Oh Scotland, don’t you dare! – Part 2

This is Part 2 in my two-part series analysing the 354-page report from the Scottish Growth Commission – Scotland – the new case for optimism: A strategy for inter-generational economic renaissance (released May 25, 2018). In Part 1, I considered their approach to fiscal rules and concluded, that in replicating the rules that the European Commission oversees as part of the Stability and Growth Pact, the newly independent Scotland would be biasing its policy settings towards austerity and unable to counter a major negative shock without incurring elevated levels of unemployment and poverty. In Part 2, I focus specifically on the currency issue. The Growth Commission recommends that Scotland retain the British pound, thereby surrendering its independence. Moreover, while it is part of the United Kingdom, the British policy settings have to consider the situation in Scotland. Once it leaves, it will still be bound by British fiscal and monetary settings but those settings would be designed to suit the remaining British nations. So if the British government continues with its austerity obsession, Scotland would be forced to endure that end. Hardly, the basis for an independent nation with progressive aspirations.

The currency issue

The Growth Commission only considers it a “possibility that the Scottish Government may choose to establish a separate currency at some future date” rather than an essential aspect of being an independent sovereign nation.

Their justification for maintaining the UK currency is based on the conclusions of the 2013 Fiscal Commission:

The rationale was that sterling was the currency that fits the optimal currency area criteria best between Scotland and the rest of the UK.

An Optimal Currency Area exists if the geographic area bound by the OCA is best served by one currency. What best means is another matter.

The crucial point is that OCA theory defines strict conditions under which several independent countries will be better off by forming a monetary union (sharing a currency).

The absence of one or more of those requirements voids the whole exercise and will deliver sup-optimal outcomes. One cannot have a ‘bit’ of or an ‘approximation’ of an optimal currency area.

The OCA concept emerged from the work of three economists, Canadians Robert Mundell (1961) and Ronald McKinnon (1963) and American Peter Kenen (1969).

The relevant references are:

Kenen, P.B. (1969) ‘The Optimum Currency Area: An Eclectic View’, in Mundell, R.A. and Swoboda, A.K. (eds.) Monetary Problems of the International Economy, Chicago, University of Chicago Press, 41-60.

Kenen, P. (1994) ‘Exchange Rates and the Monetary System: Selected Essays of Peter B. Kenen’, Aldershot, Edward Elgar.

McKinnon, R.I. (1963) ‘Optimum Currency Areas’, American Economic Review, 53, 717-725.

Mundell, R.A. (1961) ‘A Theory of Optimum Currency Areas’, American Economic Review, 51, 657-665.

In its original formulation, Robert Mundell defined three conditions, which if in existence, would justify the formation of a monetary union as an Optimal Currency Area:

  • The countries economic cycles move together and they face common consequences if hit by a negative shock (for example, a decline in private spending) – thus there should be no major asymmetric shocks which would affect one region/state significantly more than another. A consequence of this condition would be, for example, that unemployment rates should be similar across the countries in the union;
  • There should be a high degree of labor mobility and/or wage flexibility within the group of countries such that if unemployment rose in one country, workers could quickly move elsewhere to find jobs. Mobility also refers to a lack of cultural and institutional barriers (for example, a pension entitlement in one nation would be transferable to another without cost);
  • There is a common risk-sharing structure so that fiscal policy can transfer resources from better performing to poorly performing countries without constraints.

Crucially, for Mundell, “optimality relates to the state of the labor market” such that if “the currency regime within a given area causes unemployment somewhere in that area (or accepts some other portion of that same area to accept inflation as the antidote to unemployment), it is not optimal” (Kenen, 1994: 41).

McKinnon (1963: 717) considered optimality to mean a “single currency area within which monetary-fiscal policy and flexible external exchange rates can be used to give give the best resolution of three … objectives: (1) the maintenance of full employment; (2) the maintenance of balanced international payments; (3) the maintenance of a stable internal price level …”

Consider the components – both monetary and fiscal policy are important and the goal of full employment is not subjugated to price stability ambitions. Policy has to achieve the ‘best resolution’ of all the goals and not pursue one (price stability) by deliberately undermining another (by creating unemployment).

If a collection of nations cannot combine and use economic policy in this way then they do not belong together.

This is crucial for it requires that the regions or countries that enter a OCA arrangement with a single currency also share the same fiscal policy setting mechanisms, which are then used to transfer net spending capacity between the regions or countries in relation to their internal situations.

So if, for example, Scotland was to experience a negative private spending shock and unemployment rose above that elsewhere in the UK, then the ‘federal’ fiscal authority that administers fiscal policy for Britain and Scotland (as Member States) would increase net public spending in Scotland (and perhaps reduce it elsewhere). Adjustments in taxes could also be made in this asymmetric manner to increase non-government spending in Scotland.

If you think about that requirement then the idea of a single currency being shared between the newly independent Scotland and the remaining British nations is ludicrous.

Either the remaining nations would have to create a new fiscal capacity that is shared with Scotland or the newly independent Scotland would have to rely on British fiscal initiatives.

Neither is consistent with creating an independent nation.

Not only would Scottish monetary policy be set by the Bank of England but it would also have no independent fiscal policy.

In what sense, then, would the nation be sovereign and independent?

In 2014, when this issue was first broached, the British Government categorically rejected any notion of a currency union with Scotland, a fact acknowledged by the Growth Commission’s Report:

While it remains a feasible outcome for both Scotland and the rest of the UK, it would create too much economic uncertainty for the formal currency union policy to be part of the proposition in a future referendum, since it is possible that a future UK Government could take a similar obstructive position. The blocking itself created unnecessary confusion and uncertainty for individuals, businesses and investors.

