As Scotland prepares to vote on independence on Sept. 18, the future of its currency has taken center stage.
For the moment, Scotland prints its own notes and uses the British pound, which is controlled by the Bank of England. (Follow?) In the event of independence, Scotland wants to continue to use the pound as part of a negotiated currency union. All three of the UK’s major parties have ruled this out.
Nonetheless, the most likely outcome of a “Yes” vote involves Scotland using the pound anyway. On option: the scenario dubbed “sterlingization,” in which the world’s newest state would have pound notes and coins but no control over its monetary policy. The head of the Bank of England—who, just to make things more confusing, is Canadian—has said that if Scotland were to adopt the British pound on its own, it would need huge reserves of the currency—around 25% of its GDP, or £36 billion—to convince the rest of the world it can credibly act as a lender of last resort in the event of crisis.