In September 2014, Scotland will hold a referendum to decide whether to separate from the UK. A major question concerns which currency an independent Scotland would use: the pound, the euro, or a new Scottish currency?
If an independent Scotland wished to establish its own currency, there is little sense in modelling the currency on a design that has already failed many times in the UK, Europe and the US. The banking and monetary systems in all these countries have spectacularly failed, throwing millions into unemployment and wiping years of growth off GDP. There is little point in replicating a system that doesn’t work.
There is a better way. An independent Scotland could bring the creation of money under the sole responsibility of a Scottish Central Bank, which would be concerned with the long-term health of the Scottish economy rather than the short-term need to chase profits and market share. This would give Scotland an economy where:
- The amount of money in the economy would be stable and would grow roughly in line with the real economy, rather than being dependent on the confidence of bankers.
- Households could reduce their debts without inadvertently triggering a recession.
- The economy could be stimulated out of a recession without having to wait for banks to lend and without relying on rising household debt.
- The proceeds from creating money would go to the state rather than banks, resulting in a significant saving for taxpayers.
- There would no longer be the need to bailout badly-managed banks in order to protect the payments system or the wider economy.
These changes would give Scotland a safer banking system and an economy that is more stable and far less dependent on debt.
Disclaimer: Positive Money has no view on Scottish independence, as we have no expertise on this issue. In addition, we are not making a recommendation for an independent Scotland to establish its own currency; merely pointing out some of the pitfalls that it should avoid if it did so.