So why would the Growth Commission still advocate a common currency on the basis of the OCA justification when clearly the most essential condition for that currency arrangement to be effective is acknowledged to be absent or unworkable?

Their response was symptomatic of the whole assertive nature of the Report:

The case for a sterling currency union remains strong since Scotland and the rest of the UK remain a close approximation to an optimal currency area and would continue to be so for some years after Scotland became independent. It would also provide continuity and stability.

Sorry. A close approximation is a nothing concept. The OCA literature is clear – a geographic area either satisfies the required conditions or it does not.

If it does not, the ‘optimal’ characteristics are no longer present.

Being near enough is nowhere.

And, the fact is that the lack of any ‘federal’ fiscal capacity is hardly redolent of a ‘close approximation’ anyway.

Which means Scotland would be in the position of sharing a currency with a very strong neighbour who has no need nor responsibility to make fiscal and monetary policy decisions that benefit the smaller nation.

The Growth Commission claims that this would just “mean that Scotland’s government would cede effective sovereignty over monetary policy”.

It does mean that, but it means much more than that.

It also means that effective fiscal sovereignty is also ceded.

Which is why Growth Commission moves on to recommend the unworkable fiscal rules that I considered in Part 1.

In trying to justify their recommendation of the retention of sterling as the currency of a newly independent Scotland, the Growth Commission also produces some extraordinary and flawed arguments.

First, we read that “Unlike households, when states borrow on international markets they tend to borrow in widely used global currencies such as US dollars, euros, sterling or yen”.

Which states do that?

The Australian government doesn’t borrow in foreign currencies. The Japanese government doesn’t. The US government doesn’t. And, the British government does not borrow in foreign currencies.

How many more would you like me to list?

So where is the evidence to support the Growth Commission’s claims?

In the main, only nations subjugated to IMF-type programs or otherwise in desperate straits borrow in foreign currencies. That is, in addition to the Eurozone Member States, and we have seen how much trouble that has caused.

Second, the Growth Commission writes that:

In today’s world, no one ‘owns’ a particular currency and the more widely acceptable the currency the less the issuer is able to restrict its use. What happens with respect to currency the day before an independence vote would happen the day after and continue to happen until such time as the elected Scottish Government seeks to do something differently.

This is patently false and diverting the argument into some irrelevant notion of who ‘owns’ a currency is deceptive.

In effect, the Growth Commission statement is meant to engender the conclusion that there is no particular status as the currency issuer.

But that assessment is in denial of the capacities that a currency-issuer has under a fiat monetary system, which would be absent if Scotland chose to retain the British pound as its on-going currency.

The capacity of the issuing government goes well beyond “setting interest rates”, which is all the Growth Commission is prepared to concede.

Consider these essential characteristics for a democratically independent nation:

1. In a fiat monetary system, the currency-issuer can purchase whatever is for sale in that currency including all idle labour.

2. Such a sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

3. Such a government has no need to borrow from the non-government sector to cover spending beyond taxation revenue. A progressive government issuing its own fiat currency would of course not issue any debt to match its deficits.

4. If such a government voluntarily chooses to match its net deficit spending with debt-issuance it is always able to control the yields on that debt-issuance including being able to borrow at zero (and negative rates) if it so desires.

5. And, moreover, such a government would never need to borrow in a foreign currency.

A newly independent Scottish government would lack all of those capacities.

Its spending capacity and thus command over real resource would be limited by its taxation revenue and the forced debt-issuance in a foreign currency.

Its capacity to borrow would be determined by private bond markets and it would have to accept the yields demanded from those private markets.

It would never be able to guarantee payment on its liabilities because they would be denominated in a currency that it uses rather than issues.

It would never be able to guarantee stability in its banking system including protecting deposits.

The viability of non-government sector debt would be dependent on the capacity of the nation to generate exports and earn pounds.

Taken together it is difficult to argue that the newly independent government would be able to focus on its socio-economic-ecological objectives when its financial capacity to command the necessary resources lay in the hands of the non-government sector (especially private bond markets and banks), whose goals would not likely be aligned with the welfare of all Scottish people.

And it would have to accept interest rate structures that the Bank of England determined were suitable for the UK rather than specifically suited to Scotland.

This is the same problem that the Southern European states faced in the build-up to the GFC. They were forced as Member States of the Eurozone to accept ECB interest rates that were specifically tailored for Germany as it laboured in the early 2000s with recession and the impacts of absorbing East Germany.

Third, the Growth Commission claims that:

As a result of the development of global capital markets and electronic transfer it is now virtually impracticable for an open economy to impose effective capital controls in the medium or long term.

Tell that to Malaysia in 1997 and Iceland in 2009. Both small economies used capital controls to great effect to restore or maintain currency stability in the face of major financial crises.

Both nations demonstrated categorically that the nation state can use its legislative capacity to regulate capital flows in and out of its sovereign borders.

To claim otherwise is just to rehearse the neoliberal mantra that eschews capital controls. Not even the IMF runs that banal lie anymore.

The neoliberals know that if they can persuade the nation state to allow capital mobility, speculative profits will be higher, irrespective of the impact of that mobility (in or out) on the well-being of the citizens in each state.

Fourth, the Growth Commission engages in scaremongering – of the ‘state might rip your assets off you’ type – by noting (emphasising strongly) that private assets and liabilities are private and not the property of the Scottish government.

