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referendum

By GEORGE KEREVAN

WHAT are the currency options for an independent Scotland? Basically there are four:
(1) joining the euro; (2) keeping the pound, as the SNP now proposes; (3) creating a Scottish pound – or whatever else you want to call it - but fixing it in value one-to-one with English sterling, as Ireland did after it gained independence; or (4) having a Scottish pound that floats on the international exchange markets like the currencies of Sweden, Norway and Denmark.

THE EURO
No one is keen on an independent Scotland joining the euro in its present uncertain form. For a start, the eurozone won’t let you join before a long preparatory period. Second, the euro is in chaos, which would undermine business confidence in an independent Scotland using the euro. Third, the Scottish electorate are opposed.

KEEPING STERLING
With the euro out of contention, the SNP is proposing that Scotland remain part of a common sterling currency area after independence. The advantages are that it minimises the economic disruption and cost to the economy of creating the new state.

Sharing currencies promotes trade and eliminates exchange costs. What’s not to like? New Zealand was part of a common sterling area for a long period after 1945.

Note that a common sterling area is not the same thing as the status quo. The Bank of England (hopefully with a new name) would not be the central bank of the Rest of the UK (RoUK) but of all the nations using sterling.

These could also include the Republic of Ireland. There is a view gaining ground in that country that if Scotland becomes independent and keeps the pound, Ireland should quit the euro and join the new sterling area.

An independent Scotland would appoint a representative(s) to the “new” Bank of England’s monetary policy committee (MPC) that sets interest rates.

Recently, David Blanchflower, a former member of the MPC, has said it is “probably not unreasonable” for an independent Scotland to have this representation. It would even be a good idea under devolution. Currently, the US Federal Open Market Committee, which sets American interest rates, has mandatory representation from its regional affiliates.

Unionists will argue that in any such common currency arrangement the Bank of England, not the Scottish Government, would still set a common interest rate for Scotland and RoUK.

The Bank would remain the body that prints pounds (albeit electronically). By offering to lend these pounds to the financial system, the Bank sets a floor on interest rates throughout the sterling economy. Scottish banks could not undercut the Bank of England interest rate, because it would still be the Bank that provides their financial safety net.

However, as John Swinney, the Scottish financial secretary, has pointed out, that still leaves a lot of scope - far more than under devolution - for independent Scotland to use its tax powers to promote investment, attract foreign capital, advantage particular industrial sectors, or cut VAT to boost consumption.

Swinney’s point was that an independent fiscal policy would trump the austerity currently forced on us by Westminster. Who cares if interest rates are still set by the Bank of England – we have that anyway.

However, while this is true, there is a risk. The UK has been prone to high inflation as a result of an overheating economy in the South East. This imposed a higher interest rate than was good for Scotland, ending in de-industrialisation. Unless the new, common Bank of England is given a mandate to promote economic growth across the whole British Isles, rather than merely police inflation for the City, the Scottish economy might suffer.

Why would RoUK want to join a common sterling area with Scotland? An independent Scotland with its own separate currency could cause lots of problems for the RoUK economy.

If Scottish interest rates were even a smidgeon above London’s, capital would flood northwards. Remove Scotland’s oil and whisky foreign currency earnings and the RoUK’s trade deficit would be chronic. Businesses in England hoping to sell to Scotland would also benefit from keeping a common currency. Being part of a common sterling bloc means Scotland would agree to share its foreign currency reserves with RoUK.

In this system, the new Bank of England would also regulate Scottish banks. It would act as “lender of last resort” to banks north or south of the border, meaning it would provide cheap credit to ensure the banks remained solvent.

There has been some Unionist criticism that this would not be possible as the EU demands each member state regulate its own banks. But all the EU requires is that each member state have a proper regulatory system in place. It would be perfectly possible for this to be the Bank of England, especially as the Bank is undertaking this task already.

What would happen if a bank failed in Scotland? The Scottish Government would be liable for protecting depositors here, even if it was a subsidiary of an English bank. If a bank failed in England, the RoUK Treasury would be responsible for insuring their deposits, even if it was a subsidiary of a Scottish-owned bank.

This is because under European law every bank must be registered to operate in a given country (i.e. take local deposits). That country’s authorities are then responsible for insuring their own depositors, even if it is technically a foreign bank.

Thus if Santander fails, the UK Treasury would cover British depositors in Santander’s UK subsidiary. (Incidentally, had RBS failed under an independent Scotland, the English Treasury would have been legally bound to aid English depositors, not the Scottish taxpayer.)

That said, after Scottish independence, in the event of a bank failing which had major operations on both sides of the Scottish-RoUK border, one would expect a joint rescue operation by both governments, in the interests of maintaining confidence in the financial system. (People forget there was a similar multinational rescue of Foris by the Benelux countries.)

One objection raised to having a common sterling area is that Scotland would have to accept common fiscal controls as well. In other words, the Scottish Government would have to accept voluntary limits on its borrowing. A similar fiscal compact is being introduced in the eurozone after the Greek crisis. Unionists ask why Scotland should bother with independence if it means having not just interest rates but also public spending determined from outside?

But this is a distortion of what would actually apply. The fiscal rules in the eurozone, and in any future sterling area, are to stop governments borrowing more than they can pay back (as with Greece). This is a perfectly sensible rule, which one hopes Scotland would keep to anyway, even if it were not in a sterling bloc with England. And for the record, remember it was Gordon Brown who plunged the UK into unsustainable public debt, so voting against independence hardly guarantees national solvency.

