The Currency Question

89c40b4c949a83f36b67555cfe54772bWhy establishing a new currency is the right choice for an independent Scotland by John Alexander Smith.

As the currency debate dominated the 2014 Indyref and it is neither feasible nor desirable to opt for a currency union based on pound sterling, I have outlined a few basic questions and answers on why an independent currency is the best option for #Scotref.

Why should Scotland adopt a new currency after independence?

An independent currency allows Scotland to have more control over its economy. This means more control over what the Scottish government can spend on and invest in. It means the ability to better deal with changes in how much Scotland buys from and sells to the rest of the world. It would also allow Scotland to set the interest rate that is most suitable for the Scottish economy. This would also give Scotland more control over what type of economy it wants to have. Controlling your own currency also allows you decide how to deal with global economic problems like the banking crisis of 2008. An independent currency would allow Scotland to respond to such events in the way that is best for Scotland, it would free Scotland to pursue the policies it deemed most appropriate, an example is People’s Quantitative Easing.

Why not the Pound?

The simple point is that the best monetary arrangement is one government making spending decisions for one currency zone. The pound would mean that interest rate decisions would be made for Scotland in a post-Brexit rUK with potentially a very different economic strategy. Not controlling your currency can strongly damage your exporting businesses and put you at a disadvantage when trying to attract foreign investment.

Why not the Euro?

The same problems apply to the Euro only more so. The problems of the Eurozone are in large part because it is one currency that needs to deal with lots of governments making different spending decisions. This has worked well for some countries such as Germany, less so for others such as Italy and Greece. The reason there was never a “dollar-zone” crisis in the US, also a large block of differing regions under one currency is that in the US the Federal Government redistributes from surplus states to deficit states. This stopped the type of situation happening whereby, for example, Alabama would have to negotiate a bailout from California. There’s a very good argument to say that the euro will eventually either have to be split up or become even further integrated under one European budget authority that redistributes from surplus countries to deficit countries, just as the US Federal Government does with the states, if the present economic problems of the Eurozone are to be confronted.

How do you create a new currency?

There are many ways of going about this, but in principle it is a relatively simple process. A new Central Bank of Scotland would have to be established that would regulate the new currency and supervise the Scottish banking system. As Scotland already has different banknotes, it’s really a simple matter of legal decree to change those from being pound sterling to being a new currency that’s “pegged” to the pound. This would also apply to all contracts and debts falling under the jurisdiction of the Scottish government that had originally been denominated in sterling.

A “peg” is where the central bank would act in the financial markets to ensure the new currency would remain at a 1:1 exchange rate with sterling. This could be done unilaterally by the Scottish central bank, but it would be mutually advantageous for the Bank of England to collaborate with this as part of the independence settlement as financial stability is part of its’ mandate. Many countries already keep their currencies pegged to other currencies, most commonly the dollar or the euro. The pounds in your pocket are basically just debt that the Bank of England owes you. A banknote is just a “promise to pay” or an IOU. The argument could easily be made that when it comes to independence, if Scotland must accept a portion of the sovereign debt of the UK, then it is only logical that this means Scotland is entitled to a similar portion of the debt of the UK central bank (The Bank of England), which is Scotland’s share of the money supply.

This process would mean that there would be no immediate disruption from creating a new currency. Scottish pounds would simply be considered a different currency on a 1:1 exchange rate with the rUK pound. There would be the same interest rates and the same foreign exchange value with other currencies. Eventually as the Scottish and UK governments started to follow different economic strategies this peg could be cut and the two currencies would be free to have different values and different interest rates. There are benefits and drawbacks to both a low value and a high value currency in terms of foreign exchange. The peg should be considered as a transitional arrangement, pegs can have negative economic impacts in the long run and an independent free-floating currency is the best option for a country that is pursuing its’ own unique economic strategy.

What if the new currency falls in value?

This is a good thing for any Scottish business that plans to sell to the rest of the world. All around the world whisky and salmon will become cheaper and oil revenues will be worth more domestically. It will make imports and holidays more expensive. It would also negatively impact Scotland’s financial services industry.

What if the new currency rises in value?