They warn against redenomination of existing financial assets or liabilities upon the introduction of a new currency.

This is just a ruse.

We know that introducing a new currency does not require the redenomination of existing financial assets or liabilities held by the non-government sector.

For the new currency to be effective, the only initial requirement is that the government legislated that the new currency must be used to extinguish any tax or other contractual obligations the non-government sector has to the state.

In my view, the state would be wise to provide incentives to private citizens to convert what would become their foreign currency holdings into the new currency. But it is not necessary nor an urgency.

The Growth Commission tries to claim that there would be recourse to the European law and IMF rules should “a future Scottish Government … [try] … to alter existing contracts”.

But what is undoubted – and I explain this at length in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – is that international law recognises the principle of Lex Monetae or ‘The Law of the Money’ as a well-established legal principle, backed up by a swathe of case law across many jurisdictions.

This principle states broadly that the government of the day determines what the legal currency is for transactions and contractual obligations within its national borders.

Within a nation’s own legal system, under the principle of Lex Monetae, a newly independent Scottish government could determine that all contractual liabilities currently specified in pounds or whatever would now be valued in the new currency.

I explained that in this blog post (which was part of the draft of that book) – Options for Europe – Part 79 (May 6, 2014).

So again, the Growth Commission is simply making assertions that are not necessarily consistent with international law.

The Growth Commission is obsessed with the primacy of monetary policy and considers the currency issue within that frame – so a separate currency is unnecessary as long as “the economic cycle in Scotland is … [well correlated with] … the rest of the UK.

This is consistent with the mainstream New Keynesian assertion that fiscal policy doesn’t matter in the long run and that monetary policy should focus on price stability (after which optimal growth rates will follow).

It is not an assertion that stands up to any evidential scrutiny.

Prior to the GFC, the mainstream macroeconomics had deemed the ‘business cycle to be dead’ and that ‘fight inflation-first’ monetary policy had delivered unprecedented stability – the so-called Great Moderation.

They claimed that role of fiscal policy was to just passively support the main counterstabilisation tool – monetary policy. This was in contradistinction to the previous Keynesian orthodoxy where fiscal policy was seen to be a powerful and flexible policy tool to manage the non-government spending and saving cycle.

But being dispatched to a secondary status, the mainstream set about designing fiscal rules that worked to ensure there was a bias towards surpluses and fiscal drag.

Please read my blog post – The Great Moderation myth (January 24, 2010) – for more discussion on this point.

The GFC exploded all those myths and taught us that:

1. Monetary policy is largely ineffective as a counter-stabilising stimulatory tool. It is indirect and no matter how large bank reserves become (say, as a result of Quantitative Easing), banks will not increase lending if there are no credit worthy borrowers queuing up for loans.

2. Fiscal policy is extremely effective at redressing short-falls in private spending and saved millions of jobs when it was expanded. In many nations, government stimulus was withdrawn too early and too quickly and the result was continued stagnation in many nations.

3. The only nations that encountered trouble with their government bond markets were those that do not issue their own currency. This is because the bond investors knew that the assets issued by currency-issuing government were risk free (unless some extraordinary political motive triggered default) and, Eurozone Member State debt, say, carried credit risk because the governments were using a foreign currency.

So one cannot fully appreciate how restricted a nation would be using a foreign currency unless we consider fiscal policy to be the primary (effective) counter-stabilisation policy tool.

For example, the newly independent Scottish government would not be able to run an independent full employment policy with large-scale public sector job creation if the UK government was running an austerity bias and the Scottish government was forced to target fiscal balance due to lack of tax revenue or borrowing capacity in the foreign currency.

Take another example.

If the remaining British citizens decided to increase their overall net saving (meaning that the private domestic sector aimed to spend less than its income), then, given its external deficit, unless the British government increased its fiscal deficit to ‘fund’ the new saving aspirations of the private domestic sector, the British economy would go into recession and its fiscal deficit would rise anyway via the automatic stabilisers.

The situation in Scotland would be dire and its government would be largely defenceless.

A major British recession would impact directly on Scotland in three important ways: (a) its tax revenue in pounds would slump; (b) its ability to borrow in pounds to fund a rising deficit would be compromised; and (c) its export revenue would decline.

From this state, the application of the fiscal rules proposed by the Growth Commission would force the Scottish government to cut its spending for fear of running short of pounds.

As a consequence its recession would be magnified and the Scottish government could do little to avoid the damage.

With its own currency, the Scottish government would always be able to implement counter-cyclical fiscal policy to offset any recessionary forces coming from the south via its close trade connection with Britain.

Take another example.

Imagine the British trade deficit increases and the pound starts to depreciate. Given that Scotland would be using the British currency, its price level would be dependent, in part, on British exchange rate movements.

So Scotland would be forced to import inflation via the British pound depreciation despite nothing fundamentally changing in terms of its own unit costs. This is purely because it chose to forego the benefits of its own currency.

As we will see these examples would make a mockery of the ‘Fiscal Tests’ the Growth Commission proposes as the hurdle that Scotland should pass if it wanted to introduce its own currency.

Further, Scotland would have to take UK interest rates as given (so no room to create incentives or disincentives for financial flows) and nominal movements in the pound would drive Scotland’s real exchange rate, which is the accepted indicator of international competitiveness.

There are situations where importing such dynamics from Britain would be favourable but there are also many situations where they would destabilise the Scottish economy.

