New Report - How to make a Currency: A Practical Guide

New report by finance sector expert provides blow by blow account of how a transition from sterling to a Scottish Currency should happen

A NEW Common Weal report has provided a detailed account of exactly how a new Scottish Currency should be established in an independent Scotland.

The report, How to make a Currency: A Practical Guide, can be read in full here.

It is authored by Peter Ryan, who has worked in IT in the financial sector for over 25 years and has an intimate knowledge of payment systems and currency issues. The report provides a blow by blow account of the transition that would be necessary to move from Sterling to a Scottish Currency, and looks into how this would work in everything from mortgages to company accounts.

Key points in the report include: 

  • A three year transition period after independence will be necessary to introduce a new Scottish Currency. An electronic currency should be introduced first, pegged 1:1 with Sterling over the whole of the transition, before introducing a physical Scottish Currency near the end of the transition period.
  • Allow individuals to convert bank accounts from Sterling to Scottish Pound across the transition period. Conversions after the transition period will incur a transaction cost, paid for by commercial banks.
  • A domestic and international payment infrastructure will need to be established. There is the potential to establish a Scottish Government owned centralised system for this.
  • It will take just two years for the Scottish Central Bank to be turning a profit through seigniorage, based on an initial investment of £50m in starting up the currency.
  • An equivalence between the new Scottish Currency and Sterling over the transition period will ensure prices initially stay the same.
  • The payment of taxes and the recieving of welfare payments should be introduced as early as possible into the life of the new currency.
  • The Scottish Government would have to decide to whether to redenominate the debt into the new Scottish Currency or alternatively keep the debt in Sterling and make the repayments in Sterling.
  • At the start of the transition period, a working group would oversee the introduction of the new Scottish Currency, before a Scottish Central Bank takes over when the physical currency is introduced

The report is part of the White Paper Project, a series of reports produced by Common Weal to renew the case for Scottish independence, which will be brought together into a draft white paper for independence in January 2017.

Commenting on the report, author Peter Ryan stated: "My motivation for writing the paper was to put into the public domain facts about how a Scottish Currency could be established based on my previous experience with currency conversions. In recent referendums I have been concerned that the public have not had the clear information they need to make a decision. I felt we needed to move the debate beyond sound bites and to set out a plan that said not only what we could achieve but to demonstrate how we would achieve it." 

The independence movement needs to be clear and open about exactly what it means to be an independent nation and how we can go about creating such a nation. That is the reassurance that many soft No voters said they wanted in the last referendum and it is what we should be providing them with in the next one.” Robin McAlpine

Robin McAlpine, Director of Common Weal, said that he believed How to Make a Currency was “by far the most detailed and authoritative paper yet produced on how to introduce a Scottish currency in the event of independence.”

He added: “It has been produced by an author with detailed first-hand knowledge of introducing currencies and while there is a lot of work required to transition to the currency it also shows that this work is made up of a series of perfectly manageable steps. The independence movement needs to be clear and open about exactly what it means to be an independent nation and how we can go about creating such a nation. That is the reassurance that many soft No voters said they wanted in the last referendum and it is what we should be providing them with in the next one.”

Craig Dalzell, Head of Research at Common Weal, said: “This paper represents a substantial step in terms of the depth of thinking that is now being employed within the independence movement. The question of currency, once one of the independence campaign's weakest points, has now been conclusively answered in a manner that can no longer be argued against in terms of its practicality. Not only can an independent Scotland have it's own independent currency, the plan for designing and launching it in a smooth and orderly manner has been laid out in an open and straightforward way and can clearly proceed on our own terms and without the fear of veto from anyone outside of Scotland.”

Comments

Jams O'Donnell

Sun, 01/01/2017 - 15:12

And, although this is only peripherally connected to a new currency, an independent Scotland MUST develop Scottish ports (Leith, Aberdeen, or ?) so that we can ship to the continent without having to go via England and presumably transit fees.

scottishmomus

Mon, 01/02/2017 - 13:54

Was wary, initially, about reading a currency report. What do I know about its and outs? But this was great. Not only is it written in a way that makes it understandable to the layperson but it gave me insights into areas I'd never considered before.
I feel excited at the possibilities ahead, given that so much thought and expertise has gone into this and is readily available to make a transition the reality.
Surely, soft No's will be reassured by this if currency was an area they worried about.
Well done to all concerned in the research and authoring.
Still can't believe it all made sense to me!

Isembard

Thu, 01/05/2017 - 12:05

An excellent contribution to the 'Independent currency' debate. Pity that the Scottish Government hasn't produced anything similarly detailed. I hope that no-one there is still considering using Sterling forever, they seem woefully unprepared for for a repeat of the old arguments. In my opinion they should be introducing a parallel electronic Scottish currency for domestic use right now.