Even under the fiscal stability rules of a common sterling area, the Scottish Government would set its own budget priorities. The amount it could borrow safely would actually be governed by Scotland’s rate of economic growth – the more growth, the greater the tax revenues, the more you can afford to borrow.

A SCOTTISH POUND FIXED TO STERLING
What if RoUK refused to accept a common sterling currency with an independent Scotland, despite the benefits on both sides? The fundamental problem for the SNP is that there is no guarantee the RoUKers will see sense, even if they are cutting off their sterling nose to spite their economic face.

In that case, the next option would be to have a separate Scottish pound, issued by the Scottish monetary authorities, but which had exactly the same value as the English pound.

Thus a pound Scots and a pound English would have exactly the same value and be interchangeable. This was the policy adopted by Ireland when it first became independent. This arrangement would make trade simple.

How do you keep the Scottish pound and the English pound exactly the same value as each other?

Step one: a new Scottish Central Bank issues Scottish pounds which would be the sole legal tender in Scotland. However, banks and businesses requiring Scottish pounds would buy them from the Scottish central bank in return for sterling.

Thus the total of Scottish pounds in circulation is backed by a reserve of sterling to an equivalent amount. If there is 1 billion pounds Scots in circulation, it is backed by 1 billion pounds English at the Scottish Central Bank. So anyone with a pound Scots knows they can go to the Scottish Central Bank and swap it for a pound English.

A Scottish pound fixed against sterling has many of the advantages of a full sterling currency union, plus a degree of flexibility. In particular, the Scottish Central Bank, not the Bank of England, would be lender of last resort to the Scottish Government and banks. As Scotland’s sterling reserves accumulate, they can be lent in the sterling money markets to earn interest.

However, it would still mean that Scotland needed to keep the same interest rates as RoUK. Higher interest rates would suck in capital from England, expanding the Scottish money supply and causing inflation. A rise in RoUK interest rates would normally force the Scottish authorities to raise rates in parallel, to stop capital flowing to London, which could hurt growth.

AN INDEPENDENT SCOTTISH POUND
The smaller European economies that weathered the 2008 credit crunch and recession were those with independent currencies. They had the ability to devalue, boost their money supply and control their own interest rates.

Sweden reacted instantly to the downturn with a remarkable injection of quantitative easing from its central bank – unlike eurozone members who can’t print their own euros. As a result, Swedish GDP is back where it was in 2008, before the downturn.
The problem with setting up an independent currency is the disruption, transition costs and impact on business confidence in the short run. There is also a problem in establishing credibility in the bond markets. This makes going for a separate currency a hard choice.

A more likely scenario, in the event of RoUK rejecting a sterling union, is that Scotland creates a Scottish pound fixed to the English pound. But then after a matter of years – probably if RoUK interest rates become too high – abandons the fixed exchange rate and lets the Scottish pound float.

CONCLUSION
The No camp will hide behind calls for “more details” on the currency issue. In fact, the basic position is quite clear: a common sterling area is simple, helps business and is good for both Scotland and RoUK.

But those who oppose Scottish independence might well reject a sterling solution out of political spite, even though this goes against the long-term interests of the people of England, Wales and Northern Ireland.

Comments  

 
# Jake62 2012-06-21 16:16
Thanks George. I've been struggling to get my head around this currency issue for some months, and this is a nice and concise explanation of the options that even I can understand. Much appreciated.
 
 
# Harry.Shanks 2012-06-21 16:20
Well that sets out the various possible scenarios - but the final position will have to become crystal clear if we expect voters to have any confidence in it.

And that, I suspect, is the dilemma - the UK Govt & the Anti_Independen ce campaign have no interest in allowing the situation to become crystal clear - muddying the waters is their stock in trade.
 
 
# oldnat 2012-06-21 16:22
Excellent article.

The benefit of common fiscal controls would also include the rUK no longer borrowing more than they can afford, and sinking deeper into debt.

As our biggest market, we really don't want rUK to be unable to buy our products.

Harry - isn't the critical point that the SNP is suggesting a sensible arrangement to mutual benefit. What they also need to make clear is that if rUK acts against its own interests out of spite, then Scotland will simply adopt a Scottish pound fixed to sterling.
 
 
# UpSpake 2012-06-21 16:36
Whilst I am open to the idea that Ireland should ditch the Euro and join a sterling area along with an independent Scotland I doubt that the Irish having 'fought' to be independent as much as possible from 'England' then they migh be better to be persuaded to link to a seperate Scots currency with its own identity and not confused with the English unit of weight - pound.
Scotland with its Merk, as proposed by the SDA would be a far stronger currency and more stable to be associated with as opposed to a falling English pound with all its colleteral removed.
 
 
# Alan 2012-06-21 17:21
Hou no the pund Scots as it ance wis?
 
 
# Marga B 2012-06-21 18:49
UpSpake - I doubt very much that things re. the English enemy have stayed the same in Ireland - their relationship with the euro and Europe is far from happy.

But I don't really see how any country wil be allowed to leave the euro, with the present chronic instability and the soon-to-be Europeanisation of member state banks, especially Ireland with a huge debt to repay.

And Govanite, below (30 minute rule) if Scotland was Iceland, the resources you mention would be preserved in perpituity for the Scottish people under its (new) constitution.
 
