In this chapter we look at the history of money and banking in Scotland and Norway, and make some comparisons between the monetary experience of the two countries in the period up to the recent financial crisis and its immediate aftermath, with the main focus being on Scotland. We then consider the options facing small open economies like these two countries at a moment of dramatic change in the global organisation of money. This in turn allows us to open up important questions about the future that as yet are hardly being considered in the debates over Scotland's possible independence.
The referendum debates have identified three main monetary alternatives in the event of Scottish independence: to remain in the sterling area; to join the European Monetary Union (EMU); and to issue an independent currency, with or without a peg to sterling or the euro. There has been no discussion so far of a dual or multiple system where the national currency coexists with others as legal tender – as in Zimbabwe today or indeed Scotland before the late seventeenth century, Scandinavia between 1873 and 1914, and the Hanseatic city states between the thirteenth and fifteenth centuries. Indeed, we will argue that national monopoly currencies were an invention of the mid-nineteenth century and are now in disarray, as are fixed-exchange rate currency unions. Throughout history the circulation of several independent currencies within a territory has been normal and this situation is being restored now. It would be a shame if the debate concerning Scotland's money system after possible independence were limited to models that are already anachronistic.
Both the reports cited above agree that the optimal solution is to stick with sterling in a monetary union after independence. The UK Government report, however, emphasises that effective ‘supervision’ will limit Scotland's fiscal policy independence. Many other observers have made the same point, while some have ruled out such a solution even before negotiations.5 However, a recent paper by Angus Armstrong and Monique Ebell on ‘Monetary Unions and Fiscal Constraints’, argues that ‘any negotiation to form a monetary union between two sovereign states substantially different in size, and each acting in their own self-interest, is likely to result in a currency arrangement that resembles “dollarization” in practice’, and that fiscal control by the larger partner is neither necessary nor feasible.