This will make imports and traveling abroad cheaper. It is also good for Scotland’s financial services sector. It is bad for any business that wants to sell to the rest of the world as Scottish goods would become more expensive abroad.

What about Scottish Government debt?

It makes far more sense for a government to control the currency it’s debt is denominated in. Controlling your own currency means that in the strict sense your government can never run out of money. There are other constraints on what a government can choose to spend on however, but it is generally true that an independent currency places a country in the best position to deal with this. Also it is important to note that most of the economic problems we face are caused by private sector debt. In this case, having higher levels of government debt is actually desirable because it allows the private sector to pay down its’ debt and because, unlike the private sector, the government can draw on its own bank to create more money when necessary, there are fewer risks associated with government debt than with private debt.

Would Scotland face higher borrowing costs?

There is no way of knowing this for certain. Because of the actions of central banks all over the world since the Financial Crisis, governments in the developed world which control their own currencies have faced historically low borrowing costs. Scotland’s borrowing costs would reflect investor sentiments on the strength of the Scottish economy and would merely be another incentive to implement a robust and sustainable economic development strategy. The debt of a government that issues its own currency from its own central bank is in general considered the safest asset class as a central bank cannot run out of its own currency.

How much does government debt matter?

The issue of government debt is one of the most widely misunderstood political or economic ideas in public discourse. Government spending is one source from which money comes in the first place and in general the purpose of taxation is not to actually finance the government as such but to control the currency. There is also a very important economic fact that comes from simple rules of accounting: if the government is not running up debt and there is an export deficit then the private sector has to be going deeper into debt. We should view government borrowing in a more positive way in our present times of historically high levels of private debt such as mortgages and business debt. If the government were to attempt to “balance its’ budget” in these conditions it would cause a crisis for the private sector, unless it somehow managed to boost its’ exports by stupendous and unfeasible proportions.

Comments (36)

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  1. Crubag says:

    I’d generally agree with the logic here, however I’d comment that pegging currencies is not necessarily a cost-free exercise, and requires intervention in the markets.

    “As Scotland already has different banknotes, it’s really a simple matter of legal decree to change those from being pound sterling to being a new currency that’s “pegged” to the pound.”

    For those of us old enough to remember, Black Wednesday is when the UK’s peg to the euro failed and we were dumped out of the Exchange Rate Mechanism, the antechamber to euro membership.

    1. Crubag says:

      Though I am in fact demonstrating the effects of age on the brain… Black Wednesday (1992) wasn’t the euro at all (which didn’t come along until 1999), but was only an attempt to track the basket of currencies that eventually became the euro.

      A more relevant example might be the punt/pound, which was pegged for a long time, then abandoned for economic (a weakening pound) and political (the Republic wanted to be closer to European Community partners) reasons.

    2. Sieger says:

      I suppose that’s why he says

      “The peg should be considered as a transitional arrangement”

  2. bringiton says:

    Excellent article.
    All we need to do now is get this out to those who receive their “facts” from the unionists and their press pack.
    Unfortunately,the dumbed down message (economics for the under Fives) is all that many will receive and accept as fact.
    We cannae dae it……..

  3. William Ross says:


    Thanks for your article. I have always believed that using our own currency is the best option for a genuinely independent Scotland. I have three questions. Firstly, how do you get independent market actors to accept ” pegging” — will this not require intervention, with what foreign reserves to start with? Secondly, I am not sure that the Bank of England will be too keen to get involved in this as you suggest? Thirdly, are you suggesting that £ denominated contracts ( such as my mortgage) will on independence day be swapped for Scottish Pounds on a one for one basis? Will banks not scream and how about pension funds?

    Do not misunderstand me, I would love to do what you are suggesting. I genuinely do not have the answers. What happened in the Velvet Divorce?

