A Scottish currency board

Scottish five and ten pound notes
Originally uploaded by HowardLake

Several articles, such as this one in the Scotsman, have covered the Chancellor of the Exchequer’s announcement that Scotland after independence won’t be able to use the pound:

The Treasury confirmed that, while it could not block Scotland from using the currency, it could be reduced to a situation where it had no say in fiscal policy, was prevented from printing its own money and was locked out of any valuation decisions.

Treasury officials confirmed this would mean Scottish banks, which are licensed by the Bank of England to print their own notes, would be barred from doing so in the event of independence.

Royal Bank of Scotland, Clydesdale Bank and Lloyds-owned Bank of Scotland are able to print bank notes with the faces of famous Scots, in a long tradition that has been symbolic of Scottish identity.

Whereas there’s nothing Scotland can do about being locked out from England’s fiscal policy – but to be honest, it currently tends to cater for the needs of the City of London anyway – an independent country can certainly make its own decisions about printing bank notes.

I would recommend creating a Scottish pound after independence, locking it to the English pound using a currency board. This basically means that the Central Bank of Scotland would store English pounds in its vaults and print Scottish pound notes and mint Scottish coins in the same amounts.

The advantage – apart from having distinctive Scottish money – would be that it would be easy to break the peg and link the Scottish pound to the euro instead if that was decided to be desirable. If English money was used directly, that would be much harder.

Lots of countries use currency boards, and they work really well, so it’s a no-brainer to use one at first, at least until Scotland has been seen to have a strong economy, after which it might even be desirable to let the Scottish pound float freely.