Today the SNP leadership has been briefing the media that it is to present a new paper to the SNP conference addressing the issues with its proposal to keep Scotland Sterlingised for an extended period of time if it became independent. Is what they are trailing a viable response to criticisms?
At the moment the garbled official position of the SNP is that there will be an extended period of unofficial and informal use of Sterling as an independent Scotland’s currency until six economic tests are met at which point it will move ‘as quickly as possible’ to a new Scottish currency. This is a sizeable distortion of what the party actually voted for.
Given the events of Covid and the Sterling crisis of the last couple of weeks that position has come under new pressure and scrutiny (not least from this website). It therefore seems to have moved quickly to produce a ‘paper’ which explains its current position. That is that, during the period of Sterlingisation, Scotland will set up a ‘central bank’ to manage the county’s money system.
This of course wouldn’t be a central bank in any normal sense of the name. It wouldn’t have any control over interest rates. It wouldn’t have any control over currency valuation. It would’t have any control over liquidity (the volume of currency in the economy). It wouldn’t hold the compulsory reserves of the commercial banking sector (this is what baiouts are supposed to come from and these will continue to be held by the Bank of England). And it certainly won’t be able to carry out Quantitive Easing.
So it is a ‘central bank’ with no monetary powers. The SNP leadership argues that it will ‘gradually’ acquire the powers of a central bank. This is dishonest; it doesn’t have the above powers because it doesn’t control the currency. There is no ‘gradual’ about it – it has no monetary powers until it establishes its own currency.
What this proposal puts forward is in no way like the Bank of England but is rather a version of the Treasury’s currency reserves. It isn’t a central bank, its a savings account spending public money. A Central Bank has its own accounts separate from the public accounts and so acting as ‘lender of last resort’ has no consequences for public expenditure.
The SNP’s proposal appears to be designed to disguise the fact that it would be the taxpayer who would bail out banks or the government in a crisis. It also disguises the fact that the Scottish Government itself would have no-one to borrow from in a crisis other than commercial money markets, and in a crisis they might simply choose not to lend.
What this proposal puts forward is in no way like the Bank of England but is rather a version of the Treasury’s currency reserves
A central bank has many options for replenishing its reserves, the SNP proposals wouldn’t. Once the money was spent it could only be replaced by redirecting public spending. The support of the Bank of England is unlimited; the support available in the SNP proposals runs out when the money runs out. Central banks have money flows both in and out; this proposal is out only.
So how much money could there be in its ‘central bank’? If it chose to negotiate for a share of the UK’s reserves it would (on current valuation) raise about $8bn (US Dollars). That would not nearly have been enough to see us through the 2007 financial crisis, nor Covid. It is a tiny sum in comparison to the financial might a central bank is supposed to weild.
To give you an impression of the scale of this, the Bank of England had to make promises of £65bn in bailouts for pension funds to steady the market (though it only handed over £4bn – explanation here). Scotland would almost have had to promise its entire reserves, and its not clear that would have calmed markets.
And of course the Bank of England did this from Quantitative Easing, not ‘real’ money. Under the SNP proposal it would be real money. The need to borrow during the pandemic would almost certainly have wiped out a Scottish monetary fund. The 2007 financial crisis definitely would have. The current Sterling Crisis might well have as well.
Each individually could have left Scotland without any reserves. Any two would have put a degree of strain on Scotland it would have struggled to cope with. Calling something a ‘central bank’ does not give it the powers of a central bank and claiming it will ‘gradually’ take on the powers of a central bank isn’t true – it will have none of the powers of a central bank and then all of them, all at once when there is a Scottish currency.
And none of this addresses any of the rest of the problems with Sterlingisation; it still blocks EU membership (you need your own currency), it still gives Scotland the profile of a developing or tiny economy (remember, only Panama, Ecuador, Montenegro and Lichtenstein use this system), it still leaves us under the influence of UK interest rate policy, it still leaves us massively exposed.
As delegates head to Aberdeen to be presented with this position but without time for it to be discussed, examined, analysed or explored, it seems it is simply designed to save the faces of the SNP leadership
But perhaps above all this tells us who is going to be the commercial banks’ ‘lender of last resort’ (you, the taxpayer) but not who is going to be your lender of last resort (i.e., who lends government the money to pay the salaries of public sector workers if Sterling crashes and money markets freeze up?).
As delegates head to Aberdeen to be presented with this position but without time for it to be discussed, examined, analysed or explored, it seems it is simply designed to save the faces of the SNP leadership, to try and avoid them doing what they really need to do which is to accept the April 2019 decision of Conference to establish a currency as soon as possible after Independence Day.
If Party Members are to debate this it is really important that they understand what it means. On three occasions over the last 15 years the UK avoided an existential crisis not by using ‘fiscal policy’ (tax and spend) but by using ‘monetary policy’ (money supply). The SNP proposes to protect Scotland using fiscal measures only.
The strategy appears to be to hope no-one at the Aberdeen conference understands this, that they will believe a savings account and a central bank are the same thing, that they swallow the idea that you can develop monetary powers gradually even though you still don’t have a currency. The first part of that is reckless, the second part dishonest.
A separate emergency motion is being submitted to conference. That is competent and sensible, so will probably not make the agenda. What the leadership is promising is a bailout for the financial industries from taxpayer money, precisely the approach which has been avoided in every single developed economy since 2007. What the SNP membership should support instead is the following motion (if they’re given a chance to do so):
“Conference believes that this lasting reputational damage greatly reinforces existing Party and SNP Scottish Government policy to establish Scotland’s own Central Bank and introduce our own currency as soon as practicable after independence, along with a commitment to sound economic governance.
Conference calls on the Party and all SNP elected representatives to explain and highlight the considerable economic and social advantages of a Scottish currency in the forthcoming independence campaign.”