You could imagine a situation, for example, where productivity growth in the British economy was accompanied by favourable capital inflow which was pushing sterling up in foreign exchange markets.

There was no coincident productivity growth in Scotland.

As a result, Scotland’s real exchange rate would rise and its international competitiveness would decline, while the productivity growth in Britain would offset the loss of competitiveness via the nominal exchange rate increase.

Further, the interest rate environment is clearly determined by what the Bank of England deemed to be suitable for advancing its agenda, which certainly would not include any consideration of the impact of different interest rate choices on Scotland.

Why does this matter?

If the economic cycles of the two nations start moving in different directions, then being forced to adopt interest rates that are designed for the current state of the UK economy will result in ‘pro-cyclical’ policies being implemented in Scotland.

So, for example, if the UK is facing an inflationary surge while Scotland was in recession and the Bank of England starts hiking interest rates, Scotland would have to endure higher interest rates even though the responsible direction for Scottish policy is to relax monetary policy.

Of course, this may not matter that much given that monetary policy is not a very effective policy tool for controlling aggregate spending patterns anyway.

But usually, fiscal policy is forced into passively supporting the monetary policy stance. And then the pro-cyclicality of the policy positions becomes deeply problematic.

Would the Scottish currency dive?

There is a huge difference between introducing a new currency altogether, which has no volume in foreign exchange markets and breaking a peg of an existing currency or abandoning the use of a foreign currency which is already being bought and sold in the international currency markets.

In the case of Scotland, as long as the government could enforce local tax obligations in the new currency, there would be a demand for that currency.

Initially, the supply of the currency would be restricted by the government spending (given that this is the way the currency would enter the monetary system).

So massive excess supplies of the currency are not likely immediately, and that is the requirement for depreciation in a floating exchange rate system.

Eventually, as the currency volumes increased in the foreign exchange markets, buying and selling on international markets would determine its value.

There is no reason to assert that the new currency would then collapse.

The currency tests

When might a newly independent Scottish government be in a position to introduce its own currency?

The Growth Commission produced a list of hurdles (“tests”) which would be used to determine whether Scotland was ‘ready’ for its own separate currency at some future date.

It reads like an IMF Bible and includes adherence to unworkable fiscal rules, central bank credibility, sufficient foreign reserves, and relevance of trade and investment patterns.

The problem is that the requirements are so ideologically-biased that Scotland might never pass these neoliberal hurdles.

As we saw in Part 1:

First, who says that adherence to deficits of 3 per cent of GDP over a cycle is responsible, if over that cycle the nation maintains an external deficit and the private domestic sector desire to save overall?

Would we judge a nation unsuited to having its own currency if it encountered a deep recession and its fiscal deficit rose to much higher proportions of GDP?

In that case, many nations including Britain itself would be deemed unqualified to have its own currency.

The point is that there is no valid economic argument to justify the claim that a fiscal balance should be at any particular level over any particular time period.

Responsible fiscal practice indicates that the fiscal balance should be whatever it takes to support the non-government spending and saving decisions and ensure there is sufficient spending in the economy to achieve full employment.

If that requires continuous fiscal deficits of 10 per cent of GDP then so be it. It is required permanent surpluses of 10 per cent of GDP then so be it.

There is no meaning in the statement that deficits are bad and larger deficits are worse and vice-versa.

It all depends on context.

For a nation with a very large external surplus (say a large energy exporter) that can support strong private domestic saving, high levels of employment and first-class provision of public services, then a fiscal surplus might be appropriate.

But most nations will have external deficits of varying magnitudes and then if the non-government domestic sector desires to save overal, the public balance has to be in deficit, or else a recession will ensue.

The only way around that is if the private domestic sector goes on a debt binge and maintains spending growth in that way. But that growth strategy is ephemeral, as we have seen with the GFC, and eventually the private sector stops the credit glut and tries to restore its balance sheet – at that point, fiscal drag kills growth.

So no standalone rule like a ‘balanced budget over a cycle’ makes any sense at all. It all depends on the spending and saving decisions of the non-governent sector and they can change.

Second, why is an adherence to deficits of 3 per cent of GDP over the cycle responsible if mass unemployment is at elevated levels over that cycle?

Third, what does it mean to say that “the Scottish Central Bank and Government framework …[have] … established sufficient international and market credibility evidenced by the price and the stability of the price of its debt issuance” when fluctuations in the British economy can seriously undermine the newly independent nation’s capacity to raise pounds in international markets if it continues to use the British pound?

Refer back to the examples above.

Fourth, how would we decide whether “a separate currency meet the on-going needs of Scottish residents and businesses for stability and continuity of their financial arrangements and command wide support”.

If we imposed all tax and other obligations to the state in the new currency then it would immediately “meet the on-going needs” because Scottish residents and businesses would have to acquire the currency.

Further, if the newly independent Scottish governments used its newly acquired currency-issuing capacity to bring idle resources into productive use (for example, via a national job creation scheme – Job Guarantee) then it would be hard to say that that the on-going needs of Scottish residents were not being met.

Fifth, why would it be necessary for “Scotland … [to] … sufficient reserves to allow currency management” if it floats its currency?

It would be madness for the new nation to peg its new currency to the pound or the euro or any currency and then try to manage that peg.

Like all nations that issue their own currencies, the newly independent Scotland would be advised to float its currency on international currency markets.

The float will settle at the level that matches its relative productivity and domestic costs.

It frees the central bank from having to compromise domestic policy to defend a peg and also means it does not have to accumulate foreign reserves.