    Thanks Again

    1. John says:


      Thanks for your questions, you raise important issues. 1) This is really a question of how credible the Scottish government and central bank are and what speculators opinions are. A lot of central banking is smoke and mirrors and trying to maintain this aura of credibility. The reserves question is really a matter for how the independence settlement goes. Remember the Bank of England is owned by the government and so is a UK institution, I’d imagine a portion of pre-existing reserves would be part of the settlement. 2) The bank of England is primarily concerned with maintaining a stable inflation target and making sure the London financial system doesn’t collapse. Any destabilising action they take against Scotland will have implications for the city. 3) yes I am suggesting this and such is vital to maintain the integrity of the new currency. Most of these banks are already multinational and are well adapted to exchange risk. They’ll slap together a few hedging derivatives and have a grand old time at the casino as they always do.

      Basically this all goes to the nature of fiat money: it’s all about law and currency is fundamentally whatever the lawmaker says it is.

      I haven’t looked at the Czechoslovakia case yet.

      Kind regards


      1. kenmath says:


        As well as the Czech/Slovak divorce, it’s worth having a look at how Estonia installed stable government and floated its currency after the Soviet collapse brought their independence.

        They started from scratch with nothing but their skills and determination. A constitutional framework was put in place very quickly and the Kroon replaced the Russian rouble a mere 10 months after independence. The Kroon was pegged at 8:1 with the Deutschmark and that remained in place until the euro was introduced in 1999. It was then pegged to the euro until 2011 when the Euro was adopted.

        In terms of governmental issues, the draft constitution was approved by the electorate in 1992, the last Soviet forces withdrew in 1994, negotiations to join the EU began in 1998, with full membership achieved in 2004.

        So, in the space of 12 years, a nation 1.4 million people who had been occupied and exploited by Russia and Germany for most of the 20th century went from a standing start with limited resources, a wrecked economy, unaligned laws etc to fully-fledged EU membership.

        Given that our laws are already aligned and that we have a mature economy, it would be much quicker and easier for Scotland to make this journey.

        1. Penny says:

          The currency functions as claims on out output–that is the link between the financial sphere and the sphere of use values, production, whatever you want to call it. If you look at what happened to the ‘real’ economy in Estonia upon independence, you will see that much was (and is) problematic. Another feature of Estonia is these decisions were tied to denial of the large Russian speaking minority of essential civil rights (e.g citizenship). As a borderland of the EU/NATO, its currency problems are less financial than geopolitical. That is not the case with Scotland.

          I agree with the proposal of a Scottish currency but think it would be much better to consider a Hong Kong style currency board on the expectation that Scottish firms will trade directly (not indirectly via London) with many nations and earn many currencies; a portfolio of currencies backing a currency board is much sounder basis for stability. Pegging to the pound is an idea that has more to do with nostalgia for ‘connection’ with a neighbor than sound economic thinking.

  4. Clive Scot says:

    Is there anything to stop the Scottish Government from setting up a Peoples Bank now and issuing pegged currency? i.e. act like we are already in an independent country? All state employees would be paid in the Scottish Currency into accounts set up in the peoples bank. All local and national government contracts would be denominated in the Scottish currency. A pretty significant chunk of the economy is public sector spending so at a stroke a pretty big chunk of the Sxcottish economy wood be using the new currency pre indy.

    1. John says:

      This would be quite problematic.

      The peg in that situation would be very difficult to maintain as many of these people will have debts denominated in sterling and ultimately HMRC requires taxes to be paid in sterling, taxation is the practical way goverments enforce legal tender, it’s not just about the central bank it’s about who controls the tax system.

      Setting up a new currency is best done when you already control the rest of the legislative apparatus.

  5. c rober says:

    Pegging the currency inbetween Sterling and pound until its fledged works best I would think , and with a proper soveriegn bank then minor adjustments would also be used as to how close to either it should sway.

    Do we really think that the BOE , if properly OWNED by WM , would sit back , no it would attack like hidden warfare in trade tarrifs and the like. More so in Pensions as they do already with Australia and thats supposedly going to be one of the Independent Uk partners.

    1. c rober says:

      then of course theres also peggin between Sterling and Euro?

    2. kenmath says:

      Pegging 1:1 with GBP initially makes sense to enable commerce and ordinary life to proceed without disruption. Thereafter, pegging a Scots currency against a basket of currencies would ease the transition to a free-floating currency. The logical basket would be GBP (for continuity and rUK trading), the Euro (for EU trading) and USD for our important petro-chemical sector), with weightings monitored and varied to suit circumstances, market trends etc.

