I was asked on this blog yesterday whether Scotland could afford to have its own currency, and whether the process of introducing one would be economically ruinous. Neither claim is true, and this is a subject which I have studied a lot and which I have written about extensively. A Scottish currency would be both economically plausible and politically necessary if independence is to mean anything at all. Let me explain.
First, and quite critically, a country that does not issue its own currency is not truly independent. It becomes a user of someone else's money and is, therefore, subject to someone else's fiscal rules. A government that depends on another's central bank for liquidity or borrowing is not sovereign in a meaningful sense. If Scotland were to remain tied to sterling, it would find itself trapped in the same austerity framework that has blighted the UK economy since 2010.
Second, the creation of a currency is not an economic miracle; it is just an act of legislation. The fundamentals are political and institutional, not mystical. A Scottish government could, through a single piece of legislation, create a Scottish Reserve Bank with the authority to issue a Scottish pound. That currency would be declared legal tender, and then the government would spend that currency into the economy, after which all taxes would be required to be paid in this currency, meaning that it is very likely that wages and public payments would be denominated in it. That process is, of course, the same as that used in every modern state with its own currency.
Third, Scotland already meets all the practical conditions for running its own monetary system. It has a functioning, diverse economy, a highly educated population, strong export sectors, and a reliable, well-enforced tax infrastructure. Its banking system is technologically sophisticated, and electronic payments could be converted into a Scottish pound without any significant disruption (if at all), whilst generating foreign currency reserves for Scotland in the process. In other words, the plumbing is already in place. As I have often noted, Scotland's economy is comparable in scale to Denmark's, and like it is a mid-sized European country. If Denmark can run a successful currency, so can Scotland.
Fourth, the transition to a new currency would need to be managed, but it need not be traumatic. A new Scottish government of a newly independent Scotland should introduce a Scottish currency on its first day in power, but then permit both sterling and the Scottish pound to circulate for a period if people wished to use either, while ensuring that taxes must be paid in the new currency, making it the legal tender. That simple rule — what economists call tax-driven money — would immediately create demand for it. Over time (and most likely, a remarkably short period of time), salaries, pensions, and contracts would all be converted, and the Scottish pound would naturally become the medium of exchange.
Fifth, claims that Scotland would need vast reserves of foreign currency to defend its new money are misplaced. The Scottish currency would, of course, float in value. That removes the need for most of these reserves. And what matters, in any case, is confidence in the institutions of government—its ability to collect taxes, manage spending and regulate its banks. And the Scottish Reserve Bank could operate a managed float, adjusting interest rates and liquidity to maintain stability, just as the Bank of England does now. There is no economic law that requires Scotland to peg its currency to sterling, or anything else, such as the euro.
Sixth, the question of government debt is often raised as if it were a matter of solvency. It is not. A government that issues its own currency cannot run out of that currency. Its so-called deficit is the financial surplus of its private sector. What matters is whether Scotland would be using its real resources, such as labour, skills and natural assets, effectively and sustainably. In that sense, the only true constraint on public spending is ecological and productive capacity, not the number of pounds in the Treasury's account, but as noted above, the simple translation of existing sterling balances into the new Scottish currency will create considerable foreign currency reserves in itself.
Seventh, Scotland would not be liable for the national debt of the remaining UK. In international law, the debt is the responsibility of the so-called continuing state in the case of a split such as this, and the UK would want to take on that role, and all the agreements and entitlements that go with it, including membership of all the international organisations, such as NATO, of which it is a mmeber, and the UN, where it will not want to give up its seat on the Security Council to Scotland. So, the only way Scotland could be liable for the debt would be by agreement, and unless the UK actually repays the debt (and it almost never has), then there is no reason at all for Scotland to accept any obligation to repay any part of it either. In other words, this is not an issue.
Finally, the real barrier to a Scottish currency is not economic feasibility but political courage. Too many politicians still repeat the myths of fiscal responsibility as defined by Westminster orthodoxy. In reality, monetary sovereignty is the foundation of all other forms of sovereignty. Without it, an independent Scotland would have to beg permission to spend, to invest, and to care.
The alternative of a Scottish pound would give Scotland the tool required to pursue full employment, to invest in a green transition, and to build an economy based on well-being rather than deference to markets. It would not solve every problem overnight, but it would make solutions possible.
The truth is simple: Scotland already has the capacity to run its own currency. The real question is whether it has the confidence to do so.
Taking further action
If you want to write a letter to your MP on the issues raised in this blog post, there is a ChatGPT prompt to assist you in doing so, with full instructions, here.
One word of warning, though: please ensure you have the correct MP. ChatGPT can get it wrong.
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Succinct and perfectly argued. I hope you don’t mind but I have copied your blog to a number of others.
Send to as many as you like.
Has anyone decided on the symbol for the Scottish pound yet?
I fancy the £ but with the horizontal line replaced by a little x, to represent a St Andrew cross.
See the Scottish Currrency Group website.
http://www.scg.scot is our new web site and http://www.reservebank.scot is more about the central bank.
It seems to go for S£, which is a bit dull IMHO, although of course still do-able on a UK keyboard.
The biggest question, I guess, will be over the stability of exchange rates, and the ripple effects these may have on the Scottish economy more generally.
The likelihood is the Scottish £ would rise against the Engish £ – it has all the asset backing and the UK very little.
And within about 3 weeks the value of the ‘Scottish pound would be trading at 3 Scottish pounds for 1 English pound.
Which is where your comment that ‘a government that issues its own currency cannot run out of that currency’ becomes entirely meaningless – the government can issue as much as it wants, but that will just make it worth even less and make the people of Scotland poorer and poorer.
It’s amazing that a ‘political economist’ cannot understand this.
The trolls had to apepar, and you duly did.
On fundamaentals, the Scottish £ will rise – and that is the real problem. Why will it rise? Energy and water. That’s it. Scotland has the power, quite literally.
Oh no, the too wee, too poor, too stupid argument; trotted out ad nauseam, ad infinitum. The country with the resources will be the one to fail – I think not!