The fear that a float would destroy the currency is neoliberal scaremongering.

In a situation of stress, the Scottish government could deploy capital controls to advantage though.


The Growth Commission recommendations are consistent with the mainstream neoliberal consensus of these issues. They are not conducive to the creation of a vibrant, progressive nation.

Scotland would be exposed to British government decisions yet have no political stake in those decisions.

If the Scottish people determined that they wanted to retain the use of the pound as the national currency, then Scotland would be better off staying within Britain and exerting internal political pressure to improve its situation.

That is an inferior outcome to establishing an independent nation with its own currency.

However, it would be much better than declaring independence but then continuing to use the pound and accept whatever monetary and fiscal policies the British government decided.

Yes, in that situation, the Scottish government (as now) could have some fiscal initiatives. But, ultimately, when the crunch came, it would face a shortage of pounds and austerity would be required.

Overall, an independent nation has to have its own currency and monetary policy. Otherwise, the independence is a sham.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

Spread the word ...
    This entry was posted in Britain, Reclaim the State, UK Economy. Bookmark the permalink.

    41 Responses to Oh Scotland, don’t you dare! – Part 2

    1. William says:

      What would the situation be for bank created money in an independent Scotland (with it’s own currency).
      As I understand Modern Monetary Theory of how banks operate, the debt they create has to be swapped for government created money (if I understand Ellis Winningham correctly).
      Initially, would there be a enough stock of the new Thistle$ for this to happen?

    2. William says:

      “The Australian government doesn’t borrow in foreign currencies. The Japanese government doesn’t. The US government doesn’t. And, the British government does not borrow in foreign currencies.”

      From memory, some New Zealand government bonds are issued in a foreign currency.
      I haven’t been able to research this, but I read it in the New Zealand Herald newspaper a few years ago.

    3. yesindyref2 says:

      “The Growth Commission only considers it a “possibility that the Scottish Government may choose to establish a separate currency at some future date” rather than an essential aspect of being an independent sovereign nation.”

      You’d need to see my comment on part 1 to take it in context, but the point is that the SGC report is NOT supposed to be a political decision-making report, but a background report, at least in my understanding of its remit. Therefore it is not for it to decide on a new currency, it would be for the Government of the time, or a cross-party post-YES pre-Indy team.

      And yes, if there was another referendum say, after a YES vote, on the issue of currrency, I’d vote YES to our own currency from Day 1 of Independence. Plus “MMT” of course.

    4. Adrian Kent. says:

      Interviewed by Greg Palast (in the Observer back in 2000), Mundell was quite upfront about his intentions with ‘Optimum Currency Areas’ – it was always much more about entrenching ‘supply-side / Reaganomics’, than anything else:


    5. Derek Henry says:


      Commercial banks will create the new Scottish Currency from thin air like they always do. Loans create deposits.

      The key issue is what you allow the banks to do. That is back to the days of boring bolwer hat banking. You tell the banks what they can do not what they can’t because they always find a way around that.

      The beauty of an newly independent nation is you set the rules from the get go. Part of that is you reign in the commercial banks. To do that your new central bank that you’ve created allows them to go bankrupt and there will be no socialising of any losses.

    6. David says:

      It’s tragic that the economic ideology is so strong that the Scottish Government would cheerfully set themselves up to be an “independent” colony. We’d have none of the financial power of a government but would take all of the blame when it went wrong. Cue lots of parsimonious articles in the press citing lazy, wasteful, profligate Scots running up debt they can’t pay, then the IMF step in to give us a dose of economic responsibility, then before you know it have the country is owned by foreign banks.

      I’m actually impressed by the responsibility of Westminster so far in categorically refusing to allow a currency union. I’ve no idea whether it’s a cynical move to prevent independence, a jealous guarding of the value of the pound, or someone honestly making the right decision for once, but for whatever reason they’ve taken the right tack and I hope they stick to it.

      Hope to get a chance to see you when you visit for your speaking tour!

    7. Derek Henry says:

      My biggest concern if Scotland ever became independent is once the correct structure is in place they will hire the wrong people to manage that structure.

      For me what is really important is that you need the right people in place that know how to run a central bank in the correct manner. That means not hiring from the usual pool of suspects.

      It is imperative that the government of the day get MMT’rs to run the central bank and the treasury otherwise the whole thing will be doomed to fail from the start. Which means they have to hire from the Universities that produce MMT students.

      It is very easy to imagine a situation where these institutions get hijacked politically as we’ve seen all over the world by the likes of a Carney or a Draghi. That will not support the nation but vested interests that will be ideologically driven.

      This could happen at the start during the interview process or whenever a poltical party gains power and changes the people at the controls.

      Something has to be put in place to stop these institutions from being hijacked. Which could be very difficult since the right way to do it is bring the Central bank back under control as a consolidated sector with the Treasury. Which makes the government of the day more accountable and responsible at the ballot box.

      How many times have we seen neoliberals hijack these structures for their own needs. Yes, they could be voted out the next time around but the damge they can do can last for decades. It’s a huge problem nearly every country experiences.

      I’m nor sure what the answer is for this in the democratic society we have today. When those who control the narrative and the media normally win.

    8. Scott Egner says:

      There was definitely an SNP element within the GC and I believe it was funded by them. The commonweal contribution which is more in keeping with the principles of this blog have been left out in the cold. That is very worrying in my opinion.

