Survival of Scottish banknotes

The famous Scottish banknote.

The Bank of Scotland was the first bank in Europe to produce banknotes. The Scots took to banknotes so readily that England’s attempts to block their production – after most English banks had failed – in the early 19th century, caused a national outcry and a popular campaign by Sir Walter Scott helped secure their future.

Indeed, the Westminster parliaments subsequent inquiry found that the Scottish banknote was more successful and stronger than the English note.

Notwithstanding the legal tender argument; Scottish bank notes are not legal tender in Scotland or the rest of the UK but are promissary notes – a situation that has recently provoked anger in the House of Commons. The Labour Government at Westminster refused to alter their status; They are still in use and as popular today, and the three main Scottish banks print them.

Incidentally, English bank notes (or Northern Irish notes for that matter) are not legal tender in Scotland either. The English £1 note did have legal status for a while – the Currency and Banknotes Act of 1954 gave English notes of under £5 legal tender status in Scotland; and basically allowed the use of English notes in Scotland. Since the Bank of England removed its £1 note from circulation in 1988, now no paper money is legal tender in Scotland!

The Scottish and Northern Irish notes have to be backed by the Bank of England. (The Bank of England was founded by a Scotsman, William Paterson!) That means the these banks put a sum of money – the Scottish banks give the Bank of England almost £5 billion pounds every weekend – into the Bank of England before they produce their notes.

The UK government had planned to tighten those backing rules which would have had the effect of stopping the Scottish and Northern Irish banks from producing their notes.

But under intense pressure from the banks themselves and the Scottish Government and Northern Ireland Assembly these plans have been watered down so that both these countries’ notes are safe.

Alex Salmond has hailed the U-turn as a victory:-

“I’m delighted the Treasury have dropped their ludicrous proposals that threatened the very existence of Scottish bank notes. Let’s hope they’ve finally learnt their lesson and never jeopardise our bank notes again.”

“Although some concessions have been made, this is a substantial victory and, as such, we welcome it. All those who took part in the campaign deserve congratulations – their determination ensured success.”

So the SNP are happy now.

They have already said that if the referendum on Scottish independence is won in 2010 then Scotland will keep Sterling as its currency at least for the short term.

Any move to the Euro will only take place after a referendum.

Currently the European Central Bank believes that if the UK moved to the Euro that would mean the end of the Scottish notes as they are not legal tender. As the UK government has recently refused them legal tender status, it leaves their survival hanging on the UK’s continued refusal of joining the Euro, a position that could easily change in the future.

However, if Scotland was independent then I’m pretty sure the Scottish notes would have legal tender status assigned to them almost immediately by the Scottish Government.

So that argument by the European Central Bank would immediately be circumvented. The Scottish banknotes survival then would be best placed in an independent Scotland.

There is another problem though. The European Central Bank is used to dealing with countries with one central bank (like the Bank of England for England); in Scotland the three note issuing banks are retail banks – the Bank of Scotland, the Royal Bank of Scotland and the Clydesdale Bank.

Hence the European Central Bank allows countries to issue their own versions of the Euro note. Since they all have one central bank its not a problem, and France happily issues its own designs for their Euro notes for instance.

Which bank in Scotland would then get that honour? I believe it would not come to that. If Scotland voted for the Euro, one of the preconditions could be that the three banks could issue their own notes and the Scottish Government could easily negotiate a derogation on the matter.

But is it likely that a UK Government on past form would insist on a Scottish (or Northern Irish) derogation if they joined the Euro? On past evidence in Europe – in a leaked memo by senior Scottish civil servant, Michael Aron – when Labour Scottish ministers were left in the hallway and ignored by the Labour UK ministers before a Council of Ministers meeting, I think not.

Scottish banknotes will always be dear to Scotland. Sterling or Euro they must survive.

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