England appropriated our whisky, our gas and our oil. It has come for our renewables, whilst planning to build unnecessary (for Scotland) nuclear plants on our land, against our wishes, to power England; it’s coming for our water; it has already appropriated Welsh water.
England runs pylons over our land and cables and pipes under our seas to take what England wants – without payment – all the while telling Scots that we’re a burden on England!
Here’s the thing, Scotland can’t afford to continue to prop up England; England has been bleeding Scotland dry for decades. We have our own people and country to consider.
The propaganda, disinformation and mind games don’t work.
Scotland will do just fine, thanks.
Agreed
A new Scottish government of a newly independent Scotland should introduce a Scottish currency on its first day in power, but then permit both sterling and the Scottish pound to circulate for a period if people wished to use either
I infer that this means that the plan is that after a suitable period it will be illegal to permit circulation of Sterling. I would amend that date to the date of independence itself. If there’s an advantage to letting both circulate the advantages of doing so would be for all time.
Anyone can denominate a sale in any currency they like. Why outlaw that?
Ah, so the “period” in question would be indefinite. Moreover an independent Scotland should allow exchanges in crypto-currencies too, or anything else that both parties agree to.
I didn’t get that initially as it sounded time-limited, but thanks for clarifying.
There would be one legal currtency from day one in my opinion.
All I have said is that the pound could still be used by thsoe who wanted to do so – but not to pay taxes or wages, or to contract with the goverment.
In other words, I have described the situation as it is now in the UK where we can, if we wish, contract in any currency we like.
“And within about 3 weeks the value of the ‘Scottish pound would be trading at 3 Scottish pounds for 1 English pound.”
I wouldn’t be too bullish about the English pound, frankly. Why is it perpetually on the slide -v- USD?
I wouldn’t go a bear of a Scottish £ (although I’d prefer Scottish $ anyway, like former London colonies U.S., Canada, Aus, NZ . . .) – as RM says, Scotland has the resources that are going to be the “new oil”; England doesn’t.
Two reasons why Scotland’s currency should be the Scots Pound not Dollar.
1. We don’t want to appear to be seeking to be in the USA’s ambit – Scotland has much more in common with the other countries of North West Europe than with the USA.
2. Sbuck is unpronounceable but Squid could catch on.
As someone who is half English, half Welsh I am not sure I am qualified to comment…. but I will anyway.
First, I think you underestimate the challenges of transition to a new currency. I spent quite a lot of time looking at this when the Euro was being designed/created because, at the time, there were lots of people asking “How do we reverse monetary union?”…. and the answer was with great difficulty (and that is an understatement). There are examples in history but nearly all come from a different era for money with far fewer financial assets and liabilities. More recently (and, perhaps a template) would be Czech/Slovakia (1993) but these were small countries with a currency not widely used internationally and a divorce that was “backstopped” by the EU. So, yes, it is doable but your suggestion of running two parallel currencies is far more complicated than you imply… and would require wholehearted support from the BoE – which may or may not be forthcoming.
Also, currency is just part of the political equation; EU membership would also be important and part of this might include Scotland using the Euro – a transition away from sterling that would be easier. Now, I understand all the short comings that the Euro has with regards to monetary sovereignty but, as always, politics is a messy compromise.
So, in short, a freely floating new currency might theoretically be the best end point but there are reasons why accepting a suboptimal currency arrangement would make more sense.
Clive
This is exactly like the Czech/Slovak split. And this is a smaller state leaving and not one of equals.
And I am assuming nothing from the BoE. I am saying have a new currency, day 1, but if traders want to let the £ be used, so be it, but it will fade away remarkably quickly – as pre-decimal currency did in 1971, against all expactations. There would only ever be one state currency – the problem is not having a state currency at all.
And a commitment to joinmg the eiro is required – bit as is obvious, many don’t. So we can ignore that.
And to accept a suboptimal currency arrangemnt would be to commit national suicide. None of these countries should go remotely near independence without their own currtencies – that would be the worst case scenario by far. We’ll have to disagree on this.
I am not saying Scotland SHOULD use the Euro but I am saying that the proposals for introducing a new Scottish currency are very simplistic. Now, this might be intentional – no point in talking about the technical difficulties until the political arguments are won – but my impression is (and correct me if I am wrong) that the proponents don’t even grasp what the difficulties of transition are.
Why?
Advice has been taken from those who have done such transitions and many in central banking. What has been missed? It’s technically really not very hard, mjuts like money creation is not. Are you sure you aren’t overstating things?
Responding to Clive’s comment, I am old enough to remember the switch to decimalisation. This was a situation where two currencies were running simultaneously. I remember regularly being given the old currency (low-value coins) as pocket money when each coin was approaching its deadline for use. Shopkeepers were happy to accept both. Accepted that there are other contextual differences 50+yrs later but I would have thought that the digitisation of finances would make this easier and not more difficult.
I too remember the switch – and it simply happened.
Ok, a pund was still a pound, but Scotland will also still have a pound and it will work
And as to value, the problem is the English pound sinking, not the Scottish pound doing so
Relevant examples are Botswana and Namibia, both of which replaced the SA Rand. Botswana has gone from being one of the ten poorest countries in the World at independence from the UK in 1966, to having overtaken SA with GDP per capita approaching US$9000 pa.
Haven’t you written that one up, Tim?
Might you post a link?
Who gave the advice… and are they really expert?
Of course, the exchange of cash balances is trivial – it is the forward contracts (ie. debt) that create the problem. Now, in Botswanna in the 1970s I am guessing there was very little long term debt but sterling is different.
Consider a three player model; a Scottish local government worker with a mortgage, a Scottish pensioner with savings and a bank that made the loan to the worker and finances with the Pensioners deposit.
