The road to the bawbee – currency options for an independent Scotland

Lectures and events
Publication Date
Professor Sir John Kay FRSE
Professor Nicola McEwen FRSE
Professor Graeme Roy

What currency might be used in an independent Scotland?

Probably no issue caused more confusion in the 2014 referendum campaign or did more to diminish the credibility of proponents of independence. This lecture will review the various possibilities – continued use of sterling, membership of the eurozone, or the adoption of a national currency, which I shall, for concreteness, call the bawbee. The lecture will emphasise that in the modern world currency choices are matters for individuals, businesses and financial institutions as well as governments, and describe both the opportunities and the pitfalls.

This lecture is delivered by Professor Sir John Kay FRSE is one of Britain’s leading economists. Response by Professor Graeme Roy, Professor of Economics and Dean of External Engagement in the College of Social Sciences at the University of Glasgow and chaired by Professor Nicola McEwen FRSE, Professor of Territorial Politics at the University of Edinburgh.



What currency might be used in an independent Scotland? Listen to Professor Sir John Kay FRSE review of the various possibilities for Scotland.
A man wearing a suit and tie
Professor Sir John Kay FRSE
John Kay wearing a suit and tie sitting in a dark room
Sir John Kay FRSE
A person sitting at a table using a laptop
Professor Nicola McEwen FRSE
A man wearing a suit and tie
Professor Graeme Roy


Please note transcripts are automatically generated, so may feature errors.

Professor Nicola McEwen FRSE 0:00
Good evening, everybody. It is a great pleasure to warmly welcome you to the RSE tonight on such a chilly evening as well. It’s a pleasure to have our guest speaker with us here tonight. But before I introduce him to you, let me just say it’s such a pleasure to have everybody here in person tonight. So John was saying earlier to me that it’s the first time you have been in Edinburgh for quite a long time, almost two years. I think it feels to me like it’s the first time I’ve been out of my house, probably in a roundabout at the same time. My name is Professor Nicola McEwen. I’m a professor of territorial politics or with a great interest in this topic here tonight as a representative of the RSE. Delighted to introduce our guest speaker this evening, Professor Sir John Kay, also a fellow of the RSE, and one of Britain’s leading economists. His work is centred on the relationships between economics, finance, and business and he has had a very distinguished career which will be familiar to many of you. Spanning academic work, think tanks, business schools, company directorships, consultancies, and investment companies. John has been a fellow of St. John’s College, Oxford since 1970, and has held chairs in the London Business School, University of Oxford and at the RSE. And he’s been very closely connected with the Scottish constitutional debate having served on the First Minister standing Council on Europe in the last parliamentary session, and also a very prominent commentator on the economics of independence and in particular, on the issues of currency, which will be the subject of his talk this evening. I look forward very much to hearing his take on the very substantially different context in which the constitutional debate is being conducted or will be conducted them in the years to come. Following Sir John’s talk, we will hear a response from Professor Graeme Roy and Graeme is a professor of economics and Dean of external engagement in the College of Social Sciences at the University of Glasgow. Between 2016 and 2021. He was director of the Fraser of Allander Institute at the University of Strathclyde, and prior to that was a senior economist, economic advisor within the Scottish Government, including during the crucial period leading up to the 2014 independence referendum. After Graeme has responded, there will be an opportunity for you to ask what will doubtless be insightful and hopefully challenging questions. They’re both to Sir John and to Graeme. And without further ado, I will hand over to Sir John Kay.

Professor Sir John Kay FRSE 3:20
Thank you, Nicola, there is probably no issue, which cause more difficulty in the 2014 referendum campaign than the issue of currency for Scotland. And it’s an essential I think, that before we engage in a renewed debate on Independence issues, that we are much clearer about the issues and the background to this particular question. When Sir Walter Scott, left, Abbotsford, dying to try and recuperate at Naples, we can imagine that he took with him a bag of sovereigns. They’d be have they would have been gold sovereigns, and they would have had on the, the head of King George he might have taken a letter of credit from a Scottish bank with him to Naples. Hello, no, we know that. So Walters credit was not such that he would necessarily have been pre approved for the American Express card. But he would then have changed these in Naples, for Neapolitan piastres, which would have borne the head of King Ferdinand of the Two Sicilies. That was the 19th century Victorian world, in which currency consisted of gold or gold coins, and occasionally for banknotes, which are referred to gold that was kept in the vaults or supposed to be kept in the vaults of commercial banks. And because it wasn’t always kept in the vaults of commercial banks, the central government took over a monopoly of note issue, towards the middle of around the world towards the middle of the 19th century. That’s a world which we call the world of chartalism of national currencies that are associated with sovereignty, in the particular sense that they’re even associated with the sovereign of a particular country. And that’s a world that came to an end essentially, in 1914. The period between the two wars was a period essentially of economic chaos. And after the Second World War, there was an attempt to restore some kind of stable global monetary order. It was encapsulated in the Bretton Woods agreement reached in 1944, which JM Keynes was one of the major architects. But that world essentially broke down in the late 1960s and early 70s. I’m going to apologise now because I’m going to take through through what is in effect, Introduction to money and banking 101. For those of you who get interested in going on, perhaps even to further courses and money in banking, I can tell you there is a 10,000 word paper, which elaborates the concepts I’m going to introduce tonight. But I think unless we understand these basic concepts of money and banking, and money transmission, we’re not going to understand the issues there are other particular issues which you are going to face in Scotland. And I did, I remember doing the course in money and banking 101 in the city, University of Edinburgh, it was the year was 1968. And the course was delivered by Innes Smith, not I fear, the most inspired lecturer of the of the University of Edinburgh. But Innes Smith passed away in the 1980s. And by the time he had passed away, the world he was describing to us in these lectures had also passed away. In 1967, the pound was devalued against the dollar. Harold Wilson famously indeed notoriously said, the pound in your pocket has not been devalued. But it had been, and in the early 70s, inflation in Britain actually reached 27%. In 1971, President Nixon took America off the gold standard. He broke the link between the dollar and the gold and gold at which the bank, the Federal Reserve System was ready to buy and sell gold at a fixed price. And that was the end forever, of the gold standard which had prevailed in the 19th century.

