Let’s keep Sterling, but …

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By RF Morrison

In his David Hume Lecture on 2nd February John Swinney confirmed that sterling would be Scotland’s post independence currency.  Presumably this is a political strategy to deflect concern among the lieges at a time when all western currencies and banks are in turmoil.

It would indeed be naive to make any commitment on this subject at the present time and so, following sound political practice, he has kicked the can down the road apiece.

However that does not mean that the present lack of banking regulation, which lies at the root of this ongoing crisis, cannot be improved upon.  Most people would like to think that before the West becomes economically moribund someone, somewhere, is going to come up with a better financial mousetrap.

If that prospect could be manifested in the context of the impending referendum it would be a big plus, for it is well known that the doubtfuls will be swayed more by economic considerations rather than any other.  It is therefore appropriate to talk openly about these options – and their implications, without making any immediate commitments.

The phrase ‘retaining sterling’ might usefully be amended by adding ‘for as long as that remained mutually acceptable’.  That would imply having an alternative waiting in the wings and there is only one option – to launch our own currency.  It is not widely appreciated that even if the euro regained its attractions, Scotland could not join from a sterling base unless the UK decided to do so at the same time.

Joining any currency union requires a stabilising period as a basis for conversion.  After the 1992/3 Velvet Revolution, Slovakia and the Czech Republic shared a currency for only a few months and quickly divided into the Czech Koruna and the Slovak Koruna – the value of the latter depreciating some 20-30% against the former until Slovakia joined the euro in 2009.  Following independence in Ireland, the Republic retained sterling until 1928 when it introduced the Irish punt – interchangeable and pegged to sterling.  In 1978 the peg was broken when Ireland joined the EMS preliminary to joining the euro in 1999.  

Currency unions do not have a good track record because they obscure the economic realities of the ‘client’ state.  And, keeping in mind the present euro impasse, they clearly also involve the sacrifice of sovereignty.  Having an independent currency and shadowing another can be worthwhile in building stability over the short term, and ‘breaking the link’ is a minor event compared to introducing an entirely new currency.

Any advantage to Scotland in retaining sterling would seem to be restricted to the initial convenience of the payments system and cheque clearing remaining in London whilst everything else – the division of assets and liabilities etc. is sorted out, and that will take the best part of a year, perhaps two.  In the meantime the full benefits of financial independence would need to be postponed.   

The adoption of one’s own currency as quickly as decently possible thereafter presents endless scope for improvement in virtually every aspect of financial and macro-economic management among which are

1. A well regulated retail banking system
2. Steady, full and gainful private sector employment
3. Balance the domestic and International budget
4. A standard of living comparable to any
5. A cap on the national debt
6. Savings and pensions protected
7. 21st century public services and infrastructure

Expanding upon these headings in turn –

1.  Bank regulation is part of monetary policy and comes only with an independent currency.  This opens up the prospect of returning banking to its High Street identity and perhaps even to mutual status whereby banks will be restricted to lending constitutional money and legally barred from creating their own money and speculating with taxpayers’ money.

2.  Constitutional Money (like cash) would enter circulation free of debt as payment for the formation of public assets and infrastructure provided by the private sector.  It will enter the banking system as ‘new’ money only after having financed matching growth in GDP.  Such projects will be commissioned when unemployment rises above 2 ½%.  At present ‘new’ money is created as bank credit at four times the growth of GDP.  

3. Scotland can and will maintain its balance of payments – unlike the UK.  That means free trade but also the ability to adjust its own rates of foreign exchange to maintain a balance between imports and sustaining domestic industry.

4.  Arising from 2 above.  Money will be applied to full and gainful employment which, apart from standard of living issues, promotes self-worth and self respect.  Any economic system which regards unemployment and cut-backs as good for people or their economy is not for Scotland.

5.  The new constitutional money system means no more government ‘borrowing’ from the banks (the banks hold approximately half of the national debt).  We shall take our share of this UK debt together with the assets on independence day, but in future there will be no more PFI and ‘borrowing’ to invest.  Like the income of individuals and corporations, taxes are needed to finance everyday running costs and to balance the books, but not for capital investment.

6.  Savings and pensions are deferred expenditure from earnings.  As such they are the natural sources for investment in the new banks – money available for loans and mortgages, a safer haven than the stock and financial markets so beloved of pension fund managers.  Pensions and savings have deteriorated in yield and value under the present system – they must be returned to being worthwhile.

7.  The public investment arising from constitutional money would be applied to new high-tech services like mag-lev rail systems and the latest health equipment and state of the art public buildings – without borrowing.   

It is reasonable to ask why this monetary policy has not been adopted long before now.  It is simply that the banking lobby has been so powerful and politicians so compliant, that financial common sense has never, so far, triumphed over power and privilege.  If this debate can be brought to the surface as a referendum issue then we should all be able to participate in the arguments – let us hear just why it can’t be done – and why it should be done.