 
# Legerwood 2012-06-21 16:46
Quote:
The problem with setting up an independent currency is the disruption, transition costs and impact on business confidence in the short run. There is also a problem in establishing credibility in the bond markets. This makes going for a separate currency a hard choice.


Perhaps in this context it would be useful to find out the details of how Australia and New Zealand established their currencies when they left the old Sterling area in the 1960s/70s.
 
 
# oldnat 2012-06-21 17:09
Instead of Australia leaving the Sterling area, it would be more accurate to say that the UK left Australia!

When the UK devalued in 1967 (these were the days of the Bretton Woods system of fixed exchange rates), the stronger Australian currency didn't devalue. That effectively ended that sterling area grouping.

With the New Zealand currency, it was the other way around. They devalued more than the UK did against the US dollar.
 
 
# Legerwood 2012-06-21 23:41
There may still be lessons to be learned from studying how New Zealand and other countries such as Malaysia disentangled themselves from the Sterling if an independent Scotland did wish to have a separate currency.
See:
New Zealand's Exchange Rate Regime, the Collapse of Bretton Woods and the Twilight of the Sterling area.
Catherine Schenk, University of Glasgow; John Singleton, Victoria University of Wellington.
October 2007.
Abstract:
""Quote:
How did developing countries adapt to the collapse of the Bretton Woods system?
Using new archival evidence, we argue that New Zealand offers an interesting
case study of decision-making in a small economy dependent on primary
production with close economic and political links to two larger partners – Britain
and Australia – with divergent domestic policies. After some experimentation ,
New Zealand adopted an innovative intermediate solution for the exchange rate
that aimed to generate stability for primary producers during a period when the
direction of trade was diversifying and most currencies were floating. This
imaginative policy was not accompanied by comparable changes in reserves
management, and until 1975 New Zealand continued to hold the bulk of its
reserves in sterling. The article explores the different priorities and institutional
constraints affecting the choice of anchor currency and reserve currency in this
context.""
1 Wehttp://www.worldeconomyand finance.org/working_papers_ publications/working_paper_P DFs/WEF0030.pdf

Disentangling from Sterling: Malaysia and the end of the Bretton Woods system 1965-721
Catherine R. Schenk
University of Glasgow
December 2007
Abstract
Quote:
""A decade after independence, the Malaysian government and central bank were faced with a series of challenges that forced them to develop an independent policy, leading to the end of the historic role of sterling in their international monetary regime. Like some economies today that are faced with accumulated reserves largely comprised of a depreciating currency (now the US$), Malaysia had to disentangle itself from sterling at a time when there were no clear alternatives since gold was scarce, the US$ was weak and Germany, Switzerland and Japan resisted the use of their currencies as national reserves. This paper uses new archival evidence to show that external obstacles as well as some misjudgement meant that this was only achieved in June 1972, 15 years after Merdeka. This process also reveals new evidence about the post-colonial relations between Malaysia and Britain and sheds new light on the neo-colonial interpretation of the first decade of independence.""


www.worldeconomyand finance.org/working_papers_ publications/working_paper_P DFs/WEF0033.pdf
 
 
# DavieB 2012-06-21 16:52
Well done George. At last an easy to understand piece.

When all is said and done, it seems that the unionists are "cutting off their noses to spite their face" about this.

My personal preference is our own currency, that way we set interest rates.

But what would 'floating' our currency mean and what are the pros and cons of that?
 
 
# phil2014 2012-06-21 17:18
Thanks for the excellent overview.
Articles like these give me more technical confidence about Scottish independence.
Will try to pass on to as many people as possible.
 
 
# Old Smokey 2012-06-21 17:19
The most logical and for the life of me I cannot understand why the SNP have not trailed it. Is Option 3 Creating a Scottish pound , pegged on one-to-one basis with English Pound. For this to be set up and maintained for a couple of years, until business and the international market settles and lets the currency 'bed in', then follow up with Option 4 To have the Scottish pound float on the international exchange markets and find its own level. As George says just like Norway, Sweden and Denmark.
There are examples a plenty of 'independent' currencies, such as the Hong Kong dollar (still) being pegged to the US Dollar. Currencies such as the Canadian dollar are actually reserve currencies.
So for god's sake lets drop this idea of using the Bank of England and keeping the 'English' Pound.
To stand a chance to escape the status quo we have, is to do the options Ive suggested. Have faith in a Scottish Pound!
 
 
# Jim Johnston 2012-06-22 07:18
Your suggestion of George's 3 then 4 sounds logical and very sensible to me Smokey.

Our SNP Government could feed this into the "debate" right now as the only alternative if Westminster don't fancy a sterling zone, and get the reaction of Scots. To hell with bankers and anti-Independence politicians opinions, we're supposed to be deciding Independent Scotland's future.

Ditto with Independent Scotlands defense intentions, get it "leaked" asap, then stick it in the white paper. People will then be voting for what they want.
 