      A conspiracy theorist might say that a deal has been done in the background with the neoliberals in the city that they will support independence on condition of ‘business as usual’ in Edinburgh if it doesn’t work out in their favour in London post-brexit.
      Of course thats just a theory.

    9. Derek Henry says:

      What the world needs is the online MMT university and MMT universities producing a large pool of people who know how to….

      a) Manage a floating exchange rate.

      b) Manage a central bank.

      c) Manage a Treasury.

      d) Experts in the Sectoral balances.

      Etc, etc, etc

      We need these people coming through now in decent numbers. The next generation of MMT economists that have the skills to take up these roles when asked. Teams of people who know how to run a country.

      That can accept the responsibilty and pass down the knowledge to the next generations once the original MMT’rs are enjoying their well deserved retirement.

      Which again will be difficult as I would imagine alot of them not getting the chances they deserve and being lured to the bright lights of the city and the big banks.

    10. Eamon Byrne says:

      Bill, I’m very surprised you’ve written nothing on the Swiss sovereign currency initiative referendum, due to be held today June 6.

    11. Derek Henry says:


      It’s probably more simple than that. The SNP have no idea how the monetary system operates. That is pretty clear in my opinion. Just from Nicola’s comments alone you can see she simply doesn’t get it.

      The people they ask for advice are the usual Oxbridge, Ivy league economists that have been brainwashed in nonsense. The business School, banking set have their finger prints all over it.

      They walked into every trap set by the Smith Comission and playing about with taxes was a huge mistake when you don’t control your own currency.

      The common Weal are trying and have made huge strides over the last few years. However, we are all just falling short of winning the economic arguement.

      This is a step in the right direction and we all just have to keep applying the pressure on the SNP until they get it and start listening to us. We even have certain Scottish MP’s who are now following Stephanie’s twitter feed all of which can only be a good thing.

      A change of Paradigm takes time and I think we are seeing the start of that process. Then you see a change at the ballot box.

      Take Italy for example. MMt’rs have been camped over there for at least 5 years now and generated huge interest with the MMT summit in Rimini. The Italians now know how to go back to the Lira the correct way and it shows at the ballot box.

      These things take time.

      Scotland needs a MMT summit similar to what’s what’s been going on in Italy and we just need to keep on applying the pressure.

    12. larry says:

      “many nations including Britain itself would be deemed unqualified to have its own currency”. Quite right, Bill. I would argue that the conclusion is even stronger than that. Since every nation experiences at some time deep recessions and high fiscal deficits, it follows that no nation is qualified to have its own currency. Which means that they would have to use someone else’s, with the consequence that everyone has to use another nation’s currency. This is incoherent.

      One explanation for a group putting forward such gobbledegook is that they had a scizoid attitude to independence. They argue for nominal independence, but keeping the currency may make them feel that they are still deeply connected. It is a denial of reality, but when was that ever a bar to any position taken. One would be forgiven for thinking that this suggests that, unconsciously at least, they don’t really want to leave at all.

    13. larry says:

      Truly brilliant, Bill. Your argument about the give and take among the sectors and why when one goes up another goes down is illustrated well in a sectoral balances graph, which I know you know. It is astonishing that no one on the Growth Commission seems to be aware of this procedure.

    14. Brian Stobie says:

      I note that there appears to be a strong trend within the pro-independence social media to praise the report, downplaying the economics, and that opposition to the economic advice in the report comes from primarily the left-wing in Scottish politics, such as the Scottish Socialist Party and Common Weal. The Common Weal documents are excellent in my opinion.
      Unfortunately I think these organisations are seen as tainted due to some elements in them demanding that a new Scottish state should be socialist from the outset.

      The only newspaper that supports Scottish independence, The National, has ran some recent articles giving the chairman of the report, Andrew Wilson, space to explain how good the report is to the masses.
      The nadir being the article entitled “Growth Commission: Independence is only winnable when the City is convinced” with the first paragraph being “GROWTH commission chair Andrew Wilson has told left-wing yessers that an independent Scotland is only be possible when the banks, pension funds, investment trusts, and oversea investors who buy up government debt, can be convinced.” God help us.

      Maybe the report will indeed convert some of the soft NO voters, noting that 99% of them (in fact 99% of everybody) don’t know the difference between a government deficit and a government ‘debt’, let alone what the two words actually mean as MMT explains. The graphs and liberal use of econo-speak language will be very impressive to some, I’m sure.

      My biggest concern is that the authors are just confirming the neo-liberal framing and are contributing negatively to the general ignorance of the voting population no matter what they feel about Scottish independence.

    15. eg says:

      The premise that Scotland keep the GBP is of a piece with the folly that Canada ought to “dollarize” — it’s madness

      It’s the sort of forelock tugging mopery that puts me in mind of Irving Welsh’s “I don’t hate the English” riff …


    16. Chrislongs says:

      UK HMG just sold RBS shares at a loss of £2Bn ie around half the original rescue price – no mention of how this money could be better used or why the bank was saved!

    17. yesindyref2 says:

      Well, the thing to do is to just patiently persist. I’ve started mentioning MMT in postings, but don’t have the depth to do anything detailed. So what’s needed is a selection of short punchy easy to understand statements, to make people think, shake their roots, tweet length (though I don’t twitter). And maybe since it’s deliberately keeping it simple, mark them out of 10 for accuracy, even when using them, with some peer criticisms to remove false ones or dodgy ones. Things like:

      1). Government debt is NOT the same as haousehold debt – see MMT. (10 out of 10).

      2). There IS a Magic Money Tree with our own currency handled wisely, but don’t pick all the fruit at the same time – see MMT. (9 out of 10).

