financial Damoclesian sword rather than have them wield it. We’ve seen what damage they are willing to inflict even on themselves when they do.
Addendum:- A Short note on Cryptocurrencies
Some have wondered about the possibility of Scotland using a Cryptocurrency like Bitcoin. There was indeed a project called Scotcoin launched to explore just this. It, however, has largely failed due to the lack of ability to actually buy goods and services with it. The aforementioned Warren Coats discusses the impact of cryptocurrencies on his blog here: https://wcoats.wordpress.com/2014/01/25/cryptocurrencies-the-bitcoin-phenomena/