 
# Jamieson 2012-06-22 12:30
I agree that on the face of it pegging the £Sc to the £ would be the best solution. But the biggest drawback to that would be that Scotland could be subjected to an immediate attack by the currency markets to test the peg and the Scottish Government's committment to it. I have no doubt there would be (should be) contingency plans in place with other countries to resist that if it happened because the outcome of a failure to defend the £Sc could result in devaluation which would not be in anyone's interest.
But the anti-Independence people would be able to raise scare stories galore about it before the Referendum and if there were one thing that WOULD scare people it would be that their bank deposits were at risk. I believe that to be the main reason why the SNP is going down the road of a currency union, although there are also alll the advantages which George Kerevan states as well
 
 
# Old Smokey 2012-06-22 15:45
There is always a risk with anything, but its how you manage that risk. For example every time I leave the house I run the risk of being run over as I cross the road. I manage that risk by being aware of my surroundings.Same with currency, especially a high profile one that Scotland will have, its about managing it. Yes there will be die hard unionist nutters out there that will put out scare stories, but that can and could back fire onto the English currency, as the world will be watching and we do have freinds out there.
We could play safe and press for currency union with England, but that would be the same as just staying indoors and avoiding the big bad world out there
 
 
# Jamieson 2012-06-22 15:50
C'mon! That is far too simplistic a view about a very important matter which will be very relevent to the Referendum. I'm glad the SNP are doing the campaigning and not you.
 
 
# Old Smokey 2012-06-22 16:39
I'm glad as well that the SNP are 'doing the campaigning'! But perhaps it needs to be in simplistic terms. I'm not a banker or financial expert and dont pretend to be and neither are the rest of the Scottish population and its they who need to understand in terms that, well hate to say it, simplistic. I heartily agree it IS an important matter and is very relevant to the referendum.
What we keep getting hit over the head with by the unionists, is 'how would an independent Scotland look like' . Now to you and me and others on here, we probably have a shrewd idea, as all we have to do is look at a few examples in Scandinavia. But the man in the street, also wants to know how Scotland will be and that includes the money in his/her pocket. Talking in high financial terms will just fly over the heads of many
 
 
# Jamieson 2012-06-22 18:16
I agree that the 'man/woman in the street' needs things to be spelt out simply. And to help win a Referendum on Independence the simplest thing to tell them vis a vis the money in their pocket and in the bank is that nothing is going to change in the event of Independence which would be the case if Scotland were in a currency union with rUK. But the SNP needs to keep hammering home the fact that a MONETARY union does not mean a FISCAL union
Anyhow I doubt if agreement on such a currency union could be attained before the Referendum, so we will probably go into that with the fall back to a pegged currency. But if the SNP's aims do nothing else during the next two years it will keep the Darlings of this world occupied.
 
 
# Peter A Bell 2012-06-21 17:30
Excellent work, Mr Kerevan! This article not only offers a simple guide to Scotland's currency options it also gives the lie to unionist propaganda about confusion and lack of information. Many thanks!
 
 
# Edzell Blue 2012-06-21 17:42
This is an excellent article which puts into print what George said on Newsnight a couple of days ago.

My preference is for our own currency which could be fixed to sterling for a number of years before eventually floating on the markets. Like the SDA I would call it the Merk. We could have Pound Sterling and Merk on the notes during transition but need to drop pound from the currency. I remember having to change an invoicing program because we invoiced in pounds and were paid one invoice in Irish pounds when the Irish pound was much lower value than the pound sterling.
 
 
# rhymer 2012-06-21 17:52
Good article.
A clear, concise analysis of the situation.

It would be nice to see it published in the Herald or
Broadcast on the Beeb.
We live in hope
 
 
# pmcrek 2012-06-21 17:54
My own preference would be for a Scottish pound also, however I would consider pegging it to the US dollar instead.
 
 
# govanite 2012-06-21 18:12
my preference would be for oil, coal, gas, water, fishing rights, whisky, an educated workforce, green-resources & a manufacturing sector

those are the real values of currency - call the coinage what you like
 
 
# J Wil 2012-06-21 18:20
It's great to see all the arguments laid out in a logical manner, but the unionists are not listening to such logic. They prefer to keep putting about lies to put the frighteners on the public.

Sometimes there appears to be a bit of naivety on the part of the SNP. It seems that they do not think things through and look at the possible repercussions of their policies. However, it is a difficult, if not impossible task o cover every base. The one thing that we can be sure of is that the unionists are going to pick at every policy and idea the SNP have.

And who would have thought that the Labour Party would be so brazen as blame the SNP for a dipping economy which is of their own making?
 
 
# red kite 2012-06-21 18:33
If / when we have our own currency, it would be no big deal for business or individuals to use sterling as well. Say for online purchases from England. Many banks already offer US dollar or Euro accounts here anyway.
Anyone who uses paypal knows they change to & from one currency to another very easily, like buy from China in US dollars and have that converted by paypal before it's charged to your direct debit in sterling.
 
 
# lumilumi 2012-06-21 19:00
Thanks for this article, George. Sheds some light on the issue, which the unionists do their best to muddy, obfuscate and confuse, and the SNP (and other independists) avoid explaining properly. Well, admittedly, it is not easy to explain to average Joe or Joan.

What the common person on the street is interested in is HOW will all this impact them, re: mortgage payments, food, fuel prices... The problem is that there is no simple answer, and it's in the hands of supra-national unregulated global finance markets anyway. As it would be with remaining with the RoUK.

I live in an Eurozone country (Finland) and our politicians tell us we have to keep bailing out the failing members so that everybody's (voters’) mortgages in Finland wouldn't shoot through the roof and it wouldn’t be total armageddon (Scare stories, anyone?)... A bit unfair, when we're one of the only 3 Eurozone (European?) countries who've stuck to the rules and have a AAA rating.

