Scottish Bank Notes – The Treasury’s toothless threat

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By John Miller

The Scotsman’s lead anti independence scare story the other day was “Treasury Threat to Future of Scottish Bank Notes”.  The opening paragraph stated that “The referendum debate has taken an unexpected turn after Chancellor George Osborne sparked a row over the future of Scottish bank notes – raising the prospect of them being banned if Scots vote to leave the United Kingdom.” John Swinney rightfully dismissed the threat as “churlish”.

What are the facts regarding Scottish and English bank notes?  Much has been made over the years of the fact that Scottish notes are not legal tender.  Does that really matter?  What better authority to turn to than the Bank of England.

“The legal position with regard to Scottish Banknotes is as follows:

Scottish Banknotes are legal currency – i.e. they are approved by the UK Parliament.  However, Scottish Bank notes are not Legal Tender, not even in Scotland.  In fact, no banknote whatsoever (including Bank of England notes!) qualifies for the term ‘legal tender’ north of the border and the Scottish economy seems to manage without that legal protection.

HM Treasury is responsible for defining which notes have ‘legal tender’ status within the United Kingdom and the following extract from Bank of England’s website may help to clarify what is meant by “legal tender” and how little practical meaning the phrase has in everyday transactions.

“The term legal tender does not in itself govern the acceptability of banknotes in transactions.  Whether or not notes have legal tender status, their acceptability as a means of payment is essentially a matter for agreement between the parties involved.  Legal tender has a very narrow technical meaning in relation to the settlement of debt.  If a debtor pays in legal tender the exact amount he owes under the terms of a contract, he has good defence in law if he is subsequently sued for non-payment of the debt.  In ordinary everyday transactions, the term ‘legal tender’ has very little practical application.”

It is also interesting to note that, if the strict rules governing legal tender were to be observed in a transaction, then the exact amount due would need to be tendered since no change can be demanded.

The majority of banknotes circulating in Scotland are issued by Scottish banks.  Scottish notes circulate and are accepted quite freely in Scotland and, for the most part, they are also readily accepted in England & Wales, although branches of Scottish banks there may not issue them.  However, you should not rely absolutely on Scottish notes being accepted outside Scotland and this is particularly true when travelling abroad.  Our general advice would be not to carry large amounts of banknotes of any description and to make use of facilities such as travellers’ cheques, credit/debit cards and ATM cards for access to funds whilst abroad.”

My advice; Do what the Bank of England says.  Continue to use your credit card, just as you would in any other foreign country.

What the Tory Chancellor should have been aware of before he put his foot in his mouth (again) and why the threat is toothless is this, also from the B of E.

“Today, the combined circulation value of notes issued by the authorised banks in Scotland is in the region of £3.5 billion.  In accordance with the terms of the 2009 Act and the associated Banknote Regulations and Rules, issuing banks require to fully back their notes at all times with ring-fenced assets held partly in Bank of England notes and UK coin and partly in deposits held at the Bank of England.  This, of course, means that holders of banknotes issued by the Scottish banks receive the same level of protection as that provided to holders of Bank of England notes”.

The £3.5 billion of Scottish notes in circulation is the amount that people are holding in their wallets or in cash tills and does not include the notes held in the banks’ vaults and ATM machines.  The notes in circulation must be covered by Bank of England notes.  Guess who gets all the profits from the Bank of England’s note issuing department?  That would be Chancellor Osborne’s shop, HM Treasury.  Let’s see – £3.5 billion at, shall we say 2%, would make £70 million – another hidden tax on the Scots.

Bottom line is that the if Chancellor Osborne carries out his “churlish” threat then the Bank of England would have to repay the £3.5 billion to the Scottish Central Bank and lose out on £70 million or more of annual revenue.  I would say that this is much more of a threat to HM Treasury than it is to Scotland.