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 Scotpand. 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
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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.
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.
“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.
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?
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?
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.
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
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.
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