I remember, actually, lived through and survived an economic meltdown. Finland in the early 1990s. Before Finland joined the EU or Nokia went big. The banks were deregulated a few years earlier (thanks to the right-leaning government... ring any bells?), then the Soviet trade collapsed. I had to pay “market rate” (~15%) interest on my student loan for a couple of years (compared to the ridiculous "market rate" of 2.05% I currently pay on my mortgage).
Back then, Finland had the option of devaluing the Finmark, an old tried and tested way of boosting exports, which, of course has the downside of making imports (such as oil/fuel and many consumer goods) more expensive to the people. Autumn 1992, my Australian boyfriend, who’d been working in Scotland and saving money (sterling) was coming over and I remember screaming down the phone for him to change his pounds sterling into Finmaks NOW, before the sterling is also devalued! Silly boy didn’t take my fiscal advice, changed his money after the sterling devaluation, and lost hundreds.

Thinking back... It was a bit grim but not too bad. We got through it with black humour and sheer determination, and better times came along... Finland got through its meltdown all on its own (the Finnish taxpayers bailed out Finnish banks without help from abroad etc.) and there were a few grim years but then things turned good. Nokia etc. (My foreign friends find it funny that I and most Finns have Nokian wellies, but that company made toilet paper and wellies and car tyres waaay before they started making mobile phones! Though Nokia is in big trouble now – it’s 80% foreign owned now, anyway. It’s only a question of time when the HQ will be moved from Espoo to some more cosmopolitan place.)

Well, we weathered the storm, but the downside is that some of the welfare state was stripped back in the early 1990s and hasn't been put back, and income unequality is increasing even as we speak. But our country didn't become a perpetual economic basket case after that meltdown. And this is a country with few natural resources apart from plentiful fresh water and a well-educated population. Scotland has so much more going for it, if only the people believe in themselves. (If only the MSM wasn’t putting them down all the time.)

The lesson? It’s not the end of the world.
Economic meltdowns happen, and you get through them. The “little people” will still buy food and clothes and work in their little jobs. The “big people” might not earn as obscenely much as before for a year or two, and some “financial sharks” may lose their jobs (but probably have financial airbags to fall on to). Then it’ll be business as usual.

If When Scotland becomes independent, the first few years will probably be rocky but Scotland will pull through. And it'll be worth it.
 
 
# Robabody 2012-06-21 21:59
Quoting lumilumi:
If When Scotland becomes independent, the first few years will probably be rocky but Scotland will pull through. And it'll be worth it.


Indeed it will LL, even it takes tens of years making me even older and grumpier than I am now.
 
 
# Marga B 2012-06-22 22:36
lumilumi, I usually agree with your posts but I think you're being a bit harsh here:

"I live in an Eurozone country (Finland) and our politicians tell us we have to keep bailing out the failing members so that everybody's (voters’) mortgages in Finland wouldn't shoot through the roof".

Actually what you're bailing out is the Spanish banks not the country (at least so far) and tragically, the ordinary Spanish people are paying a very high price, with 25% unemployment, thousands being thrown out of their houses every week because they can't pay their mortgages. In Spain here's no temporary state housing for anyone who's evicted, good job most people have decent Spanish families able to take relatives in, sometimes grandad's pension being the only income to keep them going.

The fact that the financial and other elite of the country and speculators from abroad, many from northern Europe, have fleeced the country is a terrible problem, but as we all know, when a ruling elite is the problem it's hard to see how it can provide the answer.

Let's hope for good news soon.
 
 
# bodun 2012-06-21 19:12
Surely the solution for the referendum would be to plan to enter negotiations with rUK on option 2, with option 3 as a fall back in case these did not go well.

Option 3 also gives us credible negotiating leverage as option 2 offers considerably greater benefits to rUK than does option 3.

After a decade or so, once everything has bedded in, we can then look at options 1 or 4, and see if either of these offers an advantage at that time.

This would seem to give us the following:

a credible plan for the referendum debate;
a smooth transition into independence;
then further options in the medium term.
 
 
# Andy Anderson 2012-06-21 19:26
Thanks George, I found this interesting but I am far from convinced that we should adopt what seems to be your preferred option of linking in with the pound sterling at a fixed rate.
My concern is that Scotland will need to apply a Keyensian type policy to get it's economy moving and there is no evidence from the present Westminster Government, nor from the Westminster opposition that they will abandon a neo-classical policy.
If this is so then Scotland would face stiff opposition from the Bank of England against its investment policies and this would totally undermine any Scottish recovery programme.
I agree that some relationship with the pound sterling after independence would be best for stability, I also agree that this would be very much in the Westminster Government's economic interests too.
But Scotland would need to set up its own banking system with a central "nationalised" bank as in England because the banking system badly needs reform and regulation.
This done we could produce our own pound based on the pound sterling at that time but with a possible sliding scale to allow adjustment within a range.

This I believe would give us the stability and the flexability we will need If the economy is to come first and the currency second.
 
 
# Macart 2012-06-21 20:10
First class article and crystal clear explanation. Definitely going straight into favourites.
 
 
# From The Suburbs 2012-06-21 20:47
Spread the word to ensure a balanced audience as BBC Scotland is appealing for members of the public to join an audience for the latest in a series of debates on the future of Scotland.

The television special will take place on Friday, 29 June.

bbc.co.uk/.../...
 
 
# ttwapies 2012-06-21 21:25
The Bank of England has always been the hand on the tiller of the British Empire. An independent Scotland that truely hopes to foster a new and more equitable society will need to leave it behind, along with the dogma of currency creation for private profit.

