Several of today’s papers run with the story that in giving evidence to the Scottish Affairs Select Committee in Westminster, George Osborne yesterday made the claim that Scots could run out of cash under independence, as Scottish banks would no longer be able to print their own pound notes guaranteed by the Bank of England.
Osborne’s argument is that Scottish notes are accepted as currency in the UK under the Banknote (Scotland) Act of 1845. However, this legislation would no longer apply after independence without a currency union, thereby making Scots notes worthless.
In what was an oddly nervous and evasive performance before the Committee – despite its extremely friendly questioning – it was one of the Chancellor’s stranger assertions.
The first Scottish bank to issue banknotes was the Bank of Scotland, before the Union with England was created. On 17 July 1695 the Bank of Scotland was formed through an Act of the Scottish Parliament. At the time Scots coinage was in short supply and of uncertain value compared with the English, Dutch, Flemish or French coin, which were preferred by the majority of Scots and used informally. Trade was severely curtailed by the lack of an adequate currency, leading to the merchants of the time becoming strong supporters of paper currency as an alternative.
Notes which promised to pay the bearer were initially viewed with suspicion, however once it became apparent that the BoS could honour its “promise to pay” and that the paper was more convenient than coin, acceptance spread rapidly and the circulation of notes increased, making Scotland one of the first countries to use a paper currency.
After the Darien disaster and the Union of 1707, the Royal Bank of Scotland was set up in 1727 using the “Equivalent” (the sum of money paid to the nobles to sign the Act of Union, which had been largely paid in paper rather than the promised gold). On 8th December 1727 the bank issued six different kinds of notes (20 shillings, £5, £10, £20, £50 and £100) which were payable on demand at the bank’s office in Edinburgh.
Just over one hundred years later, on its opening day of 7th May 1838, the Clydesdale Bank began to issue notes. Early notes were printed in black only. It wasn’t until September 1777 that The Royal Bank of Scotland pioneered the use of colour in banknotes with a blue rectangle displaying the words ‘One Guinea’ and the King’s head shown in red. Colour didn’t come into widespread use until nearly a century later.
Today the Bank of England is the central bank of the UK and as such is the sole lawful issuer of legal-tender banknotes in England and Wales. In Scotland and Northern Ireland certain commercial banks are authorised, most recently under the Banking Act 2009, to issue banknotes alongside the BoE.
Scottish and Northern Ireland banknotes are fully backed with Bank of England banknotes, coin or interest-bearing accounts with the Bank of England. The bank’s own website notes:
“Today, the combined circulation value of notes issued by the authorised banks in Scotland is in the region of £3.5 billion.
In accordance with the terms of the 2009 Act and the associated Banknote Regulations and Rules, issuing banks require to fully back their notes at all times with ring-fenced assets held partly in Bank of England notes and UK coin and partly in deposits held at the Bank of England.
This, of course, means that holders of banknotes issued by the Scottish banks receive the same level of protection as that provided to holders of Bank of England notes.”
If the Bank of England was to push the matter (for some unfathomable reason), Scottish notes could be returned to the issuing bank for the assets that back them to be used to purchase Bank of England notes. The BoE would find itself forced to hand over the £3.5 billion of assets (some of which would be English notes in any case) to the Scottish banks. At that point no-one could stop the Scottish banks from subsequently buying English notes to replace the Scottish ones like-for-like.
Osborne’s gambit is a bizarre one, aimed at frightening people who have no idea of the technical ins and outs of how the UK’s currency works but an absolute nonsense to anyone who does. Scottish banknotes aren’t just conjured out of thin air, they’re representations of Scotland’s assets lodged in the BoE vaults, and will continue to be so whether Scotland is independent or not.
As the Scotsman quoted Treasury mandarin Sir Nicholas McPherson:
“If RBS or Lloyds – which owns the Bank of Scotland and Clydesdale Bank – wanted to continue to print money in Scotland, they would need a like-for-like number of British notes in their reserves to guarantee the money.”
As that’s precisely what’s already happening, we’re not sure what the scare is.