Professor Sir John Kay FRSE 8:08
In 1968, in a rather more mundane event, Barclaycard introduced a credit card into the UK, which was beginning of the plastic cards that are today ubiquitous, and other principle ways nowadays, in which we actually make payments or everyday payments. Innes Smith told us a lot about what we call fractional reserve banking. And you will still people hear people throwing around the phrase of fractional reserve banking. But that was the idea that banks needed to keep a fraction of their deposits with the Bank of England. And that was a mechanism by which the Bank of England control the money supply. That control mechanism was abandoned in 1973. And from the 1980s banking regulation has been principally governed by the international banking agreements, which were reached in Basel in the 1980s.

Professor Sir John Kay FRSE 9:19
Notice that they were international banking agreements, because the internationalisation of money and banking was a central part of the change, which had occurred. In 1968, when I was a student, there was still exchange control. In order to in order to take a foreign holiday, you had to obtain foreign currency, and you were limited to 50 pounds of currency a year, which wasn’t a great problem if you’re a student, but it would have been a considerable problems. To me, nowadays I’m afraid And that exchange control extended not just to individuals and households, but to firms and institutions. So when I began running the investment portfolio of my Oxford college St. John’s, in the 1970s, the only way we could invest in foreign securities was to pay something called the dollar premium to obtain part of a limited pool of securities. And finally, most difficult to understand, but in the long run, most important in the 1960s, the grew up something called the Euro dollar market. And the Euro dollar market consisted of American and European banks, borrowing and lending to each other in London, outside the purview of the Federal Reserve System. And that was essentially the end of national control of domestic money and banking, and the origins of the international financial system that we now have today. So today, we live in a very different world. It’s a world in which you can buy a cup of coffee, anywhere from Aarhus to Los Angeles and pay with a plastic card in whatever the local currency is, and that will be debited in whatever currency you choose to hold your account. We live in a world in which firms maintain their accounts in many in many currencies, and preserve their accounts present their public accounts in different currencies. For example, although Vodafone, BP, AstraZeneca are among the largest of British companies. AstraZeneca and BP present their accounts and dollars. Vodafone presents its accounts in euros. Most international trade is actually invoiced in dollars 20% of road Europe into invoicing of exports is basically done in Europe, in euros in the rest of the world, more than 80% of exports are actually invoiced in dollars, more than half of all the dollar notes in circulation are outside the United States, and of cross border transactions in the world. 60% take place in dollars and 20% in Europe. The point I’m trying to make, and it’s perhaps the central point, which you need to take away from this evening, is that decisions about currencies, about what medium of exchange, unit of account, people will use are no longer simply the purview of governments. They’re made by the decisions of households, businesses, and financial institutions. That’s the world we live in. And we should stop thinking in terms of that 19th century world in which there was a national currency with a sovereign whose head was on the back of the gold coin. It’s very misleading, if we think about it, in these kind of terms. So much has changed since these lectures which Innes Smith delivered in 1968. But there’s some basic things which have not changed.

Professor Sir John Kay FRSE 13:52
In 1968, and before 1968, and after 1968. These were basics of understanding money. Money is something called transferable debt. That’s something which was actually laid out in a great book in the mid 19th century by a Scottish economist Douglas McLeod. He said that the the idea that money, that debt could be transferred from one holder to the other was one of the greatest inventions of the human race. That’s perhaps overstating it a bit. But it was a very important invention. And if you think about it, every time you make a financial transaction, what you’re doing is you’re making that in terms of transferable debt. When you pay for something in cash, you take out of your purse or your wallet and note, which says, the Bank of England will pay you so much, and you pass that over to someone else. And they are then in a position that the Bank of England will pay them so much. That’s not mostly how you nowadays make these transactions. However, by far the commonest way of making transactions is you make a bank transfer. When you pay your electricity bill, what happens is you transfer a debt from the Bank of Scotland to you. And that becomes a debt of the Royal Bank of Scotland to Scottish power, it’s a matter of transferable debt. And you will notice that the government is not a party to any of these. And the final way in which you make payments today, is by using plastic cards, and is quite complicated when you do what you do when you make a card payment. But what you’re doing is you are incurring a debt to your credit card issuer, which is then transformed through the mechanisms of visa and the like, into a debt from the merchant you’re buying the goods from a debt from a merchant to the merchant from the Merchants Bank. So in each of these transactions, there is debt being transferred from one person to another. And that’s the mechanism by which money operates in a modern economy. And you’ll see that the least important of these is actually the payment of cash. The other thing that Innes Smith told us was that money has three principal functions, the role of medium of exchange, which I’ve just been explaining, the unit of account, the way in which you keep track of your spending, and your income, and the store of value. It’s a way of keeping money of keeping value to use on a different occasion. And whatever the basis of money is, and whatever monetary systems have been adopted, money continues to fulfil these functions. That slide is the introduction to money and banking 101. And everyone should if not have it engraved on their mind, at least remember what it says. Then there’s a question of what we actually mean by money in the UK. And if I asked you what, how much money you have, and this being Britain, I would never actually dream of doing so. But if I were to ask you what how much money you have? You would answer probably in one of two ways, or you interpret the question in one of two ways. You would think I was asking how much you had in your purse or wallet? Or you might think I was asking how rich you are. But actually an economist asking how much money there is it this is not what an economist means by money. An economist means by money means well, I’m afraid one of several things. And I’m going to talk about three of these things, which are helpfully labelled M0, M1 and M4, these are not ways of getting to Leeds and to Bristol. These are actually measures published by the Bank of England, of the money supply in the UK. M0 is notes and coins in circulation, plus commercial bank reserves at the Bank of England. And you’ll see that M0 amounts currently to 96 billion pounds, which may seem to you rather a lot.

