A Silver Chain

“Whilst the purpose of this report is to specifically critique the report produced by the Growth Commission it is done so in the spirit of the principle laid out by the First Minister on the latter’s publication. If the Growth Commission report was produced to be discussed, then this report seeks to add to that discussion”

My latest report for Common Weal was been published this week. A Silver Chain takes an in-depth look at the monetary policy proposals suggested by the Sustainable Growth Commission.

Those proposals were for an independent Scotland to unofficially keep using the pound sterling – outside of currency union like the one proposed in 2014 – for a period of time until Scotland’s economy is deemed ready for the launch of its own independent currency by the means of meeting “six tests” covering areas such as deficit, foreign reserves and economic need. Our report suggests that the plan proposed, especially alongside the “six tests” will make it difficult, if not impossible, to launch an independent currency and that the proposals risk locking Scotland into a future of permanent Austerity not dissimilar to that experienced by some areas of the Eurozone.

The report can be read here or by clicking the image below.

Silver Chain Cover

My object isn’t Sterlingisation per se – it can work given certain circumstances – but those circumstances look unlikely to be met in the Scotland that the Growth Commission has proposed to create.

The “six tests” in particular seem to try to pull Scotland away from creating its own currency and could well leave Scotland in the grip of London financiers whose sole motivation would be to extract as much wealth from Scotland as possible.

Briefly (and I encourage folk to read the full paper for more detail), the six tests and why I believe that they are a barrier to a Scottish currency are:

  1. Fiscal Sustainability – The Growth Commission would limit Scotland to a 3% of GDP deficit and 50% of GDP debt ceiling. This would prevent Scotland from spending during a financial down-turn (precisely when government spending should increase) and would increase your personal debt if Scotland’s overall trade balance isn’t at least a 3% of GDP surplus. This particular target also seems to be at odds with the claim in the report that it would not lead to Austerity because the Scottish Government would increase public spending in real terms (i.e. after accounting for inflation). But the Fiscal Sustainability rule states that public would also be limited to 1% below GDP growth. This means that if GDP Growth is less than inflation (current GDP Growth is about 1% per year whilst inflation is about 3%)  then public spending would shrink in real terms. This is Austerity.There’s another problem with linking public spending to GDP growth this way. If the economy experiences “wageless growth” (perhaps by a foreign company re-domiciling itself in Scotland) then GDP would grow but tax revenues might not. Without additional tax revenue, public spending couldn’t increase no matter how high that growth is. On the other side of the the problem, perhaps the Scottish Government closed some tax avoidance loophole and brings in additional tax revenue without growing GDP. This additional revenue couldn’t be spent to increase public spending either because of the link of spending to GDP. Either way, spending could end up severely and unnecessarily constrained due to an arbitrary deficit rule.There’s also the question of whom Scotland would borrow money from to fund any deficit at all (which would be the case as a Sterlingised Scotland would be unable to create money or employ Quantitative Easing). The London money markets who would no doubt dominate such funding would serve to maintain a link to the UK economy and may well demand conditions on loans such as demand to cut public spending or sell public assets (i.e. Austerity). Even if this doesn’t happen, an economic crash in London as happened in 2008 could lead to those financial institutions being unable to loan money to Scotland at all – an economic crash in rUK could lead to a liquidity crisis in Scotland.
  2. Central Bank credibility – Despite the branding exercise in the Growth Commission report, the institution set up to manage money in a Sterlingised Scotland would not be a Central Bank. It would lack many of the key functions of such a bank and would instead act like a monetary institute. One of the consequences of this may be to make it much harder for an independent Scotland to rejoin the EU as it may be difficult for it to meet membership requirements such as Chapter 17 of the Aquis Communinitaire. The politics of Brexit may prove critical as the EU’s relationship with Scotland would likely be flavoured by the EU’s relationship with the rUK and the indirect links between all three.
  3. Financial Requirements – The fear that an independent Scottish currency may result in people who have mortgages and similar liabilities being paid in a different currency from their debts – exposing them to transaction charges and possibility foreign exchange fluctuations – is a real one. However, laws like the Mortgage Credit Directive (an EU law written into UK law in 2015 thus not affected by Brexit) mandates that companies should provide measures to mitigate such risks up to an including offering the redenomination of such liabilities into the currency of the customer’s residence or income.The more serious risk to such liabilities comes from Sterlingisation which would tie Scotland to the interest rates of the Bank of England. Should the UK’s property market overheat again and should the Bank of England raise interest rates to suppress it, it would affect the Scottish housing market whether or not it was similarly overheating. Should the Scottish market be on a downturn at this point, an interest rate rise could well trigger a market crash.
  4. Sufficiency of Foreign Reserves – The tools available to create foreign reserves in a Sterlingised country are very different from those available to a country with an independent currency. With an independent currency on day one, Scotland could request a share of reserves from the UK as part of debt and asset negotiations (it couldn’t do this ten years after independence if it wanted a currency later) and could use tools like currency swaps with other Central Banks who wanted £Scots so that their home businesses could trade with Scotland (a Sterlingised Scotland would have no currency to swap). Further, the level of reserves deemed “adequate” for a Sterlingised country may be different from those of an independent currency. This mismatch may make it difficult to transition to an independent currency later.
  5. Fitness to Trade – Brexit is identified in the GRowth Commission report as a “clear and present danger”. The UK has already experienced a substantial loss of value in the Sterling and the prospect of a chaotic and unplanned Brexit may cause another. Sterlingisation exposes Scotland to the economic decisions of a UK utterly beholden to London financial markets (another danger identified in the report) which substantially reduces Sterlingisation’s fitness to trade with respect to the Scottish economy – especially if the intention of independence is to diverge Scotland away from the UK’s low wage, low security, low quality of life, consumer debt economy.
  6. Correlation to Business Cycles – The report states that Scotland should only get an independent currency if and when Scotland’s “economic cycle” delinks from the UK’s (i.e. booms and busts happen at the same time north and south of the border). Sterlingisation will act to synchronise those cycles (and prevent efforts to build an economy not based on booms and busts!). As stated above, if rUK’s economy overheats and the Bank of England raises interest rates to cool it down, it’ll freeze Scotland’s economy regardless of what is happening up here. The reverse scenario is also true where a lowered interest rate would overheat Scotland’s economy.

