The National:

AS many readers of this column will know, I have been a leading advocate of what is described as modern monetary theory, or MMT as most people call it. What this says is that a government that has its own currency and central bank can create money by running government deficits without creating inflation for this reason until the time that full employment is reached.

The theory also explains the way in which tax can and should be used in a modern economy, what the function of government borrowing is, how inflation can be controlled and how these issues can be integrated with a government’s social, economic and industrial policies. It is a pretty powerful tool as a consequence. I explain more about it here.

The important point about MMT as far as I am concerned is that those politicians who really understand it are better empowered as a result to make decisions that can significantly increase individual and national well-being.

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Hearteningly, over recent years quite a number of people involved in the independence movement have come to appreciate that understanding a government’s power to create money is key to the operation of a future independent Scotland where the interests of the people of the country are to be put at the heart of economic policy. I have warmly welcomed that fact, and the assistance that The National has provided in promoting this idea.

However, I think that some words of warning are also appropriate. I think that these are necessary because of late I have been seeing people make comments, including in this paper, that suggests that whilst they understand what MMT says they do not really appreciate its relationship with the real economic issues that exist within any economy - and which would have to be faced by an independent Scotland.

So, for example, I have seen it said by some that an independent Scotland would not need to borrow any money by issuing bonds onto financial markets because MMT suggests that, in theory at least, this is unnecessary. Theoretically that may be true. What MMT says is that the Scottish Government could, instead of issuing bonds, simply run an overdraft with its central bank which could provide all the money that it needs instead.

However, in the real world such a policy could quite possibly be very unwise. There are exceptionally good reasons why the Scottish government would, after independence, wish to issue Scottish currency bonds.

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For example, any post-independence government might want to create a safe place for people to save. This is what government bonds provide to individuals, pension funds and life assurance companies, all of which are pretty heavily dependent upon them. It would be crazy to deny them the bonds that they need and will want to buy.

Bonds are also vital to the smooth operation of modern banking. If Scotland is to have a strong banking sector after independence it will need significant numbers of Scottish currency bonds in issue to provide the safe place that banks need, which is vital for a strong economy.

In addition, the Scottish Government will want to have Scottish currency bonds in issue so that it can influence the interest rate to be used in the Scottish economy after independence. This is vital for the well-being of the people of the country if these rates are to be kept low, which is what everybody would want.

The point that I am making is that whilst MMT explains what is possible in some circumstances, it will never replace political economic judgement as to what should be done.

In principle an independent Scotland with its own currency and central bank need never borrow from financial markets. I can see that might seem to have a superficial appeal, but the reality is that Scotland needs bonds in issue for the reasons I have noted. The great thing is that this means that the Scottish Government should also be running a deficit after independence - that is the only way to achieve this goal.

The key point is this. If you want an independent Scottish Government that is in control of all aspects of the Scottish economy, then you will want it to understand MMT. It will then appreciate that it issues bonds by choice and not out of necessity.

What is more, it will be able to justify doing so because having such bonds in issue will assist the Scottish economy to work to its best ability on behalf of the people of Scotland. And, vitally, having politicians who know they are not beholden to financial markets then frees them to ignore the demands that those markets make.

Those politicians would know that they had actually issued Scottish currency bonds to do the financial markets a favour and not because they are dependent upon them. That too is a key component of independence. MMT makes all this possible, but it does not say that Scotland will not need to issue bonds, because it will.