If you’ve been watching Scottish Twitter these last two days then you will have come across the sudden debate on currency around Scottish independence. The reaction is down to Andrew Wilson’s most recent article in The National titled “Next Scottish White Paper will learn from 2014 – and from Brexit“. His article details the importance of laying out a framework for Scottish independence (which is absolutely right) and learning from the mistakes of the last referendum. Sadly it seems Wilson is keen to repeat the same mistakes of 2014, suggesting that Scotland having its own currency sooner than later means we would become “a Marxist revolutionary state”.
This was a rather disappointing read and does not offer a healthy contribution to the independence movement. Neither is his view reflective of academic opinion and the Yes movement. George Kerevan has already responded to Wilson with his article on Bella Caledonia titled “Replying to Andrew Wilson: a Scottish Currency is not Symbolism, its Power” . In the past Wilson has had his work debunked by other academics who back Scotland creating a new currency, including Professor Bill Mitchell (“Oh Scotland, don’t you dare!” part 1 and part 2), Professor Richard Murphy (“The Scottish Growth Commission gets its economics very badly wrong“), Professor Steve Keen, economist Laurie MacFarlane (“It’s private debt, stupid: Has the Growth Commission learned from the 2008 crash?“) and Doctor Craig Dalzell (“A Silver Chain“). Even one of Wilson’s own advisors, economist and nobel prize winner Professor Joseph Stiglitz, disagrees with him on the issue of currency.
Other major voices in the Yes movement were quick to call Wilson out and offer alternative solutions.
This gas lighting approach by Wilson is not helpful for the independence movement. His Sterlingisation plan was already heavily criticised at the SNP’s three National Assemblies. This eventually translated into action when the two Yes Gatherings (events which gathered all major Yes groups from across Scotland in Stirling) voted to reject Wilson’s plan and opted to have a new currency as soon as possible.
I wish to lay out why Wilson’s currency case is wrong, and instead we should opt for our own currency. To refute his case I will take head on the six key tests that are laid out in the Sustainable Growth Commission’s report, which are:
Before beginning my case it should be noted that these six key tests are not that relevant to a currency issuing monetary sovereign state. The importance of that cannot be overstressed. If we do not achieve monetary sovereignty with its own free floating fiat currency within a short space of time after independence (roughly 2-5 years) Scotland will be subject to the very constraints Wilson lays out. We will be stuck in a tax and spend system that requires major foreign reserves, harsh deficit constraints, harsh debt constraints and trade cycle dependency. Scotland has to move away from the neoliberal paradigm. There is nothing Marxist about wanting to have our own currency, but it is about removing power from the banks and finance sector.
Yet Wilson is keen to privatise our monetary powers to bankers in London. Why?
When you look at “lists” proposed by different parties they are generally used to oppose change rather than to guide it. Gordon Brown laid out five economic tests to assess if the UK was in a position to adopt the Euro, although these tests were done to avoid such a scenario. The same applies for Jeremy Corbyn’s six tests for a Tory Brexit.
Anyway, let’s kick off this post.
1) Fiscal sustainability
What Modern Monetary Theory (MMT) teaches us is that monetary sovereign nations are far less likely to go bankrupt. This is because they are the monopoly supplier of their own currency and can better control their debt. The ability to control interest rates and the money supply is absolutely vital for a healthy economy that works for all of us. For an example of this click here to see my thread on Japan.
It means we can better tackle debt interest payment and control inflation. Andrew Wilson wishes to give these powers to another central bank in the UK. Does he seriously think the UK will control interest rates and the money supply in Scotland’s favour?
Andrew also wants to keep the deficit at 3% of GDP and the debt 50% of GDP. Why reduce the deficit to such a small number? The deficit is our savings, pensions and financial assets. Reducing the deficit to such a small number hurts regular people. Scotland should only be limited by our real resources. So we when we have fully utilised our labour, skills, physical capital, technology and natural resources that is when we can’t spend any further.
What if Scotland has a large trade deficit? If we have a trade deficit above 3% of GDP or supply is greater than demand then we need to have increased levels to make up for the shortfall. This is to make up for the outflow of our currency or to get consumers spending. If we do not have the fiscal flexibility to spend into the economy in order to balance it then consumers will begin to build up levels of private debt. Individuals cannot own their own debt the same way governments can. Private debt leads to recessions.
2) Central Bank Credibility and stability of debt issuance
If an independent Scotland does not have an independent central bank then it will struggle to join the EU. Chapter 17 of the Aquis Communinitaire says that for new member states “economic and monetary policy contains specific rules requiring the independence of central banks in Member States”. So with letting the UK control our currency we cannot use monetary levers for price stability, since we are not a monetary sovereign country. Scotland could ask the Bank of England to negotiate on our behalf. However the bank is essentially owned by the UK Government. Does that sound like a credible plan to you?
