Scottish Currency Group's open letter to SNP leadership candidates
THE SNP leadership election has coincided with baseball’s Spring Training competitions in the USA, in which leading teams establish their strategies for the season, and players demonstrate that they are match fit.
For the Scottish Currency Group, a credible plan to introduce a currency soon after independence is essential to a winning strategy. The Group also believes that a match fit First Minister will quickly dispense with muddled thinking about ‘just using sterling’.
We can make devolution work better for Scotland while working towards independence.
Renegotiating the Fiscal Framework with the UK Government will be an early opportunity. The current arrangements give the Scottish Government authority to manage many services, but almost none to raise the revenue needed to pay for its priorities. Many economists believe that the devolution settlement cannot be politically stable unless the Scottish Government has the authority to run a deficit.
That would make the Scottish Government much more like the government of an independent country, setting its own priorities across its areas of competence, while issuing debt against the promise of the future revenues resulting from public investment.
Both the Scottish and the UK Government would need to accept that such debts would be issued without any recourse to the UK government. To be clear, debts of a sovereign state, as Scotland will become on independence, are repayable in the currency of the State, which means Sterling bonds issued now would be repayable in Scottish currency if not repaid before independence.
In much the same way, our currency proposals, which reflect the opinions of professional economists, are not radical. Even vigorous opponents of independence, like Ronald MacDonald of the University of Glasgow, are clear that Scotland having its own currency will be essential if independence is to succeed.
The panel of economists which advised the Scottish Government before the 2014 referendum argued that the choice was between a Scottish currency, and a currency union with the residual UK. We all know the history of the currency question in 2014.
For one referendum campaign to flounder on currency was unfortunate. To lose a second one the same way would be much more than carelessness.
Claiming that after independence Scotland will still “just use sterling” makes no sense. It gives Unionists an obvious target, the threat to cut off banks’ access to the Bank of England’s wholesale payments system.
All those billions spent in 2008 to keep Bank of Scotland and Royal Bank of Scotland from crashing into bankruptcy – that was to make sure that banks were able to make payments to each other. Cut off Scottish banks from the payments system, then when people go to the supermarket they would not be able to pay for their groceries. A Scottish Government which goes into a campaign with such a policy is a government that will lose.
There is no need to wait for the transition to independence before starting to build the institutions of the new Scottish state. This applies especially to the Scottish Central Bank. While the Scottish Government probably can’t devote resources to this before winning a vote, the first 18 months or so is all IT design work and tender document preparation. It is not expensive (£500k), and could be funded by the YES movement.
Two years before the decisive test of public opinion needed to give a declaration of independence legitimacy, a social enterprise could start the work needed to establish the Scottish Central Bank.
This organisation would plan to become the government’s own bank after an independence vote. To avoid the risk of being cut off abruptly from the UK payments system it would build Scotland’s own payments system. It would commission notes and coins. It would negotiate with Visa/Mastercard and apply to join SWIFT and the BiS in Basel. It would take over the licencing and supervision of commercial banks and other financial institutions.
It would become the lender of last resort to the commercial banking sector, especially when confidence in the banking system was low. It would manage monetary policy, both by setting interest rates, and by being an active participant in the market for government debt. It would advise the post-independence government on the exact timing for the introduction of our new currency.
Assessing the retiring First Minister’s record, ‘The Economist’ concluded: “Eggs have been kept happy; the omelette is unmade.” As one of you has observed, “continuity won’t cut it.” We wish you all well, hoping that whichever one of you becomes First Minister will govern boldly, and wisely, and prepare Scotland for independence.
Ian Stewart, chairman of Scottish Currency Working Group, Fellow of the Institute of Bankers in Scotland, retired senior banker, former Director of Switch Card Services UK, and Mastercard Global Debit Advisory Board