Michael Fry: Sterling in Scotland is up to us

The English could not prevent an independent Scotland from adopting the pound without damaging their own interests, writes Michael Fry

Hong Kong linked its currency to the dollar without US involvement. Picture: Getty
Hong Kong linked its currency to the dollar without US involvement. Picture: Getty

The debate about Scotland and sterling has become so acrimonious and confused that most people joining in it have not the slightest idea what they are talking about.

Sterling is a fully convertible reserve currency, just like the US dollar and the euro. Any country in the world can, if it wishes, make use of such a currency for both domestic and external transactions. Even Communist Cuba in effect utilises the US dollar, as a hard currency in parallel to its own soft peso, and it certainly does not ask permission from Washington to do this. Montenegro has adopted the euro, without being a member of the European Union or of its eurozone.

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Numerous Central American and Caribbean nations use the dollar in the same way, as do some oil-producers. Many African nations use the euro. In all these cases, the countries concerned often have a local currency as well, but pegged to the dollar or euro so that some of the benefits of a common currency accrue. As the dollar and the euro are also fully convertible reserve currencies, there is nothing the United States or the European Central Bank could do to stop this even if they wanted to (which they do not).

It is true that, while sterling remains a fully convertible reserve currency, few other countries take the chance to use it. These are mainly the last, leftover bits of the British Empire scattered in obscure corners of the globe.

It was not always so. All through the 19th century, sterling was the world’s primary reserve currency. As late as 1955, more than half the world’s reserves were still held in sterling. Today, the figure is 4 per cent, compared with 25 per cent for the euro and 60 per cent for the US dollar.

The reason for this catastrophic decline is that for the last half-century sterling has been such a lousy currency, subject to repeated devaluations and in between them steadily corroded through the inflation that feckless British governments have caused by their idiotic and inept attempts to maintain the pretence of being a great power.

As their monetary dominion otherwise extends only to sea-girt rocks, they should count themselves lucky that a sober, sensible and wealthy country like Scotland wants to keep sterling. Alastair Darling, chairman of Better Together, said at the weekend that this would reduce Scotland to the level of Panama. He should know, as the man who brought Britain closest to being a banana republic. More likely, canny Scotland would save sterling from chancellors like him.

A closer parallel would be the link between the Hong Kong and US dollars, this year celebrating its 30th anniversary. In 1983, when Hong Kong was still a colony, it did have the choice of linking its currency to sterling, but wisely decided not to. It chose the dollar instead and has never looked back. The arrangement is informal, initiated and monitored from Hong Kong, with no involvement from Washington. Under it, the former colony has become one of the world’s great financial centres – and does not so badly in manufacturing either, we might remind ourselves in a Scotland of extinct industries.

If independent Scotland wants to use sterling it can do that too, without even asking the English. Ireland did exactly the same during the period of currency union with the UK that came to an end when it joined the European exchange rate mechanism (forerunner of the euro) in 1979. Dáil Éireann had adopted the pound by its Currency Act of 1927 and, as far as I can discover, this unilateral legislation was the sole legal authority for the move.

At any rate, I do not think Irish governments of those days were in the habit of asking permission from Westminster to do whatever the newly independent country, recently liberated by violence, wanted to do. Again, the English should count themselves lucky that what the Scots propose instead is an agreement. But if they spurn it, Scotland can continue using sterling anyway.

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The only way the English could prevent this would be by abandoning sterling’s status as a fully convertible reserve currency, which would entail introducing exchange controls. They would need to bring in legislation banning, say, Standard Life, the biggest company in Scotland and doing more business south of the Border than north of it, from using sterling in its Scottish transactions. I am not sure what its English shareholders would have to say about this.

But, again, if that was all the government in London did, it would still not stop Standard Life using sterling because this company could do all the transactions it needs in Frankfurt or Zürich. London would lose that business, together with the rest of the business of the Scottish economy, one of its biggest customers. No doubt the world would take note of how this global financial centre no longer wanted to be a global financial centre.

In the end, the only way to enforce the ban on Scotland would be for the government in London to introduce comprehensive exchange controls on all overseas transactions, reducing itself to the same level in international commerce as Poland or Turkey. Just to thwart the Scots, David Cameron and George Osborne would have achieved a degradation of sterling even worse than what Harold Wilson or Norman Lamont brought about – and, among other things, terminally ruinous to the City of London.

Yet, out of the goodness of his heart, Alex Salmond offers an arrangement by which Scotland’s continued use of sterling would come about not unilaterally but through the agreement of both sides. No measure could surely be more conducive to the friendship, continuity and mutual benefit within these islands that we all wish for (do we not?) whatever the outcome of the referendum.

Given the close links bound to continue between the economies of Scotland and England, this would surely be of advantage to both sides. Of course, the English are perfectly entitled to refuse any such agreement: it’s up to them. What they cannot do is actually stop the Scots using sterling while it remains a fully convertible reserve currency.

The position is slightly complex but perfectly clear. It is even so quite beyond the conceptual grasp of Alistair Carmichael, Secretary of State for Scotland, who when asked in an interview last week if an independent Scotland would be excluded from sterling, simply replied “yes”. Perhaps he should return to being a pastry cook: he would find his soufflés more substantial than his command of the economic arguments about independence.