Following on from his article on a Scottish banking system (SIC Transition Paper No. 4), financial expert Peter Ryan presents a clear roadmap for the introduction of a Scottish currency.
In the follow-up, Transition to a Scottish Currency (SIC Transition Paper No. 6), Peter argues that a future independent Scotland must adopt its own currency to avoid the risks of future economic shocks, such as a banking crisis or a pandemic. . “In order to reduce risk, Scotland should switch to an independent Scottish currency as soon as possible after the independence vote,” he wrote.
It describes the types of money that make up a currency: cash, money in your bank account, and money in the central bank. He argues that the introduction of the new Scottish currency can be curtailed by phasing it in over the transition period rather than trying to do it all on any given day.
Some of the key steps proposed in the document are as follows:
– A Scottish Currency Bill is expected to be drafted ahead of the Independence Referendum, which would establish a Scottish currency initially equivalent to the pound sterling (£ 1 would equal one unit of Scottish currency)
– Once the period of transition to independence is in place, the new Scottish banknotes and coins will be introduced in stages rather than all in one day. This will allow Scottish people and businesses to adapt to the new banknotes and coins as they are introduced.
– The Central Bank of Scotland is expected to be established at the start of the transition period
– The Central Bank of Scotland will issue notes and coins in the new currency, with the profits going to the Scottish people and not to the shareholders of the British banks. The three banks that currently issue Scottish sterling notes (Clydesdale Bank, Bank of Scotland and Royal Bank of Scotland) will no longer be able to issue Scottish notes
– During the transition period, commercial banks would apply for Scottish banking licenses and (if the license were granted) would start converting existing bank accounts from British pound to the new Scottish currency. By doing this during the transition period, we would avoid waiting for the slowest and reward the banks that invest in the new currency.
– At the end of a transition period, the new Scottish currency would break away from the pound sterling and be a floating and independent currency in physical and electronic form
To give the Scottish people ownership of their own currency, Peter offers a currency design competition that would start before the independence referendum, with the results announced immediately after an independence vote. This would reduce delays in the production of Scottish banknotes and coins. The design competition for the new banknotes and coins, based on the ‘Scotland’ theme, would be as inclusive as possible. For example, the design of the coins would be open to all Scottish children aged 16 and under and young Scots aged 16 to 18; the ticket designs would be open to all adults (aged 18 and over) in Scotland; and the design of the ‘Scottish’ one-of-a-kind piece could be done by special groups (such as art therapy groups). The design could change regularly after the initial introduction of the Scottish currency.
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Recent history is provided to illustrate that a monetary transition can be made smoothly. One example is the decimalization of the pound sterling, where the 50 pence coin was introduced in October 1969, 16 months before the pound sterling was officially converted into decimal currency in February 1971. Peter also reminds us that central banks are replacing periodically their tickets by new grounds to reduce the risk of fraud. This process normally takes about three years from initial design to production and distribution. This gives an indication of the realistic timeframe needed to issue the new Scottish banknotes and coins. Peter believes that, with designs agreed upon before independence, production of the first banknotes and coins could begin soon after independence and be introduced over a two-year period.
Commercial banks operating under the New Scottish Banking System will need to make deposits during the transition period with the Central Bank to enable them to issue loans, process payments between banks, provide mortgages, etc. As these deposits will be in foreign currencies (sterling for UK banks or euros for European banks), they will be converted into the new Scottish currency issued by the Central Bank of Scotland. This would amount to deposits of around £ 25 billion and provide around $ 33 billion in foreign exchange reserves for an independent Scotland. In addition to accepting and managing deposits, the Central Bank of Scotland would also provide loans to financial institutions which are licensed to operate in Scotland and manage the issuance of Scottish cash. For this, the Central Bank will need an IT system, the selection, testing and implementation of which would take around two to three years, given the volumes required for Scottish Central Bank money.
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Regarding interest rates, Peter says the only certainty is that with a new Scottish currency, interest rates will be set in Scotland, by the Central Bank of Scotland, and will therefore be appropriate for the Scottish economy. Having a Scottish currency could lead to cheaper borrowing for the Scottish government and in turn to cheaper interest rates for loans and mortgages in the new currency.
The introduction of a new Scottish currency will not affect citizens’ pension rights. If retirees receive their pensions from the UK government and choose to have their pensions paid into a sterling account, they will receive the
same amount as if they lived in the UK. If their UK pension is paid into a Scottish currency account, they will receive the Scottish currency equivalent of the amount in pounds sterling.
According to Peter: “This is not the last word on the currency debate, but it should clarify how Scotland could move from sterling to a new Scottish currency, how long it would take and the benefits of do it.”