There is a world of difference between using something and owning it. The pound sterling is used in Scotland. But it is owned by the UK Government. The pound sterling is not Scotland’s currency, it is the currency used in Scotland.
The only way an independent Scotland could continue to use the pound sterling as its currency is if the UK Government agreed. This post is short and tries to explain the simple fact that the UK government oversees the Bank of England which is the exclusive issuer of the pound (other entities can issue pounds under licence from the Bank of England) and it is the BoE that oversees the payment clearing process of transactions in pounds.
When it comes to Scotland continuing to use the pound, the UK holds all of the cards. The UK Government could instruct the Bank of England to consider an independent Scotland “as if” it was still under its control and supervision, until such a time as Scotland took on its own currency. This is possible. But it would have to be categorised in the ‘unlikely to happen’ column despite the Sustainable Growth Commission idea of Sterlingisation.
Without an agreement from the UK Government, only physical pounds (the ones in circulation now or those that could be physically drawn from accounts in banks denominated in pounds) could be used in Scotland. There could be no digital use of pounds in Scotland by banks not registered or headquartered in rUK. No one would be able to buy anything in pounds with their cards or transfer funds electronically to anyone else unless they had a bank account with a ‘foreign’ bank.* (Please see the footnote that attempts to fully explain in detail how this would likely work given international clearing and payment systems).
To expand on the importance of the Bank of England, let’s take a simple transaction of buying a sandwich. This is the process that happens behind the scenes if you bank with a different bank from the shop owner:
Your bank (bank A) sends X money to the reserve account of the bank (bank B) used by the sandwich shop. Bank A debits your account X and credits the reserve account of bank B by X. The money is an internal transfer between the two reserve accounts held at the Bank of England. Without the Bank of England, it is impossible to make the payment in this scenario. These reserve accounts, held at the central bank, are also used for transactions between the private sector and the government and for transactions between private/commercial banks and the central bank. They are also how banks access physical funds to put into ATMs. They are at the very heart of the financial system. As Richard Murphy explains:
Central bank reserve accounts (CBRAs) are held by the UK’s commercial banks with the UK’s central bank – the Bank of England. As a central bank the Bank of England is owned by the UK government. It is responsible for the day-to-day management of the money supply in the UK; for the regulation of commercial banks in the UK and for managing the settlement of inter-bank debts in sterling, for the issue of which currency it is responsible. (1)
The Bank of England oversees millions of transfers every day and effectively “clears” the transfer of funds between reserve accounts. If the Bank of England does not offer reserve accounts to banks located in Scotland these payments would not be cleared and new physical money could not be accessed by Scottish banks. I am not saying this would happen, but rather that it would be down to the UK Government and not the Scottish Government to make the call on what funds are cleared by the Bank of England* (Again, this is a very simplified statement and the footnote gives more details).
There is a middle ground between the free-flowing and free exchange of funds in pounds sterling between entities in the financial services system and a total collapse. Maybe this is *only* longer delays in payments and millions of pounds in costs paid by customers, banks and the Scottish Government for ‘cross border’ transactions in Scotland. My hope is that the upcoming Scottish Government paper will explain exactly how a smooth transition would play out.
You can use something without owning it.
we would continue to use the pound, which is our currency as much as it is the rest of the UK’s
Nichola Sturgeon – October 7th 2022 (link to short interview on Twitter)
Our First Minister is wrong. 100% categorically wrong. We use the currency like everyone else but only one Government owns it. And that is the UK Government.
Without the express permission of the UK Government, Scotland can not, in any meaningful way, have a financial services sector that uses the pound sterling as its currency.
It is likely that I will add to this short post once we have seen the Scottish Government’s paper on the economics of Scotland.
But at this point, I think it is very important to stress that the Scottish Government is and would always remain a user of the currency issued by the Bank of England.
(1) Tax research, July 2022. Available here: https://www.taxresearch.org.uk/Blog/2022/06/17/how-are-the-central-bank-reserve-accounts-created/
* Let’s assume I pay by a credit transfer (bank to bank transfer) as in the example. My account is debited £3.50 and the bank needs to decide where to credit the £3.50. If the sandwich shop account is with a different bank then the IT system of my bank will look at its payment routing tables and decide how to route the money. If they are both Sterling then this will be via a UK payment network such as Faster Payments. So my bank will route a UK Faster Payments message to the sandwich shop bank for the payment. The movement of money (clearing) would then happen later (Faster Payments works on a net settlement basis which is done 3 times a day) using the clearing accounts.
After independence, most of the banks in Scotland will be part of U.K. banking groups. So the part that sends the payment from Scotland to England – if it is within the same banking group – will be internal. My assumption would be they would use the same IT system for both U.K. and Scotland while both used the same currency. Unless there is a legal requirement to do so (such as the New Zealand regulation BS11 which states the New Zealand operations needs to be separate) there will be no / or little separation between the U.K. and Scottish parts of the U.K bank. Effectively this means that all our Sterling banks accounts continue to be U.K. bank accounts after independence and governed by U.K. law. So the payment problems would not happen unless the UK government decides to make it difficult. The movement of money is international, the IT systems involved are designed to work out how to get the money to its destination. However, cross-border payments can be slow and expensive (especially if they use a correspondent banking network).
