A Scottish Currency? – 5 Lessons from the Design Flaws of Pound Sterling

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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.

Screen Shot 2014-02-19 at 8.09.06Our publication “A Scottish Currency? -5 Lessons from the Design Flaws of Pound Sterling”  highlights the worst design flaws of pound sterling and explains how Scotland can avoid them.


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Download (PDF, 10 pages)

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.

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  • Scott E

    Good article and document and one people should be looking at in Scotland if they are thinking about independence.

  • Bob Welham

    Steve Keen has some interesting comments on a Scottish currency:


  • Bob Welham
  • Charles Passmore

    At long last, Positive Money has come forth to say “why start a new banking system using a failed model”. Thank you. Say it load and clear..
    Further to this and Financial Regulation, I am waiting to hear from the SNP how an Independant Scotland will regulate Finanical Services, in particular pensions and ISAs. If Scotland becomes independant then my savings which fund my retirement will be in a foreign currency (if Head Prefect Osborne is to be believed) and will be registered and regulated in a Foreign Country (UK(r)); or will they? Of particluar interest are the arcane regulations that govern pensions and which seem set up to protect UK government interests (nice one Gordon Brown) and the Financial Services Industry (sic) and make life as complicated as possible for the punter, aka pensioner.

  • Vince Richardson

    Taken from the pdf article.

    “However, notes and coins together make up just 3% of all the money in circulation. The other
    97% is the electronic bank deposits created by banks as they make loans. This means that the
    proceeds from creating bank deposits goes not to the Treasury or the taxpayer, but to the
    banks. In the period that the government earned £16.7bn from creating paper bank notes,
    it lost hundreds of billions of potential revenue by allowing private banks to create money in
    place of the state.”

    Now I am a big advocate of PM proposals on banking and if the Scots decide to leave the UK I would 100% say they should look at the PM banking model.

    However the above point is bit of a red herring.Assuming they do allow banks to operate under PM model,banks will still operate electronic money transfers and as such they will always avoid the seigniorage on that.The revenue to the Scottish treasury from this source will therefore be no more under PM model than the present one,assuming demand for notes remains the same

    • Simon

      Banks do not ‘avoid the seignorage’ in fact seignorage is just the profit made from creating money wether it is cash or electronic money. At the moment the government earns the profit (i.e. seignorage) on the creation of cash but private banks earn the profits (i.e. seignorage) on electronic money and since 97% of the money supply is electronic, most of the profits from the creation of money go to private banks. It doesn’t have to be this way.

      • Tim Kelly

        Yes, and according to Stacy Herbert, at an 8 to 1 overhead, ie, it costs £8 to create £1…which means banks attempt to possess 8/9ths of all created currency…leaving the world with 1/9th…. so if outlawed worldwide, then it should follow that we could have 9 times as much money circulating without any inflation anywhere as everyone would do the same…and we all should know that money supply is controlled by banks to create boom and bust…this would leave us with boom and plenty for business startups…

      • Vince Richardson

        The private banks get no direct income from seigniorage,just it is better for them to use electronic money rather than dealing in notes, so they avoid having to buy notes from the BoE at face value….i.e they avoid the seigniorage.They prefer us to use their electronic funny money.
        But this would be continued even in a 100% reserve model,banks would deter us from using notes as much as possible so there is no advantage on this particular aspect.

        They do benefit from creating new money yes and that is the real issue.This is only a side issue but we must get it right.

      • John Morrison

        To clarify. When a government issues permanent money and spends it, it recieves seigniorage on that money – the benefit of spending it.

        When a bank lends money into existence (temporarily by definition) it recieves interest while that money exists. It does not get the benefit of spending it (seigniorage) . Instead it recieves rent on its existence (interest).

        Rather than avoid seigniorage, banks prevent seigniorage from reaching the nation and instead extract interest for theitr own benefit.

  • flatron85

    I thought this would crop up sooner rather than later. Thanks positive money for raising awareness on the issue of money sovereignty and the other dynamics that play out.

    Personally I think Scotland isn’t ready for independence, I’m all about self-determination and not being beholden to another but this isn’t a liberal independent Scotland that’s the cards; it’s an increasingly bigoted and racist, nasty place to live. The liberals will leave when it gets independence, they won’t be ready fiscally. My liberal friends have already packed their bags or have left already. Thanks for the free education! L8r.

    • Border Reiver

      “Increasingly bigoted and racist, nasty place to live” Strong words. What evidence can you present for this?
      In contrast to the current climate in England with its overt racism, increasing support for far right parties and attacks on the working poor, sick and unemployed much of the Independence debate focuses on asserting the social-democratic nature of Scottish culture post -Independence i.e. tackling poverty and its causes; welcoming immigration as a positive and necessary element in building a successful Scotland, etc.
      Are you and your “liberal” friends by any chance from South of the Border? Could it be that you don’t view Scotland as your home and that your friends have merely been enjoying the benefits that devolution has brought, like free education but have always intended to use the education and skills you have received here to benefit another country?

      • flatron85

        I never said England was a walk in the park. My friends are from Scotland. I didn’t go to a Scottish University.

        Stop putting words in my mouth or think that you understand my situation.

        Ask any Scottish grad where they think they’ll get gainful employment? Answer is they’re being tempted south by what London has to offer. (debt-fuelled property speculation and high outgoings, gratis)

        Your loyalty to a landmass will be your undoing. This is most enabled time for travel and living and earning anywhere you so choose. Why limit yourself to the geographical region that one was born. We’re living in a time when billion dollar companies (whatsapp) spring from nowhere and entire countries (Greece) go bankrupt. May we live in interesting times.

