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
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.
Comments
When commenting, please take note of this blog's comment policy, which is available here. Contravening this policy will result in comments being deleted before or after initial publication at the editor's sole discretion and without explanation being required or offered.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
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.
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
“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?
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.
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
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.
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
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?
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.
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….