Sterlingisation could work for Scotland given favourable circumstances but the Sterlingisation plan in the Growth Commission report is a recipe for permanent Austerity in Scotland  – regardless of any desire within the report to the contrary – and links the Scottish economy to the UK’s to an unacceptable degree (in some respects, even more tightly and more constrained at present). The plan here certainly does not lay out a timeline towards an independent currency and in many ways acts against the creation of one.

Common Weal’s plan for currency takes a very different path with a defined timeline of creating one during that transition period between a referendum and formal independence such that the currency would be fully functional and ready on day one of independence.

I understand the Growth Commission’s desire for an option focused on continuity and familiarity but I believe that that option can be much better met through our own currency initially pegged to Sterling rather than informal Sterlingisation (we’re already used to using multiple versions of banknotes – something nearly unique in the world). This would grant a security of pricing, especially during the transition period, but also gives Scotland the option to change or move the peg should the economy require it. This can be done very quickly, as evidenced by Switzerland in 2015, but should a Sterlingised Scotland somehow meet the “six tests” and decide it needs a new currency, it would then have to approve and move through the three year process of launching that new currency. Almost an entire Parliament would be dominated by that decision and events may well unfold during it which complicate the process. It’s a much less flexible, secure and sustainable position.

Ultimately, the Growth Commission’s report is a discussion document. It lays out one possible scenario. Common Weal has laid out another. Other groups may well present their own options as well (and this should include pro-Union groups and their responsibility to show how their vision of Scotland in the Union will be better than the one we’ve got today).


The SIC conference in November 2017 – More than 90% of delegate favoured an independent currency

The National Assemblies planned by the SNP as well as party branch meetings and other public events have the chance now to discuss the plans that have been produced and to pick the one they prefer. Certainly, my experience so far is that almost all activists want an independent currency for an independent Scotland and I’m sure that most of them want it as soon as possible.

I want to hear your thoughts though. Let’s get that discussion going.

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15 thoughts on “A Silver Chain

  1. “There’s also the question of whom Scotland would borrow money from to fund any deficit at all (which would be the case as a Sterlingised Scotland would be unable to create money or employ Quantitative Easing). The London money markets who would no doubt dominate such funding would serve to maintain a link to the UK economy and may well demand conditions on loans such as demand to cut public spending or sell public assets (i.e. Austerity).”
    Cutting public spending severely so as to eliminate the deficit and run a budget surplus so as to repay a large commercial loan entirely defeats the purpose of taking out the loan in the first place, which was to pay for the deficit.

