I AM aware that some National readers have been surprised by my reaction to Nicola Sturgeon’s economic plan, published this week, including my suggestion that I doubted if I could vote for this plan, so big are the risks that I think are inherent in it. In this column I want to explain some of that concern in more detail.

Saying that, my belief in an independent Scotland remains undimmed. It does, however, exist outside a commitment to any political party, because I am not a member of any, and is instead based on my professionally reasoned appraisal of the facts, which I have taken the risk to explain, knowing I will take criticism for doing so. In that case let me explain my concern about the SNP plan for the currency after independence, which is what troubles me so much.

READ MORE: Everything you need to know from the Scottish Government economic case for independence

Why I'm worried about the plan

The new economic plan is in many respects little more than a rewrite of the 2018 Growth Commission report. This is most especially true with regard to the currency issue. Now, as in the previous plan, the stated intention is to use sterling as the Scottish currency for as long as is thought appropriate (largely, it seems by financial markets) and only then might a transition to a Scottish currency begin. The claim made is that the rest of the UK could not stop Scotland doing this this and that rUK agreement to use sterling is not needed. I must beg to differ on that. I think London could stop Scotland using sterling after independence, very easily.

Over the last few years, I have spent more time than many might think good for me seeking to understand just how central banks really work. I know think I have a pretty good grasp of this issue, and that’s what makes me worried.

To be clear, a central bank is an organisation like the Bank of England. It is nothing like the high street banks we are all familiar with. Instead, it performs several other quite critical tasks.

First, it issues a country’s currency. At present, every pound sterling ultimately comes from the Bank of England or a bank it regulates, and regulating banks is its second task.

Vitally, those other banks can only create pounds when they make loans (which is how they do create money) with the Bank of England’s permission, which is indicated by their having what is called a central bank reserve account with the Bank of England.

If you thought opening a normal bank account is hard, getting a central bank reserve account is much harder still. They are only available, it seems, to some foreign governments that actively trade in sterling and to UK banks and financial institutions that are regulated by the Bank of England.

The National: The Bank of England

The reason for this is apparent when it is understood what these accounts are used for. Primarily, they are used as conduits to make any payment due by the UK Government to other countries and to people who bank with UK commercial banks to whom the Government owes money.

Essentially, they are the intermediate mechanism used so that money can flow from the Government’s bank (the Bank of England) via commercial banks into the economy. In reverse, they are the mechanism used to return tax and other sums owing to the government to it. In that case they are fundamental to a government’s economic management of those who are using the currency it creates. This economic management is the central bank's third purpose. As part of that exercise they set the Bank of England base interest rate, because that is the rate paid on the central bank reserve accounts.

Fourthly, these central bank reserve accounts with the Bank of England are the accounts used by commercial banks to pay each other, which happens millions of times each day as a person with a sterling account at one bank pays a person with a sterling account at another bank.

So, what would happen if Scotland was independent?

I suggest that it could not have its own operational central bank undertaking these activities and run a proper central bank reserve account system until it has its own currency. That’s because the Scottish central bank after independence could not create new English pounds because it would not have the permission of the Bank of England to do so, and that process is at the heart of a central bank’s operations. There can only be one sterling central bank. It will not be possible to have a second in Edinburgh.

But things are actually worse for Scotland than that if it does not have its own currency. That’s because Scotland’s commercial banks would still want to create new sterling by making loans after independence, as they do now, but to do so I think it inevitable that they will need to be regulated by the Bank of England. And they will also need Bank of England central bank reserve accounts to make transfers to and from other banks, whether in Scotland or otherwise, on their customers’ instruction. And the problem is that as far as I can see the Bank of England had never made its central bank reserve accounts available to a bank not located in the UK, and Scotland won’t be in the UK after independence.

READ MORE: Nicola Sturgeon unveils economic case for Scottish independence in new paper

What is more, I can see no reason why the Bank of England would want to make such accounts available, which would be something that is a matter of their choice. Its job is to minimise risk in the UK financial system, which will then exclude Scotland. Letting Scottish banks have access to the Bank of England’s facilities would increase financial risk in the rUK after independence. It could not do otherwise, simply because the two countries will have different economic policies that might conflict. In that case, I see no reason why the Bank of England will let Scottish banks into the sterling bank account clearing system run through the Bank of England’s central bank reserve account system, and if they don’t Scottish banking, if it is still based on sterling after independence, will at best be slow, cumbersome, and expensive. At worst it would be unworkable.

At best a very short-term agreement might be available on this issue to address this problem after independence and to allow an orderly transfer to a new currency. But can I see the Bank of England permitting it to last for years as the SNP think possible? I really cannot. And at a time when the Bank of England is showing utter indifference to the stress of the people of the UK as a whole, I think it naïve, at best, to think they might wish to play ball to make life easier in Scotland when it is independent.

In that case I think that Sturgeon's economic plan is based on a false assumption. As a consequence, and just in case, Scotland really should be prepared to use its own currency on independence day.

Alternatively ...

Of course, I might also be wrong. However, a long career in finance has taught me that planning for the worst outcomes always pays. That is the situation I outline here. Negotiation might improve the situation I describe, but if it does not the worst has to be planned for. Unfortunately, the SNP is showing no sign of planning for this situation and has given no assurance that any agreement on it has been reached with London. I think that a big mistake for Scotland and the independence movement, because the risk inherent in this situation needs to be resolved before an independence referendum, in my opinion. It’s just too important to leave it open at that time.

In that case we really do need to know if the SNP has got an agreement to use sterling and, if not, what the alternative is. And that’s why I raised my concerns, precisely because I thought it my duty to do so.