An article for the Wall Street Journal …
Last week the U.K.’s Conservative, Labour and Liberal Democrat parties got together to administer a Flodden-style thrashing to Alex Salmond’s dream of an independent Scotland using the pound. But there’s a problem: short of an actual Battle of Flodden, what exactly could a Westminster government do to stop the Scots from using the pound?
Imagine walking along Edinburgh’s Royal Mile in a newly independent Scotland. You want to buy a Bay City Rollers CD as a souvenir and you have a fiver issued by the Bank of England in your pocket. If you can find a vendor willing to take that English note and give you the CD in return, the English authorities would be no more able to prevent the transaction taking place than the U.S. Treasury is to stop rickshaw drivers in Nepal from taking dollar bills in exchange for rides.
There is also nothing necessarily to stop a Scottish government conducting its business in sterling, euros, or whatever else. But it would need to be able to get hold of the requisite sterling, euros, or whatever else. A government that issues its own legal tender has three ways of getting the money it needs to fund its activities: It can print it, it can borrow it, or it can tax it.