I wrote this blog yesterday morning in response to The National newspaper in Scotland coming out in favour of the SNP's currency plan, which is to use sterling after independence without the UK's consent (so-called "sterlingisation"). But I sent it to The National instead, and this morning they have published it, and so I share it now:
IT was disappointing to note that The National has decided to support the SNP Growth Commission on the issue of the currency of an independent Scotland. Along with friends at the Common Weal think tank, I have thrown some effort into seeking to persuade Scottish nationalists that if they are serious in wanting an independent Scotland, then they must also be serious about wanting it to have its own currency on the day it comes into existence.
My fear is that with The National now backing away from this, the SNP leadership will get its way, and that this will be a disaster for Scotland, as I have previously noted.
The National appears to have just two arguments in support of its opinion. One is that it is not clear that Scottish people want a new currency after independence. The other is that Scotland could do just fine without one. The first is probably true, but not relevant. The second is, I think, just wrong.
I accept that many in Scotland will say, if asked now, that they do not want a new currency. People don't like change. They resent learning new things. They are risk-averse. So of course they will say they do not want a new currency. It would be staggering if they said anything else. But that's not the issue. If they want a new country then, in my opinion, they have to have a new currency.
I would be the first to say that no-one could force anyone to use that currency after independence. The option of keeping sterling accounts would, of course, remain. Some in Scotland might, as a result, choose to still hold sterling after independence. No-one can force them to do otherwise.
But what a government can require is that its currency be used. To ensure that happens, all it has to do is demand that all tax be paid in it. That would, for a start, mean that every employee in Scotland would be paid in Scottish pounds to ensure PAYE was correctly operated. And almost all traders would use the Scottish currency in that case, to ensure they could settle their VAT without currency risk. In that case the new currency would be used as a matter of fact.
And people would get used to it remarkably quickly. As evidence, I recall decimalisation in the UK. It was presumed that it would take many months for the changeover to take place and for the existing currency to disappear. It did not: the change happened almost overnight and everyone got on with the new currency, accepting it as a matter of fact. The same would happen with a Scottish currency. The National's argument does not, then, hold water.
Much more important, though, is the argument that Scotland does not need its own currency to succeed. This is just wrong, and in my opinion catastrophically so.
First, it is wrong to argue that Scotland will be a small state as an independent country. In fact, Scotland would be a mid-sized European state post-independence.
Secondly, similarly sized states without their own currency have not won from that lack: the euro has not been good for such countries, for example, even if it has worked for Germany and maybe France.
Thirdly, and more importantly, if “sterlingisation”, which is the SNP's plan (which is using sterling without the rest of the UK's consent, as the SNP is suggesting Scotland should do) was so good then rather more states than just Ecuador, Lichtenstein, Montenegro and Panama would have a policy of this type at present. But they don't. And those countries are hardly examples to be followed, I would suggest.
In that case, let me spell out again why pegging against the currency of another country would be so wrong for Scotland. Firstly it's because governments must have their own currency or they cannot pursue monetary policy to manage their economies. The interest rates that Scotland might set may be very similar to those elsewhere after independence: they tend to move together. But to deny Scotland the option of such a policy choice would be to deny it economic independence.
And without its own currency the Scottish Government would also be unable to pursue a fiscal policy, which is the alternative tool to monetary policy available to any government wishing to manage its economy. Fiscal policy is all about deciding how big a deficit a government wants to run — and deficits are good because they are the way that the currency that a country uses is created.
Quite literally, notes and coins are part of the deficit. And running a deficit is essential when economies are in the doldrums because in that situation this is the only way to pick them up. Without its own currency Scotland could not do that. So Scotland's government would be unable to do anything to prevent economic downturn, except from borrowing from the rest of the UK, which would stimulate the rUK's economy, but not Scotland's.
So a Scotland without its own currency would not be economically independent at all. Which is why the vast majority of states — and almost every successful one barring a few euro-using countries — have their own currencies. Those countries have their own currencies because they know that what I am saying is true. In that case, the people of Scotland should not be mislead on this issue.
The fact is that a meaningfully independent Scotland has to have its own currency. Without it, Scotland would not really be independent. It's that black and white. The Growth Commission is wrong on this issue. No small state can properly and decimalisationThey independently function with any degree of success without its own currency: this is a fact.