Professor Sir John Kay FRSE 18:32
But actually, it’s both rather a lot and not very much in fairly obvious senses, is rather a lot in the sense of that if I look at the largest component of M0 which is notes and coins in circulation, and observe that 65 billion pounds, that amounts to 1000 pounds for every man, woman and child in the United Kingdom. That amounts to about 3000 pounds per household in the United Kingdom. And I don’t know how many of you often have 1000 pounds on your person of 3000 pounds in your household? I certainly don’t. And I don’t despite I suspect being well, I don’t suspect I know, being a good deal richer than the average person in the UK. We need to ask where is all this money. And the evidence seems to be that a very large part of it is in the illegal or semi legal economy. And further evidence for that is produced by the fact that if we look at dollars, and euros we discover for example, that more than half the Euros in circulation are in euros notes, or 500 Euro diamond denominations or larger, I noticed the last time I went into a frozen French supermarket a month or two ago, they didn’t notice saying 500 euro notes are not accepted. These are not things which anyone would use in, in the normal way of transactions. So money is on the one is, on the one hand, there is rather more money in circulation than there should be, which is why a lot of people have written rather welcoming, the idea that cash is, is dying, because the other part of it is that cash is dying. I think every one of you in this room knows how you are making less and less use of cash, and how the pandemic has actually greatly accelerated the way in which you no longer use cash. Cash is now used in less than 20% of retail transactions in the UK. And during the pandemic, the amount of cash withdrawn from Cash Machines has fallen by 30%. I confess I’m getting that figure, I was surprised just how small it was. So M0 is notes and coins, plus commercial bank reserves at the Bank of England. That’s the monetary base, which Innes Smith taught us to give a lot of attention to the reason for that was that it was that it was on that monetary base that M1 and M4 were built. What M1 is his UK household and business Sterling deposits with the UK bank banks. And you will see in contrast to M0 of 96,000,000,00 M1 is nearly 25 times that it’s 2000 290 billion. And finally, there’s M4, which is not just household and business Sterling deposits with the bank with UK banks is the broadest measure of the money supply. And that includes, for example, commercial paper issued by large companies. What you will learn from that is that physical money actually plays a minor role in the modern economy. This is just some numbers to give you some sort of perspective on all of this. Remarkably, we have three figures which are very close to each other. There’s UK national income, there’s the UK government debt. And there’s UK M1 basic money supply, which all by coincidence at the moment are currently rather similar numbers. We have a government deficit, which is pretty large by any normal standards. And M4 is a bit larger than M1, but not a great deal more physical money plays a minor role of all in all of this, which is why when people talk about currency choices in Scotland, and write essays on which famous Scots would be portrayed on five pound or 50 bawbee notes, they’re engaging with a debate which has no practical significance, and no practical relevance.

Professor Sir John Kay FRSE 23:22
If you ask what these numbers imply for an independent Scotland, then your starting point is to think that Scotland is about 8.5% of UK. That’s something that you can apply to national income, Scottish National Income is about 160 billion, about 8%. of the UK figure. Scottish government debt. Well, we don’t know what it would be. But it seems reasonable as a starting point, to say that government debt would end up one way or another being prorated across the nations of the current UK, so that we’d be talking about a Scottish government debt, which might be of the order of 170 100 80 billion pounds. If it was a current times, we will be adding a great deal to that government debt every year. But hopefully government debt levels, government deficit levels will fall to lower levels than this. On the other hand, we have to accept the fact that it’s likely that an independent Scottish Government would begin with a rather larger government deficit than its pro rata share of the UK deficit today would imply so these are basic numbers which we need to understand in all of this, but to emphasise once again, what I believe is the key point for you to take away from this evening. Decisions about what currency are going to be used in an independent Scotland are decisions which are going to be made not primarily by people deciding what money what notes they have in their wallet, they’re going to be decided by what debt they hold, what short term assets they hold, what deposits they make, and the currencies in which they choose to make these deposits. That means the what currency is used in an independent Scotland is not exclusively, or even primarily a matter for the Scottish Government. It’s a matter for mobile Scots, like myself, it’s a matter for Marks and Spencers and Sainsbury’s. It’s a matter for Wood Group and Bailey Gifford. It’s a matter for what cab drivers in Edinburgh choose to use to end what the Balmoral hotel chooses to you do, the decisions these people make in terms of the currencies they use, the units of account they deploy, and the stores of value they choose to use. These decisions are every bit as important as those made by the Scottish Government. That doesn’t mean that the Scottish Government has no role it does. Government has basically three functions in relation to currency. The first is that government determines something which is called legal tender, each jurisdiction, each legal jurisdiction has something called legal tender within that jurisdiction. If you want to understand the unimportance of that in the modern world, Scotland is the paradigm case. Because in Scotland by historical accident, the only thing which is currently legal tender, is coins issued by the Royal Mint. That means the only strictly legal and definitive way of paying off your mortgage is to turn up to your bank with a pile of coins, you should reckon about 1000 kilos per 100,000.

