As promised, I can finally reveal my work examining Scotland’s currency options going forward into the next independence campaign.
My report has been published through Common Weal and can be read here or by clicking the image below.
In it I first examine the macroeconomic considerations which go into selecting a currency option, chiefly looking at the interaction between movement of capital, interest rates and exchange rates. It turns out that it is impossible to have full control over all three at any one time so all currency options entail therefore some degree of risk or management requirements including the founding of infrastructure such as a Central Bank. All options have their advantages and disadvantages, their risks and rewards.
Several currency options are then laid out alongside some of those advantages and disadvantages. The principle ones are:
1. Currency Union with rUK
Gives Scotland more control over currency than it has now but limited control compared to most other options. Subject to “veto” by rUK and may well be impossible in light of a post-Brexit rUK and an independent Scotland inside the EU.
2. “Sterlingisation”
An easy option to do and would only require the set up of a fairly lean monetary board rather than a full central bank. Would not require minting of new money. But Scotland’s economy is a larger fraction of the rUK’s economy compared to other countries which “Sterlingise” like Ecuador to the USD, Andorra to the EUR or Liechtenstein to the CHF. This may result in divergent and sub-optimal economic choices being made by the BoE which would not be obliged to consider Scotland even as an aggregate within the UK. The UK would also be able to keep all seigniorage resulting from minting of money which would be a loss to Scotland of about £50 million per year.
3. £Scot – Pegged, Flexible or Floating
A new, independent £Scot (or “Pound-Scot”) would offer full monetary sovereignty and whilst an initial peg to Sterling would offer a sense of continuity in the immediate aftermath of independence the country should be prepared to move or remove the peg at such time as it becomes advantageous to do so. This could be done by, for example, pegging to a “basket” of currencies depending on our trading partners so that, post-Brexit, if (for example) our economy leans towards the EU and rUK diverges away on it’s own path, our currency would automatically stabilise towards the new trading weights.
4. Euro
The Euro was a surprisingly popular option in my recent currency poll which placed it as around three times as popular as the combined Sterling options. It may well be good for Scotland, being a trading exporter, as the currency is being kept artificially weak compared to stronger former currencies like the German Mark. However, the loss of monetary sovereignty and, especially, the lack of a formal exit protocol if the union disintegrates may cause concern. Whilst Scotland couldn’t formally join the Eurozone on day one of independence there would be nothing, in theory, stopping us from running a referendum campaign on the basis of either unilaterally using the Euro or trying to join as soon as possible.
Other options such as a Gold or Oil standard or of using a Cryptocurrency like Bitcoin are also discussed within the full paper.
All in, I’ve concluded that a £Scot would be the right option for an independent Scotland. This would initially be pegged to Sterling but, as stated above, we should not shy away from moving that peg if it becomes to our advantage.
Once we’ve decided on launching our new £Scot, practical matters like the setting up of a Central Bank (citing potential models like Norway, New Zealand or Slovakia) will form the heart of a new macroeconomic policy and the importance of getting that right for us cannot be understated. This would be a good opportunity to launch schemes such as a National Investment Bank which use its place within the Central Bank to intervene in the Scottish economy where desired and to help tailor it to meet our needs. Other considerations like the size of a foreign reserve (around 5% of GDP. Roughly £10 billion) and how we could build it are examined too.
Finally, the design and launch of our currency should be undertaken in a participatory manner. The actual practicals are comparatively straightforward when managed well but a new country needs a strong sense of commitment and ownership from its citizens and the participation in the design of our new currency could be an important step in this regard.
Please read the full report to dive into the details of the analysis and I do hope it provides a useful and important source to take with us into the new campaign.
Press Coverage for the Report
Russia Today
A live interview on the evening news covering the Sterling peg and the possibility of changing it as well as my opinions digital or cryptocurrencies.
CommonSpace
Summaries of the nine currency options and links to the report itself.
The National
Front page feature and a two page article on the report as well as summaries of the nine principle currency options.
The Scottish Daily Express
A slightly less than positive spin on the report focusing largely on the £10 billion sum estimated to be required for the foreign reserve fund. My work is now a “body-blow to Sturgeon’s independence plot”.