The independence movement has to decide: does it have the confidence to be an independent, successful and modern economy managing its own affairs with its own currency, or does it simply want to have apparent responsibility devolved to Holyrood and yet choose to have no economic power to implement anything of consequence in a supposedly independent Scotland for the benefit of its people, which is what keeping sterling would actually mean?
The SNP have to decide. But if they are true to their principles there really is only one decision they can take. Anything but an independent currency is a choice to stay in union with the rest of the UK.
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As I understand it those ‘Scottish’ banknotes have to be backed by BoE notes (or am I about to be shot down in flames again!).
If this is the case then surely one possible answer will be the repatriation of those funds back to a Scottish Central Bank with Scottish notes continuing to be used much as the £ notes were at decimilisation. The one change needed, as at decimilisation, would be the requirement for new coinage.
Scottish notes are at present simply BoE currency issued by Scottish banks backed by BoE deposits
But you have wholly missed the point if you think that reissuing currency is the issue
Willie John says:
“As I understand it those ‘Scottish’ banknotes have to be backed by BoE notes….”
Not ‘backed by’…..what they are is BofE notes with pictures of Brigadoon locations and characters on them to keep the natives under the false impression they have their own money.
Works well doesn’t it. ?
Physical money , notes and coins are about 3% of the total amount of money that is circulating in the economy. The rest is invisible to us. It appears only on computer screens as ledger entries in the accounts of individuals corporations, banks finance houses, and governments.
It’s easy to spot which is which in media discussions. The money we handle is denominated in pounds. The other stuff is denominated in millions, billions and trillions of pounds. 🙂
I am very worried at this development.
Thomas Jefferson is reputed to have said
“I believe that banking institutions are more dangerous to our liberties than standing armies.”
He was thinking mainly of the Bank of England at the time.
But Scotland without an independent central bank has no real freedom at all
I so much agree, but the central bank is such a powerful tool that it must be under the control of the nation itself to ensure its power is exercised for the common good.
Agreed
If we wish to understand how this has actually been done in Britain, we may usefully look no further than the Union of 1707. £ Sterling was introduced quickly in Scotland with the Treaty of Union, including a recoinage. The Scots Mint continued its role, under Article 16 of the Treaty (continuing, effectively throughout the 18th century, but gradually lost its role through ill usage, as a sinecure; but not technically eliminated until the 20th century), and it played an important role in the recoinage. We may look at introducing an independent Scottish currency now, as turning that process on its head; but the precedent, and its successful introduction – to a largely hostile public reception of the Union and the key payment of the Equivalent – was undeniably successful as a practical revolution; and it was a revolution; a subtle, insinuating but decisive financial and monetary revolution. It should be examined carefully.
Before a critic of the relevance of this history surmises that the early 18th century was a much simpler, cruder age; what we find in 1707 is a remarkable level of financial sophistication, and openness to innovation, both embraced quickly, and with huge effects over time: conducted rapidly by two independent Parliaments. In spite of this novelty and its deeper revolutionary nature, a remarkable degree of financial acuteness and adaptiveness is shown by the participants; especially the Scots, because for them this was a radical and immediate monetary revolution, and the changes were fundamental, potentially affecting every basic transaction they made. For England there was also a financial revolution underway, but less direct and less obvious.
Scots had been using Sterling (and other currencies) in trade pre-1707 and adopted the new currency readily enough. This was helped by the Equivalent, a payment of Sterling (theoretically as compensation for Scotland having to take a share of England’s National Debt – a point well worth contemplating); a payment which was made in bullion, notes and Bills (Government paper), confirming the relative financial sophistication and adaptability of the Scots recipients. The old Scots coinage however, remained very widely in use throughout the 18th century by the widest population, and was accomodated without creating insuperable problems. Two currencies used by the population, in functional terms, in harmony. Think of this process now; simply in reverse.
Thanks John
Excellent article Richard, and a much-needed counter to The National’s opinion piece!
However, The National is not known for good subbing so they have published this sentence verbatim without checking –
“No small state can properly and decimalisationThey independently function with any degree of success without its own currency: this is a fact.”
Should presumably be “No state can properly and independently function with any degree of success without its own currency: this is a fact.”
Annoying…
And I checked: they subbed that in….
My thought is that – to put it simply – having its own currency is one of the marks of sovereignty for any serious country, along with its own army and its own law courts. And I’m sure an independent Scotland would wish to be seen as a country to be taken seriously – so it needs all three.
