Could Scotland have just used the pound anyway?

As the weakness of the CU case began to get exposed the Yes movement threw their campaigners another bone, although it was really another dog whistle but I’ll be mixing my metaphors: we don’t need permission to use the Pound anyway.

Very true. There was nothing to stop an independent Scotland using the Pound, the Euro, the Dollar of the Ruble for that matter.

The trouble is using the Pound is not in any way keeping the Pound, which by definition implies ownership. Just using the Pound, so called Sterlingisation is not a CU, not by a long shot and is an economic policy which would be ruinous to Scotland and certainly to the social plans of the Yes movement.

The most obvious point of contradiction for anyone from the Yes movement advocating Sterlingisation would simply be to point them towards the Fiscal Commission Working Group (FCWG) report and it’s lesser known Annex which examined in detail  all but one of the currency options for an independent Scotland.  

This was the famous “three plan Bs for the price of one” line used by Salmond in his debate with Darling where he argued that all options were perfectly viable. Of the options that Salmond set out Sterlingisation was not one of them, for a good reason.  Simply using the Pound was not viable as far as the Fiscal Commission Working Group was concerned.

Sterlingisation, an informal CU, was the only option dismissed out of hand by the FCWG and required no further analysis.

Strange then that the Yes movement seemed to flirt with this option as a viable currency option and on the front line it seemed to be the default option following the “revelation” by Darling at the final televised debate that “of course Scotland can use the Pound”. Indeed the audible triple “AHHHHHH” from Salmond at that point of the debate was only missing the word “GOTTCHA”.

However Salmond knew full well that simply using the Pound was not viable and yet deliberately pedalled this as a perfectly viable option in the debate and encouraged his supporters to view it as such.

It was a masterclass in deceit on a grand scale.

So what then is wrong with Sterlingisation? It is a valid method of running monetary policy but it’s one that has profound consequences for anyone interested in using the state as a means of correcting the mistakes of the market.

It’s no surprise then that the Adam Smith Institute was quite comfortable with the concept of Sterlingisation. This resulted in some of the most bizarre social media posts at the tail end of the campaign as outright socialists ignorantly posted the Adam Smith Institute as seemingly backing their preferred currency option post independence.

Sterlingisation firstly denies the state any access to monetary policy. You are in every sense of the word giving that control over to a foreign state who has no interest in the well being of that state’s citizens.

It also severely restricts the ability of the state to borrow as it must hold reserves of another currency in order to meet demands from creditors as it cannot use a central bank to print money if required. It would consequently mean that the government would be severely constrained in its ability to borrow or run a deficit and would likely mean huge austerity to bring the budgets into balance through tax and spending cuts (effectively the only weapons available to the government).

Further as the government has restricted access to available funds the financial services industry would face a severe contraction as state backed schemes such as policyholder protection could no longer operate. That is if the obligations within the financial services sector are greater than the resources at the government’s disposal (which they are in Scotland) then it would be impossible for the state to bail out the industry. Without state backing and policyholder protection which rational investor would put their money with a Scottish based institution? Hence the likely capital flight if Sterlingisation was proposed.

Finally with no central bank and no policyholder protection scheme an Independent Scotland under Sterlingisation would not meet the entry criteria for the EU.

Could Scotland have used the Pound without permission? In the words of Darling “of course” but, and it’s a huge but, doing so would have devastated Scotland and the Scottish state, it would be everything the vast majority of Yes campaigners would have been against and Salmond and the Yes leadership knew it. They just refused to be honest with their supporters about that fact.