      This enables a national economic track record to be established (i.e. Scotland’s credit-worthiness) and once that is achieved, a free float becomes feasible and desirable as it then divorces our currency from exposure to adverse trends resulting from other nations’ economic policies affecting the basket currencies.

  6. NoThenYes says:


    Nice article. I agree with much of what you are saying (I think) but:

    1. “Not controlling your currency can strongly damage your exporting businesses and put you at a disadvantage when trying to attract foreign investment” – the first part may or may not be true (it depends), the second part isn’t.

    One of the biggest risks for investors, as you know, is foreign exchange risk. Companies (and governments) in emerging markets will often issue dollar-denominated debt for this reason: the market for U.S. dollars is extremely deep, the pool of U.S. savings is in the trillions, if I am the Nigerian government then the easiest way to raise money is tapping this pool, there is definitely a local market for Nigerian government debt but it is small relative to the market for dollar-denominated debt.

    Of course, we don’t know what the actual market for Scottish pound would look like but it seems very unlikely there would be enough Scottish pound assets to finance government/companies/mortgages simultaneously. At the very least, the Scottish government would need to finance at least part of any debt in GBP/Euro.

    2. “An independent currency allows Scotland to have more control over its’ economy” – Ok, so I am going to try and put this in the context of your whole post.

    If Scotland was to have its own currency, I think I agree that a peg would be the first step before a free float…however, at no point would all this necessarily mean that Scotland had more control over its economy…it is a mixed bag with many issues.

    First, the reason to adopt a peg is because the new currency would need to import credibility and policy from an established central bank, likely the BoE. In this scenario, by definition, the Scottish central bank would have no control over monetary policy. The peg would help trade and capital flows but everything (even fiscal policy) would be subordinated to maintaining the peg. I also think it is very unlikely the BoE would care about the peg, unless the crisis concerned cross-border banks. So no control.

    Okay, so let’s say that the Scottish central bank does acquire credibility and the Scottish pound floats and a Scottish central bank can set rates how they like…more power? Again, no. The Scottish economy is very small relative to deep markets in USD, EUR, GBP, etc. and this means subordinating control over monetary policy to financial markets/capital flows. If you have any foreign currency liabilities (Scotland would), this, of course, leads to severe crisis. There is a reason substantially all small economies have pegged currencies: financial markets are too important and too large.

    3. “Also it is important to note that most of the economic problems we face are caused by private sector debt. In this case, having higher levels of government debt is actually desirable because it allows the private sector to pay down its’ debt” – I think this is a misconception.

    The argument goes: if everyone tries to pay down debt at the same time then the economy goes nowhere, if you shift it into the public sector then the private sector will start growing again. This is partly true, but what is also apparent is that this strategy hasn’t actually worked anywhere it has been tried apart from the U.S./China.

    In Japan, private sector indebtedness of the 1980s was moved to the public sector in the 1990s but the burden of financing that debt has suffocated the economy (the economy has barely grown since). The problem (and this is key for Scotland) is that if you have an independent currency, you rely on external capital markets and there comes a point when no-one will give you money any more. This happened to Japan, it happened to Italy, both turned to domestic savers, both got very cheap financing (trapped money) but it also crushed investment.

    It is the fashionable view right now that governments can just do anything because everyone pays taxes in government currency but this is actually a somewhat limited argument in practice: both the U.S./China face unique options, both were willing to impose huge losses on certain sectors of the economy. In the actual event, Scotland would be, like Italy and Japan, totally unable to do this.

    Sorry if this comes across as nitpicking. I think you have an awful lot right but, I think, you are massively discounting the role of international capital markets in calling the shots. The most likely scenario is a peg with GBP. This means “outsourcing” monetary policy to the BoE but it also means stable trade and capital flows. For an independent Scotland, this is a trade that is probably worth making.

