From Prof Charles Goodhart.

Sir, John Kay is generally spot on. So it was a pity to see him claim, in his article on an independent Scotland, that “currency is a confidence trick: its value depends entirely on the belief that it has value” (“The pound is a poison pill for an independent Scotland”, February 1).

That is mistaken; the value of fiat currency depends on the power and standing of the issuer, usually a sovereign with the power to tax. Moreover, this error generates erroneous policy proposals; for example that currency ills can be resolved by browbeating rating agencies and uttering ministerial placebos. Instead, what is needed is the reinforcement of political and fiscal authority. Thus the central problem of the euro has been the adoption of a centralised currency without matching centralised political and fiscal powers in support.

Charles Goodhart, Financial Markets Group, London School of Economics, UK

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