The worker will now be paid in SCP and, presumably, their mortgage will be redenominated into SCP 1 to 1 for all payments with the interest rates unchanged. What if the pensioner chooses to wait and see ….. so keeps their balance in GBP. The bank immediately has a mismatch that has to be hedged (or put up massively more capital that they wouldn’t be able to do). The hedge is to sell SCP, buy GBP. This is almost certainly the flows that will happen in the early days of the SCP (it was certainly the case in CZKSKK) – how will that be addressed with limited FX reserves? How will you prevent speculators positioning for this trade in the run up to “SCP day”?
Even if the pensioner converts their GBP cash to SCP there is interest rate risk for the bank – how will this be managed?
Fundamentally, creation of the new currency creates risk – CRX (cross currency basis swap) risk and IRS (interest rate swap risk) – who will bear that risk… and are they equipped for it?
Now, you can pretend that all these flows will net out…. but in reality they will almost certainly not – life in finance never works like that.
Are there ways around this? Yes…. but at this point nobody seems to acknowledge the existence of these issues.
Richard, I am not trying to be awkward… just trying to give those planning a new currency a “heads up” as to what lies ahead.
That I am aware of, all of this has been considered by the SCG
Tim might reply.
Clive
I have thought more about this. You raise important and practical issues that anyone serious about an independent Scottish currency must confront. I welcome that challenge because, while many want to talk about the politics of independence, it is the plumbing of transition that determines whether a new system works.
Let me respond to your points step by step.
First, you are right that in any currency transition, the main complexity does not lie in the exchange of existing cash balances. Those can indeed be redenominated overnight. The difficulty arises in how existing contracts — loans, deposits, and other financial assets — are treated. But this is not a new or insurmountable problem. Every country that has introduced or restored a national currency — from the Czech Republic and Slovakia to the Baltic states and, more recently, Croatia joining the euro — has faced the same questions. The solutions are well known.
Second, your example of the Scottish worker, pensioner, and bank is helpful. In your scenario, the worker’s mortgage is redenominated 1:1 into the new Scottish pound, as are their wages. The pensioner may hesitate to switch their savings from sterling to SCP. In that moment, the bank appears to face a mismatch between its sterling liabilities (the pensioner’s deposit) and its SCP assets (the worker’s mortgage).
That mismatch is precisely why transition planning must involve the creation of a Scottish central bank from day one. The central bank must act as the market maker between sterling and SCP, ensuring liquidity and providing the swap facilities that allow banks to manage precisely these exposures. In other words, the central bank becomes the counterparty that allows the system to function while private actors decide their own pace of conversion. This is what the Czech and Slovak authorities did during their own currency split — and it worked.
Third, the presumption that large-scale hedging against the SCP would overwhelm Scotland’s reserves misunderstands the nature of those reserves and the tools available to a currency-issuing government. An independent Scotland with its own central bank does not need to defend a fixed exchange rate. The Scottish pound would be a floating fiat currency. There would be no official peg to attack, so speculative pressure would find no fixed target. The exchange rate might move — as all currencies do — but that is part of the normal process of establishing value through trade and confidence.
CONTINUED
CONTINUED
Speculative attacks only succeed when a government tries to fix the value of its currency while lacking the reserves to defend that peg. A floating SCP avoids that trap entirely. The central bank’s role is to manage liquidity and stability within Scotland’s domestic financial system — not to maintain a particular cross rate with sterling.
Fourth, on the point about interest rate and swap risk: these will exist, of course. But they exist in every financial system. The difference is that, with an independent currency, Scotland regains control of the ultimate safety valve — the lender of last resort function. The Bank of England currently performs that for Scottish institutions, but with its own central bank, Scotland can do so directly, providing sterling swap lines, liquidity support, and capital buffers as necessary. Those are all design questions, not reasons for inaction.
Fifth, you note that the financial flows will not “net out”. I agree. They never do. But that is exactly why any new currency regime might be accompanied by temporary capital controls during the transition period (and I agree, I did not mention that possibility). The aim is not to lock money in but to slow speculation while domestic systems stabilise. It’s what Malaysia did successfully during the Asian crisis, and what Iceland did after 2008. Such measures buy time, allowing confidence to grow on the basis of functioning institutions rather than speculative fear.
To summarise:
1. Yes, redenomination of contracts requires clear legal rules and central bank backstops.
2. Yes, banks will need liquidity support and hedging facilities in the early months.
3. Yes, there will be speculative positioning, but that’s manageable under a floating exchange rate.
4. Yes, the transition creates risks — but those are precisely the risks of regaining economic sovereignty.
The greater danger lies in pretending that remaining dependent on another state’s monetary system is somehow safer. Scotland currently bears all the risks of a monetary system designed for London’s interests — without the policy tools to respond. Independence brings those tools home.
There is no painless path, but there is a practical one. It begins with political honesty about the transition, credible institutions to manage it, and a commitment to serve the real economy — not the speculative markets — as the priority in the creation of a Scottish pound.
Richard
“and would require wholehearted support from the BoE – which may or may not be forthcoming”
How could the BoE be a problem?
Does not the BoE always follow the money! LOL!
Now we are getting somewhere…. you start to see the issues.
You appeal to other precedents but few stand up. Croatia and the Baltic states created their own currencies after the break up of Yugoslavia and the USSR. It was pretty traumatic and I doubt anyone would like to use those as a template.
Czech/Slovak divorce is, perhaps a better precedent. You say it ran pretty smoothly… but that is not the way I remember it (although it is a while ago now). The first plan (a monetary union) had to be abandoned after a few weeks as money flowed across the border to the perceived, bigger/stronger country. They then shut down the payments system and started stamping physical notes to prevent this and forced conversion on people…. all incredibly disruptive for business and individuals. Once things were reopened the SKK fell sharply – although it did end up stabilising down just 15% or so. If this is the template for Scotland then I think you should think again…. rather, I hope Scotland could learn from it and do it better.
The dilemma is this. A long term fixed exchange rate (if credible – and that is key) with an eventual drift away is, from a “stability” perspective, best; this is Ireland from 1928 to 1979. But it is perhaps, no coincidence that Irish economic performance was constrained greatly by its FX arrangements and only since 1979 did things really take off.
