Scotland’s decision on which currency to use post-independence is the most important decision we will make. This, more than any other economic decision, will shape our economic future. We put a case for a Scottish currency on day one of independence by listing some of the fundamental differences that affect a country as a user of a currency and a currency issuer.
After a yes vote for Scottish independence, everyone agrees that initially, during the transition period, we will continue to use Sterling as our currency. But what happens next? What will be the currency in an independent Scotland?
An independent Scotland’s most important decision: currency
At the end of the transition period, Scotland will have only two options (we have discounted immediate entry into the Euro or using any other currency).
- Keep going with Sterling, continuing as a user of currency issued by a central bank in London.
- Become an issuer of our own currency.
The current Scottish government policy, as outlined in the Sustainable Growth Commission and tweaked a little in the 2022 paper ‘A stronger economy with independence’, is to continue with Sterling once Scotland is independent, eventually moving to issuing our own currency. The timeframe is not included in either paper, but it could easily be a decade after the first day of independence and certainly more than five years.
The current route of retaining Sterling is by far the riskiest one
Under the Scottish government’s preferred route, Scotland will continue to use currency issued by the Bank of England, with all payments between banks on our behalf clearing in London. All monetary transactions in Scotland will continue to be in Sterling. The Scottish government will collect tax and make payments in Sterling. When the Scottish government wants to pay civil servants or pay a company for materials, it must have enough Sterling notes on deposit at the bank to make these payments. This is very much the status quo. To put it clearly, after Scottish independence, monetary sovereignty will still rest in Westminster.
There is little disagreement that under the current administration’s proposals, this is the mid-term future for Scotland. This is a defacto currency union. Scotland, as a separate nation, will be using currency issued by a foreign country. This is seen as the low-risk option by the Scottish government. This approach steadies the market and allows the Scottish government to prove to Bankers across the globe that Scotland is a good bet. This argument is framed by a neoclassical misunderstanding of how money is created in a modern economy.
Putting aside the economic argument for a moment, let us consider the political position. For this ‘union’ to work, it must assume that in Westminster, a compliant UK Government is happy to support Scotland’s transition to an independent nation. An administration that will have lost a referendum but will be sporting enough to wish us well and facilitate our success. Reading this back, I am not sure we even need to discuss the economic madness of the proposal! On a practical political level alone, this policy should be dropped.
It is a simple binary choice but one that has huge implications for the Scottish economy and wider Scottish society
We believe that Scotland should become a currency issuer on day one of our independence, and Scotland should not enter a defacto currency union with rUK. We have more than enough time.
To further support this belief and hopefully to encourage more discussion, here are twelve fundamental differences between Scotland as a user of a currency and as an issuer of a currency.
An independent Scotland’s most important decision: currency
The very stark difference between the two.
So, what will be the currency in an independent Scotland?
Managing and issuing your own currency is a challenge, but of course, these challenges are already being met by Bankers in London (and in my experience, many of them are Scottish), and there is no reason to think that these challenges could not be met by a Scottish central bank and government.
We have tried to be as de facto as we can with this list. The vast majority of economists would agree with the substance of this list. It would be a very interesting exercise to ask senior SNP politicians if they were aware of the detail of their favoured policy and the real-world impact between these two very stark choices.
If you would like SCOTONOMICS to present a virtual talk to your group or organisation on the difference between Scotland as a currency user or currency issuer or any related economic topic please get in touch.
We have to keep spreading this information as widely as possible. Using Sterling is a non starter frankly. It makes no sense at all. Good article William.
Thanks Duncan. People who support a de-facto currency union with England need to know all the facts. I hope this helps.
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