The Common Green 
You ought to be aware that your report has been interpreted by Stuart Rodger on Common Weal as follows.
‘Option 6: Scottish Pound, free-floating
This would give much more flexibility and mean the value of the currency would fluctuate along with economic circumstances, but it’s a riskier move. This is because it the early days of independence, market speculation could “seriously affect the price of the currency”.’
https://www.commonspace.scot/articles/8920/explained-9-new-independent-scotland-currency-options-laid-out-new-report
Whether or not Stuart has fairly interpreted your report, Stuart’s conclusion is not correct.
Beware the opportunities for currency speculators making a killing by daylight robbery of the Scottish central bank and commercial banks trying to defend a one-sided pegging of an independent Scottish £ to a Bank of England £ when the Bank of England doesn’t honour the pegging rate.
Currency speculation with a pegged currency works like this.
The speculator borrows a lot of the Scottish £s from the Scottish banks and exchanges them for the currency to which it is pegged by the Scottish central bank, for example, to Bank of England £s.
Very soon the Scottish banks run out of Bank of England £s and ask the Bank of England to exchange Scottish £s for Bank of England £s at the pegged rate.
However, the Bank of England is under no obligation to honour the pegged rate and then refuses to exchange the Scottish £s for Bank of England £s at a one for one rate and at best offers a market exchange rate.
At this point the Scottish banks can no longer honour the pegged rate either because they have run out of Bank of England £s.
The only way to exchange Scottish £s for Bank of England £s is at the market exchange rate, with Scottish £s being worth less than Bank of England £s.
Supposing for simplicity, the Scottish £ falls to the value of half the Bank of England £s on the market.
The speculator then uses half of the Bank of England notes he bought with the previously borrowed Scottish £s and exchanges them at the new market rate of 2 for 1 to buy back all the Scottish notes he borrowed in the first place uses them to pay off the loan, making a 50% profit for the speculator and a 50% loss for the Scottish banks.
The moral of the story is that not everyone whose views about currency options are published on Common Weal knows enough to be governor of a Scottish central bank.
___
Those who forget the lessons of history are doomed to repeat the same mistakes ….
“In politics and economics, Black Wednesday is 16 September 1992, when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after it was unable to keep the pound above its agreed lower limit in the ERM. George Soros, the most high-profile of the currency market speculators, made over £1 billion in profit by short selling sterling.”
https://en.wikipedia.org/wiki/Black_Wednesday
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It’s true that a speculative attack on a pegged currency (e.g. ERMI and Black Wednesday) is a risk which would need to be managed, it’s also true that a speculative attack can occur on an unpegged currency (Brexit. Which led to an even larger drop in the pound than Black Wednesday and the BoE is implementing a multi-billion pound security fund and is now considering zero or negative interest rates in response).
There’s no option that’s risk free. There’s no option that’s, really, particularly risk prone (countries, including the UK, have operated pegged currencies successfully for decades at a time). The trick is recognising the particular risks to your own situation at any given time and making sure you have the tools at your disposal to deal with them.
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That which really needs managing appropriately is the Scottish economy, by managing for growth in the economy, not by mismanaging the economy into stagnation or recession, foregoing the advantages of growth of increased wealth and prosperity for the country and the people.
If a pegged currency stagnates the economy but a floating currency grows the economy, then what are the really significant risks of the policy options?
Aren’t the real risks that must be managed, the trivial risk to value of the currency by increased government borrowing or the devastating risk to the growth prospects for the economy by pegging the currency?
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hi common weal i say hello to robin mcalpaine and all the gang i had being watch this with interest i am a guy from cork i think the best option is a indy currency should call it the bruce pound a 100 pound scottish note known a bannock burn keep it going cause joining the euro worse thing ireland did and pegging it to stirling
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Regarding the Daily Express headline, Scotland needs £10BILLION in reserve to start own currency, warns think tank.
No, Scotland wouldn’t need any foreign reserves AT ALL to have its own floating currency.