A “Big Bang” instant conversion runs the risk of (prior) speculation which could be deeply destabilising.
The key is preparation. For example…
What contracts get redenominated? By compulsion? Or, if by choice, who get the choice? When do they get that choice? Most contracts in finance are under English Law – how would English courts rule on redenomination?
How will the Bank of England behave? How would FX moves influence Scottish monetary policy? How can capital controls be used?
Lots and lots to consider.
What is deeply depressing Clive is what you are saying is you think banking should constrain democracy.
Is that really it?
Is that your summary?
I disagree.
And candidly, I smply can’t see the issues are anything of the order you describe – unless of course bankers want to sabotage the democratic will of Scotland.
Perhaps what you are really persuading me of is the vital need for capital controls now so that bankers cannot now win (anywhere, I’d suggest, and nnot just in Scotland) whilst dumping their costs on everyone, inclduing the right of people to choose.
Would you agree?
And would you agree the answer might be to deny a banking licence to anyone who does want to abuse its indepdence, offering a state banking system in its place? Have we actually found the reason for a CBDC after all, with Scotland paving the way?
I will send you Tim Rideout’s paper if you might review it.
No, that is not what I am saying…. but democracy requires an informed electorate.
What I am saying is that transition is complicated and that current proposals do not acknowledge the associated risks. Step 1 is for people to realise there are risks; step 2 is to try and identify what the risks really are; step 2 is to “wargame” how different players will behave; step 3 is put in place measures that limit the ability/incentives to act in damaging ways; step 4 is to then put those plans up for democratic scrutiny.
To do otherwise runs the risk of a Brexit style fiasco (or, indeed, the current Labour government budgeting saga) where “promises made” can’t be kept… or are much harder to keep than advertised.
Noted
Although I think the risks differ from those you suggest, but that discussion will be offline fur now.
I have explained myself, and you look past what I said, simply to suggest quite gratuitously that I do not believe in independence. That is both unfair, and wrong.
I have made out a position that happens to be close to Mr Parry, and for good reason. And I think you are avoiding asking the right question, you should consider asking; will the sceptical Scottish voter find convincing your confident optimism about serious financial risks that face your untested theory? If I am wrong, then the Scots vote for independence, and that is fine; but if if the transition works very badly there will be hell to pay, endlessly and that is a hard fact. There is a large number of elderly, influential Scots who are implacably opposed to independence, and will only ever bend to the grim reaper. A recalcitrant 49% of Unionists makes the SNP nervous, for good reason. And Scotland’s dear neighbour will exploit that to the hilt. I do not think you realise just how hard this is.
I happen to believe the polls may not deliver a majority, for the reasons I have outlined. Democracy is messy and imperfect. Think of Brexit. The British people are being economically, politically and socially destroyed by Brexit; and they still want to vote for Farage.
Mr Parry offered a wise 4 point research agenda. I co-incidentally framed the scale of the investigation project required for a Scots currency. They fit together; but you disparaged my comment. And you have simply sidestepped my point about sovereignty. It isn’t an atom in the void; it is a moving point on a spectrum. China pegs the renmenbi to the dollar; even Trump realises he has to compromise with China in the modern world. Sovereignty is not absolute. The British are currently finding that out – the hard way.
Scotland is a small country that has to find a way to maximise its potential, inside or outside the Union; and from long experience that is very, very difficult. No state that leaves British rule, ever wishes to return. But no other state replicates the predicament of Scotland. No matter what, in many problematic ways, Scotland can never leave Britain, inside or outside the Union.
I came to make one comment, and ended with four; which is why I stopped commenting.
I have disparaged nothing John. I just asked you reasoable questions, and you have answered none of them, simply saying in response that the questions will never be answered to the satisfaction of some – and most especially the powerful – and therefore that Scotland must succumb to their wishes, as I read your message. I think I concluded correctly. Your penultimate message conforms that and is in my opinion as fundamentally wrong as you have always been on party politics. You can comment whenever you like, but make it useful, because this approach, and your refusal to engage, is not. Defeatism never is.
Yo complain to me: “And if you say money needs to be spent, on what, and with whom? Or is it really the case you are saying Scotland is too wee to manage this? “.
Mr. Parry wrote this: “Step 1 is for people to realise there are risks; step 2 is to try and identify what the risks really are; step 2 is to ‘wargame’ how different players will behave; step 3 is put in place measures that limit the ability/incentives to act in damaging ways; step 4 is to then put those plans up for democratic scrutiny”.
Without having read Mr Parry’s 4 point agenda, I wrote this: “A Scots currency introduction is a task requiring the organised, full-time resources of large numbers of professionals in a wide range of accounting, economic, legal and banking specialist research; in the commercial finance sector, in commercial and central banking, and with close familiarity with international State Treasury operations (all freely defined, since this work should include insurance, shadow banking and the black economy – anywhere a “surprise” may appear from nowhere). And that research resource is nowhere to be seen. It doesn’t exist, and there is nobody to fund it: and that is my opinion of the scale of the problem.”
After reading Mr Parry’s 4 point agenda, I wrote this: “Mr Parry offered a wise 4 point research agenda. I co-incidentally framed the scale of the investigation project required for a Scots currency. They fit together;”
You then wrote this, Richard: “And if you say money needs to be spent, on what, and with whom? Or is it really the case you are saying Scotland is too wee to manage this?”.
That is not engagement. It is question begging. The current worthy efforts on a Scots currency are simply not enough. The resources required to do this scale of rigorous detailed work have not been invested. Mr Parry clearly understands this. I understand this. I rest my case. And I am tired of being gratuitously badgered for making a comment with which you disagree. I leave you to engage with Mr Parry – offline.
John
Let’s live in the real world shall we?
First, most of the thinking Clive asks for has been done: I have sent him a summary. You have had ample chance to engage with it already and have not done so.