Professor Sir John Kay FRSE 27:16
of debt to repay. Of course, your bank will not be grateful for this, and nor will you cabdriver. For that matter. I’ve never offered a cab driver attempt pound note and had him turn round and say look, that’s not legal tender, gov. What matters is the medium of exchange, which people are prepared to accept. And that is not there is very different from what from what legal tender is. Government can determine that, but it’s of no practical importance. The second role of government is of course, that government can pass legislation, and it can pass legislation to convert private contracts. Now on some of what is written about this currency debate, that is something which it is envisaged that government would do. So a Scottish Government could pass a law that says in any existing contract that says one pound read 10 bawbee or something instead, now it’s possible to pass such legislation. And the paradigm recent example of such legislation was the European regulations, which implemented the euro, which said, for every contract that refers to the French franc, for example, where it says 6.56 French francs now read one euro. That’s legislation that government could pass. But recall, think of the conditions that made it possible to introduce that provision. Firstly, you will not in reality, changing the values of any one’s current contracts, because the European exchange rate had remained fixed relative to each other for 10 years prior to the introduction of the euro, so that no one saw themselves as either gaining or losing as a result of this change. Secondly, all contracts in French francs were made under European law. And that means that they were all made under the jurisdiction to which this applied, it is manifestly not the case. And it is very far from being the case that all contracts in Sterling, are made under Scottish law. In fact, it’s not necessarily the case that contracts between Scots or involving Scots, which are expressed in pounds are made under Scottish law. There are basically two ways in which a Scottish Government could introduce legislation of this kind. One is it could say that the Scottish parliament met in secret last night. And it is passed a law that changes all your pound contracts to bawbees. The results of that that would be that you would spend the next few days looking at the small print of every agreement which you would ever signed. And you would incur a lot of surprises when you did that, you would discover that the relevant jurisdiction was in many cases, it was in a large proportion of cases a jurisdiction outside Scotland. And you would also discover that in many cases, it wasn’t that clear what the jurisdiction was. The result of that would be that the courts sort of, of Scotland and indeed elsewhere, would be clogged for many years with a result in cases which people would implement. And more than that, since people would feel that gained and lost or lost as a result of these transactions. This would be open to challenge and European Human Rights provisions to which Scotland would presumably be a signatory. This isn’t far from frivolous.

Professor Sir John Kay FRSE 31:21
Train drivers, who drove trains from parts of the Czech Republic, to parts of what is now Slovakia have been in the European Court for many years. Some of them live in the Czech part of the country, some of them lived in the Slovak part of the country, and what are their pensions payable in. This is an issue which we potentially have in spades. If we do this. On the other hand, we could say that the Scottish, the Scottish Parliament will be debating this legislation next week, or more realistically, in three months or a years time. And in that case, a great many people would be taking contracts, their bank accounts, the credit cards, their loans, other things outside the jurisdiction of Scots law, and the need a great many financial institutions would be unwilling to make contracts, which might be subject to the jurisdiction of Scots law. This was in fact a mess. As I’ve described, in Czechoslovakia, when things broke up, it will be a mess, on a scale ordered orders of magnitude greater if Scotland were to do this. I think if there is a second important lesson, which I’d ask you to take away tonight, it is the lesson that the people who are advocating Scottish independence should make clear that it would not be in the intention of an independent Scottish Government to introduce legislation of this kind, that a change to new currency would apply only to agreements private or public, which were made after the date of the change, there would be no intention of introducing legislation. of that kind. It is hard to exaggerate the damage which could be done by a failure to recognise the importance of this issue. That means it will be up as I’ve described, to firms, governments and others, to decide firms, households and others to decide after the transition after the introduction of a new Scottish currency, whether they wish to make these contracts in a new bawbee or whether they wish to carry on with their old Sterling arrangements. Now, I imagined some people would choose to convert their bawbee the bank accounts to bawbees out of patriotic fervour. I imagine others might feel the opposite way and want to maintain Sterling. But people who are not interested in political statements, and might well prefer the familiar to the new, what would be the reason for making contracts in bawbees, it’s not very obvious that the introduction of a new currency is very attractive to people in Scotland, or to firms in Scotland. Which brings us to the third area in which governments can affect choices in this area, which is it’s open to the government to choose its own unit of account. Indeed, that would be the natural mechanism by which a new currency was introduced, that a Scottish Government decides from now on it will pay its employees in bawbees and it will collect taxes in bawbees one might note immediately that the Scottish Government does not employ directly that many people. But the bulk of Scottish public expenditure goes through either local councils or NHS Trusts. And it might be assumed that the government could expect or indeed require that these agencies would follow the government’s own provisions and roll recommendations. But that doesn’t necessarily have any implications for what private sector agents would do. To take a ludicrous counter example, if the Scottish Government decided to adopt the Russian Ruble or the European or the Vietnamese Dong, as its unit of account, or for that matter, if it decided to adopt Bitcoin, as its unit of account, then probably what would happen would be people would simply convert as they received their wages and salaries in Dongs to to some more familiar currency like Sterling. And similarly, people would do the same on the other side of the ledger when they had to pay their taxes. There are quite complicated issues here.