    What are the public assets that the Scottish government owns or manages which are practically speaking available to be privatised and offered to banks as collateral for a commercial loan? What assurance could be given that any such assets could not be taken back into public ownership without compensation?

    There is a considerable doubt in my mind that such government deficit loans could be raised from commercial banks. I don’t know of any examples of this ever having been done.

    The reality is that the deficit of an independent Scottish government would be funded by a central bank or not at all.

    It is governments and their central banks which bail out commercial banks. It doesn’t happen the other way around.

    It is embarrassing for Scotland that our First Minister would think in such terms, giving the credibility of her office to such a pathetic and clueless report.

    It is rather like Deputy First Minister sleeping out rough that night to draw attention to homelessness, only now it is the First Minister begging on the streets with a cardboard sign scrawled on it “Indy Government deficit to pay for, please give generously”.

    I am sorry Craig but all the plans and advice of Common Weal are falling on the deaf ears and blind eyes of such an incompetent shower as Sturgeon and Wilson.

    If Common Weal wish others to take your carefully crafted ideas seriously you all ought now to call for the resignation of First Minister Sturgeon, as someone patently unfit to lead the country or the Scottish National Party towards independence.

    Otherwise, you all might as well join the Nicola Sturgeon Personality Cult because that is all the Scottish government has become.

    Peter Dow
    Science and Politics


  2. A new Scottish currency is the best solution. We all know it here. Here’s the issue though: it will lose the vote. It’s great to have the best plan for Indy Scotland, but it does us no good if we can’t win it.

    A Scot Pound would give Bitter Together 2.0 campaigners (and let’s not forget, 99% of the papers and 100% of the TV and radio) a very easy to use, simple and effective soundbite to repeat on each and every doorstep, news report and papers column: “The SNP will force on you a banana currency which will crash on day one – you will lose all your savings, your pension will be worth nothing, and your mortgage with a London bank is in GBP so it will skyrocket and you’ll lose your home.”

    I know it’s BS, you know it’s BS, the No campaign will know it’s BS too – but it doesn’t matter, because it will work. It will push on primal fears of losing the basic means to survive.
    Yes, we can counteract with (complicated and long) facts and answers, and provided we manage to get the same exposure (unlikely) it might turn back some voters – but not all of them. They won’t stick – the scare stories will. We’d start already on the defensive, rather than the offensive. It would shape the entire campaign. And that primal fear will still be lurking behind in the more conservative (small c) and risk-averse voters, and will win the day for the unionists.

    If we had half the TV channels on our side and a good chunk of the papers, like in Catalonia, maybe. But with the current status of the media? No way.


    • @Luca
      Well I was going to respond but you have already done it. I could not agree more. Politically we would lose the war.

      Craig whilst we all know that a Scottish Pound is the BEST option we must firstly WIN the war.

      So far the naysayers of the Growth Commission have mainly been Yessers disappointed with the report for all the reasons that you have outlined. The BritNats not so much, but they will be sharpening their pens and ensuring that Luca’s points above are front and centre of the next campaign. IMHO it would be better therefore to be a bit more subtle in our rejection of the GC, by perhaps rejecting some of the “6 requirements” prior to a Scottish currency being instituted and beefing up the Central Banks capability in the GC to enable it to happen from day one or as required. The Asset split can be identified from day 1 and can be placed into actual accounts as required, for example by opening an account with a Foreign central bank in the currency required ie Switzerland for Swiss Francs etc.
      There are solutions we just have to be subtle and put our thinking caps on.


      • Just reading some BTL comments in the Herald and it would appear that the “big stick’ with which to beat up the SG is the fact that the GERS numbers were used as the starting point for the GC report, ie we are subsidy junkies and this report suggests that the GERS figures are correct. So we need 14bn gers plus 5bn debt share every year to stand still.
        Looks like the next few months could be lively with economics!


        • Maybe we need a model which can compare the various options under similar parameters. ie growth at various percentages then using various beexit scenarios, commonweal and GC options so that we can readily see the impacts. Publishing this comparative might be the simple way of getting the message across. Should be able to do this with a spreadsheet and then publish the results. Sorry it’s more work to do, hopefully you have got a suitable spreadsheet or near enough to be able to do this quickly.


    • @Luca
      There is a way but not with Sturgeon as First Minister.