Second, you know full well that a call for “A Scots currency introduction is a task requiring the organised, full-time resources of large numbers of professionals” before a referendum is a fantasy because a) there is no funding and b) 92% of those professionals will be so conventionally minded they will say this is not possible, come what may. I read your suggestion as a typcial proposition from someone who does not want something to happen because they know the condition they have attched is insurmountable, hence my unavoidable conclusion that you have no desire at all for an indepdnent Scotland or, despite all your past blustering, any change at all to the status quo.
I suggest you don’t call again John. Frankly, you’re deliebrately wasting my time and very obviously have nothing of use to say to anyone and I have no time for such people any more.
Over and out.
Richard
I have to comment here. I am completely with Mr Parry; the currency mistake Salmond made last time was the lethal clincher for Union in 2014. Mr Parry beautifully describes the complexity, with but one simple example. There will be many more examples; some will come ‘out of the blue’. My main point however is at a very basic but absolutely critical level of currency credibility: trust. Richard in an earlier blog on ‘a narrative for a Scottish currency’, observed that money is in part a function of: “who we trust to ensure the transformation of value into well-being”. For Scots, since 1707, that has been the pound Sterling. The word “trust” is key; and decisive. This is Sterling, and this makes the matter both different (from Namibia or Slovakia), and a great deal more complex, in a country that contributed a great deal to make Sterling into the world’s effective reserve currency for almost two centuries. This is not a background of trust in a deep and long association with a major world currency (albeit now dimmed); that Scots will easily cast aside, without a much stronger proposition, and far more rigorously argued than the one the Scots currency lobbyists have made. The conviction in Sterling for many Scots has been based on very long term (and often very rewarding) trust in Sterling, and that holds, prima facie even in the decayed state of Britain today. In agreeing with Mr Parry, I do not believe this issue of “trust” has been sufficiently addressed by the Scottish currency lobby, still less answered.
I do not claim that Scots currency case cannot be made; but it has not yet produced an adequate case (which Mr Parry has deftly eviscerated); nor do I believe it has managed to move the political dial. The current relative robustness of the SNP prospects rest elsewhere. The relevant electorate are aware the problem is hiding in plain sight, but seem to me prepared to accept the Holyrood/Westminster compromise (for all its Westminster designed, and deliberate flaws); because the currency argument is frankly inadequate, and will likely fail.
That is all I have to say.
And what of my response?
And how would you make the case, John? Do you think it is insoluble, or have you a better answer?
Richard,
I do not pretend to offer a silver bullet. Mr Parry has the advantage of having observed how the issues typically have played out, and from an acute, informed perspective, and much more closely and perceptively than I could claim. Theory is never enough.
I am also making my judgement based on my understanding of the older, active voting – and seriously, financially interested – Scottish voter; a powerful, determined, no-nonsense lobby in Scotland. I do not see them “buying it” as the case stands: theory and principles are not enough (whether theoretically right or not – this is about voter belief and trust. The trust in Sterling remains strong, even with Britain in complete economic disarray, destroying itself with Brexit. Everyone in Scotland knows that the Westminster political class is discredited, and the Parties are long past their sell-by date. But Sterling,
remains a different kettle of fish.
The international financial system has become far more complex, even than in 2014; its diffuse operations inadequately understood, including by Central Bankers (the BoE missing the LDI crisis shook me – and that was after 2007 was supposed to have woken them up); which confirmed for me that the finance sector is frankly ill-regulated in the digital age, and which is showing the hallmarks of the Wild West (cryptocurrency for heaven’s sake!); and more alarmingly, perhaps even signs of entropy. At the same time, we sit on the edge of dot.com2, the AI Bubble.
Selling a new currency to Scots in this world is a monumental undertaking. And this is a form of money reality that is changing fast, under our feet. A Scots currency introduction is a task requiring the organised, full-time resources of large numbers of professionals in a wide range of accounting, economic, legal and banking specialist research; in the commercial finance sector, in commercial and central banking, and with close familiarity with international State Treasury operations (all freely defined, since this work should include insurance, shadow banking and the black economy – anywhere a “surprise” may appear from nowhere). And that research resource is nowhere to be seen. It doesn’t exist, and there is nobody to fund it: and that is my opinion of the scale of the problem.
I really have said enough; I stopped writing comments because I found it too time consuming and distracting. Sorry.
But my question is John, what would you do?
You say it’s all very risky, and Clive sees that, and I acknowledge that there is risk (it would be bizarre not to do so) but are you saying as a result there should be no thought of independence, or that you prefer the idea of Scotland as an English vassal state forever, tethered by sterling and living in a permanent state of economic insecurity as a result?
And if you say money needs to be spent, on what, and with whom? Or is it really the case you are saying Scotland is too wee to manage this? Why, when others have done it – and it has worked (no one has ever gone back?). I am genuinely bemused by your position that bankers rule Scotland’s future. Is that really what you are saying? Surely you do not think that banking risk – or the threat of it – now prevents even the emergence of a chosen state?
I did not comment on your response. Your dialogue with Mr Parry covered the ground. I confess I am persuaded by Mr Parry, for the following reason. Your argument made a good rational, but nevertheless theoretical case that can’t be tested, while Mr Parry has accessible, challenging downsides to draw on.
Trying to read that discussion from the imagined perspective of the Scottish voters who are sceptical of a Scots currency (and we all know they are important), I wish to focus on your response to Mr Parry, point 4: “Yes, the transition creates risks — but those are precisely the risks of regaining economic sovereignty”. For some, economic sovereignty is critical, but for many Scots the real, attention grabbing inducement of independence is open-ended autonomous opportunity; but less – I think – the abstract concept of sovereignty. Why do I say that?
Essentially the Scots do not have a problem with the principle of a shared sovereignty (England has a problem sharing the abstract idea of sovereignty with anyone – in devolution, even with the Scots). Yet, in the modern world ‘sovereignty’ is elusive. Britain ties itself to the United States, in a relationship of obsequious supplicant (Starmer’s Oval Office ‘triumph’ will not age well). At the same time, Britain makes itself a prisoner of ‘international capital markets’, while claiming its absolute sovereignty. The proposition frankly looks delusional.