Professor Sir John Kay FRSE 36:15
But the question then becomes, what is the quantity of the new Scottish Bawbee that has been issued relative to the quality of the Scottish bawbee which is being demanded? Initially, there would probably be rather more Scottish Bawbees, probably be a shortage of Scottish Bawbees, people would be looking for it to pay their taxes scrambling around to get money to pay taxes. And you could easily imagine a situation where a good deal of speculation about what the ultimate value of the Bawbee was going to be, there are two alternatives for the government. It either agrees that it will accept both salaries and, and taxes on a basis that there is a fixed exchange rate between the Bawbees and the familiar currency of sterling, in which there’s nothing very much of substance has changed. Or the government decides to do something to leave this alone. In which case, of course, police constable Burns, who receives his check, or rather, his bank transfer in Bawbees is pretty much at the mercy of global financial markets. And I have to say, having my research assistant having given a small talk to a group once about this issue in London, we’ve already received a couple of calls from hedge fund managers in the city, who are interested in the opportunities for speculation, which this kind of which this kind of introduction might provide. So I hope you got the idea that currency transitions in a country like Scotland, are not very easy. That is not to say they are impossible. And there are certainly examples around the world of currency transactions. The two most relevant currency transitions, currency to induce transitions in relatively rich and advanced countries. There are applicable ones seem to have happened quite a long time ago, and took quite a lengthy transitional period, in order to introduce the most rapid is probably Singapore for which it ran transition round from 1965 to 1973. Perhaps the most relevant analogy for Scotland is Ireland, where the transitional period actually ran from 1922 to 1979, in which Britain Ireland was continuing to use sterling as absolutely nothing and happened to 1979, in which the Irish pound was finally allowed to engage in a free float. You have an even longer transition actually in Australia, which introduced the Australian pound in 1910. And it wasn’t until 1983, that there was a free floating Australian dollar. As I say these transitions took a long time. And they are by also quite a long time ago. There are no analogies for transitions of this kind in the modern world among relatively rich and advanced countries. And the closest analogy one can find is actually Greece, which decided not to make the transition out of the euro in the early years of the last decade. The other recent transitions are all to do with the collapse of the Soviet Union, in which a whole range of countries in Eastern Europe adopted their own currencies in place of the Russian Ruble, we can take you through some of the history of what happened in these countries. But I think there are two lessons which we will quickly take away. One is that we don’t want to do in Scotland, a lot of the things which were done in these countries. And the second part of the lesson is that these things were possible by virtue of the authoritarian regimes and unsophisticated financial systems with which these these countries emerged from communism.

Professor Sir John Kay FRSE 40:53
So if it’s difficult to do this, we need to ask the question, why do we actually want to do it? And the argument which seems persuasive at first, is we need in Scotland to be able to have an independent monetary policy. How could we be an independent country, unless we’re free to have our monetary policy to fix our own interest rates to determine our own money supply to set our own exchange rate? Well, here again, it’s useful to look at experience in other countries. If we look in Europe, they’re probably three countries, it’s natural to look at, the three Scandinavian countries of Norway, Denmark, and Sweden, each of which are outside the Eurozone. Denmark, however, has successfully pegged its currency to the euro, since the formation of the euro and Norway as essentially sui generis because of Norway’s heavy reliance on oil revenues and the dependence not just of the monetary system, but the whole Norwegian economy on that particular source. The most relevant case is probably Sweden. And this is the history of the Swedish exchange rate. And you will see how much it has deviated from the euro over the last 20 years in which the answer is honestly not very much. The fluctuations of the Swedish Kroner against the euro are much smaller than its fluctuations against the dollar. The international value of the Swedish Kroner is essentially driven by the exchange rate of the euro against the dollar, rather than the exchange rate and autonomous exchange rate. And actually, as will emerge rather clearly here. Sweden has very limited capacity to pursue an independent monetary policy, you can see that they tried. They tried particularly in ahead of the financial crisis, where they were rather sensibly slower at lowering interest rates than other countries. The other attempt was when after the financial crisis, they tried to raise interest rates faster than was happening in Europe and the rest of the world. They tried that for a bit. But the result was that the Swedish Kroner rose that were though there were strong objections from Swedish exporters. And then the end, Sweden decided broadly to revert to the European nror the amount of monetary freedom that Sweden has exists. That is not that great. And if I look at the other clear analogy, which would be Canada and the United States, I find basically the same thing that the Canadian dollar has almost always sat at a 20% discount to the American dollar. That premium that that difference discount was briefly eliminated in 2010. When people rightly saw Canadian banks as a rather sounder bet than American banks. But one’s faith in American banks returned. As the financial crisis abated, the Canadian dollar returned to its normal discount. We could do quantitative easing in Scotland as well, I suppose. That means buying up long term government debt and replacing it by short term government debt, which the British government has done on a huge scale over the last decade.

Professor Sir John Kay FRSE 44:56
We have difficulty doing that here because there wouldn’t be any long term Scottish Government debt to begin with to buy. I guess a Scottish Government could just start going around buying other things. There’s no reason why you can’t engage in quantitative easing, by buying shops and offices and property of other kinds. And you could borrow short term in order to pay for that, you might find that people were not very enthusiastic about lending money to the Scottish Government on a short term basis in order to do it. And finally, for those who are really passionate about having an independent Scottish currency, it’s worth thinking for a moment about the Jersey option. Jersey, as those of you who have visited Jersey will know as Jersey pounds, Jersey pounds are trade at one to one with the pound sterling, and Jersey residents keep their accounts in pounds. And nobody asks whether they’re Jersey pounds, or English pounds, because there is no practical difference. What they do have is rather pretty notes. And the States of Jersey Treasury encourages people to use Jersey notes, because they earn a small amount of senior rich income from the basis of doing this and Jersey has sensibly maintained a reputation for conservatism in financial markets, couldn’t be the financial centre it is if it didn’t do that. And it limits the total amount of Jersey notes which can be printed, by law 125 a million pounds, which might equate to perhaps 6 billion in the case of Scotland, which would roughly equate to the total of the Scottish bank, the likely use of currency in Scotland. This would be an innocuous way of doing it. We asked the States of Jersey where they thought all these notes were because even 125 million pounds, it’s quite a lot relative to the size of the Jersey population. And it seems unlikely that money launderers are making much use of Jersey palms. And their guess which is probably mine is that there are quite a lot of people who went to Jersey, and then ended up bringing back one or two Jersey notes, which they either couldn’t be bothered to change, or which got pushed up in the washing machine when they wash their shorts after their Jersey holiday. This is actually not entirely frivolous. Because introducing a Scottish currency in a way that would give a Scottish Government options for the future could be done by imitating this rather palate introduction of a currency, which certainly does not involve the kind of problems which I have been describing.

