IT is clear from Andrew Wilson’s article today (Scottish pound from day one could cost us dear) that the Growth Commission has come up with the wrong proposal on currency for at least two reasons.
Firstly, they do not understand the process of creating a Scottish currency, and secondly they are trapped in the discredited neo-liberal/monetarist model.
It is discredited because it is based on demonstrably false assumptions which can’t offer any explanation for real world macroeconomic behaviour, such as the 2008 crash, and produces policies such as austerity and balanced state budgets which lead to mass poverty, inequality and private debt.
Of course those are actually the real but hidden objectives of what has always been a right-wing plot to shrink the state and enrich the affluent.
To focus on the currency: the figure of $164 billion for the Bank of England (BoE) foreign reserves (more correctly the UK Government reserves) is taken from the list of assets. The February, 2019, figure is actually $175bn for the UK Government and $20bn for the BoE, making $195bn in total.
However, you can’t look only at one side of the balance sheet. So there are also liabilities of $140bn that mean the net foreign reserves of the UK Government are actually only $55bn while the BoE has net foreign reserves of nil. The notional Scottish share would thus be $4.4bn, not the figure of $13bn cited by Wilson.
Likewise, the actual foreign reserves of countries of similar size to Scotland such as Denmark and Finland are of the order of €10bn and nowhere near the $70bn quoted. If your currency floats on the market you simply don’t need large foreign reserves – it is just wasted money that would be better used for something else, for example the oil fund.
There is absolutely no need for Scotland to accumulate any new foreign reserves at all. Had the commission understood anything about creating a currency they would know that.
The reason is because we already have them. Every person, company and organisation in Scotland currently has some sterling. The new Scottish pounds are not handed out for free. If we want any then we will have to buy them using our existing sterling, in exactly the same way as you buy dollars for a holiday.
That handed in sterling becomes the property of the Scottish reserve bank (the new central bank). So on day one of the new currency, if 10 billion Scottish pounds was sold to the public then £10bn of old sterling goes into the Central Bank and becomes the foreign reserves.
The new Scottish pound would in fact be the ONLY currency on the planet that had 100% backing by foreign reserves. I estimate there is actually more than £100bn of sterling held by us, though I realise many would only exchange a part of their cash.
However, in due course it would be likely that the Scottish reserve bank would be holding more than £50bn of sterling and thus Scotland would in fact have more net foreign reserves than the rUK.
Speculative attacks on the new currency would probably not be clever. Firstly at the outset speculators would not have any Scottish pound as the only people to have any would be us. Secondly the central bank would have all the firepower needed to give any speculators a bloody nose. It could in theory buy back every single Scottish pound.
Every credible international economist whose opinion I have read disagrees with the commission and state that without our own currency there would be no real independence as control over our economy and policies would lie in London and the hands of the city financiers. Perhaps Wilson should reveal who the “best economic and central banking experts” that advised him are.
Tim Rideout
Dalkeith
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