Show Me the Currency!

Published on by D. G. Hart

Why the Scots should listen to economists more than pastors when it comes to temporal affairs:

One of the strongest practical arguments against Scottish independence, made by Paul Krugman this weekend, is that an independent Scotland would actually wind up with less control over its economy than it does now – because it would have no more say in British monetary policy, but, so long as it kept the pound, would be as affected by that policy as it is now. And the “yes” advocates have been very clear that they intend to keep the pound.

I think he’s right. I’ve argued for some time that if anyone is interested in saving “Europe,” then “Europe” needs some kind of fiscal union – not by any means a powerful centralized state like France, but some kind of confederal or federal arrangement, with limited but real powers and direct accountability to voters. If Europe’s states don’t want to cede national sovereignty in that way, then they really do need to rethink the whole currency union thing – or just settle in to a quasi-colonial relationship with Germany and be done with it.

But if all of the foregoing is true, then why would Scotland seek an independent government but remain tied to a foreign currency? Why would “ditch Westminster, keep the pound” be a reassuring platform, rather than an ominous one?

The answer doesn’t just relate to what constitutes an optimal currency area or how integrated Scotland is with England, economically. It relates to transition costs. And it relates to what degree of confidence Scotland’s electorate has in their own, new political culture. Keeping the pound, at least initially, is much cheaper than ditching it. And the prospect of ditching it in the future would mean higher borrowing costs today. Why, after all, would you want to ditch a solid, respectable currency unless you planned to devalue? And if you wanted to tie the hands of a new government that might otherwise open the spigot a bit too wide, what better way than to force them to borrow in a foreign currency?

Precious few seceding states in recent years have adopted a truly independent monetary policy. Many have ditched their own newly-minted currencies entirely. Slovakia adopted the Euro before the Czech Republic has. Montenegro and Kosovo adopted it unilaterally. The Baltic states have rushed to adopt it as swiftly as possible. Croatia is hammering at the door to get in, notwithstanding all the nastiness of the past five years. Countries also continue to adopt the dollar as either their official currency (e.g. Ecuador, El Salvador) or as legal tender alongside a pegged local currency.

Indeed, not that many years ago, the question was whether Britain would ultimately join the Euro, not whether the Euro would ultimately collapse. If it had, then what I am calling one of the strongest practical arguments against Scottish independence would be entirely nugatory. If the UK had adopted the Euro, then leaving the UK would have exactly zero implications for Scotland’s control over its monetary policy. Even as, on one level, monetary union has made deeper European political integration more necessary, it has also made political separatism, from Catalonia to Flanders to Lombardy, vastly more plausible. But these ever-smaller political entities will perforce have even less control over the forces that largely determine their destiny than they once did as part of a national community with direct accountability to voters.

But such a calculation winds up making Scotland just as money-grubbing as London, no?

20 thoughts on “Show Me the Currency!”

  1. Germany! Unified once again, surrounded by all these weak sisters, and Russia expanding. Berlin, BERLIN! calling out Russia. If they sign a non-aggression pact, everybody duck and grab something blunt. Sweden, SWEDEN! has political movement toward contemplating joining NATO. Time to redraw the maps.

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  2. Why, after all, would you want to ditch a solid, respectable currency unless you planned to devalue?

    Having no opinion on Scotland’s decision I’ll ask concerning the above – Compared to what? As all western currencies are racing each other to the bottom through massive increases in their money supplies, borrowing, and deficit spending, led by the dollar, the British Pound has yet managed to weaken against the dollar over the last 40 years by about 25%, while Gordon Brown, former Chancellor of the Exchequer, sold off virtually all the England’s gold reserves in the late 1990s and early 2000s for 20% of what it would be worth today in order to have more dollars in their hands! The dollar that has the purchasing power today of 17 cents compared to a 1970 dollar.

    But I will say that at least Scotland could be its own master as it slides into currency default with all the rest!

