INDEPENDENCE will inevitably mean Scotland having to set up several organs of government which are currently reserved and run at a UK level. If we choose, as I and Common Weal believe we
should, to use the opportunity of independence to launch our own sovereign currency then one of the important departments that we shall have to set up is our own Central Bank.
READ MORE: An independent Scotland could set up a Central Bank that would pay for itself
Whilst institutions like the Bank of England have been around for more than 350 years, the current shape and form of a Central Bank as we know them today is surprisingly recent. Economics has been a discipline of constant change. Over time, banks like these have gradually evolved from purely commercial banks, through the preferred banks of the governments and monopoly currency issuers to, more recently, becoming actual departments of government with an active role in determining and managing macroeconomic policy.
In our modern world, Central Banks often perform a key role in various aspects of monetary policy such as maintaining price stability by ensuring that inflation doesn’t rise or fall too much or too sharply; defining the amount of money in the economy by printing or destroying it as needed or – perhaps most importantly in these days since the 2008 financial crisis — regulating and enforcing regulation on the financial sector to ensure that it doesn’t run amok and do significant damage to the economy if and when it fails.
The independence of a Central Bank — how apart it stands from government influence – is a topic which has went back and forth for more than a century. The current paradigm, in place in the UK since 1998, is that Central Banks should be formally independent from government and that their decisions over things like interest rates and money issue should be out of the hands of politicians.
On one level, this is an entirely sensible proposition. Politicians who hold the “print money” lever tend to pull it, pull it hard and keep it pulled. But on the other hand, it may be that an autonomous and unaccountable body does not fit easily into a purported democracy, especially when that body does more than simply set interest rates. Since the financial crisis, Central Banks have become increasingly more proactive in their economies through programs such as quantitative easing — a powerful new financial tool with the potential to fundamentally change how nations think about their public deficits and debts.
So when Scotland comes to design its own Central Bank, it must consider just how it is to be structured. There are many models in use around the world – we should not assume that the Bank of England is the only possible way of doing things – and many of them work quite successfully. Perhaps instead of filling the governing boards of the banks with bankers and academic economists (who may still be needed for their expertise with the technical details of implementation), Scotland could adopt a “stakeholder” model by forming a board – either advisory or with actual power – made up of people from trade unions, industrial and agricultural groups, social bodies and other people who can represent the demos of our nation.
Of course, one issue sure to be raised is “can we afford it?”. A Central Bank for Scotland could cost £200 million per year to run but it is important to note that they generate income too via financial services, seigniorage from the currency and other sources.
Almost all Central Banks are self-sustaining and profit-making and often donate those profits straight back to their nation’s treasury. Cost is simply not an issue, it would pay back within just a few years whilst providing several hundred, maybe a thousand, skilled and highly paid jobs based here in Scotland.
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