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  • Pound Confusion

    May 13th, 2017
    ideas, money  [html]
    The Pound Sterling (GBP) is a peculiar currency union. There are English, Scottish, Northern Irish, Manx, Jersey, and Guernsey Pounds. And not only that, but the Scottish and Northern Irish pounds are issued by a total of seven commercial banks. So there are eleven different entities issuing GBP notes!

    UK law requires that Scottish and Northern Irish banks keep a Bank of England note in their vaults for every one they print. On the other hand, the Manx, Jersey, and Guernsey Pounds are just issued by their respective governments. They hold their pounds pegged 1:1 by promising to exchange their notes for Bank of England notes.

    Which leaves me with a bunch of questions:

    • Why is it worth it for the Scottish and Northern Irish commercial banks to print their own currency? That's expensive, and they're on the hook for forgeries. Normally someone printing currency can make up their expenses through seigniorage, but since these banks are required to hold full reserves of Bank of England notes that doesn't work here. Is it for the advertising and legitimacy benefit of having your bank's name on the notes?

    • Why is there GIP and FKP but Manx, Jersey, and Guernsey pounds are just considered GBP?

    • Why doesn't Gresham's Law apply, and people avoid non-Bank of England notes? This is the same thing I wondered about Ecuador, except coins are a lot more expensive to make than bills.

    • Could one of the crown dependencies make a lot of money by breaking the currency union? Let's say Guernsey prints an enormous number of notes, and deposits them in UK banks. Even though they're not required to, the banks accept the notes and credit the accounts in GBP. Guernsey keeps doing this until people catch on and stop accepting the notes, by which point they've earned billions in seigniorage. Then they abolish the Guernsey pound, and just use Bank of England notes. Back of the envelope: there are ~10k bank branches in the UK, they might let you deposit £20k in one go, that's £200M. And I don't think bank branches have a centralized system for making sure you don't deposit too much weird money throughout the country all at once? I think the rule of law in the UK is strong enough that the banks can't just confiscate the deposits?

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