      Sturgeon clueless on independence strategy too

      As an experienced YES campaigner and very strong supporter of Scottish independence, I would advise that at independence marches, the marchers should do 2 things –

      1. CHANT, the following …

      “Independence, YES!
      Sturgeon, NO!
      Enough! First Minister,
      It’s time to GO!”


      2. BURN AN EFFIGY of Nicola Sturgeon.

      I will explain why I, a pro-indy supporter, would suggest this course of action.

      Sturgeon has NO PLAN to win a future independence referendum because she has NO PLAN to remove the BBC unionist bias which rigged coverage of the referendum campaign in 2014.

      So if we rush headlong into indy-ref 2 with Sturgeon as First Minister, don’t be surprised if we LOSE AGAIN.

      Unlike Sturgeon, I do have a plan which can WIN independence.

      The YES movement needs a new First Minister who will pledge to manage the police and courts to allow independence protesters to occupy BBC premises in Scotland to press our demand for home rule of broadcasting to end the rigging of Scottish politics by the UK’s state broadcaster.

      So independence marches must highlight our dissatisfaction with Sturgeon as a clueless SNP leader and a clueless First Minister.


      Of course ordinary Scots considered as gospel the BBC’s propaganda which they have been brainwashed with all their lives.

      So typical is the occupation strategy that the UK government already occupies BBC premises in Scotland – with BBC managers – who force the BBC’s journalists to broadcast unionist and royalist propaganda. The only so-called “nationalist” coverage the BBC broadcast are puppet nationalists, like Salmond and Sturgeon, whom they support in order to tame and to contain genuine independence movements within boundaries set by the BBC and their UK masters.

      Actually, we DON’T live in a democracy where free speech is a right that is encouraged and treasured.

      We live in a kingdom where officers and courts of the crown deny democratic and legal human rights, arresting, fining and jailing citizens for simply exercising their right to free speech.

      I can testify personally how my freedom of expression has been crushed by police and courts on many occasions.

      Indeed it is precisely because the kingdom DOESN’T defend free speech – not even when innocent lives are at risk from disregarded dangers – that for reasons of public safety in Scotland, we must gain independence from this kingdom, to do a proper job of defending free speech in Scotland.

      Peter Dow
      Science and Politics


  3. The drawback with the introduction of a Scottish Pound pegged to Sterling is not just the threat of continual devaluation as the English economy underperforms going forward but also the establishment of a central bank with sufficient gold reserves or foreign currency reserves (approx. 10% of Scottish GDP) to make the credible to fend of speculators.
    One cannot assume that London would cooperate in a national debt/currency reserve swap.
    A possible solution economically (but a hard sell politically) would be a Scottish pound pegged to the Euro maybe with some arrangement with the ECB, possibly a commitment to join the Euro depending on the outcome of a referendum on the issue.
    Or to simply use the euro without actually joining but this might rule out arrangement with the ECB.
    If Ireland is used as an example, only when Ireland started using the Euro with the ECB as the lender of last resort did Ireland remove the control of london over its economy, improve growth and stop the decline of its population. You lose control of interest rates and have to take the debt/GDP constraints into account but if the aim is to align with social democratic economies in Northern Europe its a price worth paying.


    • I’d refer you to Peter Ryan’s paper on foreign reserves here: https://www.commonspace.scot/articles/11228/report-backing-scotlands-currency-foreign-exchange-reserves-independent-scotland

      Remember there’s a distinction between pegging the £Scot to Sterling during the independence transition period (where the £Scot would operate more like an accounting unit than a full currency anyway thus wouldn’t be fully traded and couldn’t be speculatively attacked) and keeping the peg after independence. That’ll be a decision for the Scottish government and based on the merits of the time. It may well be that floating the currency at that point makes sense. BUT if the government WANTS to keep a 1:1 link with Sterling, my contention is that a pegged currency is a far better way of doing it than Sterlingisation.

      I should note that it’s exceedingly unlikely that the Bank of England will not agree to a currency swap. Businesses in rUK that trade with Scotland will need £Scots to buy goods/services and the Scottish National Bank would be the monopoly creator of £Scots. If the ECB was feeling more co-operative, then I’d just suggest swapping Euros then selling them for Sterling. Problem solved.


      • I agree that there is little prospect of the Bank of england agreeing to a currency swap. Scotland should expect no help from help from england in developing its economy.
        I think the links to Sterling should be limited from day one of Independence. If London is foolish enough
        to follow through on its threat to act as a tax haven and go in for money laundering on a industrial scale then the EU (and possibly US) sanctions will be fast and furious.


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