A new central bank might prefer to have a floating exchange rate, as suggested by Professor Joseph Stiglitz. The fluctuations within the UK economy can be damaging, but floating our currency will reflect our productivity and domestic costs.
3) Financial Requirements
Many point out that mortgages/liabilities are held in sterling, therefore sterlingisation makes more sense. But legislation is already in place to deal with these difficulties, such as the EU Mortgage Credit Directive. Mortgage lenders would have to offer mechanisms to protect borrowers against exchange rate risk up to (and including) giving them the right to redenominate a foreign currency mortgage into the currency of their country of residence or of their income. The EU Mortgage Credit Directive is baked into UK law, and would presumably be carried into Scots Law. Scottish residents would have the right to have their mortgages converted into the new currency for an independent Scotland or some other forex risk protection would be applied.
There is also the internationally recognised legal convention lex monetae. Scotland could redenominate its liabilities into the new currency. There is also the solution proposed by economist Warren Mosler (another expert who advocates Scotland have its own currency). You can see his solution in the video below, but replace “Euro” with “Sterling” and the same logic applies.
The Growth Commission puts forward the question: “Would a separate currency meet the on-going needs of Scottish residents and businesses for stability and continuity of their financial arrangements and command wide support?”
Yes, it would. Various forms of tax, that need to be paid in a new currency, create demand as businesses and households must accumulate the new currency. You can also use a Job Guarantee programme to maximise idle resources and labour, increasing our productivity and the value of the economy.
4) Sufficiency of foreign reserves and financial reserves
If we wanted to copy the UK at around 5% of GDP for foreign reserves then we could take our fair share of the UK’s (£11-14bn). That covers our target of around £10bn. But we could go much further. Common Weal have done research which suggests we can build up strong foreign reserves at 20% of GDP. This can be achieved through collecting money in circulation, foreign exchange swaps, bonds and taking our share of UK’s foreign exchange reserves.
5) Fit to trade and investment patterns
Having your own currency means government can better control its own debt. For monetary sovereign countries we don’t see many investors increasing yields to compensate that specific risk (again, see my example of Japan). Demand for bonds can be healthy with low yields. Giving the UK our monetary levers effectively leaves us within the UK neoliberal paradigm. What if the financial elite in London saw an independent Scotland create a healthy relationship with the EU whilst a Brexit UK began to crash?
By giving up monetary sovereignty we open ourselves to real bankruptcy and a liquidity crisis. That sort of scenario is what will push investors to increase yields, whilst others may be hesitant to purchase government bonds.
6) Correlation of economic and trade cycle
If we wish to move away from the UK neoliberal paradigm, which pushes for a private sector deficit and increasing private debt, then certainly there is an even greater case for Scotland to be a monetary sovereign country.
But, as I stress, if we wish to move away from the growing credit bubble economy then we need control of interest rates and the money supply. Why do we want to force investors to look at the UK economy before investing in an independent Scotland? We need our own merit.
There is nothing Marxist about wanting our own currency sooner than later. It is common sense backed by a vast amount of academic material.
Another interesting debate occurred on Twitter around the message and importance of the currency debate, between myself and Wings Over Scotland. It’s worth noting Wings isn’t supporting a particular argument, rather he seems to be playing devil’s advocate.
This exchange brought forward two main arguments presented by defenders of Andrew Wilson’s plan to keep the pound for the start of independence. They are:
1) Proposing to have our own currency in the next independence campaign would not work, because such a proposal is hard to sell.
2) Voters don’t even care that much about currency, therefore obsessing over it won’t actually win us over any new votes.
But defenders of Wilson’s plan cannot have it both ways.
If we accept that voters do not care that much about currency then proposing something new will receive little backlash from the public. Therefore it should be less about the sound of the message and more about the quality. As I have shown above (with links to other experts sharing similar views) keeping Sterling will be far more harmful that adopting our own currency. Therefore it goes without saying we should not keep the UK pound after independence.
But if Wilson’s defenders argue that a new currency will put voters off then they ultimately fail to realise that their own solution achieves the same outcome. Keeping Sterling in 2014 did not work. If gave the Better Together campaign ammunition to repeatedly ask “What currency will you use?”
Wilson’s plan to keep Sterling in the “short” term replaces the uncertainty element of “what” currency we’ll use with “when”. He has refused to set a timetable for a new currency (and remember, his tests are set up to fail). It does not fundamentally address the major uncertainty issue. But the opposite is true with a new currency. By proposing a brand new currency we address the “what” and “when” factors. That only leaves the next unionist campaign to try and debunk the logistics of our argument, which is much harder to do because they can’t reduce the argument to an easy slogan.
The Yes movement does not buy Wilson’s plan, nor do the experts cited above. It’s about time he listens.