Don’t the Scots want to be in the EU? no independent currency allowed then…
Simply not true
To join you have to commit to join the euro one day
Just as Sweden did and has never done
So your claim is pure nonsense
Why not deal in facts?
Why not deal in facts?
Because on Brit Nat and unionist Facebook sites this sort of ‘shite’ plays really well. (?)
Clearly nothing sticks ….
🙂
Teflon Don says:
“Don’t the Scots want to be in the EU? no independent currency allowed then…”
Cue for a song: (Cue to around 1 min if you’re in a hurry)
https://www.youtube.com/watch?v=SaoxI1DO6Sk
I don’t think the general population (of anywhere) understand how money works or the distinction between fiscal policy and monetary policy. Until someone finds a way to explain it clearly in a way the electorate can buy into then this discussion is going to appear academic and irrelevant to most people.
But SN0 members should get it…..
Adrian says:
“I don’t think the general population (of anywhere) understand how money works or the distinction between fiscal policy and monetary policy. Until someone finds a way to explain it clearly in a way the electorate can buy into….”
More and more people are taking the time to watch some of the myriad presentations on Modern Monetary Theory (and Practice). MMT.
This is where in my opinion it is best to start. The distinction between the role of money supply through government spending and ‘printing’ and ‘destruction’ through taxation is quite clear to see. (The role of banks in the process is deliberately confusing to prevent it being obvious that bankers are getting a free lunch. Bankers aren’t daft, they are devious.) It isn’t rocket science when it’s explained. People become curious when their lives are going wrong and they wonder why. The numbers of people who see their life plans and aspirations being destroyed as their own money supply dries-up are increasing and the ‘pinch’ is moving up the socio-economic scale.
In some, maybe many, cases the ‘pinch’ comes for a person when they know that their work, albeit reasonably paid, is pointless, or the other side of the coin, that they are clearly underpaid and under-regarded despite knowing their work is useful or even vital, while their line managers do bugger-all useful, make their own working lives difficult and get handsomely paid. They notice at this stage that something is very wrong and ‘economic policy’ is behind it. They would like some answers. We can give them some answers……
This blog is also a very rich resource (There’s a huge archive of articles and comment) where the questions are discussed with only the occasional interjection from those who already understand, but prefer the status quo because they are well placed in the existing system. They know they are ‘getting away with it’ at present.
If enough of us put this information out there where Facebookers and Twitterers et al are whingeing and bitching at the wrong targets we’ll get the message across. Mainstream media is generally very pro-establishment and still in the ridiculing stage of covering MMT and it’s possible repercussions. Social media is the modern medium for information exchange. We need to use it extensively. The reactionary forces do.
But SN[P] members should get it…..
And particularly MSPs (and indeed MPs of all parties, most of whom don’t appear to have a clue either) who don’t ‘get it’ are negligent. They REALLY ought to understand what is at stake, and therefore why it matters. If they don’t why are we paying the buggers ? We might aswell have a citizen parliament if ignorance is a qualification for representing the people.
Yes, I hope they do. But they still need to convince the public and influential bloggers etc it’s a good idea and they seem to want to duck the debate. Here’s what we’re up against https://wingsoverscotland.com/were-talking-about-money/
Depressing
Depressing too that Stuart cannot make up his mind
“Depressing too that Stuart cannot make up his mind”
Even more depressing is the poll that asks people who haven’t a clue what sort of currency they would like to use to express an opinion on the subject, and pretend that counts as evidence.
Asking the uninformed for their opinion worked really well with Brexit. 🙁
If we ignore the lessons of Brexit we’ll all be pretending ‘the will of the [Scottish] people’ is to farm unicorns in Brigadoon before we know where we are.
People keep telling me that the decision on Brexit was made in 2016….. Really ??
“……The National newspaper in Scotland coming out in favour of the SNP’s currency plan, …”
What is particularly insidious about this is the impression given that The National is another source of opinion, when in reality given Andrew Wilson is on The National payroll it amounts to his having two voices in the discussion.
One overt, and one covert pretending to offer an objective viewpoint.
To my mind that is tantamount to fraudulent…….. and ‘they’ wonder why the press is held in contempt ?
