I had an article in The National newspaper in Scotland yesterday that was more significant, I think, than usual.
I firstly used the column to address the criticism that has come my way for writing the Twitter thread that I did on Monday criticising the Scottish government's plan for the Scottish economy, post-independence.
I am aware some SNP members did not appreciate my comments. But, as I pointed out, I am not a member of any political party, anywhere. I offer commentary on what is happening in Scotland and elsewhere on the basis of my reasoning, not party politics. If that means I have to challenge a prevailing political view, so be it. I am willing to take the criticism for doing so.
I then used most of the column to expand on my concerns about the plan Nicola Sturgeon presented. Rather than repeat themes on the risk that this plan has inherent in it, which I explored on Monday, I developed another reason for concern. This develops an idea Tim Rideout and I have discussed on the potential credibility of a Scottish central bank, which this new plan sys is on offer after independence.
Unfortunately, in my opinion, the plan that the SNP has offered makes no sense. As I explain in the article, the new central bank will lack almost all the characteristics of such an agency if Scotland uses sterling after independence. That is because it will not be able to:
- Issue currency
- Set interest rates
- Do QE
- Act as borrower of last resort
- Regulate commercial banks
That leaves it as a central bank in name only.
The last of the issues I list is a particular focus for my concern. As I point out, commercial banks registered in Scotland (as no doubt the government of an independent Scotland would require for tax purposes, and to provide a veneer of a regularity environment) would, however, still need to clear all their payments through the Bank of England central bank reserve account clearing system if sterling was the currency in use after independence. That is because the BoE is the issuer of sterling, and there is no viable parallel system for clearing interbank payments available (or even plausibly possible in my opinion) in that currency other than the one they have created.
My key point after noting that is that the Bank of England does not appear to make such clearing systems available to foreign banks. It does to the London based subsidiaries of overseas banks, but not the foreign banks themselves. And Scottish banks will be foreign banks after independence. It seems likely in that case that Scottish banks might have no viable way to clear their inter-bank payments after independence in that case, which would cripple the Scottish economy.
There is good reason for this BoE policy of excluding foreign banks. It is tasked with maintaining the stability of sterling, a currency only used in the UK and a few tiny overseas territories and Crown Dependencies that are as a result, and fur these purposes critically, integrated into the UK banking system as a consequence. If it allows foreign banks using sterling as their operating currency and regulated by a foreign government with a differing economic policy into the UK banking system then, of course, it is going to increase the risk of instability. It is bound to refuse Scottish banks' desire to be part of that system as a result. It would have a duty to the remainder of the UK to do so.
In that case, my argument is that Scotland had better be ready to use its own currency on independence day or very soon thereafter (I suspect a very short transition could be negotiated) or else its banking system thereafter, if trying to operate in sterling, might be slow, expensive, and cumbersome at best, or inoperable at worst.
This is not me challenging independence as some have suggested. It is me saying that the risks in becoming independent need to be properly appraised, and I think the SNP have simply not done that. There is good reason why almost no country in the world tries to use the currency of another jurisdiction (and the eurozone counties do not). It is because it is nigh in impossible to do so.
All I am doing is explaining why I think that might be the case for Scotland after independence and why as a result the SNP policy of sterlingisation is not only a bad idea, but one that cannot work, in which case it harms the independence cause.
What needs to be done now? I have acknowledged in my National piece that I might be wrong and that there might be a way around this, and exploring that possibility needs to be happen. But assuming I am right (and I would not have said all this and taken the flak for it if I did not think that was the case) then there are three other options.
First, the SNP needs to say if it has the agreement of London that it might use sterling. This negates my argument.
Second, it must show that the Bank of England are, at least in principle, open to Scottish banks using its clearing arrangements after independence. This would also negate my argument.
Or, third, the SNP needs to come back with a plan for a very rapid transition to a Scottish currency on, or incredibly soon after, independence day.