    – the world’s ruined…

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  4. McMark,

    I did not read the whole, “Fandango” article, and the subject does not hold my attention much anymore. It did seem interesting though from the 2 or 3 paragraphs I read. Watch what the fed says now rather than what they do is really true from what I remember of my days studying such matters. What I am curious about is whether your brother has Luddite sympathies or not? He seems like the antithesis of you. Not really expecting a reply but I try to imagine what it was like growing up in the McCulley fundy household with a preacher father and two sons the likes of you two guys. I am laughing as I am writing.

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  5. mcmark, historically every fiat currency has eventually gone bankrupt because government’s cannot resist giving benefits to their citizens in order to pacify them or they can’t resist expanding spending beyond what they can bring in with taxes. Even your brother won’t be able to change that…

    On its present course it’ll be no different for the dollar. And a ruined world doesn’t mean things can’t be done better, but government leaders like staying in power. They don’t care what the long term problems are that they create. They’ll be long gone when the tipping point comes. We live in a ruined world, does everyone go into debt to the point of bankruptcy? No. We can’t print money. All it takes for the government to produce dollars today is the click of a compute key. The more they wantonly make the less valuable it gets.

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  7. Gary North keeps crying wolf, but the predicted inflationary disaster is not here yet.

    Noah Millman—-Political communities around the world want more political control over their affairs, but without assuming all the costs that true control incurs. They want smooth integration with global supply chains and access to international capital markets, but without suffering the risks and costs that come with that loss of control.

    Check out a magazine that does not think it’s always “conservative” to go to war.

    http://www.theamericanconservative.com/dreher/the-absurd-bush-prophecy/

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  10. Romans 8: 20 For the creation was subjected to futility, not willingly, but because of him who subjected it, in hope 21 that the creation itself will be set free from its bondage to corruption and obtain the freedom of the glory of the children of God. 22 For we know that the whole creation has been groaning together in the pains of childbirth until now. 23 And not only the creation, but we ourselves, who have the firstfruits of the Spirit, groan inwardly as we wait eagerly for adoption as sons, the redemption of our bodies

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  11. Brian, Krug suffers the problem of everyone who gets a column in the NYT, they have to turn off 90% of the thinking powers that got them the gig. Frank Rich was the biggest meltdown of the last decade in that respect.

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  13. I love it how libertarian Austrian economic types think they are the last word on economic issues and that they could cure the ills of the American economic system if they could just convince Congress and the Senate of their solutions to America’s economic problems. None of the insiders who follow economic issues and make policy have bought into the Austrian school of thought. And they have spent time studying it and listening to its advocates. At least that was the way it was in the 90’s. From skimming through the McCulley article it looks as though their ideas are still looked upon with skepticism.

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  14. “None of the insiders who follow economic issues and make policy have bought into the Austrian school of thought. And they have spent time studying it and listening to its advocates.”

    * Turns head and surveys economy and Fed of last hundred years* yes Johnny boy, that’s exactly right. That’s how we know wrong they are. Sir Keynes thanks you though.

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  16. Couldn’t be farther from a theonomist but yes it was condescending reply to your equally condescending non-argument that because the people in charge today, who are doing one heck of a job (sarcasm), are not into Austrian economics, or even just Hayekian classical economics, it must be bunk.

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  18. Which confessional protestant would get an obituary in the New York Times?

    http://www.nytimes.com/2014/09/13/world/europe/ian-paisley-northern-ireland-leader-dies.html?_r=0

    Is a “gracious covenant of works” an “Austrian economics” concept ? Does denying that God has a character which makes any idea of “intrinsic merit” possible means that God merely (arbitarily) values the obedience, and “by grace accepts it as if were”….

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  20. The Schaeffers thought that talking about election would only encourage the determinism of atheistic humanists, and so they avoided Confessional language and talked about “family values” instead. If thinking we are saved as families makes one “confessional”, then your ranks have greatly increased.

    You can read more of the explanation in No Place for Sovereignty, IVP, by Mcgregor Wright. But now’s he’s dead also, until the Lord Jesus returns.

    http://www.nytimes.com/2013/04/07/world/europe/edith-schaeffer-98-dies-defined-christian-values.html?_r=0

    Which confessional protestant does the New York Times already have an obituary in their file? Mouw, Marsden, Noll, Strimple, Gaffin….?

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