Professor Sir John Kay FRSE 48:04
But let me sum up what I think it’s important for everyone in this audience to take away. The first important point is that this is not simply a matter of what the Scottish Government will do. The modern world is not like that anymore. And the Scottish Government can influence the choices, which is private sector makes, but it cannot determine it. The second is that we need to accept with some realism, to the degree of economic independence, which a Scottish Government could actually enjoy in the modern world is limited. And this is especially true in monetary policy, where because of the growth of international financial markets, of which Scotland is inevitably part. And indeed, Scotland profitably trades in international financial markets. Sadly, there are one or two institutions in the first decades of this century, who didn’t manage to trade profitably but our asset managers continue to do so. So the degree of independence which we can have in that world, in that international financial world is limited. And that’s just the way things are for a small country. Indeed, today I rather wonder how much real power and real influence the Bank of England has, that our reverence for the Bank of England derives from an era when it was much more authoritative in the world than it is today. And important decisions about global money are taken in Frankfurt by the European Central Bank in Washington by the Federal Reserve, and perhaps to an increasing degree in China, although that’s still quite a long way off. We do not have a chartalist world anymore in which money is associated with a nationality and sovereignty. And we need to put these ideas out of our mind. I think if there’s a lesson for us, it is first do no harm, which, as you will know, comes from Hippocratic Oath. I’ve had Hippocrates flanked by Adam Smith, a great small Scottish economist on the one hand, and Nicola Sturgeon on the other. First do no harm is I think, a central tenant, which ought to be part of the heart of this debate. An ill considered transition can do a great deal of damage, both to the credibility of a Scottish government, and to the credibility of a Scottish financial system, inept discussion of transition can also do a great deal of damage to the potential credibility of a government and to the Scottish financial system. That means we should not go into this debate hastily, or any transition hastily, without having carefully planned and prepared a runway and a strategy for doing that. If you’re prepared to envisage an extended transition, there are no limits to the ambitions which you can have. Thank you.

Professor Nicola McEwen FRSE 51:40
Thank you very much for that remarkable tour de force. And what I should have said at the beginning, is that we are audio recording tonight’s event. So at the risk of sounding like I do when I tell my kids to do their homework in revision, if you did want to do that money in banking 101 all over again, it will be available on the RSE website. Thank you very much. And we will open for discussion and questions. But first of all, for some provocative thoughts, hopefully. And some responses over to Professor Graeme Roy. Thank you.