If an independent Scotland adopts the pound sterling or the Euro as its currency, then the nominally independent Scottish Government would be a mere currency user – a user of a foreign currency – which means that it would be subject to solvency risk. In order to remain solvent, there would be occasions when the Scottish Government would have to implement fiscal austerity and increase the unemployment rate in order to protect its solvency. Such a Scottish Government would be independent in name only. It would not be able to guarantee full employment via a Job Guarantee that pays a fair minimum wage to anyone who wants a job. It would have limited fiscal policy flexibility.
If an independent Scotland issues its own currency, allows that currency to float in foreign exchange markets, and uses a Job Guarantee as an automatic stabilizer to maintain full employment with stable prices at all times, then the government would be genuinely independent. It would be able to keep unemployment at 1 or 2 percent at all times (this would comprise wait unemployment and frictional unemployment). The government would have no solvency risk. The constraints on the government’s spending would be real resource availability and inflation risk.
It is much much better to allow the currency to float and keep unemployment constant at 1 or 2 percent than to be a mere currency user that must allow the unemployment rate to float in order to maintain the government’s solvency. Unemployment inflicts devastating ills on society. Unemployment is economically wasteful and it is cruel. Exchange rate movements, on the other hand, need not be a problem. Australia, for example, has had a floating currency since 1983. Since 1983 Australia’s exchange rate with regard to the USD has varied significantly in both directions without inflicting significant economic or social damage on Australians.
Unemployment = a massive problem
Currency depreciation = a much more manageable problem than unemployment, or not necessarily a problem at all
The SNP need to learn that by advocating that an independent Scotland be a mere currency issuer they are assuming that unemployment is a smaller economic and social problem than currency depreciation. The facts do not support that assumption.
Thank you for such a clear, crisp, succinct and persuasive account.
“I accept that many in Scotland will say, if asked now, that they do not want a new currency. People don’t like change. They resent learning new things. They are risk-averse. So of course they will say they do not want a new currency. It would be staggering if they said anything else.”
That is the key problem here. (I live in Scotland and have been here since 1986, and I well remember the 2014 campaign.) Many No voters voted No at the time (I know a number of them personally) because they were scared to death of what would happen to the country’s finances. This why Alistair Darling & Co made such a huge deal out of ‘You won’t be able to use the Pound’ as a scare tactic.
If we are to win these former No voters over, we need to present the changeover from the UK to an independent Scotland as gradual and not disruptive. Otherwise they will vote No again. And we will lose the independence vote again.
There is nothing the SNP is saying or has done to indicate that they intend to use the Pound indefinitely, or are adverse to a new currency being set up after independence.
However, this is more than just deciding what the country will be like after independence. This is getting people to vote FOR independence in the first place. Scaring them by suggesting our relationship with the Pound will cease the moment independence is achieved is NOT the way to do it.
People didn’t vote No in 2014 because the SNP wasn’t radical enough and wanted to keep the Pound. They voted No because they were scared of losing the status quo. It’s in our favour that the status quo looks pretty shaky just now. But start advocating a major immediate change in our financial structure–and believe me, that’s exactly what the overwhelmingly pro Unionist media will focus on scaring people with AGAIN–and these folk will lose the bottle and vote No again. You can ‘bank’ on it.
Where will another No vote leave a new currency for Scotland and Green New Deal? Nowhere.
We don’t always get everything we want right away. Getting formerly No people to vote for independence is the first step. And if we don’t manage that step, the rest of the steps won’t matter.
There really is no step by step option
Independence means a new currency
Or it’s not independence at all
Jan Foley says:
I entirely agree with with your analysis of the massive effect currency and money uncertainty had on producing a ‘no’ vote in the 2014 referendum. With the benefit of hindsight we were lucky to get that result, because we’d have been in economic basket case by now. Even the current SNP leadership now still doesn’t get it.
So the analysis of the problem is fine, but the solution you propose is not: “If we are to win these former No voters over, we need to present the changeover from the UK to an independent Scotland as gradual and not disruptive. Otherwise they will vote No again. And we will lose the independence vote again.”
The sudden switch-over to a Scottish currency is not in reality going to be sudden. Millions will still have their savings denominated in pounds Sterling and if they choose to keep their money that way until they feel the Scottish currency is ‘safe’ then they will be perfectly able to do so. They may lose-out when they eventually convert if the exchange rate moves in Scotland’s favour, which is quite likely. But peace of mind comes with a bill.
