IN its last two articles for The National, the Scottish Banking & Finance Group has proposed that after independence Scotland should seek to replace the banker’s currency of the UK with a new “people’s currency”.
This means our new currency should be managed within a redesigned banking and financial system which serves the social, economic and cultural needs of the Scottish people as a whole.
What we want to happen is for Scotland to adopt a financial system that avoids damaging crises of the sort the world experienced in 2008 and ensures that, when global crises do recur, Scotland is able to avoid the worst effects of them.
Free market-based finance has proved quite capable of crashing itself and taking down the rest of the economy with it. The motto “prevention is better than cure” applies here.
What the Global Financial Crash (GFC) of 2008 demonstrated beyond any doubt whatsoever is that only the financial firepower and legitimacy of the state can resolve serious financial crises when they happen. The global and national banking and financial systems were completely reliant on co-ordinated action by the most powerful states to save them from catastrophic collapse after the GFC.
Creating a “people’s currency” requires a more active and interventionist state to manage and co-ordinate the financial system. The state is a pivotal player in any financial system in any case. The critical factor is the degree of autonomy which the state grants to private banks and other financial institutions. How much freedom is provided to finance is a political choice, not an inviolable law of nature.
A government with its own central bank and currency can create all the money that is needed in the economy. The question is: what role is then given to the private sector in the circulation of money and the creation of credit?
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To become a successful, sustainable, independent country which is able to provide for the needs of all its citizens to live well and in harmony with nature, we need a financial system which allocates capital for useful, productive purposes.
We have much to do in order to tackle social and economic inequality, environmental degradation and make the transition to a zero-carbon way of life. We no longer have time to waste through inefficient and inappropriate allocation of financial capital and our available human and physical resources.
So a people’s currency requires a democratically elected and accountable government to become more active in directing the allocation of capital. This does not mean relying on government to “pick winners”, but to identify the top priorities for economic activity, then ensure capital is made available so that the necessary human and physical resources can be employed.
Then the private sector can play its part in the delivery, supported where needed by state-owned enterprises. This is a model for a mixed economy – a “directed economy”, not a planned economy. Strategic capital allocation cannot be left to “free markets”.
SO, how can government and the central bank, working together, direct financial capital to where it is most needed in the economy and by ordinary citizens?
lApplying “credit guidance” measures to banks involves a mix of incentives and support to direct private bank lending to strategically important sectors of the economy.
Bank investment in low-risk infrastructure such as proven renewable energy technologies, which is very likely to produce a reliable and stable revenue stream, can be incentivised by permitting higher levels of interest combined with low-cost credit risk and liquidity support from the central bank.
A framework like this would reduce the level of a bank’s own capital which would be required as “self insurance” against a loan repayment default.
- State-owned banks have the capacity to provide capital for strategic sectors of the economy if the private banking sector is reluctant to do so.
- Regional, local, community and mutual banks will be important because of their closeness to local economies and ability to understand what local businesses and communities’ needs are.
The banking system also needs to meet the needs of the public for the safe custody of their savings, for making payments and to obtain affordable loans, so Scotland will need to restore local and mutual banks and savings banks, such as post office savings, which were once provided important community banking services.
As well as banks, pension funds are very important vehicles for citizens’ savings, and have grown to become large pools of capital for investment.
Unfortunately, like banks, pension funds have not been allocating capital into productive investments and instead most of their investments are in the buying and selling of financial assets.
In our next article we will discuss the important role of pension funds in the allocation of capital and how this needs to change.
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