WELL, we know now what plan B is:

informal currency union, or "sterling­is­ation". But I am puzzled as to why it is not plan A.

Alex Salmond links sterlingisation to Scotland not paying the alleged debt it would owe rUK, but these are two separate issues. We don't need a formal currency union to pay off the debt, if such a debt does emerge from the negotiations (which will be linked, of course, to other matters such as the timescale of Trident withdrawal).

We do need deposit protection as is provided by the Financial Services Compensation Scheme. But this scheme is largely funded by us, the bank customers ourselves, via bank levies, and we don't need a formal currency union to extract Scottish bank customers' share and provide Scottish government back up.

The economists Angus Armstrong and David McCarthy, in a new report ("Economist warns independent Scotland may have to ditch pound", The Herald, August 8) look at the other major issue of liquidity support and insurance under plan B, insurance which would be needed in the event of, indeed in order to reduce the likelihood of, another liquidity crisis such as 2008 when the banks stopped lending to one another.

However, they seem to downplay the role here of the Federal Reserve Bank which provided, for example, $86bn in loans and emergency assistance to Barclays, $541bn to RBS (though maximum exposures were less than that, about $58 billion for RBS). These loans and guarantees weren't targeted only at the American operations of these banks, just as Bank of England assistance to RBS didn't, couldn't, exclude its Republic of Ireland operations via Ulster Bank.

The authors suggest, however, that given sterlingisation, the major "Scottish" banks will move their registrations to London, with their Scottish operations becoming subsidiaries or perhaps even just branches of foreign banks.

They appear to suggest that the example of Latvia and its relation­ship with the Swedish banks does not augur well for such a relationship: but is the Latvian situation relevantly similar to the Scottish one?

Their main objection to such a development appears to be that an independent Scotland would depend heavily on exports from its financial sector but a change in domicile for the major Scottish banks would mean more than a shift in brass plates.

It would also involve transfer of other important operations, (presumably "casino banking" in particular) and thus a shrinking of the Scottish financial sector. On the other hand, Scottish taxpayers would then no longer have to cover the losses of investment bankers. In the long run, would it be such a bad thing if a somewhat smaller Scottish financial sector concentrated again on its more traditional prudential strengths of asset management and insurance?

There certainly is an issue about liquidity insurance for our smaller banks and building societies, but if another major liquidity crisis arises in Scotland it will not be because of them or because RBS Auchenshuggle branch is refusing to process payments from BOS Auchtermuchty branch. It will because lending amongst the global banks which do most of the banking here, but whose assets and liabilities are largely non-Scottish and who will be registered elsewhere, is drying up. Will the Federal Reserve Bank and the Bank of England really refuse to support these banks, will they let them crash, just because they have branches or subsidiaries in an independent Scotland?

So I am still far from convinced that an independent Scotland ought to sign a formal currency union which will tie our hands in fiscal matters and continue to expose Scottish taxpayers to being lenders of first resort once again to casino capitalist London.

Alan Weir,

5, Dalveen Court,

Barrhead.

I HAVE no wish to argue for or against independence, but as an economist I would like to separate the economic realities of the currency issue from the political bluster that obscures them.

The Chancellor has ruled out a formal currency union, though some say this is just negotiating bluff. Either way, there is nothing to stop Scots continuing to use the pound if they choose. A Westminster government with no jurisdiction over an independent Scotland has no power to stop them.

Several independent countries, including Panama, use the US dollar, without seeking the permission of America's central bank, the Federal Reserve. In the absence of a formal currency union agreement, Panama has no say in the Federal Reserve's monetary policy, which is conducted solely for the benefit of America. Some argue, by analogy, that if an independent Scotland continued using the pound without a formal currency union, Scotland would have no say in Bank of England policy, which could be potentially damaging for Scotland's economy.

Nevertheless, as a result of using the dollar, Panama - a country comparable in population to Scotland - has one of the world's most stable banking sectors. And the economic interdependence between Scotland and the other countries of the present United Kingdom is so deep that the Bank of England would, in reality, have to take Scotland's welfare into account when setting monetary policy. Not to do so would risk damaging the other UK countries just as much as Scotland.

Another suggestion, from Jim Sillars, is that Scotland should print its own currency and tie it to the pound. There is no substantive difference between this idea and using the pound. As the two are pegged, the only difference is the design on the currency. And why (apart from national pride) go to the expense of printing Scottish notes, exactly equivalent to the pound - but which people south of the Border might be reluctant to accept?

The other option, switching to some other currency such as the euro, would be even more costly and difficult, and would raise huge, business-damaging uncertainties. It would also leave Scotland subject to the monetary policy of a country or agency with a very distant interest, if any, in Scotland's welfare.

The easiest solution, therefore, would be for Scotland to continue using the pound, with or without a currency union, safe in the knowledge that, as an important part of the sterling economy, the Bank of England would have to take Scotland's interests into full account when setting policy. The currency problem just isn't a problem.

Eamonn Butler,

Director, Adam Smith Institute,

23 Great Smith Street,

London.

ALEX Salmond says that the "sterlingisation" option, of using the pound without a currency union, was attractive because it would mean Scotland would not have to assume part of the national debt.

There is no logical connection between national debt and the currency: national debt is part of national liabilities, to be divided along with assets. If Scotland does not assume national debt she will not get a share of assets (or only net share after national debt discounted).

Andrew Findlay,

Fawside Lodge,

Gordon,

Berwickshire.