If the people of Scotland use a promised referendum to end the 300-year-old union with England and vote for independence, one result could be the reappearance of the merk, groat or bawbee.

These were ancient Scottish coins used long before the current monetary and fiscal union with the UK, and highlight a pressing question to politicians campaigning for independence: what to do about the currency?

Options for an independent Scotland include maintaining the currency union with the UK, joining the euro (it would first need to join the European Union), or launching its own currency.

Addressing this and other economic issues such as how to share out North Sea oil revenue and Britain's debt are likely to be key to whether Scotland ultimately opts for independence.

A Scottish debt crisis at the end of the 17th century helped bring about the 1707 Act of Union. Since 1709 all coins have been issued from London, though three Scottish banks issue their own banknotes, which are legal tender throughout Britain.

Scottish National Party leader and first minister in Scotland's devolved government, Alex Salmond, has said he wants to keep the pound, at least temporarily. This would allow Scotland to control taxes, spending and borrowing while the Bank of England would continue to set monetary policy.

This is the most likely option but could raise serious questions about Scotland's ability to honour its debts.

Salmond met Prime Minister David Cameron, who opposes breaking up the United Kingdom, on Thursday for talks on the content and timing of a referendum.

Angus Armstrong, an academic at the National Institute of Economic and Social Research, said that due to their strong trade links and close business cycles, England and Scotland were perfectly placed to share a currency.

There may be many intangible benefits from independence. But the Scottish Parliament is likely to find the implicit financial constraints on economic policy, especially fiscal policy, are even more restrictive than being a full member of the UK, he wrote.

The SNP has said it would expect representation at the BoE and that the central bank should continue to function as lender of last resort, injecting liquidity into the banking system to ease any funding strains.

But the BoE can only provide liquidity to alleviate a lender's short-term cash shortages. Under proposed new legislation, any rescue that is likely to require public funds will from 2013 have to be agreed by Britain's finance ministry.

Scotland on its own could certainly not have afforded the hundreds of billions of pounds of cash and state guarantees to save Royal Bank of Scotland and HBOS, another Scottish lender, from collapse during the financial crisis.


The SNP said it was up to the Scottish people whether they joined the euro. Such a move could be unpopular given the debt crisis but Scotland would get a European Central Bank seat.

Even so, joining could be tricky as a Scottish currency, or the pound, would have to show stability against the euro for at least two years.

How to maintain a stable relationship with the euro when you don't have your own currency and when the inherited currency does not have a stable relationship with the euro. This would be messy, wrote Andrew Hughes Hallett, professor of economics at St Andrews University, in the book Scotland's Economic Future.

Some economists said Scotland was unlikely to launch its own currency as it had no gold or foreign exchange reserves.

Similarly, a currency peg to sterling could come under attack from the market if speculators decided they fancied their chances against a new and unproven Scottish central bank.

The last time a Scottish currency was pegged was in the years before Union when 12 Scottish pounds were equivalent to one English pound.


Around that time, the Darien venture, a disastrous attempt to establish a trading colony in Panama, lost thousands of pounds of Scottish life savings.

Scotland was bailed out by the Bank of England to the tune of 398,000 pounds soon after the Union.

The UK currently owes just over 1 trillion pounds to bond investors and on a population or GDP per capita basis, Scotland would acquire about 8 percent of public debt, 84 billion pounds.

But redenominating UK government bonds could be a legal minefield as it would effectively mean splitting every gilt into two. In a worst case scenario, an attempt to alter the terms of UK government bonds could constitute a default.

RBS economist Ross Walker said the most likely outcome was that the UK Treasury would retain liability for servicing the entire stock of UK debt, with Scotland paying its share when coupon payments fell due or a bond matures.

Some Scots say their country should not take on any UK debt, given they will not be asking for 30 years-worth of North Sea oil revenue back from the Treasury.

Under demarcation lines used by the fishing industry, 91.4 percent of oil and gas tax revenues in 2009-10 came from Scottish waters. But if oil revenues were apportioned on a population basis, Scotland would be entitled to 8.4 percent.

(Additional reporting by David Cutler, editing by Nigel Stephenson)