My point is simple. If the first two can't be delivered (and I very much doubt that they can be) then the only remaining credible plan for independence is the third option and I think it would be utterly irresponsible of me not to point that out, however inconvenient that might be.
I believe Scotland is a viable, mid-size European state. I am certain it could be better off independent than as part of the UK. But that is only possible if the independence movement properly appraises and presents the risks involved in the transition to independence and shows that it is competent to manage those risks by creating credible plans to do so.
All my work is solution focused. I am seeking a solution to what I think is a real problem. I sincerely hope the SNP will address the issue. It's now on the table. I think they have to address it now.
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Richard, I totally agree with you and Tim Rideout about the need for us to adopt our own currency on Day 1 or at least have all the arrangements in place for doing so asap.
Just for my own clarification, I was in Prague recently where almost every tourist establishment accepted local curreny or Euros. I also saw recent tweets from a fellow Scot on holiday in Ireland who says that he has no trouble using Sterling there. Does Czechia have a formal arrangement with the European Central Bank on the use of the Euro?
No, just good bureau de change which you were willing to pay a premium for but which no one should day to day
Currency was always the elephant in the room. I remain staggered that so few people, even in Scotland recognise it. At the same time, I suspect if the currency issue was easily fixable Scotland would already be independent; therefore suffcient numbers of the Scottish electorate must be aware of the problem, even if unconsciously or intuitively, but silently.
The current chaos over debt and borrowing in Britain, and the catastrophic handling of the Treasury and central bank (and the relationship between them), will not make the (small ‘c’) conservative Scottish electorate (of whatever political persuasion) more eager to undertake radical monetary change.
The urgent desire for political or constitutional change is far less controversial in Scotland than in England; a fundamental change of ‘money’ will prove quite another matter, ‘at the touch’. Sterling came to Scotland with the Union, and sterling (and all that implies) is the real matter of Union; sterling has proved far more resilient and deeply enduring in Scottish life, politics and history than the great, public constitutional issues that are generally acknowledged; like dynasty, empire, parliament, politics, or even religion. I do not think this distinctive attachment and its deep political reach is sufficiently recognised, even now in the Scottish debate – at any level.
Forgive me John if I’ve not picked this up but what is your view?
Do you think that Scotland should be a sovereign currency producing nation?
Yes, but they have to carry Scots with them. I do not believe the Scottish people, at the required level of belief have confidence in the Scottish Government proposals. People often believe in contradictiry ideas. Using a Scottish currency is not about persuading people tht you have ticked all the technical process boxes. It is deeper, and I do not believe its proponents grasp the scale of the problem they must overcome. they are overconfident in process, rational argument and theory.
I don’t think you are being repetitive John, after all it helps the point sink in…………….
……so John in terms then of culture, the English pound is trusted by Scots – in fact the fact that it is English in origin does not even matter. It is not a nationalist issue for the Scots person in the street. However, at the fiscal level, the benefits of the poond are more pronounced – we’ve seen that the euro zone as a currency can’t really be trusted to help given their own Neo-liberal leanings, and how any debt is used buy markets to hobble pro-active (courageous even) Governments. Scotland surely wants to avoid that?
A new Scottish poond has hundreds of years to make up and build that level of ‘cultural trust’ that the pound has. That is also the challenge – can people trust it, never mind just printing it.?
So, it is even more important then about avoiding the so-called English ‘debt threat’ – how that might strangle the birth of new currency with a history unfairly placed upon it. As I keep banging on, I do not think that that should be the case given some of the old fashioned ideas that dominate about Scotland in England. An anti-independence or sore English government could cause a mischief . And we know how much this lot likes to use chaos to win arguments.
Interesting.