I think we need our own currency, created by our own publicly owned Scottish Central Bank. We already have three issuing banks based in Scotland, so we wouldn't have to reinvent the wheel. Perhaps a new role for the Royal Bank of Scotland (need to change the name though).

The new central bank could issue interest free money to local authorities, to pay for required capital projects. This would allow the public (i.e. democratic) management of the amount of money allowed to flow in to the economy at any one time. This would provide a control over inflation, it would also protect against deflation. As Milton Freedman has pointed out, no severe depresion can occur without an innitial severe contraction in the money supply. It would also avoid the unnesessary enrichment of private banks, through expensive debt based bond purchases and interest payments. I am not anti-business, but why should a private bank profit from the creation of our currency, which after all is a measure of national wealth. It is the nation the gives the currency its value, not private banks.

Scotland also needs to end fractional reserve banking, or at least aim for parity between the loans made and the capital reserves banks hold. At present, the Bank of England operates a voluntary reserve ratio system, with no set minimum reserve requirement. This means that banks can operate with zero reserves, effectively enabling them create an infinate amount of credit based money. Although the average cash reserve ratio across the UK has been 3.1% since 1998, many observers feel this is still to high, including Sir Edward George, Governor of the Bank of England 1993-2003.

I know this is very broad brush stuff, but hey, I'm not an economist. But then again, isn't economics the discipline of applying bad mathematical formula to a construct of reality which itself is based on very large assumptions and wishfull thinking. Anyway, I will leave you with an interestin quote attributed to Sir Josiah Stamp, who was appointed director of the Bank of England in 1928.

"Banking is conceived in iniquity and born in sin. Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with the flick of a pen they will create enough money to by it back again. Take this great power away from the bankers and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a better and happier world to live in.

But if you want to continue the slaves of bankers and pay the cost of your own slavery, let them continue to create money and to control credit"
 
 
# Ard Righ 2012-06-25 21:31
"-but why should a private bank profit from the creation of our currency"

Exactly.
 
 
# Legerwood 2012-06-21 21:29
This article seems to precis the points set out by Professor White in his article on the currency options for an independent Scotland.

Lawrence H White, "What monetary arrangements for an independent Scotland"
policyforumscotland.com/.../...

My personal preference in the medium to long term would be for Scotland to have its own currency, Central bank etc with sterling being a short-term option.

One potential problem with remaining with Sterling for any length of time is the issue of regulation of the banks. This would be largely in the hands of the BofE and it shows no sign of bringing in stricter regulation that would prevent any future meltdown.

In an independent Scotland it would be essential for the credibility of its economic and financial well being that it had a strongly regulated banking sector. The signs are that the UK, and by extension the rUK, is not going to adopt such regulations any time soon.
 
 
# graememcallan 2012-06-21 21:39
Thanks George for this clear and concise article - that's helped clear things up a wee bit for me - great job ;-)))
 
 
# Koenig 2012-06-21 21:53
Everyone seems to want to favour keeping Sterling. If that's the case stay controlled from London. Keep your union. You clearly don't want independence.
 
 
# Louperdowg 2012-06-21 22:30
Everyone?

No one on this thread has advocated it.

Personally, I favour a Scottish currency otherwise, as you rightly point out, you are not really independent.
 
 
# Aplinal 2012-06-22 00:02
Quote:
Personally, I favour a Scottish currency otherwise, as you rightly point out, you are not really independent.


"Not really independent"? Hmmm. try telling that to the Germans, French, Italians, Dutch, Belgians etc. A currency union is perfectly feasible for nation states. Whether it would work in the British Isles depends more on the attitude of Westminster and Whitehall than it does about the principle.

Scotland could be a partner in such a sterling monetary zone, notwithstanding the difficulties. But I suspect that like "devo-max/plus/light" or whatever the latest version is, the "keep the pound" mantra was designed by the SNP to box the pro-dependency parties into a corner they haven't the wit to avoid.

In a few years after independence Scotland could have its own currency, but I suspect it will start with a Scottish pound fixed to the other pound. It makes sense for both Scotland and RoUK as an interim measure.

If Scotland does go the whole hog, I favour the "Merk"
 
 
# Macart 2012-06-22 04:12
Quite agree Aplinal. Initially there will be a period where Scotland's financial services and government spend will be in a state of flux. Much negotiation over resource and asset will be on the table, investment in shiny new infrastructure, the building blocks of hopefully a new financial and manufacturing base constructed. In the short term being tied to the Sterling zone as outlined by Mr Kerevan makes perfect sense for all the reasons outlined in his article.

Once our period of settling is complete and our currency hardened sufficiently, based on consolidated resource and asset base then I'm in favour of the Merk being floated as Scotland's currency. If we don't like that then Scot's Pound, call it the Fred n' Wilma, call it whatever we like, it'll be the final piece in place.

Independence
 
 
# Louperdowg 2012-06-22 04:27
I'm working with Italians, Germans and French people at the moment and I asked them over breakfast if they felt independent with respect to the Euro.

Can you guess what they said?
 