It’s only swivel-eyed loon countries that try to peg their currency’s value to that of another – like today’s Egypt, for example – that think they need foreign reserves to try to hold back the tide and prop up the value of their faltering currency on the currency exchange markets.
The Scottish government does today however need about another £10 billion a year in borrowing powers to invest for strong economic growth.
But that’s borrowing in our own currency (the £) from our own central bank (still the Bank of England), which can be sourced from national saving.
Equally, an independent Scotland could likewise source £10 billion a year from its own savers.
Foreign currency not required.
NEXT!
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I don’t know enough (anything, really) to contribute any sort of analysis. I was, however, listening to a Corbett Report earlier this evening where the narrator was fairly excited about the impact of some new agreement, made on 1st October, between the IMF and Chinese SDR bonds. There were links I couldn’t access but it seemed to be about a global currency basket. Given I know heehaw about any of this stuff, it might have nothing to do with anything.
If I had to choose anything, (pressed for an answer, despite my ignorance) I’d opt for an independent currency as it seems to me that every bloody thing that’s wrong with the UK and the world in general revolves around money and pursuit of safeguarding energy resources.
Scotland has so much energy potential and resources (particularly in renewables). A greener Scotland, showing the world the way forward, not tied to anyone else’s agenda. Sure, we want to trade and promote Scotland and see it truly flourish but not just to emulate the worst excesses of what has brought the world to this brink. I say we dare to be different. Really different.
If the worst comes to the worst, we can always barter! I just want out of this UK union to give our country a chance to shine as an example of what civic engagement and freedom could be.
Anyway, that’s my tuppence worth. Or shekel. Or whatever we end up using. Just don’t let us be tied into something that restricts the options we have to be different – better than what has been peddled since forever – that only money matters.
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The IMF maintains a kind of reserve foreign reserve denominated in SDR (Special Drawing Rights). The value of the SDR is pegged against a basket of multiple currencies which is updated every five years. The news you saw was about the start of the latest revaluation which includes, for the first time, the Chinese renmimbi.
SDR isn’t a currency per se as private groups or individuals can’t own one or use them to trade, they can only be owned by countries for the purposes of backing up their own foreign reserves (the IMF acts as the world’s Lender of Last Resort in this respect) and even then countries wishing to withdraw some of their holdings can only sell them to other countries in exchange for currencies in which the SDR is denominated (USD, EUR, JPY, GBP and RMB).
Some countries can and have pegged their currency to the SDR though the IMF warns that this may not suit a particular country’s own economy. Nevertheless, some countries, particularly in the developing world, still do so as they can benefit from the transparency of having an independent and globally trusted organisation define their peg rather than be accused of corruption by setting or mismanaging it themselves. This highlights that currency choice and policy has as much to do with politics as it does economics.
As for the rest of your points, I pretty much agree that the important thing is to maintain the ability to make our currency choice. This is probably more important than the actual choice made. After all, things change and we need to be able to change our minds when they do.
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This is the key thing, having the power to change our minds. If pegging to Sterling is hurting us then we peg against something else (Euro, a basket) or we float it.
Such options are not set in stone.
I grew up in NZ where the actions of the Central Bank and the impact on consumers of where the NZ$ is are active discussions and rightly so. Such things are healthy in a democracy and should not be feared or shied away from. People finding the cost of the latest consumer desirable is beyond them because their currency is weak will complain about it. However people are also capable of understanding that having the currency set to benefit exports is a good thing for everyone. NZ earns its way in the world and is currently running a small surplus. It is a political aim for NZ to run a surplus if possible.
Surpluses have usually been used to retire debt, which action tends to increase the surplus (no longer servicing that debt). It went into a big, historically, deficit as a result of the earthquakes, but that government spending boosted the local economy as a result of the reconstruction effort. People got paid, plant was hired/bought, materials were sourced etc. etc. As a result the deficit reduced and now there is a surplus again. Thus temporary deficits for necessary national projects can be good things, borrowing to invest.
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Absolutely agree. New Zealand’s open and frank discussions on currency (especially in the early part of the century when discussions about re-pegging the NZ$ were being published) played a valuable role in informing this paper.
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