In this article we summarise the key advantages of an independent Scotland introducing its own separate currency (the Scottish Pound) at the earliest opportunity after independence.
The main advantages of Scotland having its own currency after independence are:
- Maximum control by the Scottish Government over the levers of monetary as well as fiscal policy to manage the Scottish economy in an integrated way in the interest of people and companies based in Scotland. Without a Scottish Pound (even with a Scottish Central Bank owned and controlled by the Scottish Government), vital economic policy instruments such as interest rates, the money supply, and foreign exchange rates would be substantially under the control of other countries or financial institutions. This makes integrated and effective economic policy decisions for Scotland difficult or impossible.
- Owning our own sovereign currency will represent a valuable asset to the Scottish economy. It will provide the Government of an independent Scotland with maximum flexibility to make liquidity available to fund programmes of public investment to tackle priorities such as the NHS, the climate crisis, investment in new industries and infrastructure such as wind turbine manufacture, and other pressing social and economic problems. With our own currency there will be no need to borrow from foreign Governments, banks, or other investors, and will thereby incur any debt denominated in a foreign currency. There would also be increased scope (if a Scottish Government wished) to pursue unconventional monetary policy measures such as those adopted by the UK Government in response to the Covid-19 crisis in 2020-21. The Scottish Government would also be able to issue Government bonds to ensure the continuing liquidity of private sector financial institutions.
- Adoption of the Scottish Pound is necessary if Scotland is to re-join the EU.
To be clear, a nominally independent Scotland would not be independent in practice if it retained sterling. Interest rates and other important aspects of monetary policy would be controlled by the Bank of England without regard to Scotland’s interests. Since a post-independence Scottish Government, like most other Governments, will likely run a fiscal deficit, financing that by borrowing in sterling would create foreign debt which would severely limit Scotland’s economic policy choices. Scottish Government borrowing costs would likely be higher since it would have to raise funds from the City, and this could mean higher rates on bank loans. There would also be no control over exchange rates.
Recent events and economic research emphasise the advantages of a Scottish Pound and the risks of retaining sterling, even for a limited period. Sterling has been subject to long term decline since WWII and further considerable volatility on the foreign exchange markets in recent months. These factors reduce the attractiveness of an independent Scotland using sterling.
Governments should have their own currencies to support major public investment programmes.
Many economists believe that the world is entering a period where, irrespective of previous ideological positions, Governments will need to take the lead in addressing global challenges such as climate change, wealth and income inequality, and public health crises – all of which cannot be tackled effectively by free markets alone; and that Governments will increasingly look to unconventional monetary policies only available to Governments with their own currencies to support major public investment programmes.
Dr Iain Hardie of Edinburgh University has highlighted the increasing role of Central Banks as ‘buyer of last resort’ for Government bonds, while the experienced international market strategist Russell Napier has argued that the next 20 years will see a substantial increase in capital investment reflecting national strategic priorities using Government credit guarantees to commercial banks. Only Governments with their own currency can provide reliable credit guarantees to banks.
These recent and prospective developments strengthen the case for the early introduction of a Scottish Pound. It will be for the post-independence Government to decide the precise timing. The present Scottish Government should concentrate on making the necessary preparations in advance of independence so that all options are available for a post-independence Government, including introduction of the new currency without delay following formal independence. This is a priority which cannot be over-emphasised.
During the public sector pay disputes this winter, the contrasting policy opportunities for Governments (like the UK Government) with their own currency and central bank compared with that of Governments (like the present devolved Scottish Government) which do not control their currency has become very clear. The UK Government’s claim that there is no more money available to increase pay offers is simply untrue given its ability to run an overdraft at its own Central Bank, the Bank of England, whereas the Scottish Government is much more tightly constrained by its statutory duty to balance its budget. An independent Scotland with its own currency would therefore have much greater flexibility, a crucial advantage when responding to such issues.
John Randall (Scottish Currency Group)
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