Let me tease out the point by comparative illustration. Contrast this perception of sovereignty with England. Sovereignty drove the Brexit argument in 2016; it was compelling for English voters. The Scots, however voted decisively for the EU. In 1707 the Scots Parliament voted itself out of existence, for a British Union; the economic opportunity outweighed the loss of a Parliament. In 2014 the Scots voted for Union. The Scots are demonstrably prepared to share sovereignty, for opportunity. An independent Scotland now would transform relations with the EU immediately, and probably rejoin the EU; and currently, would certainly wish Britain rejoined the Customs Union now, as a minimum.
If autonomous, rather than shared sovereignty was low risk, the Scots sceptics would probably buy it. The problem with a Scots currency is a function of the very real perception of risk by sceptical, currency risk-averse Scots voters, unconvinced by abstract concepts of sovereignty.
If the majority did wish for sovereignty – and there are signs they do – what would you do then, John? Are you saying you don’t believe them? Are you saying they shouldn’t? I find your logic hard to follow. It seems you are creating shibboleths and then retreat behind them. But what if they don’t exist? What then? In other words, if enough discard the caution you say they are possessed of, are you saying that should be ignored because they are wrong to do so? In other words, do you now think the Union should prevail, come what may? That is a little surprising, if so. Might you explain?
If I may add one final note (from me, at least) to this very long exchange. I take no view on Scottish independence or what currency arrangements they should have – well, I do… but as an Anglo-Welshman I keep them to myself, it is for Scots to decide.
My comments are merely technical in nature to ensure that whatever ideas on a new Scottish currency that are put to the electorate are not “half-baked”.
John, I disagreed with you the first time you put forward the theory that Scots have some mythical attachment to the GB£, and I still disagree with you. Firstly, the old Scots coinage remained in use and circulation even after 1800, a century after the Union and the adoption of the GB£. There was no rush to switch to the GB£! Secondly, I have done over 50 public talks from Dumfries to Steornabhagh and I have never encountered anyone that expressed any attachment to the GB£! Admittedly those were pro-independence audiences. Opinion polling (Panelbase) we did in 2021 reported 59% were ‘strongly or moderately in favour’ of our own currency if we become independent. Thirdly, what there is is a very strong attachment to the “Scottish Pound”. That is what folk see on the bank notes which almost all say Scotland with some variation of a Scottish scene and a complete absence of any Windsors! Those notes are one of the few symbols of Scottish nationhood that we are still allowed. Sir Walter Scott led a fierce and successful campaign in the 1820s to protect those notes.
Internationally, the GB£ has performed poorly, having devalued against almost all major currencies. It was SFr 25 per £1 in 1948, for example, and only SFr1 today.
Much to agree with
Clive, I suspect a great deal of the delays and complications in the creation of the Euro stemmed from the widespread opposition of the German population to giving up the Mark, which had served them so well. There was also the huge problem of balancing under-performing currencies like the drachma into a Europe-wide currency.
These complications shouldn’t arise in a secession of Scotland from the UK unless England deliberately sets out to prevent Scotland’s secession. Given England’s record of stimeying Scottish devolution, I wouldn’t be in the least surprised if they tried to wreck its secession.
Very useful to have all this in one place, thanks. I hope you would write further in future about Wales, which has a population somewhat less than Denmark.
Give me time…
Take time! If I don’t ask now, I shall forget to. Please go watch some birds soon.
Friday
@ Richard,
The designation, in point 7, needs to change from “successor” to “continuing”.
Successor states are the new entities; that’s the designation that would apply to Scotland in the scenario you describe.
You are right. Corrected. Too much haste on my part.
“where it will not want to give up its seat on the Security Council to Scotpand”
New country name too??? LOL! LOL!
Edited
Having moved to Scotland in Feb I have to say it’s a much more family friendly place to live, even with the constraints of England controlling the purse. I still feel guilty when I walk into the pharmacist and they write me a prescription and I don’t have to pay £9.90 for each item (I call that a trauma response!). I went to the Scottish Currency Group website and it’s mostly good stuff, however, in their FAQ they talk about joining the Euro, which they must absolutely NEVER do, because they would just lose sovereignty again! Are you involved in discussions with them?
I am a member
Tim Rideout, who has commented here, is its convenor
He is very approachable
We definitely do not recommend the Euro!
Can you point me to where you found this exactly? The web site only just launched and has been created by multiple people so it is possible it is either not clear or there is an error.
Hey, if scg.scott is the website it’s implied in the QandA section under “Shouldn’t we be joining the Euro?”. My read of this, is we will but after we’ve managed our own finances.
Q: If a sovereign state needs its own currency, does it follow that the Eurozone states are not sovereign? And if Scotland joined the EU would it then cease to be sovereign?
I don’t know the answer. The EU nations are separate states, but have no control over their own currency, at least as far as I understand the Euro and the mechanisms behind it.
Is the Eurozone a weird hybrid? Or is it an exception that proves the rule?
The Eurozone is a weird hybrid
And ask Greece about sovereignty, and there is your answer
Germany may be sovereign
The PIGS, as they were called, were not.
With regard to the euro, as with many other aspects of their legal/financial infrastructure, EU nations have ‘pooled sovereignty’ – much like the UK (as a union of nations) in some ways – but without the centuries of colonial domination. Ultimately, the ECB is subject to political control, just like the Bank of England – but it has to be negotiated with the other member states. Just as if Scotland, or indeed the North of England, need a different monetary policy from the City of London, they have to negotiate for it. And good luck with that.
Opponents of a Scottish currency are desperate to make it look impractical. They don’t want to be reminded how quickly the Slovakian, Slovenian and Croatian governments – the latter in the midst of a brutal war – set up currencies with few of the advantages Scotland has.
Agreed
An excellent article, Richard, with obvious application here in Cymru.
