Conservatives deserve better than the latest wheeze from the party leadership that is neither clever nor helpful.
At a time when the economic news in Britain has been going from bad to worse in very quick order one has to hope that the party that philosophically believes in the capitalist system, warts and all, might try to offer some explanation of why we are now entering the worst recession since the great depression of the 1930s and how free enterprise still offers the best hope for the future.
Unfortunately the best idea coming from the Scottish Conservatives has been for the party’s sole member at Westminster, David Mundell, to offer the hope that Scottish banknotes will be made legal tender across the whole of the UK. How that is expected to help pay someone’s mortgage in Biggar - or anywhere else in Scotland where no problem of using the notes exists - is a question the party leadership have obviously not thought to ask.
The Clydesdale MP hopes that his Private Member’s Bill will do the trick, although the irony of his timing is clearly lost on him. At the moment when the reputation of the Royal Bank and the Bank of Scotland could hardly be lower in Britain he announces a plan to force people to use their paper notes. The idea has clearly not been market tested – and would be unlikely to find favour with the many potential Tory voters in the rest of the UK that have seen their life savings and pensions based upon Scottish bank shares go down the toilet.
Had Scottish pound notes been real money then everyone would have rushed to hold Bank of England or Clydesdale banknotes - offloading those of the Royal Bank and Bank of Scotland that would have been considered to be near worthless. The result would have been a run on the two Scottish banks far worse than we have already seen forcing them both to be fully nationalised within a day.
I’m sure bringing home this economic reality was not what David Mundell intended.
The Conservative MP was happy to pose with Alex Salmond with a big Scottish bank note for the media. Again the irony was lost on this one man Conservative think tank. Alex Salmond not only supports the break-up of Great Britain he also supports the Euro becoming the Scottish currency and has recently been talking up that idea in Barcelona. Having a Euro would of course mean no Scottish banknotes, certainly none as we now know them saying the Scottish banks’ names on them. We would have Euros some of which might have thistles on them - but they would be Euros not Scottish pounds – authorised in Frankfurt to suit the German economy, not in Edinburgh and London to suit a British economy in which Scots play a disproportionately large role.
I’m sure giving aid and comfort to Alex Salmond’s goal of replacing the pound with the Euro was not what David Mundell intended.
But it gets worse, for when I consider what would happen if Scottish banknotes were made legal tender I find it hard to accept that the policy has been thought through beyond the initial photocalls and favourable headlines in the Scottish papers - for such a law is only likely to lead to the banknotes’ demise. Here’s why.
The three ‘Scottish’ banks - the Clydesdale (owned by the National Australia Bank), the Royal Bank of Scotland (now owned by the British Government) and the Bank of Scotland (now owned by the English Lloyds TSB Bank) - have the continuing ‘right’ to print their own banknotes so long as they are backed up by holding an equivalent amount in Bank of England notes.
The Scottish banks have to pay for this right, through the printing, transport and administration costs of the exercise, but for the moment are willing to swallow the overhead because it is worth it in marketing terms – and they are able to make money out of it.
Political and economic commentator Peter Jones explained it well in an intuitive article published in The Scotsman of 8 February last year. I only wish David Mundell had read it for Jones explained that: “Scottish bankers being clever types, they spotted that the value of their note issue was calculated on its value at the close of business on a Saturday. So they figured if they put the necessary deposits into the Bank of England on a Friday and took them out on Monday, the letter, if not the spirit of the law, would be complied with. Why do this? Because when their money is in the BoE, no interest can be earned on it, but for the other four days it can be deposited in an interest-bearing account, thus earning money for the note-issuing bank.”
The profit has been calculated to be £65 million for the Clydesdale alone – with far bigger sums for the two other Scottish banks.
If the Bank of England is forced to accept Scottish notes as legal tender surely we can expect it to demand that for the protection of everyone using them the notes are ALWAYS covered by the Scottish banks holding the equivalent value of the central bank’s own money.
With no profits to offset against them the production and administration costs would become a burden. So, while the Scottish notes would technically become legal tender they might be withdrawn from circulation when the Scottish banks find they can no longer afford them. True there is a marketing value to having the notes – but these are hard times and the pressure to find cost savings will be severe.
But don’t take my word for it, here’s what one senior Executive from a Scottish Bank told me when I asked about the policy: “If we force the issue on legal tender then the Treasury will simply demand that we lodge money with Bank of England at all times and it will then be cheaper to use bank of England notes rather than print our own. Scottish notes will simply disappear.”
I’m sure being responsible for the death of Scottish banknotes was not what David Mundell intended.
It’s known as the law of unintended consequences and it happens when policies are not completely thought through. But Alex Salmond thought it through – he could see where it will lead – towards more nationalist votes as the Conservatives put another nail in the Union’s coffin.
Thursday, 5 February 2009
Brian Monteith on the Scottish pound