 
# Marga B 2012-06-22 08:45
I would guess that their words were not printable, at least not here, Louperdowg.
 
 
# cardrossian 2012-06-22 06:04
As do the Scottish Democratic Alliance Aplinal. As do the SDA, who have put it in writing. The Merk,initially tied to sterling with our own Central Bank, Stock Exchange and Mint is the proposed outcome. And massive changes to our tax system by adopting Land Rental Value (LRV). Check it out on the SDA website
 
 
# velofello 2012-06-21 22:43
Excellent article. Please don't rest on your laurels, more please,Clear bullet-pointed articles are needed to counter the weary willies and the dafties who think that with a few quid in the bank and voting Tory all will be well with the UK
 
 
# cirsium 2012-06-21 23:40
thanks Mr Kerevan for such a clear exposition.

I favour ditching the pound sterling for our own currency as soon as the transition period is over. We need monetary sovereignty to ensure our independence. It would also allow us to regulate the financial sector properly. In addition, Scotland needs to issue the currency to ensure that we are not beholden to private banks.
 
 
# Old Smokey 2012-06-22 00:12
Reading through the various comments, I think there is a consensus building up in favour of George Kerevan's Option 3 of creating a Scottish pound , pegged on one-to-one basis with English Pound. For this to be set up and maintained for a couple of years, then to be followed with George's Option 4 , to have the Scottish pound float on the international exchange markets
Weither its called a pound, Merk or even Kroner, is irrelevant. The point is to have a mechanism in place that leads towards our own currency and central bank
 
 
# ttwapies 2012-06-22 04:45
@ Andy Anderson

I am not sure if I can agree with your statement that the Bank Of England is "nationalised", in the sense I took you to mean.

True, the 1946 Bank of England Act was "An Act to bring the capital stock of the Bank of England into public ownership and bring the Bank under public control, to make provision with respect to the relations between the Treasury, the Bank of England and other banks and for purposes connected with the matters aforesaid".

However, as I understand it the BoE still retains the Royal Charter it was granted through the 1694 Tonnage Act. As such, it does not have to file accounts, can not be audited, and does not have to provide details of directors or shareholders. Other groups formed under Royal Charter include the British East India Company, the Hudson's Bay Company, the Peninsular and Oriental Steam Navigation Company (P&O), the British South Africa Company, and some of the former British colonies on the North American mainland.

This appareant contradiction has always confused me. How can you transfer capital stock when you do not nesessarily know how much is there to be transferred? Perhaps someone more financialy knowledgeable could explain this one to me?
 
 
# Big Eye 2012-06-22 06:35
Estonia. Set up it's own currency very rapidly after independence and it was tied at a fixed rate to the German Mark at the rate of eight to one. When Germany joined the Euro the Estonians then tied their currency at a fixed rate against the Euro before joining the Euro some years later.

Estonia has a population of 1.35 million and a much smaller economy than Scotland but managed with ease to maintain Economic stability and high growth throughout this period.

The interesting thing about this debate. Is that having been in control of the Scottish economy for over three hundred years and having created a mountain of debt among the highest in the World unionists seem to believe we should regard Westminster and the Bank of England as "experts" on these matters?

I know if I had been investing in shares in any company for a fraction of this period and now found that the shares,after all this period, had only a negative value then I would not be ploughing in any new money and would be looking for anew alternative.

So I will be voting YES
 
 
# Zef 2012-06-22 08:32
Scotland needs to print its own currency. BORROWING your currency into excistence from the banks is insanity (and largely to blame for many of the UK's/USA's/etc. problems)! Why pay interest on almost all your money when you can simply create it debt free as all free nations could do? With the enormous burden of debt and interest payments removed it would greatly increase the prosperity and freedom of the New Scotland.

Ellen Brown and Bill Still have many articles on these issues worth reading and quite a few good videos too.

Temporary measures for transistion are understandable but goal number 1 for independence must be to sever all ties to the financial vampires of London and secure monetary freedom, control and independence for Scotland. Otherwise it will be for naught.
 
 
# Tinyzeitgeist 2012-06-22 15:46
Zef - spot on. Let me add, without energy our currencies of whatever flavour are worthless bits of paper, and what Scotland has is an abundance of energy. We will have no problem in taking an independent Scotland forward using whatever currency mechanism we decide to use. I would prefer it if we moved away from the current system that allows private banks to issue currency with interest and we would be back with the situation we are in today. Modern Monetary Theory (MMT) is the way forward,
 
 
# crazytonic 2012-06-22 09:19
O/T but financial.

Moody's has downgraded the credit rating for 15 global banks. BBC report this showing a picture of the only Scottish bank in the list:
bbc.co.uk/.../world-18542691
Just to give a different viewpoint, Channel 4 news provides a picture of Moody's website:
channel4.com/.../...

Bias? I think just maybe!
 
 
# Old Smokey 2012-06-22 11:04
YOu have to laugh at the BBC and specifically Robert Peston. In the article he tells all that RBS shares have fallen 1%. Which is strange as the BBC kindly show a 'live' trading graph for RBS which clearly shows an upward trend with the line going up since 0800 this morning. Perhaps Peston was looking at it upside down!
 
 
# alang 2012-06-22 09:32
Excellent article George!

However we should remember our history;

The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity. -Abraham Lincoln

“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.” – Sir Josiah Stamp, Director of the Bank of England (appointed 1928). Reputed to be the 2nd wealthiest man in England at that time.

The above quotes are as true today as they were then. It is the Bankers that created this global depression and Scotland needs to seize the opportunity to free it's people from future financial slavery.

Iceland is not much in the news these days because they told the Bankers where to get off. They would not go down the austerity route, instead they only agreed to pay the Bankers what they could afford and look at Iceland today, doing fine thank you very much.
 