“There is nothing the SNP is saying or has done to indicate that they intend to use the Pound indefinitely, or are adverse to a new currency being set up after independence.” Correct. they are not ‘saying’ that, but Sterilisation is a bear-trap. Sterlingisation in the short to medium term will make the transition to a Scottish difficult and expensive so it will become a long term condition by default. International Bankers are rubbing their hands at the prospect. They will have Scotland’s economy in their sticky fingers, just where they want it. The escape clauses will be prohibitively extortionate.
“Where will another No vote leave a new currency for Scotland and Green New Deal? Nowhere.” Exactly. So Nicola’s caution in going at the second referendum is well justified. There is not currently a convincing majority for Independence according to opinion polling. And there won’t be until people realise the SNP knows what it is doing about the currency. If voters understand the implications of Sterlingisation and that is the proposal (even in the shorterm) for independence I sincerely hope they will roundly reject independence. I will. I’d rather wait a generation and have an independence that can work. We’ve waited a couple already.
“We don’t always get everything we want right away. Getting formerly No people to vote for independence is the first step. And if we don’t manage that step, the rest of the steps won’t matter.”
I agree …but the argument is circular….to persuade voters independent Scotland is going to prosper they have to understand that the mechanism to achieve prosperity is to be a currency issuer and have control of the national economy. It comes that way round, or it doesn’t come at all (or it’s a disaster).
That is the first step that means the next steps will be possible, and at least getting them wrong will be our own damn silly fault not the result of being stymied by financial interests abroad.
This upcoming SNP conference will make or break independence for the next decade. The currency issue is the one that matters. Get that wrong and the rest is vacuous blether.
Agreed
Andy wrote:
“The sudden switch-over to a Scottish currency is not in reality going to be sudden. Millions will still have their savings denominated in pounds Sterling and if they choose to keep their money that way until they feel the Scottish currency is ‘safe’ then they will be perfectly able to do so. They may lose-out when they eventually convert if the exchange rate moves in Scotland’s favour, which is quite likely. But peace of mind comes with a bill.”
This is explained with great clarity and detail in Robin MacAlpine’s book “How to Start a New Country”, which I’d encourage anyone interested in this topic to read as it’s not just an explanation of the myriad tasks (not just in the economy) involved: it’s also effectively an outline project plan for the whole exercise at macro and micro levels. I do hope someone at SNP HQ has read it.
So do I hope that…..
What about Isle of Man? I ask from a point of ignorance, so please excuse me if this is a silly question.
Are they not ‘Sterlingised’ with their pegged Pound, and therefore without the fiscal levers you describe? While we might not want to follow their example, they seem to be doing okay.
They’re not a country
They’re a Crown Dependency
Which I think says it all
So, your argument is philosophical, rather than economic? I have no problem with that at all, but I’m just trying to understand your position.
Again, I stress that I’m no economist, and may even be reaching for the wrong indicators, but Google says that the Manx economy’s GDP/capita is USD 81,672, compared to the UK’s USD 39,720. Even lacking the fiscal levers you describe (and, I admit, pursuing economic policies we may not want to emulate), they appear to be doing better economically than the UK as a whole.
Please note I’m not wedded to any position here, just trying to make myself more informed.
Thanks in advance!
The excess is because they are a tax haven
In the UK profits make up less than 30% of GDP
In the Isle of Man more than double that
The people of Douglas are not seeing that income
Andy wrote:
“More and more people are taking the time to watch some of the myriad presentations on Modern Monetary Theory (and Practice). MMT.” The problem here, Andy, is that all such evidence is anecdotal and I’d guess that the vast majority of the UK’s voters know nothing of MMT and care even less. Richard has stated on this site that MMT is not widely taught in Academia and that is a truly worrying situation: if tomorrow’s journalists, politicians and thinkers, never mind the electorate, aren’t getting this taught at student level, it’ll take decades, if ever, for the penny to drop in wider society.
Perhaps if a new nation embarking in a new economic environment could be persuaded to embrace the principles of MMT and issue its own sovereign currency it might waken up the people of the UK to the fact they’ve been taken for a bunch of mugs (for ever) by people who believe they have the right to rule the others? Now, can anyone think of a country that might be in a position to try this…..?
Ken Mathieson says:
“[…..] Now, can anyone think of a country that might be in a position to try this…..?”
Hmmmm…. I can. The one that was so central to the first Enlightenment……