The Scottish Growth Commission of the SNP is, I am told, reporting this coming Friday.
One of the key issues for the Commission will be the central one of which currency Scotland should use if it were to be independent. I hear rumour that it will not be the euro. Equally, I hear rumour that it will be the pound, before transitioning to a Scottish currency. But, I stress, rumours can be wrong.
My own position on this is clear, and is reflected in my White Paper on Scottish Taxation after independence written for Common Weal last year. In the summary of that paper I said:
If Scotland is to have a sound tax system then it must be based on economic reality. It is widely believed that tax is necessary to pay for government provided services. It has, however, recently been realised that this is not the case. This is because all government services can in principle be paid for either by a central bank creating new money or by quantitative easing (‘QE') operations (which amount to much the same thing).
This understanding is critical to the design of a Scottish tax system. What it demands is that Scotland must have its own currency from the day it becomes independent. This is because of another critical consequence of the understanding of tax and money, which is that a country with its own central bank and currency cannot go bankrupt.
What should also be clear is that a Scottish currency is also essential for the creation of an effective tax policy for an independent Scotland. This is because if a country has its own currency then there is technically no limit to what a government can achieve. There are, however, two practical constraints. The first is that the government does not try to create more economic activity than the economy can deliver. And the second is that they must tax sufficiently to cancel enough of the money that the government has created through its spending to ensure that its inflation targets are met.
The implications of this understanding are profound. First, a policy based on this understanding does not require that the Scottish Government balance its budgets. Secondly, this understanding means that the Scottish Government does not need to think itself beholden to bond markets or their interest rate whims. Third, in this scenario tax entirely ceases to be a mechanism that raises money to pay for government spending. Tax is, instead, a means of reclaiming the money that the government has spent into the economy as a result of that spending.
I am pleased to say that leading independence campaigner Robin McAlpine adopts a similar position in his recent book, ‘How to make a country'.
Scotland could be half-hearted and go for a gradual transition, but if it does three things follow on.
First, it will not be economically independent.
Second, it will have to balance its books, which will be desperate for a new nation needing to invest for its future.
Third, the new social settlement that a Scottish tax system should deliver will not be capable of delivery.
And perhaps as bad, who knows how long the transition will last?
The Commission has to go for an independent currency. Anything less sells the people of Scotland short and would reveal a lack of understanding of tax and money that would be deeply worrying in a party that will seek power as the government of a new country.
Courage is required. It will pay handsome rewards. Scotland would be free.
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Wonder where Greece would be if it had bitten the bullet and reintroduced the drachma in 2013? Sure the next couple of years would have been tough and the usual suspects would be screeching ‘how dare they!’ but I’m sure Greece would be growing by now with the initial inflation caused by the drop out falling, and critically with its own currency back.
Well, it could peg it to sterling for a while. The Irish did this for a long time before letting theirs float (immediately rising above sterling; and later being replaced by the Euro).
Ireland was as dependent on UK exports but has long since reduced that. Currently 11% go to the UK (mostly food related; this number is falling fast because of the depreciation of sterling & successful diversification) and the 23% of imports that come from the UK are readily available from the EU, albeit with some added transport costs. Ireland could be a more important market for Scotland (and vice versa) if both are in the EU and the rest of the UK is not.
No!
Why be crushed as Ireland was as a result?
Interestingly I’m already seeing the ‘dog whistle’ stuff regarding Scotland having a floating currency.
Greece is the first comparison, even though it doesn’t actually have its own sovereign floating currency which is part of its problem.
No doubt we will move onto ‘Zimbabwe’, with little regard to what actually happened in that country.
I also notice there is the worry about the value of the currency upon issue, but if anything that will make our exports more competitive, adding to a trade surplus which in turn will strengthen the currency. A currency likely to strengthen should attract investment.
I am sure Zimbabwe will come up….
I believe the Isle Of Man has its own currency, used on the island and of no value any where else. (At least I have never seen it quoted on exchange rate sites.)
Could such a currency be run in Scotland on par with the GBP until the last day of the union? On day one of independence Scotland would then have its own currency up and running and everyone would be familiar with the new notes and coins.
It does not have its own currency
It prints IoM bank notes that are sterling and are backed pound for pound by BoE deposits
Utterly irrelevant in other words
Those who control the currency own the asset. Only those who control and own the should be responsible for it; therefore the owners of the asset alone must be responsible for the liabilities.
apologies; should read “own the asset should be responsible for it”
Call it Dram?
They could negotiate a seat or two on the Bank of England’s MPC. It would be up to the government of Scotland to decide what they wanted and to discover what was negotiable. There are many successful countries with currency pegs, including your own favourite one.
There are no really successful countries with currency pegs
And why seek independence to then beg favour of London?
Get real would be my version of the comment. I could think of others if in Scotland
I would be interested to read here your thoughts on the transfer of debt. I am inclined to the view that there should be no transfer at all, except in the new currency. The “asset” of a currency (which is almost bottomless) is control over it. I do not think I need rehearse the argument. Control over the currency should carry with it ownership of the asset, and total responsibility for all the liabilities.
Notice that in 2014 the British Government made clear that, no matter what rUK would accept responsibility for all the liabilities of the British state. It had good reason to accept that responsibility; it knew the value of the asset outweighed both the liabilities and the risk.
I am not sure what you mean by “transfer of debt”?
Is that between the countries or something else?
I have read the Common Weal work on currency and debt. It is carefully argued, but is of a ‘on the one hand, on the other’ nature. I wondered if you may venture to come off the fence, in whatever direction?
I am referring to the negotiations that would surround the transfer of a ‘share’ of UK debt to Scotland. Personally, I can see few convincing grounds to allow a transfer of debt in sterling, if Scotland had its own currency; even acknowledging Common Weal’s effortful gymnastics.
I think the rUK might owe Scotland
I strongly suggest the work be done to show it
The reason is UK national income has flowed into rUK for far too long
Please check out
HOW TO START A NEW COUNTRY: A PRACTICAL GUIDE FOR SCOTLAND
The subject and transition to a Scottish pound is covered there.
It is
You will find I am mentioned and thanked in the book
I think my comment on ‘the transfer of debt’ has landed in the wrong place (above?). It should be here (unless I am wrong twice!).
I think CommonWeal make the argument for a Scottish Currency very convincingly. Anything less will be a mark of economic illiteracy and virtual economic suicide.
A connected issue, also discussed in the document, is that of foreign currency reserves and why they are needed. I wonder if this is an achilles heel, as it is sure to be seized upon by the naysayers?
I think it is
But Scotland does, anyway, own part of the UK’s reserves
Part of the infrastructure must be there as I’ve just come back from Orkney with a load of Scottish money. You already have a sort of paper currency separation as you can’t always spend it much further south of here (Newcastle). Surely all that’s needed is a central bank and the electronic infrastructure.
Could you perhaps get somewhere like Norway or Iceland to sell you a clone of their central bank to get it up and running quickly.
Paper money is utterly meaningless: those Scottish notes are just a wrapper on Bank of England notes. They are noit really Scottish in any way
Two things: Scotland has had its own money, it can do it again. We could use the present money, but without the Bank of England, less expensive. As to Scottish money not being welcomed elsewhere, not true. I was in London last year and not one person, cafe, taxi etc. refused my money.
Scotland has not got its own money
It is sterling
It is just a version printed in Scotland. That’s totally different