Professor Graeme Roy 52:14
Great. Thank you, Nicola. And it’s a great pleasure to be here tonight. And to give the response to John’s remark, a real honour to follow Sir John as a hero of mine, and many economists of my generation actually first met John when he was in the Council of Economic Advisers for the Scottish Government. And I was a relatively junior civil servant at the time with the view that senior civil servants should never be questioned ever. And remember one of the meetings we had a presentation from a polished civil servant to add all the policy strategy buzzwords who had all the the infographics, all the PowerPoint presentations, all the buzzwords and at the end of the presentation, the chair invited comments. And Sir John said in that quiet, but powerful voice of himself. But very nice presentation. Thank you. But you didn’t actually tell us what the point of it is you’re trying to do. Queue an immediate quick redraft of the programme for government. So the point about what I want to do tonight is wrangle through Professor Kay’s proposition line by line. And hopefully we’ll get a chance to do some of that in the q&a. I wanted to offer us some reflections on the context in which his remarks sit. Now clearly we have a long journey to go before the referendum is called let alone held. And I hope John doesn’t mind me speaking on behalf of both of those who may say that any kind of political crystal ball gazing, we’re delighted that Professor McEwen will handle all of those tricky questions. But one of the things that really interests me is the extent to which the context has changed over the last seven years. And that sets the backdrop for the issues that Sir John has touched on. Now, of course, not everything has changed. So Yes, supporters will argue that Scotland has the economic strengths to be an independent nation. Indeed, Andrew Wilson co tonight has argued that Scotland would be the richest newly independent country in history and will point to examples others from New Zealand to Scandinavia as evidence of have the power to do things differently. Likewise any better together refresh campaign will return to familiar arguments that Holyrood already has a lot of power to influence day to day life in Scotland. And will no doubt point to recent issues from ferries through to education and health outcomes, as a counter to any argument of decisions taken in Scotland are always for the better. And arguments will also I’m sure be put forward for all our strengths. The Scottish economy has challenges that could be exposed, at least initially under independence, not least our higher public expenditure expenditure. And just as the financial crisis provide a real important backdrop in 2014 unionists I’m sure argue that COVID provides an illustration of the benefits of financial pooling and sharing. So debates many ways will tread familiar grounds. But where are the differences and why might that mean for the currency debate? So well, firstly on the economy, the decline in oil revenues, COVID-19 and weak growth even before the pandemic poses some challenging questions for those planning a smooth transition to independence. jeres numbers this year show a fiscal deficit of above 20% of GDP. Now that will come down quickly. But no longer can we hope that the relative gap and spending in Scotland can be closed by oil revenues. But clearly, Brexit has done the Unionist case no favours either. And it’s not just in trade as the area that we hear most of the debate on the economy. But Scotland’s demographic outlook is much more challenging than for the UK as a whole. So the loss of freedom of movement for me is arguably a much more serious blow to Scotland’s long term growth potential than the barriers that have been erected on trade. Which brings me to my second reference, and that’s the political at the policy and constitutional perspective. Brexit is clearly the most significant constitutional upheaval in living memory. And for Unionists isn’t just an economic challenge, but one of economic credibility too. So putting up trade barriers, with Scottish export markets that are larger than Australasia, North America, Africa, South America and Asia combined, isn’t for me a great example of better together. More broadly, in 2014, the choice has been a quite different future under independence, obviously, and what was seen at the time as being a relatively stable status quo, but with Brexit, and that status quo is no different and also more uncertain. Also, since 2014, we’ve had the new powers of the Scottish Parliament now, perhaps, not going far enough for some, but they have been extended in quite significant ways. And I guess in many ways, any argument of further devolution was going to cement Scotland’s place in the union, you know, haven’t hasn’t really borne borne fruit and independence hasn’t gone away. But the chart that is transition, even in the transition of the Smith powers, has shown actually, economic change is actually quite difficult to do. And on the one hand, though, we have actually seen with the new transfer of powers, if Scotland is given the power to do things, they will do it differently, whether it be the new five banf income tax system, whether it be the child payment that was increased last week, but Brexit and Smith powers has shown that change isn’t easy, or always has an upside. So Holyrood, is having to deal with what happens when your tax revenues don’t grow as quickly as you would like. We’ve also seen that firsthand, transitioning from one status quo to another can bring up some challenges. So in 2014, we were told independence could take place in 18 months, at a cost of a couple of 100 million pounds. But even if you just look at the transfer of the Smith powers, we’re talking about 600 million pounds to transfer by 11 Social Security benefits, and potentially up to a decade from when they were first recommended to actually being fully operational. So when we know much more, that change is actually quite difficult to do. And we’ve seen it with Brexit. So for all that Brexit has created political opportunities for the people advocating independence. And for all the protests of Scottish exporters, over the mess of the UK is exit from the EU were political dynamite for the SNP in many ways. Equally, it’s not then convincing to wish your way. Challenges was your market, which is three times as large as the EU. So a lot of the challenges we’ve seen the last few years, so that change is difficult. That’s why I think that Sir John’s comments about the importance of the transition, and carefully managed and transition is absolutely crucial, because what we’ve seen even just in a smaller scale from Smith, but also through to Brexit is that change is actually quite difficult to do. And it’s crucial to get it right, it’s okay to look at the long term. But the short term has really important implications, not just immediately for people, but also for that the long term potential of your economy. And I guess the third element in all of this that’s different from 2014 is the political dynamics. And if you look at the work of James Mitchell and Rob Johns, They’ve tracked the the growth of SNP and what’s really interesting on the economic front is at the heart of that drive was idea of competence and moderation. And that has been crucial to success. And again, referencing Andrew Wilson that the famous prawn cocktail dinners that they had, I don’t know if you had prawn cocktail, but and these famous dinners where they toured the board the boardrooms of Scotland, to make the case for the economic competence of the SNP was very much based on a pro economic growth, a competence model that was underpinning that selling of that message in the 2014 perspective is very much in that same vein as well. So full fiscal autonomy was the prize, coordinated financial regulation, fiscal stability, limiting how much the Scottish Government could borrow membership with the EU, and crucially, a shared currency so the idea of competence and moderation was the heart of that campaign, but now there’s many in the yes campaign who are seeking a more radical form of independence, irrespective of the challenges on transition. Indeed, some of them are now actually in government. And that means that the lightning rod for all of this will come on to the issue of the currency and issues that Sir John has so eloquently set out. And the currency is a question as John mentioned, the lack of a plan B was often described as the Achilles heel of the yes campaign. And what Sir John’s model tries to do is building on the work of the sustainable growth commission seek to strike that balance between competence and moderation. And but also one that learns the lessons from 2014. And where the economics, I would argue the economics policy, and constitutional context looks quite different. It doesn’t rely on negotiating currency union, and it leaves the door open for a future a new currency in the future. As John gave us the the money in banking 101 I should also say the University of Glasgow offer a really fantastic course. And that discounts are available for RSE members. But it reflects the way that money operates in the modern society. And crucially, in principle, it would limit the risks around assets and liabilities and facilitate that trade with the UK is it being our largest market and crucially as well, it focuses on investor confidence. But like any other any currency option, there are challenges that will be useful to pick up into the q&a. So as John mentioned, you wouldn’t be setting interest rates in Scotland. Interest rates be set in the rest of the UK for the rest of the UK. That may be okay. If in the long run your the importance of an alignment with the UK is key. But if independence is about doing something different about perhaps aligning more with the with the European Union, then people might question and markets might question strategy, at least over the long run, you wouldn’t typically have a lender of last resort Scottish banking system will require some funds. Now, you could do that through building up reserves to facilitate that day to day clearing that you would have the unit a lender of last resort, if instead you didn’t have a banking sector that relied upon banks and domiciled are domiciled in scomp are headquartered in London and regulated by regulators down there. So essentially operating within to Scotland, that would avoid any issues about having to acquire a lender of last resort because you would have it a in UK taxpayers and out of London, but it might raise questions in the Bank of England about having a large scale banking sector opposite operating in what would be for them, a foreign country might require banks doing that to hold higher capital ratios might require greater regulatory instruments. If they were operating into a market, which they were actually controlling or regulating anymore, because it was no classified in their view as being a foreign market. I think perhaps the biggest questions and it’d be really useful to get joins us on this is around a macro questions around different currency models, not about how money is operating, but actually how much money you’re generating in your economy. So my colleague at Glasgow, Roy McDonald’s, put some interesting questions out there about your ability to support your economy in a crisis if you can’t do quantitative easing. So have you got that ability to print money when you urgently need it? And questions about running a really hard fiscal regime if you’ve got a balance of payments deficit, or you’ve got a larger fiscal deficit in the UK, so how are you generating these pounds? These these Sterling’s as a real economy that can operate, operate on through the Scottish Scottish economy. And again, one of the more political questions will be interesting, perhaps to turn to Nicola and all of this would be as and what might be the interesting monetary and fiscal requirements the EU might require this will sterilization meet these requirements, and will the potential more smaller central bank in terms of remit satisfy the European regulators and the European Commission for joining? And again, a further question for me is how well might not having our own currency go down in the new yes movement? And Alex Salmond, he’s he’s talked about saying that the construction of a currency in rapid time, she’d be a major priority for independent Scotland and the Green Party’s opposition to retaining Sterling and the political dynamics in there are much more complex than they were in 2014. But as Sir John said, you know, I think it’s really important though, I really important caution here is it is really, it’s naive to think that creating your own currency means that is a passport to operating in a world with no constraints. All of the choices and currency are by operating under constraints is just what constraints do you want to do you want to operate under which ones do you want to trade off? And crucially, if you make the scale of the transition that much more difficult, and perhaps the transition becomes harder to do. Then even if on paper, you have greater ability to do things differently, the practical realities of that are not going to be true because you’ve because of the constraints you’ve placed on because you’ve made that transition harder, which I guess brings me to my concluding point in all of this, and back to the point that Sir John made to that civil servant, and all those years ago, which is what’s the point? And it’s understandable that people like us, Sir John, and I will talk about the technical issues such as currency, and John should be commended for exploring these options. But it strikes me that both proponents of both yes and no, and not John or I. But yet proponents of yes and no have work to do to set out their future vision for Scotland post Brexit post COVID and into a net zero world. And in the yes side, many of the ideas in the white paper even just that was eight years ago, since the white paper policies on cutting corporation tax, cutting air passengers have been dropped, policies and childcare have actually been delivered. Now, the growth commission did offer interesting suggestions. But sadly, that’s one part of the report that actually is doesn’t get the attention it deserves. So how do we move on to the, if you’re going to go through these transitions? What is it you actually want to use these powers for? What are you going to do differently? But crucially, we need to ask the same questions to the Unionist side as well. So what is the new vision for the Union? And Stephen Gethins, the former MP and colleague in the Scottish Government, with me is pose a really interesting question, seeing that while it’s right that we questioned politicians over independence and its consequences, post Brexit there is no status quo. And people deserve answers in the consequences of remaining in the union. And it’s an interesting turn of phrase, but he’s right. And it’s not enough simply to point out about the risks of short term transition to independence. If the long term vision for the union is missing, might that involve more powers? Or might it be the levelling up agenda or so called muscular unionism? And how might all this of who make this work? And fundamentally, what does each option whether independence or Scotland, remaining in the UK, and mean for our ability to tackle the inequalities in society, to level up our country into focus on issues that really matter to the people of Scotland. So I congratulate John on his really thoughtful contribution. In 2014, just after the referendum, he said the no verdict in September was not the end of the argument. But the beginning, I remember thinking that I didn’t agree with him at the time, I think it’s seven years have proven that John was entirely correct. And I really hope to continue the discussion in the q&a. Thank you very much.

