A Dual Currency Country: the case for Two Pounds

Photo: cowrin (flickr)

Recently the UK Treasury has released a report on the potential currency arrangements for an independent Scotland. This report and  many commentators show a lack of imagination. Yet it is not hard to change the arrangement so that a competativeScottish currency goes from improbable to very possible.   Just four currency options were discussed in the report:

1. A Sterling zone

2. unilaterally keeping the pound,

3. creating a Scottish currency or,

4. joining the euro.

The Two Currency Solution (2+3)

One solution,  currency competition, was not discussed. As discussed in an earlier blog competition between the Euro and Guilder would be a good thing. Similarly competition between the English (rUK) and Scottish Pound would be good too. This could be implemented relatively easily, by choosing to issue a Scottish pound which would initially be pegged to the pound and allowing both the Scottish and rUK Pound as legal tender (effectively adopting the English (rUK) Pound as a shadow currency unilaterally). Initially the English pound may dominate (it is not unusual to adopt an other currency. Panama has used the dollar since 1904 and Montenegro the Euro since 2002). Yet as local economic conditions change the two different central banks may make different monetary choices. Depending on which currency citizens think is more useful they will change between the use of the different currencies allowing the most competitive currency to thrive.

Oligopoly better than Duopoly

In the above solution there would effectively be a duopoly. The BoE and the Scottish central bank would essentially be competing in a two supplier market. Adding the Euro would create competition from the ECB or  simply allowing Scottish businesses and individuals to choose their own currency and have no formal government currency arrangements at all could be even better. As Philip Booth states:

This would decouple the currency from what would be a highly indebted government thus preventing debasement and inflation as a method of dealing with government debt.

As Andrew Lilico has stated the above arrangement  would indeed be a dream-come-true for those who believe in free markets and free banking. Unfortunately Philip Booth also notes that:

there are aspects of EU law which surely torpedo this.. Scottish banks would have no access to lender-of-last-resort facilities and deposit insurance would probably become infeasible. There is a big problem, though. Firstly, EU law requires deposit insurance so we will probably end up with incredibly tightly regulated Scottish banks to avoid a cost to the public purse of a bank going bust.

In the Dual-Currency situation these problems would not arise. The Scottish Central Bank could print Scottish Pounds and act as lender of last resort. As is pointed out the currency choice has become political and  the gloves have come off. The choice for a separate Scottish currency alongside the  rUK Pound would allow the SNP to keep face, whilst allowing voters to go the polling booth knowing that at best they will be gaining a new currency, with potential monetary independence.

My hope is that a successful dual currency arrangement in Scotland will lead to a European rethink of allowing currency competition.