John, it is not a radical change. I think most people think we already have a Scottish Pound, as most banknotes are Scottish already. You rarely get a Bank of England one. So for most people after Currency Day they will see a different design of notes and coins, they will get a new set of bank cards and a new bank account to log into online. They can keep all their Sterling ones if they want to. Those Sterling accounts will be legally moved into an English registered part of the relevant banking group if that isn’t already the case. Other than that prices will be the same, shops do not need to change anything, no need to reprint menus, or anything like that. I think most people will hardly notice the change. We did a Panelbase opinion poll in Oct 2020 and the result was 59% either strongly or moderately supported the idea of introducing the S£ ASAP after independence day. Even 21% of Tories.
Dr Rideout,
I understand all that; that is mere repetition. I seem to recall there was a discussion about the point I raised here some time ago on this Blog to which not only Richard, Clive Parry and you contributed, and which I think it fair to say was not resolved then. It is not resolved now, in my opinion simply by reiterating the theory. Sterling is not just any other currency, it was effectively the first reserve currency, and the model for the US (read Mehrling); it is the currency the Scots have relied on for three centuries, and I consider at bottom, far more than anything in the Union, it has built a resonance with Scots that retains a powerful loyalty. That seems to me just to be a critical fact. This is a matter of custom, trust and psychology, not technical procedure. You have to make an extremely powerful case to swing the predilections of those Scots with sterling balances. I do not claim answers cannot be given; I just haven’t heard, read or seen them.
Furthermore, the disastrous decision on debt in a foreign currency undermines the intellectual credibility on monetary policy, of the Party promoting not just the sterling debt proposal, but will implement the change of currency. I merely draw attention to the problems, and insist they be addressed and convincing solutions offered. Your comment, in my opinion is not a covincing solution to the questions I raise.
Tim
Why is it then do you think in my Derbyshire town , do I see a number of retailers refusing to take Scottish notes?
Is there any rational basis for this at all? Is there any loss to business in accepting them?
No hurry BTW.
I think Scots are attached to the ‘Pound’, but that does not mean it has to be an English Pound Sterling. As I say in the talks – we will carry on using the Pound, just not the English one. We did a Panelbase opinion poll in Oct 2020 and 59% were either strongly or moderately in favour of introducing a new Scottish currency ASAP after independence day. We have just had an offer in principle of £2000 to allow us to do four opinion poll questions so we will ask that question again as one of those.
In over 50 talks to several thousand folk the length and breadth of Scotland I have simply never encountered any strong attachment to a Pound Sterling of the kind you are concerned about. Lots of attachment to our Scottish Pounds, such as folk who make a point of only taking Scottish notes down to England or abroad, but not to the Bank of England.
As to people in Derbyshire not accepting Scottish notes then it is simply unfamiliarity and concern that there is going to be a bother in passing the note on. You will get much the same reaction in Scotland to a Northern Ireland note.
I think you are right Tim
I get what John says, but seriously doubt that most people think in that depth
Dr Rideout,
The Scottish notes were a function of Scotland’s independent banking history, and the innovation of Scottish banks. They are covered and regulated by the same overarching Sterling system. Nobody believes they actually represent something like a shadow currency (and if anyone does, they are misinformed).
I am not arguing THAT there can be an effective, functioning independent Scottish currency in theory, I challenge that we understand HOW it is to be done in practice. The current political chaos makes political change in Scotland more likely; but will simultaneously likely make the conservative Scottish mindset monetarily more caustious.
A tiny minority understand any money system
Please help me understand this. Surely Scotland has some “ownership” right to the Bank of England which could be negotiated to use the banking system as required for Sterlingisation? If not do you think it is feasible to have a Scottish currency on day one of independence?
I very much doubt Scotland has any such right
On breakaway the idea of a ‘successor state’ is likely to apply
rUK is likely to be the successor state and they will keep institutions like the BoE
The SNP recognise this by saying they will need to create a Scottsh central bank
This will be driven by modern international law. In the case of a state as central to the internation plotical and economic community as Britain there is no prospect of there not being a “successor” state. The impact on the world financial system, and the 2,000+ international treaties to which the UK is tied, simply does not allow any other solution to be found, not just for the stability of Scotland and rUK, but for the international community itself. Once that is acknowledged, Scotland is by far the smaller post-Union state, and only rUK can undertake the successor role. There is an element of legal realpolitik about this solution over history and logic (it was unchallengablly an incoroprating Union – England’s choice – now overturned by international law, which is ironic, but irony butters no parsnips); so there it is; inevitable.