I have proposed that it be published here in a local online paper.
Going to your seventh point, I wonder if you are underselling something which appears to me – in the light of all you’ve written on this topic – a win-win outcome.
First, as you say, England would retain the ‘large’ National Debt with its large counterpoint credit – the liquidity and security it provides.
Second, that on independence, Scotland (and Cymru) would have zero ‘national debt’ of their own and be free to utilise deficit spending (prudently of course) relatively untrammelled.
A share of the UK’s foreign currency reserves would also be helpful, but probably best kept as such.
Swapping English pounds for Welsh ones would, but itself, generate foreign reserves.
The UK FX reserves are small at only around US$80 bn. So 8% would be trivial and we will not need it anyway.
“First, as you say, England would retain the ‘large’ National Debt”
Would England try to exhort a billon £BPS BREXIT style divorce settlement from Scotland?
It may. But Scotland has most of the power.
I am watching JK Galbraith’s 1977 Age of Uncertainty series currently on BBC4 and of course iPlayer. The latest on The Rise and Fall of Money was fascinating in its exploration of the creation of money and central banking. Recommended.
The Age of Uncertainty – Series 1: 6. 6. The Rise and Fall of Money – BBC iPlayer https://share.google/l8gdikpAgrWkM3XXU
I’d forgotten about this excellent series, Doreen. I will look at it again.
While its at another time and place there is the example of Ireland, firstly in using sterling and then having its own currency within the Exchange Rate Mechanism.
New Zealand also has its own currency since 1933 when it stopped using Sterling and became ‘free floating’ in 1985
One question though………….
Pensions, my wife has – we think a small Scottish pension while there will be a lot of pensions payable to Scottish residents which may or may not be denominated in £Scot but payable from Sterling assets OR which will continue to be paid in Sterling .
Clearly a lot of people could suddenly be exposed to exchange rate fluctuations in their old age
If the Scottish pound falls having a pension paid in sterling will be great news.
If it rises then the Scottish government will be able to make good the difference.
Problem solved.
Excellent article Richard. Very well explained, and that is something we could have had the Yes campaign promoting in 2014, which I believe would have taken away a lot of the uncertainty in the mind of the electorate. However, despite your attention to detail, I believe the most telling observation you have made is the phrase, “Political courage”. Well do we?
Your guess?
Not right now?
Would you like the phone number of the new Mayor-Elect of NYC?
Maybe, like the Nigel Farage-Donald Trump bromance, Zohran Mamdani has followers in the UK you could network with.
LOL! LOL!
An interesting article. I do think that in practice there would be some difficulties:-
UK national debt – you have said that this would not be an issue. While legally they may not have to, I suspect that this would be a real issue with any negotiations and that an independent Scotland would likely take on a proportion of the UK national debt (as well as assets of course!).
Euro – a commitment to joining the Euro cannot be ignored and in reality this would obviously be discussed with any membership application.
I wonder when Scotland will get another chance of a “once in a generation” vote in anycase!
1) Why would Scotland take the UK national debt?
2) If it did, what are the asesets?
3) The reality omn the eruo is as I described.
4) It will leave if it does not, anyway. England does not have the power to stop it.
Your suggestions are interesting. You have often made the point that the validity of a sovereign currency depends on the issuing country requiring people to pay tax in that country, and this thought experiment suggests that that would be enough to drive relatively rapid adoption of a new currency even while old and new exist in parallel.
One question though. It seems that countries with a sovereign currency all have the habit of issuing bonds (or running a “national debt” in media-speak). Would that be something that a newly independent Scottish government would need to do? If so, surely bonds issued by a reserve bank with no track record in a currency not yet widely traded would attract a risk premium, creating a drag on the new government’s ability to manage its economy.
(Apologies if you have already addressed this elsewhere, but I don’t recall a discussion of the issue).
Governments issue bonds because savers want to deposit funds with them. That’s it. Will people want to save with the Scottish government? Yes. So will it issue bonds? Yes. To meet market demand. And to permit a repo market.
Scotland will issue bonds. For example the Scottish Council Pension Funds currently hold about GB£8bn of UK gilts. They will want to sell those and replace them with S£ bonds from ScotGov. Beyond that the state actually ‘funds’ the purchase of its own bonds since running a deficit creates Base Money and there is nothing else you can buy with Base Money other than bonds. In terms of interest rates, Greece has, I believe, defaulted 11 times since 1820 and actually had more years ‘in default’ than not. Yet the interest rate on Greek bonds now is less than that on UK bonds.
🙂
I wonder if the editor of The National might accept this, or a slightly condensed version, as your column one week? I feel that the lack of clarity over currency was a misstep in 2014. The work of the Scottish Currency Group needs sharing much more widely.
I will ask….
“Scotland would not be liable for the national debt of the remaining UK……[and] there is no reason at all for Scotland to accept any obligation to repay any part of it either.”
However, IF Scotland accepted 8% of the national debt (~250bn), and since you have established that every debt is a saving for the other party, this would effectively mean that the rUK trusted Scotland with its money, which would be a significant confidence boost for the new currency.
Why?
This literally makes no sense.
What part is it taking over?
And why should the owners of the so-called debt agree?
Nothing makes any sense about claims that Scotland can take the debt.
Very comprehensive and enlightening article as usual. Thanks very much. Have to say, it beats me why anyone would want to join the EU now, in its present state. I was once a supporter of the EU but not now – they have shot themselves in the foot with their support of the US/Nato intervention in Ukraine, and now they should be on life support but they are too stupid to realize it. I think Scotland would be better off maintaining its own sovereignty, choosing with whom it trades.
I agree. The EU shot itself in both feet with the sanctions on Russia since cutting yourself off from your main energy and raw material supplier was always going to damage Europe far more than it would affect Russia (who would just sell to somebody else). In addition most of the European elite (including the UK) seem determined to become fully paid up vassals of the USA. Europe will be completely ripped off and exploited as a declining US Empire cannibalises its allies.