With thanks to Peter Ryan @indybanking
So my state pension, and BT pension, paid into my Nationwide/TSB accounts, in GBP, would effectively be frozen? Somehow, I think not! Not to mention building up that entitlement during 12 years serving in the RN and 19 years in Essex/London. Seem to remember the governor of the BoE in 2014, some years later, saying it wouldn’t be a problem? I want Scotland’s currency in place as much as the next guy but puleeze – keep the scare stories for Halloween..
Thanks Ian. The point I hope to get across is that the decisions regarding the pound are made by the UK Government. This is a very important point to stress. The idea that we have as much say of its use and the framework that supports it is wrong. We use it we do not own it. Is it likely that payments would be frozen to and from banks and pension funds etc? Very unlikely. But the UK Government via its agent the Bank of England ultimaley decides what banks to support and what payments to clear.
This is completely wrong. A country does not need another countries permission to use its currency. Currencies are market traded. It benefits a country the more countries use its currency. To see why this article is so wrong look at the United States Dollar $.
The article states that we can use the pound, as we do today, ONLY with the express permission of the UK Government. Sure there are complicated and expensive workarounds but to say we can use it in the same way as the UK Government or financial institutions in rUK as we like is wrong. It is owned by the UK Government and to use the pound Scotland will be in the uncomfortable position of having to “ask”.
I’m pretty sure if the r-UK said no the £ would crumble considering it BE’s borrowing power is based on the assets of the whole UK including oil gas whisky, Scotland could go elsewhere say for instance the € or the $ and if it did the r-UK’s credit rating would crumble so I’m pretty sure the r-UK would have no option but to play ball.
Have you considered the £ is actually owned by the Monarchy as used HM Goverment, and as such would remain with the Monarchy, which due to Scottish Monarch inheriting the English throne would mean that it would remain with Scotland, albeit unrealistic, it would in fact be accurate given the history of unification unless I am mistaken. Similar situation would be true for armed forces which swear allegiance to the crown, not Government.
I didn’t consider that because the Bank of England is owned by the UK Government. I think the monarch has enough without being gifted the assets of the UK.
My point is that, your argument is inherently wrong as the £ is not owned by BoE. The £ is owned by the Monarch, it wouldn’t be gifted to them. The Monarch belongs to Scotland, not England, as it was the Scottish Monarchy that inherited the English Throne and therefore the £ as with the armed forces should rightfully be returned to Scotland. If you truly believe in Independence then you must believe in the abolition of previous Act of Union (parliamentary) and Unification of Crown (Monarchy), meaning Scotland would take back their rightful Monarch and England would need to find whoever it may be that should/would sit on their throne.
A little thing that many forget, the Monarchy of the UK comes from a Scottish Throne.
I understand your point. I just totally disagree with it but very happy to publish your perspective.
And not if but when Scotland Independent
We too can play hard ball like
The 40 % average renewable energy England receives monthly
A secure base for Trident
Export our own goods from Scottish ports denying England import/ export duty and England has the Highest trade deficit in the World
Tell BOE that legally Scotland will not
Contribute to Debts incurred by it
Those debts are not ours
Send you a demand for a credit note to be issued for misappropation of 47 Billion Barrels of oil, before we agree to take our portion of Westminster debts
The plain and simple truth England needs Scotland far more than we need England who now are technically bankrupt and will certainly be so if you wipe Scottish assets from the balance sheet of England
Leaving England at the total mercy of the IMF and the spivs of the hedge fund managers
So much for ” Taking back Control ”
Another meaningless catch phrase just like
Growth Growth Growth
£ 350 million every week for the NHS
Best in the World
Green sunny uplands
British fish are happy
We have the highest GDP growth in G7
Easiest trade deal in history as far as USA concerned
Their will be no customs checks for NI
On and on they go but ominous silence since £ tanked and pensions hrs away from going up in a puff of Smoke
Truss threatened China
What with what, 5 fit for purpose capital fighting ships, China has over four hundred
80 Front line aircraft, China has 9678 no.
22000 fighting boots on the ground
China has 9 million
80 clapped out tanks, China has over 90000
Approx 6 no military satellites China will launch by 2025, 28000 satellites
Little England not only bankrupt but
Utterly and completely delusional
Badly in need of a meeting of the real World and reality
Wake up before it is too late and you confront total collapse, civil unrest which is more than capable of breaking out into English civil war 2
As for your history a brief synopsis of
Deliberate starvation of millions in Ireland, 300 million in India, Genocide of 1.6 million aborigines in Tasmania,
Opium wars in China, Inventor of concentration camps in the Boer wars over 1 million woman and children disposed with, so much so Hitler and Heydrich admired so much they basically copied
Plunder and pillage of India during colonialism of $ 67 trillion ( yes correct )
Kenya concentration camp for Mau Mau and a Scottish regiment mutiny
Refusing orders and walking out from the killing camp
Tell us how Drakes and another English Admiral,s huge Armada got on with the Spanish at Cadiz and Porto, how 8000 troops lost and most of both fleets sunk
You aint going to find out here in the UK but you will if you attend National Library of Spain
Tell us how that in 1940 in France why 360 Spitfires and Hurricanes blown up during the retreat to Dunkirk, I can some buffoon of a English logistics commander botched up by not ensuring enough fuel to fly them back to England
I could fill a library with the disgusting awful truth re England
But i shall finish with that Edward 1st and Cromwell between them destroyed 98 % of Scotlands historical records
England must bend its knees and beg for forgiveness to many of this World
Your fate now awaits and may be referred to as KARMA
Yes it may be all part of the negotiation my point is that we can not simply use the pound sterling as if we own it.