    1. John says:

      I grant you a lot of this is highly regime dependent and what I say is based on the assumption of a developed economy and is not necessarily going to be true for the currency arrangements of developing economies such as Argentina or Nigeria. Talking about the demand for dollars is a bit complicated given their global reserve currency status which creates other problems for them. I’m not sure I agree with that second point, I’m assuming a demand led monetary regime:

      2) This is more of a fiscal policy type of control, you have a government that can draw on its central bank to invest in infrastructure, research and such. That’s how you control your economy not by fiddling with interest rates. With current levels of private debt the only thing the central bank can really do is cause a crash. They are more or less powerless apart from keeping the bubbles afloat with QE.

      3) I’m going to have to disagree with you on the case of Japan and direct you to the work of Richard Koo on Balance Sheet Recessions and the QE trap. The point is there isn’t really a way of having financialised capitalism without at some point having massive fiscal expansions to deal with private debt bubbles, the best way would be a straight up Debt Jubilee. The way we dealt with it after 1929 was WWII.

      1. Jeffy says:

        So, are we saying then that Scotland is the only country in the world that can’t have a currency? Seriously?

    2. Andrew V says:

      I’m a bit more positive than you are about the operation of a Scottish pound.

      First off, I’m not sure that Scotland would have large foreign currency liabilities. It is vital than any government debt and most private debt is redenominated into Scottish Pounds in much the same way debts were redenominated when countries entered the Euro.

      I agree with you that a Scottish Pound would be subject to international capital markets (look what they are doing to GBP at the moment!) but I don’t think a peg is a good protection. Indeed it would probably make it worse as we wouldn’t have sufficient reserves to defend it.

      I don’t see why there wouldn’t be enough Scottish Pounds to finance the government, business and mortgages. We’ve got a good current account position, lots of pension assets, a glut of bank deposits, good FDI flows, etc.

      None of which is to deny that it would be a very complex process with no doubt a lot of nasty bumps along the way.

  7. Patrick says:

    As the currency debate dominated the 2014 Indyref is the today debate, pure distraction, currency today is not a problem for any government. What must matter to all Scottish is take the Independence as soon as possible and control of our natural recurses and destine.

    1. John says:

      Tell that to the Eurozone periphery.

      1. Patrick says:

        Better is ask yourself why , they want:
        Lloyd’s of London to open company in Brussels
        Okey ! Turn your brain on it look like is off.

  8. Andrew V says:

    I think this is an absolute article. There’s a couple of points I would add:

    1. It’s already clear that Scotland’s economy operates on a different cycle to the rest of the UK. If you look at the GERS numbers (imperfect though they are) Scotland’s good years tend to bad years for the UK and vice versa. This means that sharing the pound has generally been bad for Scotland.

    2. It’s vital that any UK debt that Scotland took over would be re-denominated into Scottish pounds rather than left in Pound Sterling.

    3. I’m not convinced a peg is a good idea. As well as losing the benefit of a floating rate it would inevitably require large currency exchange reserves to defend it. Unless the plan is for it to be a shoogly peg!

    1. John says:

      Thanks Andrew.

      As I said in the article the peg is the transitional arrangement to minimise disruption. The assumption is the peg should be broken when everything is properly set up.

      1. John says:

        Which itself is just a matter of a press release from the central bank really.

    2. John says:

      And as for 2. Yes you’re completely right. I should have spelt that out.

  9. Andrew V says:

    I meant to say absolutely excellent article.

  10. Patrick says:

    Yes but now is more urgent be Independent Nation as sooner as possible because what comes next in Britain is not easy it happen several times in differents nation.
    The third attempt to show that even free and open societies are not immune to the authoritarian and legalist ideologies of history, by history professor Ron Jones in the case of the German-Romanian secondary school students in convincing their students that the movement would eliminate the democracy. The democracy that emphasized individualism was considered a Democracy, and Jones emphasized this by developing “Strengthening discipline, strength through community, strength through action, strength through pride.”

    1. John says:

      The point is to do this you need to build a case to convince civil society of the benefits and feasibility of indendence – as is part of the democratic process.

      You can’t just go about declaring UDI.

  11. Patrick says:

    My friend you yet not realize the damage BBC had made to Scottish with subliminal programing.
    Independence for Scotland Now is the order then all can be done peaceful and creatively.
    Remember The old Greek story Pygmalion and Galatea. We almost have Galatea ready .