      3). If you need to spend more money on the public sector, then print more – see MMT. (5 out of 10).

      A couple of dozen like that, just be persistent, both online and face to face, and appraisal of my markings out of 10 please welcomed!

    18. stone says:

      All you’ve just written makes perfect sense about an independent Scotland needing its own currency. But what about all the “third world” countries that are in dire straights with government debt denominated in USD rather than their own local currencies? I’m puzzled that there isn’t such a clamour for Haiti etc to have full monetary sovereignty. Wouldn’t advocacy for such a transformation in such countries be where MMT could have the greatest impact? (sorry if MMTers have been vocal on this and I’ve missed it).

    19. larry says:


      One of Bill’s posts might fill the bill nicely. (Sorry) It is “How to discuss Modern Monetary Theory”, which Bill posted on 5 November 2013. Hope this helps.

    20. Paulo Marques says:


      Bill recently did an analysis for East Timor. It’s incredibly depressing.

    21. larry says:


      I neglected to say that you might like to have a look at the table at the end of Bill’s post that I mentioned.

    22. yesindyref2 says:

      Thanks for that, bookmarked and will read when I’ve time (prepping for tomoro).

      I found it by googling “How to discuss Modern Monetary Theory site:http://bilbo.economicoutlook.net” and the reason I do that is because it was a Wings poster who told me how to reference just one single site. URL is http://bilbo.economicoutlook.net/blog/?p=25961

      Very quick look – yes, I’ll read it soon on YOUR recommendation – you have been warned 😎

      Quick comment about denominating debt in USD, last July Denmark paid off all its foreign denominated debt and now has it only in Krona. A good model to strive for, I think. The unionists bang on about needing £55 billion reserves, but that of course is not exactly the full story. An article about how Denmark fits in or otherwise with MMT could be very interesting all the same, and give us more solid ammunition to use against that argument. I do my best (ERM2, way tighter peg than ERM2 needs, having problems keeping the Krona down, etc.).

    23. William says:

      Derek Henry said:
      “Commercial banks will create the new Scottish Currency from thin air like they always do. Loans create deposits.”

      Do they create the actual national currency?
      We are repeatedly told by Stephanie Kelton and Randall Wray etc. that only the State can create the sovereign currency, so there must be a conversion of bank created money to State money at some point.

    24. bill says:

      Dear stone (at 2018/06/06 at 1:17 am)

      A moment’s research on my site will reveal that I have dealt with the ‘third world’ issue extensively including Haiti.

      For example:

      Bad luck if you are poor! (June 25, 2009) – http://bilbo.economicoutlook.net/blog/?p=3064

      Haiti should build houses and schools and forget about the army (November 4, 2011) = http://bilbo.economicoutlook.net/blog/?p=16779

      Ultimately, real resource availability constrains prosperity (February 11, 2016) – http://bilbo.economicoutlook.net/blog/?p=32938

      Ending food price speculation – Part 2 (October 17, 2016) – http://bilbo.economicoutlook.net/blog/?p=34609

      Ending food price speculation – Part 2 (December 18, 2016) – http://bilbo.economicoutlook.net/blog/?p=34618

      Several posts under the Timor-Leste Category http://bilbo.economicoutlook.net/blog/?cat=3

      best wishes

    25. larry says:

      William, bank created money IS effectively state created money. Actually, they don’t create money as such. What they create is credit. The bills and coins in your bank account are not minted or printed by the private bank. To engage in such an activity would amount to counterfeiting, which is illegal. I don’t know if you think this makes any sense.

    26. William says:

      Thanks Larry,
      It’s just that Kelton & Wray etc. say that the government is the monopoly issuer of the currency, but surely this is not the case if banks issue sovereign currency too?

    27. Henry Rech says:

      Larry said:

      “Your argument about the give and take among the sectors and why when one goes up another goes down is illustrated well in a sectoral balances graph, which I know you know”

      They’re only good for telling you what happened but not what will happen.

    28. William says:

      OK. Just looked at Ellis Winningham’s site. He says the following regarding banks:

      “A Brief Note on Loan Payments, Accounting and Bank IOUs”

      “So, it {the bank} creates a coupon that is not a US Dollar, but the coupon can and will move reserves between reserve accounts so that payments for those goods purchased with the coupon will clear.”

      So banks don’t actually create the sovereign currency which is what I was questioning.

    29. bill says:

      Dear William and others (at 2018/06/06 at 9:28 am)

      Your queries are why the original MMT proponents use the term ‘net financial assets’ instead of ‘money’.

      The commercial banks can create ‘money’ (liquidity) by creating loans (credit). But they cannot create new net financial assets because the asset (loan) is offset within the non-government sector by the liability (debtor).

      Only transactions between the government and non-government sector can create or destroy net financial assets.

      The government is also the monopoly issuer of the currency (notes and coins). The commercial banks can get access to that and distribute it (vault cash) but only by sacrificing bank reserves held at the central bank.

      I hope that helps.

      best wishes

    30. William says:

      Thanks Bill for clearing that up.
      It is a difficult concept to get your head around!

    31. Some Guy says:

      William:We are repeatedly told by Stephanie Kelton and Randall Wray etc. that only the State can create the sovereign currency, so there must be a conversion of bank created money to State money at some point.