There is something unclear to me in the report, however. If the Scottish Central Bank has insufficient foreign reserves to maintain a currency peg, surely it will need reserves of sterling before introducing the electronic currency as well, for the same reason? Sterling would be just another 'foreign' currency.
In other words, on your time diagram on page 2, I don't think the 'Independent Scottish Currency established' point is after 'Physical currency introduced', it's at the point marked 'Electronic currency introduced'.
Large-scale foreign exchange activities are not done with physical cash.

weeme56

Mon, 01/09/2017 - 16:44

Very very interesting & sensible reading. Wish this had been about in 2014!

MauriceBishop

Sat, 01/14/2017 - 21:25

"Scotland should aim to start with foreign exchange reserves of around £15 billion, building up with the aim of getting towards £40 billion."

Professor Ronald McDonald, writing in 2013, also floated the £40 billion figure. If that is the right number, then that is the right number. To "start" with £15 billion would be to invite catastrophe.

"Consequently any Sterling debt obligations of the Scottish Government as a result of its own borrowing following independence would be controlled by the laws of Scotland and so could be redenominated and repaid in the Scottish Currency if the Scottish Government chose to do so."

This is frankly insane. The SNP has advertised its desire to borrow as much as possible after independence to "undo austerity". The new independent Scottish Government will be informed by the lenders that if it attempts to repay its sterling debts using freshly printed bank notes it will adjudged to be in default and there will be no future borrowing in either currency.

Similarly, if the new independent Scottish Government declares that private debt contracts like mortgages and auto loans are, by fiat, changed over to the new currency, it will find itself buried under an avalanche of litigation. It certainly has to power to legislate that all FUTURE contracts must be in the new currency; but if it attempts to apply that power retroactively it will be fought every step of the way by English banks who can probably "out lawyer" the Scottish Government 10-to-1.

ryanpe

Thu, 02/09/2017 - 17:35

In the report I suggest having a transition period where Sterling and the new Scottish currency will effectively be the same currency until a date is reached where the next Scottish currency floats free. I suggested 3 years in the report as that was the transition period when the Euro was introduced but the time period could change. For this transition period the Scottish central bank would not need foreign currency reserves to keep the peg.
Some people have suggested that the UK government would not agree to a transition period. However I believe the financial services industry (who seem to have a lot of influence with the UK government) will insist on it. The large UK banks have millions of customers and billions of assets in Scotland and they will look to have an orderly transition.
Once the Scottish currency floats free then if a Scottish government wants to maintain any sort of currency peg (against, Sterling, Euro or a basket of currencies) then it would need foreign reserves to maintain the peg if the currency came under pressure.
With regards to establishing an electronic currency before a physical one that is quite common. For example the European Currency Unit (XEU) existed as an electronic currency for a number of years before it became the Euro. When the Euro was introduced it was created electronically in 1999 (you could have a Euro bank account from that date) but the physical notes and coins did not appear until 1st January 2002.

ryanpe

Thu, 02/09/2017 - 18:20

@MauriceBishop during the Euro crisis there was a good deal of legal opinion published about redenomination of government debt if a country fell out of the Euro zone or if the Euro currency ceased to exist. A legal principle of Lex Monnae suggests that a government can redenominate the sovereign debt of the country into the currency of that currency (obviously this was never tested in reality). A good example would be Portugal which before joining the Euro zone had issued bonds in Deutsche Marks, French Francs as well as Portuguese Escudos. When it joined the Euro zone all these bonds were converted to Euros. If after its bailout in 2011 Portugal had left the Euro zone then the Portuguese government would not have to continue to repay in Euros (or Deutsche Marks or French Francs). It could redenominate its debt into its own currency. If the lenders did not agree they could go to court but as Portugal was a sovereign state it could ignore them. Obviously lenders could then stop lending to the country in response because of the increased risk. However it is not in anyone's interest for a state to default as that is the worst outcome for lender and borrower.
If a future Scottish government decided to borrow to change the economy away from austerity then the lenders would need to decide whether lending to them was a good deal and what effect the investment of the Scottish government would have on the value of any money lent to them (that is what the sharp folk in the sharper suits get paid for). So for example if a Scottish government offered a 10 year Scottish Currency bond but the market analysis suggested this would cause a sharp rise in inflation and a consequential lowering of the value of the Scottish currency then it would not be attractive to lend unless the interest rate on the bond was priced high enough. However if the analysis suggested the new economic plan would boost the Scottish economy and cause a resultant rise in the value of the Scottish currency then lending to the Scottish government would look a whole lot more attractive.
In terms of the United Kingdom the South East of England has been inflating the value of Sterling for some time (due to its successful banking sector) which has had the effect of making some other industries uncompetitive. As the biggest impact of Brexit will be on financial services (because of the loss of passporting) then this has impacted the value of Sterling. A Scotland with its own currency would have a currency priced to match the strength of the Scottish economy and allow many more indigenous businesses to be successful.

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