The Croatian National Bank shall be the central bank of the Republic of Croatia.
The Croatian National Bank shall be autonomous and independent, and shall report on its work to the Croatian Parliament.
The Croatian National Bank shall be managed and its operations shall be conducted by the Governor of the Croatian National Bank.
The organisation, purpose, tasks and remit of the Croatian National Bank shall be governed by law.
– Article 53, The Constitution of the Republic of Croatia.
Today sees the launch of my latest contribution to the Common Weal White Paper Project on the very important topic of Central Banking in an independent Scotland.
And the paper itself can be downloaded here or by clicking the image below.
If, as I hope we should, Scotland uses the opportunity of independence to launch our own sovereign currency then one of the departments of government that we’ll need to set up is our own Central Bank. This paper outlines the principles that we’ll need to examine and follow as we design that bank.
One thing that I should make quite clear though before we do that is the distinction between a Central Bank and a Retail Bank (even one that is nationally owned as RBS currently is). The Central Bank isn’t the type of bank that you’ll be able to put your savings into and there are good reasons for this. The purpose of the Central Bank is to maintain the stability of the currency, to guarantee trade between financial sectors and to regulate the economy (especially the financial economy). If it is too directly involved in providing savings and loans to consumers then there is the temptation that it can start setting interest rates and inflation targets to benefit itself, rather than the economy as a whole – a clear conflict of interest.
Onto the paper – one thing that has come out of this research is the diversity of opinion amongst even central banks as to the range of powers that they should have and how they should use them. I’ve tried to give an outline of those options though it’s clear that none of them are particularly “better” or “worse” than any other. Anyone who simply assumes that the way the Bank of England does things is the only possible way or that Scotland must (or must not) follow that model may be in for a surprise.
It is inevitable that some will ask how much a Central Bank will cost to set up and run. Is this cost going to be another “blow for indy”?
Simply – No. A country Scotland’s size could expect to run a Central Bank with a budget of around £140-£200 million per year (roughly. There’s a lot of variation between countries) depending on how much it is charged to regulate the financial sector or to gather and analysis economic data. But it’s important to realise that Central Banks are generally profit making enterprises. They make money on seigniorage (the profit involved in the process of printing and issuing money), the make money by providing financial services like clearing, they make money by issuing loans, and they make money by buying assets like government debt (via instruments like QE).
And if we’re smart enough to ensure that our Central Bank remains owned by the government (as many but not all countries do) then those profits would be given straight back to the Scottish Treasury. The Central Bank would pay for itself within a few years and then remain a self sustaining source of revenue. And that’s even before the impact of adding several hundred – perhaps up to a thousand – very skilled, well paid jobs to the Scottish economy.
Another point to consider is the concept of Central Bank Independence (CBI). This is the idea that a bank should remain not just outside of the retail sector but that it should be detached from and not be influenced by the nation’s government.
There are essentially two extremes on this and the history of central banking is one of a constant push and pull between advocates of these extremes. The first says that politicians absolutely cannot be trusted with levers of power such as the “print money” or “set interest rates” and that they’d tend to pull the first one hard and keep it pulled and pull the second one in time with election cycles rather than economic necessity. It is this principle which drives laws such as the Maastrict Treaty which actively prohibits Central Banks from printing money and giving it directly to the government.
On the other extreme is the principle that says that such intervention is sometimes required – the 2008 Financial Crisis being a case in point. The prohibitions of Maastrict meant that European banks had to find loopholes in order to provide the funds that were desperately needed – hence why QE took the form that it did. This principle also says that detached, “independent” Central Banks run the risk of drawing their talent from a very narrow pool where political appointees, academic economists and other bankers look only to their own ranks. That such an important organ of government as the Central Bank can do this may run contrary to the principles of a democracy.
To ease this – and because something like an elected Central Bank governor carries obvious problems of its own – some banks try draw on a wider pool by opening their governing boards to people like trade unionists, industrial and agricultural representatives or third sector bodies. Sometimes these “stakeholder” boards are given actual voting power; often they are merely advisor. Either way, they allow a bank to develop a compromise system where the demos of the country is better represented, where expertise about the economy is better drawn upon but also where the highly technical skills required for policy implementation remain with the governor and the implementation board.
The history of central banking is a long and shifting one. The evolution has been constant and there’s no reason to believe that it won’t continue – especially as we enter a new phase of economic thinking and new models of governance continue to be tried and tested. Scotland can learn from any of the many models of banking that are out there and if we choose to, it is eminently possible that we could add to that rich history with our own distinct approach.
This work is part of Common Weal’s White Paper Project which aims to reinvigorate and remake the case for independence. We are entirely reliant on the generosity of small donors, both one-off and regular, to be able to do this work. If you would like to contribute, please visit our website at: allofusfirst.org/donate/