THE Scottish Currency Group continues its explanation of how a separate Scottish currency under the control of an independent Scottish Government with its own Central Bank will work and some of the implications. This follows on from a previous article on May 15.
Wouldn’t creating a Scottish currency be more complicated than decimalisation in 1971 or bringing in the euro?
No, it is actually much easier for us and businesses. That is because one Scottish pound will initially equal £1 sterling, so there is no need for any shop or restaurant to change any prices, have menus reprinted or buy new cash registers as they did in 1971 or for the euro.
Companies will pay exactly the same amounts to suppliers and staff in S£ as in GB£. All you will notice are a new design for the bank notes and coins, and a new debit card for making payments.
Will this mean that there has to be a border with England?
Not because we have our own currency, but there will be one for trade. The border is likely to be similar to that between Northern Ireland and England, depending on whether we apply to join the EU or Efta. The Common Travel Area (1922) means you will not need a visa.
Who will control spending?
The democratically elected Scottish Government and the Scottish Central Bank will be responsible for all aspects of economic and monetary policy.
A Scottish currency will enable the Scottish Government to increase investment in social priorities such as the Scottish National Health Service, pensions, social care, education and infrastructure, including the Green New Deal.
Why should we trust the Scottish Government to get this right? They can’t even build a pair of ferries!
Scotland has some of the brightest economic minds and some of the best financial people in the world. You need not have any concerns about our ability to run the economy, just as other small independent countries do.
All governments make mistakes. The overall record of the Scottish Government, including the successful management of big capital projects (Queensferry Crossing, Borders Rail), compares favourably with that of the UK Government (HS2, the Elizabeth Tube line).
What happens to the banks?
Commercial banks and building societies that wish to continue to do business in Scotland will need a Scottish subsidiary company that is registered in Scotland and obtains a banking licence from the Scottish Central Bank.
It is standard practice that foreign banks – which would after independence include banks from the rest of the UK such as NatWest Bank Plc – would not be allowed to offer services in Scotland if they do not comply with the requirements of the Scottish Central Bank.
Background information
You won’t be able to hold sterling in a bank in Scotland or the Scottish pound in a bank in rUK other than as cash notes and coins. That is because holding the currency in an account requires that the account and the bank are connected to the relevant central bank payment system and account ledgers.
So, for a bank such as Tesco Bank, it will divide into Tesco Bank (rUK) Plc and Tesco Bank (Scotland) Plc, with both companies being owned by Tesco Banking Group Plc.
Prior to independence, our sterling accounts and loans will become part of the rUK part of the relevant bank. In the case of Tesco Bank (rUK) Plc, it would carry on being a Bank of England-regulated bank that works in sterling.
Tesco Bank (Scotland) Plc would initially have no accounts or funds and thus a nil balance sheet. When the currency is created, the new Scottish pound accounts will be opened in the relevant Scottish bank company.
If you ask to exchange GB£500 into Scottish pounds, then the rUK bank holding your sterling account will sell that £500 to the Scottish Central Bank.
The SCB will deposit 500 Scottish pounds to the Scottish Bank company reserve account at the SCB (of the same banking group, eg Tesco Bank) for onward deposit to your new Scottish pound bank account.
You will then have S£500 in your new Scottish account, and the SCB will have GB£500 of foreign reserves.
The SCB will work in Scottish pounds, so the sterling it buys from us can’t be held in the SCB accounting ledger. The way banks work this is to hold the foreign currency in a correspondent bank that works in that currency.
It is likely the SCB would use a Sovereign Reserve Account at the Bank of England but it could use Barclays or another sterling bank.
In the above example, the £500 would be paid into the SCB reserve account at the Bank of England.
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