Alex Salmond
First Minister Alex Salmond is gambling that he will be able to get his way with a being able to use Sterling in a monetary union with the rest of the UK. Reuters

A man's favourite hobby can reveal something fundamental about his character. One of the great passions of Alex Salmond outside work is horse racing.

This is fitting as the style of Salmond as a political leader resembles that of a championship jockey leading the race to the finishing line.

He is talented, provocative and brazenly self-confident.

During his weekly performances at First Minister's Questions, when Salmond's opponents try to unseat him from his high horse, he easily jumps over any obstacle in front of him.

By the end of each session, he has galloped home wearing the same self-satisfied grin as never before.

But in biggest and most important race of his life, the race to convince the Scottish people to vote "yes" for independence in September 2014, Salmond is competing like he has never before.

As a fan of the horses, he knows he is betting more than he ever has on being able to persuade voters that his case for independence is the correct one.

The one question in the entire debate that has provoked the most intense emotion is what currency Scots would use as an independent nation.

The nationalists in Edinburgh argue that it will be able to use sterling and that the Bank of England is as much Scotland's as it is the UK's.

Salmond is betting that those in Westminster will give him what he wants: a currency union or Sterling Monetary Union (SMU).

It was advocated in the SNP white paper of November 2013 and suggests the BoE could be shared by the Scottish and British governments.

The Fiscal Commission Working Group, a body of experts appointed by the SNP, suggested that the BoE could be jointly owned and run by both countries, based on population size.

But chancellor George Osborne has told Scottish voters that if they quit the UK, they will lose the pound.

"If Scotland walks away from the UK, it walks away from the pound," he said. "There is no legal reason why the rest of the UK would need to share the currency with an independent Scotland. The pound is not an asset to be divided up."

Salmond said that if an independent Scotland were denied use of sterling it was unlikely it would feel obliged to take responsibility for its share of the national debt.

Osborne, a cool strategist and calculated risk-taker, replied: "The SNP threat to walk away from the country's share of UK debt would mean punitively high interest rates for Scottish debt issuance."

Experts are divided on what would be the best currency arrangement. There are three options for an independent Scotland: it retains sterling in some form, it joins the euro, or it issues a new Scottish currency.

Retaining sterling

Sam Bowman, director at the Adam Smith Institute's Research, believes that the best option for Scotland would be able to use sterling independently of Westminster and not be in a currency union:

"It is perfectly feasible," he said. "There is nothing the UK government could do to stop Scotland [apart from the introduction] of harsh exchange rate controls."

He is sceptical that any British government would do that.

"This would be really crazy and pointless and there is no real way that would ever happen. It would just be crippling to the English economy. They would simply ban you from carrying a certain amount of pounds abroad like Britain did the 1970s. You would have to impose them on all foreign travel.

"The crucial thing is that banks have the power to issue their own notes. For the average Scot, nothing would change. They are already used to using five or six different kinds of bank notes.

"You would get rid of this implicit central bank support for insolvent institutions and government that almost all countries have. The eurozone is a good example of this. [Eurozone countries] can count on the European Central Bank to print money and monetise their debt and to give them an implied bailout."

Bowman said that Scotland's position would be closer to that of Panama, Ecuador and El Salvador, which use the US dollar without American "permission".

A new Scottish currency?

Frances Coppola, a financial commentator disagrees. She warned that if Scotland adopted sterling without permission, the country would find itself locked into the monetary policy of the UK - but without any influence.

"Whatever the BoE decided to do with interest rates, they would have to follow suit. They have no choice. If you are using a foreign currency, you have to adopt the monetary policy of that country."

"If Scotland goes independent, it would have a series of free banks that would have to be backed by sterling reserve that would have to be bought on the open market.

"What [Scotland] would be doing was creating a separate Scottish currency called the Scottish pound issued by banks with no central bank of their own and backed 100% with foreign exchange reserves. That is pretty bad news.

"A [ Scottish currency] might be backed nominally by sterling but not by the Bank of England and therefore they are at the mercy of market conditions. There would be an exchange rate that banks would be forced to absorb to maintain parity," she said.

Under those circumstances, she predicted that the three largest Scottish banks, the Royal Bank of Scotland, the Halifax Bank of Scotland and Clydesdale Bank, would move out as 90% of their business interests are south of the border.

Sterling Currency Union or joining the euro?

Bowman and Coppola both agreed that a currency union between the UK and an independent Scotland advocated by the SNP was a bad idea.

"Adoption of a currency union has to be agreed by all parties. What they [SNP] cannot do is start imposing on the rest of the UK is how they will be governed including staying within the currency union.

"We would be into a situation where the UK government would want to bind the Scottish government in terms of what type of debt they can get and what type of debt they can fall into which runs contrary to independence".

Both agreed that the euro was not a viable option for Scotland. Coppola said that the EU had already ruled out automatic Scottish membership of the currency while Bowman said he "wished the euro on no one" and that it was a "troubled currency".