THERE are many ridiculous scare stories that have spread about an independent Scotland’s economy, from hyperinflation to the classic “how will you pay for it?” type questions. Yet, there is a particular claim from critics of Scottish independence that is so bizarre and beyond reasonable thinking that it’s almost shocking that it’s even printed in the mainstream media.

This claim originates from economist and Better Together supporter Ronald MacDonald, who claimed back in 2018 (and repeats almost annually) that an independent Scotland would need around one-third of a trillion pounds (£300 billion) of foreign reserves to launch its own currency. This claim is made on the basis that an independent Scotland would need to peg its currency to the UK pound for the short term to avoid drastic price fluctuations.

This claim is wrong on multiple fronts. Firstly, no other country similarly sized to Scotland in the EU with foreign exchange reserves has anything close to that amount. Bulgaria, with a population of under seven million, has foreign reserves of around £28 billion, which is just over 40% of GDP. Other countries more similar to Scotland include Sweden with £45 billion of reserves (7% of GDP) and Denmark with £55 billion (20% of GDP).

READ MORE: GERS and the continuing myth of the ‘fiscal deficit’ in Scotland

Ronald MacDonald’s £300 billion comes from comparing Scotland to Hong Kong, which currently sits on £392 billion in foreign reserves. Yet, MacDonald completely removes context of the hugely hostile relationship between Hong Kong and its neighbor China, with a population of 1.4 billion people. Hongkongers, who have their own sense of identity and culture, have pushed back against aggressive power grabs from the Chinese Communist Party (CCP) who wish to remove their freedom of speech, the right to vote, freedom of the press, and free elections. Hong Kong’s large foreign reserves are largely a defence against an authoritarian power – a political decision to keep monetary policy closer to the US than China. Second to this, Hong Kong also acts as an intermediary between Chinese markets and the rest of the world.

For MacDonald’s £300 billion figure to be even remotely right the UK would need to turn into an authoritarian state that would seek to completely destroy Holyrood and our basic human rights. Either MacDonald (below) is detached from reality from reading too much political fanfiction, or he’s misleading the people of Scotland. I’ll let you come to your own conclusions.

The National: Currency expert Ronald Macdonald of Glasgow University

Currency reserves are typically used when a currency is pegged to another, however launching a new currency with a peg is economic illiteracy. It would leave a new currency under attack from speculators and waste time and resources on defending the peg. This would also put pressure on the government to sacrifice domestic policy and possibly implement capital controls, which should typically be deployed as a policy tool of last resort. A new Scottish currency should not play speculator’s games and instead allow the currency to float, therefore allowing the currency value to match Scotland’s productivity and domestic costs.

Let us also consider how reserves act in the modern age. Reserves are very limited in their ability to hold off speculative attacks or sudden fluctuations in the exchange rate. When the UK voted to leave the EU in 2016, the value of the pound fell by 8% overnight, and then fell by a total of 16% over the year. Foreign exchange trading happened electronically by software automatically selling off Sterling assets. Whilst Sterling assets were dropped across the globe, London markets were, quite literally, fast asleep.

The world where foreign exchange markets were mostly done through the telephone or in-person meetings are in the past. In the modern age, regardless of how big our foreign reserves are, technology is one step ahead. As the Bank of England has stated, foreign reserves now take a key role in supporting the financial services industry. Since Scotland’s financial service industry is smaller than that of the rest of the UK, the demand for foreign reserves is less.

An independent Scotland would naturally accumulate foreign reserves in fairly large quantities. First, Scottish citizens would be required to pay taxes (alongside other bills) in the new Scottish currency, thus requiring them to exchange their current Sterling currency for the new currency. This would have the advantage of allowing citizens to obtain a premium (perhaps between 1-3%) and would see gradual increasing demand for the new currency. On top of this, an independent Scotland would be able to accumulate Bank of England coins and notes for its foreign reserves. Assuming Scotland has a proportional share of physical cash, Scotland’s foreign reserves would be starting around £60 billion.

An independent Scotland could exchange around one-third of their Sterling reserves to Euros, Yen, Dollars, Francs, Kronas and more, therefore diversifying its foreign reserves. These levels of reserves of a huge abundance are not necessary for a country our size, especially if the currency has a floating exchange rate.

At the end of the day, there is no specific target an independent Scotland needs to meet on their foreign currency reserves. We’ll keep the conversation grounded in reality, whilst MacDonald sticks with hyperbolic falsehoods.