Richard – please see your email as I have sent you a Word file, still a work in progress, but which I have been writing specifically to nail the sort of issues raised by Clive. There are an awful lot of people, including a lot of economists, who simply do not understand money and have no clue about double entry accounting. Also a lot of very woolly terminology. For example talking about Natwest Group as a bank, when it is a holding company that owns many banks. A lot of folk, including William from Scotonomics, are adamant you can just pick items out of the English bank balance sheet and declare them redenominated into S£ in a different ledger, entirely ignoring that you can’t have a debit without a credit.
Just as a general point please do not talk about redenomination! We are not redenominating money – you can do that for e.g. moving all DM to Euro, but not for a partial switch like the S£. You can only redenominate what I term ‘descriptions of money’. So a menu that was in GB£ can now be S£. A contract of employment that said your wage was GB£2000 can now be S£2000, or a ScotGov bond that was issued as GB£ becomes repayable in S£. I gather the correct term is ‘migrate’. So banks will migrate deposits from GB£ to S£ (which also means moving them from a GB£ ledger to an S£ ledger). Mandate is also another relevant term – the central bank mandates banks to e.g. migrate 90% of deposits by X date. Or the central bank mandates banks to issue clients with new S£ mortgages on the same or better terms as existing GB£ mortgages.
Noted Tim
I have shared with Clive but I do not think I should share here, yet when it is still a draft.
Can an independent Scotland just use Euro?
No
It has to have its own curemncy before it can even join the euro.
And it should not join it. There is no point being independent to just give up the currency again.
S£
My main take away from all of this is that Scotland should not base its plan on committing, even at some indeterminate time in the future, on joining the Eurozone. By all means peg the currency to the Euro, but retain the ability to vary the exchange rate, like Denmark and Sweden.
As a strong supporter or Scottish political and economic independence, I have no illusions about the many bumps in the road we will encounter, but the benefits of controlling our own destiny will outweigh the downsides.
How many countries that have broken from the empire, and I include Ireland in this, are clamouring to rejoin?
None
And they all created their own currencies at some time.
At the time of the Scottish referendum I wrote in my blog that Salmond had overcomplicated the question of the currency. I also noted that the SNP appeared to suggest that they would form the government after independence which I am sure put a lot of waverers off.
I feel both of these factors contributed to the success of the No vote.
“I read your suggestion as a typcial proposition from someone who does not want something to happen because they know the condition they have attched is insurmountable, hence my unavoidable conclusion that you have no desire at all for an indepdnent Scotland or, despite all your past blustering, any change at all to the status quo.”
Oh my! Well said.
There are a few people in Scotland, like this, who hold forth on Scottish independence on blogs and elsewhere. They don’t want it if it doesn’t follow exactly their idea of how independence should look. On this occasion, it was implied that Scotland is so, so unique that it can’t possibly survive without the union, or re-introduce its own currency, unlike the dozens of other countries which left the ambit of the British state never to return.
I’ve always thought them undemocratic, bordering on autocratic, and give them a wide berth.
I’m relieved, the input on independence and currency was very depressing. Perhaps it was meant it to be.
Thanks.
John Warren will not be appearing here again. He’s been well and truly rumbled.
I found the claim of Scottish attachment to sterling rather odd. I’ve never seen evidence to show that this is the case in Scotland.
I’m in total agreement with Dr Rideout’s view @ 12.33 in this regard. I’m going to look for further information about our old currency. I didn’t know that Scots continued to use Scottish coinage until 1800; I’m going to read up on that.
I also have a fondness for our own Scottish notes with Scottish scenes on them; they’re attractive and I’m glad we retain them.
Agreed
Thanks for this blog post and I welcomed all the exchanges despite a number being a little too convoluted for me. I do take the points about the need to explain to Scots very clearly what would need to happen when and how. There needs to be a very clear plan that explains in simple details with visuals and videos what this will all mean to them at every stage of the transition.
I would suggest that we certainly need many experts involved in developing and agreeing the detailed plan, consider all the organisations and people who might question and destroy the plan, but please Tim Rideout et al do not use any neoclassical economists or bankers who as you Richard and especially Stephen Keen have shown simply do not understand economics, money creation, banking, government finances and worst of all double entry accounting!
And with that last point you hit the nail on the head, and explain exactly why John Warren is missing the point. You could spend a fortune buying consulting on this to get the answer “nothing is possible” based on the prior assumption of the consultant that this is the case.
From all the many points raised it appears to me that a Scottish sovereign currency is not impossibly complicated to create. More of a problem is convincing some people that Scotland is a colony in all but name and all that implies particularly extraction of resources to benefit the colonising country just like the “good old days “ of the empire. It should be stressed that independence would be a new fresh start for Scotland as it has been for many former colonies.
Thanks
The heated discussions between Richard, Clive and John S Warren were above my pay grade and my on-line time is limited while I’m in hospital. Personally I’m sorry to see John go as he is well-versed in Scottish history as well as having a broad knowledge of commerce and economics.
Clive’s posts on the inherent dangers facing a new nation’s new currency were very useful. For what it’s worth, my view on this topic is that life itself is full of risky gambles which we all take for granted – driving on busy roads, flying in aircraft etc. Starting a new nation should embrace this: if the cause is worth it, taking that risk is worth it.
Clive’s 4-point agenda is a very useful warning of what could go wrong, so it’s a helpful guide for the Scottish Central Bank to set up a small specialist department to prevent interference in Scotland’ economy. I would certainly expect the City of London and the English Treasury to engage in some mischief.
As for the views of the Scottish electorate on secession, a growing majority recognises that the Union has been disastrous for Scotland all along, but especially in the last 50 years. The view that Scotland has been treated as a colony is now more widespread than ever. Some widespread, simple explanation of MMT and it’s application in an independent Scotland would be useful.
I just hope I live to see an independent Scotland, preferably a republic, but if not, I hope my children and grandchildren do.
Go well, quite literally in your case, Ken, and I share your hope. Thank you.