  12. davi mcvey says:

    why should we be the only country with English cash we deserve better and our own currency

  13. Henry Holland says:

    John Smith, I also appreciate your article but wish there was more clarity about the evidence you draw from to reach your conclusions. On the question of “Would Scotland face higher borrowing costs?”, you claim “since the Financial Crisis, governments in the developed world which control their own currencies have faced historically low borrowing costs”, in order to imply that an independent Scottish government would not have to borrow money at worse conditions than it does now, via the Bank of England. Niels Kraditzke, writing in Le Monde Diplomatique in March 2017, argues the exact opposite, namely that if Greece were to leave the Euro, and “control” their own currency, they’d have to borrow money at much worse interest rates than they use to borrow money now from the European Central Bank. Why does your general principle about the favorable situation of governments which control their own currencies not apply to Greece, if they were to leave the Euro? And for an article of this level of importance, could you use either links in your text or footnotes, so readers can be clearer about the facts your articles are based on? (Full text of Kraditzke’s article here, your browsers should deliver an adequate translation:

    1. John says:


      Yes I realise the detail is somewhat lacking. This is really because the purpose of this was meant to be a starting point for discussion and an example of how it could work. More to get people thinking than as a hard nosed research article.

      Comparing with Greece is dubious for several reasons largely to do with the idiosyncrasies of the Euro. The UK is a transfer union where the EU is not and Greece is suffering a dual debt crisis and balance of payments crisis with massive unemployment, which Scotland currently isn’t.

      The low borrowing costs was really about WE which is beyond the scope of this type of article to discuss.

      Also so much of this is contingent on what Scotland’s financial position really is which as Richard Murphy has demonstrated, we don’t really know.

      Laying my cards on the table this is written from a generally Chartalist Keynesian perspective drawing on the works of people like Richard Koo, Wynne Godley, Hymen Minsky, Stephanie Kelton, Englebert Stockhammer and Marc Lavoie. Not neoclassicals but also hardly radicals.


      1. Henry Holland says:

        Thanks John for your explanation, I know have more context to understand where your argument is coming from. Think it’s great that experts like yourself are provoking more non-experts like me to think about economics in the Scottish framework. Ideally this can lead people to enjoy thinking about the economy, often for the first time. This seems to be Mike Fenwick’s strategy too, so I’d applaud that. John Lanchester is also an entertaining writer on basic, necessary questions, like what money actually is or does. He’s also into the bitcoin question, as part of a bigger argument about how decentralizing currencies and money supply could help “ordinary” (not high earning, not stake-holders in big financial institutions) on the ground. Here’s his video blog on that:

  14. Hector says:

    If an independent Scotland uses ‘a new currency that’s “pegged” to the pound’ then interest rate and other decisions would inevitably be made for Scotland without Scottish control. If Scotland is going to join the EU is it going to be possible to have a currency pegged to another currency outside the EU anyway? This may be only a temporary measure, but if Scotland is in the EU it will probably have to accept the euro, with all its disadvantages right from the start anyway.

  15. Mike Fenwick says:

    Project: To establish the widest possible discussion on and understanding of the subject of “currency” in a series of stages.

    Stage 1 progress can be found here:

  16. Martin Thorpe says:

    The critical question you fail to address, let alone answer is that of debt creation. Namely, should an “independent” Scotland slavishly copy the model of private debt/revenue, public liability adopted by other myopic administrations, or should it instead embrace the bloody obvious and restrict the private banking system to exactly that, banking. And leave issues of national debt to publicly accountable, socially responsible organs of the state.
    I’m afraid your synopsis is little more than that l would expect from a 1st year A Level student, but then again, that puts you several leagues in advance of the current SNP administration.

    1. John says:

      They teach endogenous money theory at A level? My, things must really have changed.

      When you say “banking”, what precisely do you mean? Do you mean the implementation of a quantity style monetary system that adheres strictly to the loanable funds model?

      You miss the key premise of my argument, namely that public debt is a determinant of the money supply and that the banking sector, currency and the state are inextricably linked.

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