I also wish to emphasise the points in a previous thread because they are critical. Currency and debt are like debits and credits; not just symbiotic but opposite sides of the same coin, to meta-metaphorise the issue. To present a so-called plan that propose to accept responsibility for the debt due to a foreign government in a foreign currency is a total failure of responsibility to recognise the unquantifiable scale of the risks being embraced. It is also an absurd acceptance of a false idea of international law that has no substance whatsoever. Responsivility for Debt must go with the currency in which it is denominated. There is really nothing more to be said. The proposal to accept a share of rUK’s debt is not acceptable, and must be rejected by everyone in Scotland. “Indpendence” on such terma is not only not independence, it is actually far, far worse than the ‘status quo ante’; and it gives me no satisfaction to write these words.
My apologies to those who may discern I am repeating myself, but I genuinely fear the issue and its critical importnce is already being lost in the noise of politics. The proposal is appalling,, and sight of the problem must not be lost in the politics of essentially far less imprtant issues for the financial stability of Scotland.
That is worth reiterating
Good article. Thank you.
Some time will elapse between voting Yes and Day 1 of Indy. The SNP may believe that a) or b) in your piece are reasonable objectives to negotiate. Plan c) only becomes a requirement if those negotiations fail. Yes?
If I am correct
1) What leads you to believe they don’t have such a plan which they choose not to expose now?
b) Why would SNP lay all of their cards on the table now when there will be a significant period of negotiation on which to develop/present their plans?
I suggest without a) and b) in place you must tell voters c) is likely before a vote
Scotland having its own currency is one issue. Quite separate is your plans for it to be a MMT test case with zero interest rates and the constant issuance of the new currency to pay for public spending. Given that Scotland would have a high propensity to import many things your MMT philosophy of zero interest rates and continually increasing the money supply would have grave consequences for the FX rate with other currencies. We would be at risk to very high inflation and to try and control it very high taxation. This would not be popular,
Since I have not suggested such things you are, very politely, taking complete and utter nonsense
I suggest you learn about what MMT says because you are utterly clueless
So you would advise scotland against low interest rate and You would advise Scotland to issue its own sovereign debt to finance public expenditure and pay market interest rates reflecting that of a fledgling sovereign currency so probably 6% for a 10 yr term with mortgage rates obviously priced off this?
You are wasting my time
Stop being stupid, I suggest
There are two separate issues. One is what goes into the Prospectus for the vote, and the other is what actually happens 2-3 years later after Independence Day. For the Prospectus all you need to say is that we will complete all the preparations and then introduce our new currency ASAP after Independence Day. The post Indy government (which won’t be the same as this one because there will have been another election by then) will decide the precise timing and procedure based on decisions by Parliament and on the advice of the Scottish Reserve Bank.
That can’t be challenged by the NO campaign. Anything else can be destroyed by the NO campaign before we even get to a vote. We will have a currency union (2014) – No you won’t. We might well have done but it is impossible to prove it as it requires UK approval. We will just use Sterling informally for many years (2022 position) – No you won’t as you will do what every other country has done and move straight to your own currency. Again, there is no way to prove that we will use Sterling for some years, and the UK can prove it by saying the Bank of England will shut us out of the payments system at midnight on Independence Day. Whether they would or not does not matter as they only have to say they would.
Didn’t Ireland use sterling for years before moving to its own currency?
And it was a total disaster
Ireland stayed in poverty
Why are the SNP even discussing it , the question on the ballet paper is only about independence, not any other matter, this is surely why we need a draft constitution so that the currency, central bank, national wealth fund etc etc would be discussed and then voted on in a single document…