      (a) Since Kelton & Wray are right, there is never a simple, magical conversion, but there is trading of bank money for state money at par. (Bank money= bank credit, state money = state credit)

      When?: The basic, important “conversion” is when that state accepts bank money from a taxpayer as satisfying the taxpayer’s tax liability to the state. You write a check to the government from your bank account and you’re done with it. This fact makes bank money just as good as state money – outside the banking world. But the bank is not done with it after you write the check. Now they owe the state that amount, and they have to pay it in state money = central bank reserves. Money that is NOT created by the bank, but only comes from the state as Kelton & Wray told you. You could think of the above tax transaction as the bank giving you a hundred dollar bill out of your bank account and you paying the hundred to the state tax authority, if that makes it clearer how the bank and the state converted your bank account money into state money, from your perspective.

      How do the banks get that state money? A conversion the other way happens when you deposit say your Social Security check into your bank account. You give up state money in return for bank money, because you know the bank money is just as good for you and everyone else because of the above (and may pay interest or whatever). Or the bank could get the state money from interest on reserves or government bonds or other government spending, or from other banks. But somehow, it always came from the state.

    32. Schofield says:

      Excellent article! Perhaps by the end of this century it will be viewed as entirely moronic that previous generations should seek to tangle up a national currency, there to serve the well-being of the many, with the narrow profit-seeking objective of the few!

    33. cs says:

      Very interesting series on Scotland that sums up a lot of the key advantages of having your own currency with a floating exchange rate and comments on the transition to a sovereign currency which also has relevance for Italy too I imagine.

      I have forwarded it to my very active Scottish Independence acquaintances and implored them to read it.

    34. cs says:

      From a previous blog:
      “We consider a fall in the real exchange rate to signal a nation’s international trade competitiveness has fallen and this should lead to a fall in local exports and a rise in local imports.”

      But in this blog:
      “You could imagine a situation, for example, where productivity growth in the British economy was accompanied by favourable capital inflow which was pushing sterling up in foreign exchange markets.

      There was no coincident productivity growth in Scotland.

      As a result, Scotland’s real exchange rate would rise and its international competitiveness would decline, while the productivity growth in Britain would offset the loss of competitiveness via the nominal exchange rate increase.”

      Confused on this. Cheers for help anyone.

    35. David says:

      Hi cs,

      What part are you confused about? I’m not an expert by any means but here’s the example as I understand it;

      The idea is that the English and Scottish economies and their performances will be decoupled whilst the value of the currency won’t be. Scots will have to accept the performance of the pound based on what’s going on in the English economy – England is much larger and will retain issuance control of their own currency so will always have final say in the value.

      So whilst normally a more productive economy will produce more demand for it’s currency, raising the cost of a foreigner buying it’s goods, and a weaker economy will reduce currency demand and price, lowering costs for foreigners, once the economies are decoupled this will no longer apply for Scotland.

      Bill’s example is that there’s been some major investment and growth in England which, as our hypothetical Scotland is now independent, has not been shared with the Scots. The value of the pound rises even though the Scottish economy hasn’t experienced the investment and growth that would help balance that out. As a result, Scotland is now both economically less productive, is forced to sell her goods at an inflated price, and is less able to afford imports, further reducing Scot’s ability to compete.

      The bit I find a little confusing in your example is “We consider a fall in the real exchange rate to signal a nation’s international trade competitiveness has fallen and this should lead to a fall in local exports and a rise in local imports.” I would’ve thought that a fall in the real exchange rate would lead to the opposite – a rise in local exports and a fall in local imports, as buying from the country will be cheaper but selling to will be more expensive.

    36. Henry Rech says:

      O Scotland! my Scotland! rise up and hear the bells;
      Rise up—for you the flag is flung—for you the bugle trills,
      For you bouquets and ribbon’d wreaths—for you the shores a-crowding,
      For you they call, the swaying mass, their eager faces turning;

      Here Scotland! dear fatherland!
      This arm beneath your head!
      It is some dream that on the deck,
      You’ve fallen cold and dead.

      Apologies to Walt Whitman and Lincolnphiles.

    37. Mel says:

      “We consider a fall in the real exchange rate to signal a nation’s international trade competitiveness has fallen and this should lead to a fall in local exports and a rise in local imports.”

      Maybe we can get confused between abstract and concrete descriptions:
      * Diminished desire for a country’s export goods (= international trade competitiveness has fallen) leads to
      * diminished desire for the currency that would buy those goods, leading to
      * fall in the exchange rate.

      But this would make the fall in exports part of the cause, not an effect.

    38. CS says:

      I thought Scotland being less productive in this scenario compared to UK means a fall, not rise, in real exchange rate (not nominal)…so Scottish goods are relatively more expensive for foreigners cause they aren’t as productive. You get less bang for your buck in Scotland hence less competitive. I guess I find the whole real Vs nominal Forex thing tricky and from which country perspective we are viewing the rise or fall.

    39. paul says:

      This is great example of putting the cart bfore the horse.
      Without independence, we can have no indepent policy.

      If the Scottish people determined that they wanted to retain the use of the pound as the national currency, then Scotland would be better off staying within Britain and exerting internal political pressure to improve its situation.

      That,time and again, has never worked.

      I look forward to your visit here

    40. Malcolm Reavell says:

      Trying to raise awareness of MMT in Scotland. Anyone interested in helping, please visit the Facebook group: “Modern Monetary Theory for an Independent Scotland”

      Hoping to catch you when you come over.

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    To prove you're a person (not a spam script), type the answer to the math equation shown in the picture.
    Anti-spam equation

    This site uses Akismet to reduce spam. Learn how your comment data is processed.