 
# alisdair 2012-06-22 19:58
Aye alang, not only that, they jailed, or about to jail the miscreants that caused the problem. The bankers and subserviant politicians that caused their problems. Time to do the same here!
 
 
# Am Fògarrach 2012-06-22 21:24
Mr Kerevan makes the following statement in the KEEPING STERLING section:

What would happen if a bank failed in Scotland? The Scottish Government would be liable for protecting depositors here, even if it was a subsidiary of an English bank. If a bank failed in England, the RoUK Treasury would be responsible for insuring their deposits, even if it was a subsidiary of a Scottish-owned bank.

This is because under European law every bank must be registered to operate in a given country (i.e. take local deposits). That country’s authorities are then responsible for insuring their own depositors, even if it is technically a foreign bank.

What European law, Mr Kerevan? EU law? Isn't that an assumption that independent Scotland would be a member of the European Union -- but that would mean independent Scotland would not be independent. When will the SNP finally understand that fact?

Independent Scotland would be foolish to join the profoundly undemocratic EU. It should conduct its business as a member of the European Free Trade Association (EFTA) of the European Economic Association (EEA) as Norway and Switzerland have done.

Maybe you could tell us about the banking laws of Norway and Switzerland?
 
 
# oldnat 2012-06-22 23:51
Norwegian model

bankenessikringsfond.no/.../...

EEA members are required to comply with the EU Directive on Deposit Guarantee Schemes.
 
 
# indy2014 2012-06-23 21:33
Common sense would be for stability (3) and then (4). If a tidal wave hit Scotland and disrupted our economy the ability to devalue it would mean cheaper holidays for foreign visitors and a recovering economy. Also it goes without saying that if we can do that we can also make Scotland the cheapest place to buy anything in the British Isles. Westminster are scared they could have a shark on their doorstep- and I thought it was just about oil.

Scotland would have the hardest currency in Europe (see McCrone Report) mainly because of the oil. If you were part of Arab Royalty and wanted the safest place to bank a few billion. Scotland is where you (along with a mass of world banks) would be heading. Giving Scotland its rightful place at the head of world banking.

Pound Sterling hasn't been well managed for over 40 years (see Joseph Stiglitz). They put oil money straight into the economy, making the pound too strong for manufacturing (but making themselves look like they had a good economic policy- they still do that's why the pound is always worth more than the dollar or Euro- it's a superiority thing, the same as spending £100 billion over the life of the new Trident so they can sit at the big boy's table).

Scotland needs to be Independent but more than that we need to tell the world that this is the right place to invest in. Thanks to Westminster representing us, a survey stated that out of 180 chemical plants built in Europe. None came to Scotland. Why- they thought Scotland was a third world country with no infrastructure.

Scottish Diaspora, Tartan day, world-wide Highland Games (look them up), even Hawaii is having its 31st year of Scots festivals and Highland Games- are there any English Days anywhere, No!
Connect with our many friends worldwide, make the Scots Diaspora feel like they they're coming home, stop making a fool of them.

I'll end with a passing thought on the economy. If Edinburgh's Festivals are worth £250 million to the Scottish economy. How much would a nation-wide Scottish Independence Day be worth £1 billion, more?
 
 
# border reiver 2012-06-24 09:40
Full independence is the only way forward and the question should be a straight yes or no. It is my opinion that we have won most of the arguments in the general population, but the biggest obstacle to people coming on board is the "economic argument" and we must start to focus on the truth rather than the unionist lies and scaremongering, if we can win this argument we will win the battle.

George Kerevans article a few days ago explained the options very well and how it was in everyones interest to keep a sterling zone but also the options for going it alone with a new currency each option is still a winner whichever way you look at it even though a new currency may be a bit of a balancing act at the begining, but there is nothing that we cant handle as a country.
newsnetscotland.com/.../...
 
 
# Ard Righ 2012-06-25 21:47
"By offering to lend these pounds to the financial system, the Bank sets a floor on interest rates throughout the sterling economy."

No No No No No

To remove interest attached to the money supply in any central lending facility is imperative, it is this interest - or from our perspective- debt on creation of the money that is the root problem, there would be the potential for long term stability on the eradicating of debt (interest) at supply, it only profits banks.
 
 
# Caledon 2012-06-26 11:42
Excellent article, thank you.
 
 
# Caadfael 2012-06-26 15:12
A pleasant wee side-note, the 3% fuel duty rise has been cancelled! See here ..
citywire.co.uk/.../...
 
 
# J Wil 2012-06-26 15:54
Not sure why the SNP are not saying that being attached to the pound Sterling would only be a transitional arrangement until its decided what's best for Scotland.

Perhaps they realise that adding this additional concept would be too much brain loading for the unionists to grasp. Is one item at a time about all they can cope with to avoid exploding heads?
 
 
# CharlieObrien 2013-04-23 00:07
All I can add is that I have always supported independence and even if I was poorer I would still want Scotland to be independent.That said I'm glad that there are many people out there much smarter than me and can work out all the details,and I trust Alex,and the rest of the government to know what is best for Scotland and me.
 
 
# Jo Bloggs 2013-04-23 07:31
A small point: the Danish krone does not float. It was for years held close to the Deutaschmark, and since 1999 has been held close to the euro. This requires great skill on the part of the Danish central bank, but the currency most certainly does not float freely.
 

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