ONE of the arguments Unionists have been using to spread doubts about the viability of Scottish independence is that a Scottish currency will be weak and vulnerable to speculation. Their claim is that the Scottish pound will lose value compared to sterling and other currencies.
It is possible that the exchange rate of the new currency will fall, but there is nothing inevitable about this, nor is a decline in the exchange rate necessarily a bad thing. A strong currency has the potential to make our exports more expensive in overseas markets and result in an adverse impact on employment in export-orientated industries and companies.
The most important consideration is what our currency is being used for, and how money is being allocated within our economy. If capital is being used effectively, it will be supporting the creation of real wealth through the production of all the goods, services and infrastructure that we need to live well and in harmony with nature.
READ MORE: Debunking the Unionist myth about a ‘weak’ Scottish currency
Scotland must use its currency to create resilience and greater self-reliance, particularly in strategic economic sectors such as food production, energy, construction and materials, biotech, banking and finance (by creating a strong domestic banking and financial sector which provides investment in our economy). If we do this then we will be less reliant on imports and on the need to earn foreign currency to pay for them.
When we adopt our own currency and establish our own central bank Scotland will have a “fiat currency”. All modern currencies are fiat currencies. “Fiat” means “let it be”, and fiat currencies are created in the process of government spending.
Currencies used to be backed by gold, until 1971 when the USA, under Richard Nixon’s presidency, ended the convertibility of the dollar to gold. As all currencies were pegged to the dollar they were all indirectly backed by gold and a country’s money supply was limited by the amount of gold reserves it possessed. At that time, a central bank’s promise to “pay the bearer the sum of ... ”, which is written on a banknote, was a promise to pay the equivalent value in gold to the bearer of the banknote. Now that currency is no longer backed by gold what does the “promise to pay” mean and what gives the currency its value?
The answer can only be that a fiat currency is backed by the wealth which is created in the economy in which the currency circulates. So the “promise to pay” is a promise that the bearer has a rightful claim to a share of the wealth of the economy, commensurate to the value of the currency he/she has in cash or in digital form as recorded in their bank and savings accounts.
If our economy provides what people need, then the currency they possess has real value and they do not need to exchange it for another currency in order to acquire what they need. The Scottish currency will find its own value relative to others according to the capacity of our economy to meet everyone’s needs.
Ideally, our currency will be a “Goldilocks currency” – not too hot and not too cold. Maintaining the right temperature will depend on the ability of the government and central bank to manage the value of the currency using a range of economic policy tools such as interest rates, taxation and borrowing.
READ MORE: Here’s why an independent Scotland must take away the monopoly from private banks
The objective is to maintain a currency exchange rate which maintains a balanced economy, supports strategic economic sectors and promotes full employment. This will be rather like flying an aeroplane which involves skill and judgement in adjusting a range of controls in order to respond to changes in flying conditions. A pilot cannot fly an aeroplane by pre-setting the controls in advance and a government cannot manage the economy by applying a rigid, dogmatic approach to policy.
We cannot know in advance what the economic conditions, both domestically and globally, will be at the time Scotland becomes independent so it is impossible, therefore, to predict whether Scotland will have a trade deficit or surplus or whether the exchange rate of our currency will fall, rise or remain stable.
Whatever the conditions may be, by exercising skill and judgement our government can ensure that our currency supports a productive economy, which in turn will sustain the currency. By creating this virtuous circle we can steer Scotland to a prosperous and environmentally sustainable future.
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