  • Simon Thorpe

    Go for it Scotland! And while you are at it, how about introducing an unconditional basic income (Citizen’s income) as a way to inject debt free money into the Scottish Economy. If you put those two ideas into the program, there could be a really interesting debate

    • http://e107.se Knutars

      Please, I beg of you, stop promoting “unconditional basic income”. It’s not a human, innate right to earn money without working for it. It’s a philosophy based on parasitism, and parasites are the problem, not the solution. With a fully democratic central bank, Scotland may enjoy 0% unemployment anyway, with no need for handouts.

      • John Morrison

        “unconditional basic income” is no more than a recoginition that we don’t leave anyone homeless and starving. It doesn’t eliminate the incentive to work but it does eliminae the fear that drives people into unsuitable and often unethical employment. It will lead to a healthier economy where people have more choice over what they do.

      • Tim Kelly

        A rich man wanted to know the ‘answer’ to capitalism’s current problems, so he hired top financial people to analyse the whole EU and the solution was to give everyone 1500 euros monthly to take care of the bills and reduce stress, then tax free earnings on top, with only 25% vat on luxury goods which would pay for the machinations of the EU…of course I doubt they factored in the constant embezzlement by banks, which apparently is an 8/1 overhead/issue… a basic income makes a lot of sense, it creates enormous wellbeing and allows people to follow their creative dreams, which makes a society more hardworking and not less… the current problem being doing what you don’t even want to or agree with, just to survive….so it actually promotes morals too..

        • http://e107.se Knutars

          Winners of the Nobel Memorial Prize in Economic Sciences who fully support a basic income include Herbert A. Simon, Friedrich Hayek, James Meade, Robert Solow and Milton Friedman. None of the above saw the financial crisis in 2008 coming, while numerous independent researchers and economists were blowing whistles with all their might – to no avail, unfortunately. If that doesn’t convince you that listening to authority is a trap, what will?

          I repeat; a Fully Democratic Central Bank can issue as much money (cash or debt) as it decides to, to achieve full employment and social security. There is No Need for Any Other Means to stabilize a country, or a subdivision thereof.

          • Simon Hodges

            You are arguing like a dick! Herbert Simon is not a macroeconomist, Frederich Hayek, Milton Friedman and James Meade are all dead. Robert Solow is almost 90. Why should they have been bell-weathers for the crash?

            Massive transfer of wealth was made to banks and disappeared from public view. Mate, you’re not even arguing to support yourself.

      • DozyHole

        What if I pick an apple from a tree? What about kids learning to read and write in school? Take money out of the equation and you will see that the matter is not black and white.
        I’m not saying that what Simon is saying is a good idea, but it’s worth consideration. When you say ‘stop promoting’, is that another way of saying ‘don’t discuss this idea’?

        • Simon Hodges


      • Wil Bremers

        Here in The Netherlands everyone above 65 gets an “unconditional basic income”. Many people who are healthy still work because it makes them happy to be useful in society.
        The fallacy is that a lot of people think that you need to earn “a living” while the mere being a human should earn you a living. People allways tend to do things for themselves that are also beneficial for society. Look at teenagers who invent stuff. Or look at the Zuckerbergs (Facebook) who come up with great inventions while they do not have to worry about “earning a living”. Why the stick if the carrot works too?

      • Simon Hodges

        By eliminating scarcity it would do a lot of good. It would help people focus on more important things and….by crikey make the economy more creative. Good news for an economy dwindling in natural resources. People LOVE to make lots of money. They LOVE making huge, boundary breaking things. But you can’t come up with the big ideas if you’re scraping around for pennies. A few do it but they are the staggering minority. Most entrepreneurs, especially the creative ones, take risks because they come from relative privilege and have no ingrained fear of poverty. Other than a few difficult post-uni years, they never really experienced it.

        What of the other wealth you work so hard to deserve: that air you breathe, the materials that go into the clothes you wear. Birds don’t work for their food. They fly to it, but it exists naturally. We should mimic healthy eco-systems by taking monetary poverty out of the equation.

        So little of extra wealth is deserved. It’s often inherited factors that determine, including ahem, talent. Hard work is necessary obviously, but most upper-middle class don’t work overly hard. They ride a system designed to support them because they are supporting the upper tiers that are creating the system. Don’t need Marx to tell you that, it’s just social mechanics. And I would say they need correcting.

        It’s time we gave people the responsibility they deserve. Supported people WILL make money. It’s part of a healthy self-respect that comes from being supported, as I am sure you were Simon. We are naturally creative, boundary breaking, and expansive (in a good way) people when we don’t have to scrimp and scrape. It’s a disgusting myth you’re perpetuatiing.

        LET US NOT FORGET the Golden Age economically came at a time of massive transfer of wealth from rich to poor both explicitly and in the form of increased investment in public services. Not just for the UK but for EVERY RICH COUNTRY. A trend that continued for 30 years.

        A basic income would make this transfer explicit, transparent and – guess what Simon – require a smaller government!!!!

  • John Morrison

    What do you do about existng savings and debts denominated in Pounds Sterling?

  • Vince Richardson

    Another issue not considered here is if the Scots did decide to follow a PM style banking model,how would that restrict UK banks(or any other foreign bank) from intervening and making loans to Scottish customers( I am thinking mortgages in particular),Would the Scottish government have to ban outside investment?How would the rest of the UK respond?

    Personally I would be more inclined to borrow from a Scottish bank in such circumstances so maybe that would balance itself out.But it would maybe cause some short term affects in Scotland.

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