Professor Nicola McEwen FRSE 1:07:33
Thank you, Graeme. Thank you very much. So over to you. If you would like to make a comment or ask a question, if you could please raise your hand and then one of the staff will come with a microphone, which will then be cleansed before it goes to the next person so we’re COVID safe here.Yes, sir.

Audience member 1:07:54
Good evening. Thank you. My name is Dr Kevin Parker. I spent the early years the 1990s. In the ex Yugoslav republics of Slovenia and Croatia, I was struck by what Professor Kay said about the experiences the post Soviet republics. But there you have two countries of middling GDP per head, roughly the same as Greece, who together have a slightly smaller population and Scotland, and who both managed to set up the independent currencies and operate them for 10 years in a pretty short space of time. I just wondered, if Professor Kay had studied those countries. And do you consider that those countries were successful in that efforts? Or did they make some of the mistakes that you alluded to on the post Soviet bloc?

Professor Nicola McEwen FRSE 1:08:47
Thank you. Thank you. I’ll gather a few questions, if I mean, to give everyone an opportunity. And anyone else? Yes.

Audience member 1:09:02
Thank you. I was wondering if Scotland did go independent and rejoined the Europe, the EU sorry? Do you think it will be a pressure to take on the euro? And if so, what consequences would that have? Do you think?

Professor Nicola McEwen FRSE 1:09:23
And we’ll take one more.

Audience member 1:09:31
Hi, Graeme has not proposed another option to the currency, which should be used an independent Scotland. Does not seem to be about whether we should be independent or not. So what’s the point you were making?

Professor Nicola McEwen FRSE 1:09:49
John, would you like to go first?

Professor Sir John Kay FRSE 1:09:52
Okay, all right. The two addressed to me one was, have we looked at the experience of the ex Soviet Union. Yes, we have we haven’t devoted much time specifically to Slovenia and these Balkan countries. But we we’ve looked at the Baltics and some of the Soviet republics. The basic answer to the question is, in the end, all these countries managed to come up with something. And many of them, there was chaos, or a degree of chaos in the course of the transition. In none of them. Was there any close analogy to the Scottish case for two reasons, both to do with the transition from communism. One was the possibility of a kind of authoritarianism, which I think would be impossible in Scotland, for example, in Estonia, which was relatively aggressively declaring its adherence to Europe, it was actually made illegal to use the euro. I hope we could to use the Ruble, I hope we could not think of having these kind of provisions and in Scotland, the other is that by virtue of the transition from Communism, all these countries began with relatively unsophisticated financial systems by Western European standards. Scotland, by contrast, begins with an extremely sophisticated financial system by almost any standards. So there is not I think, much to be learned, we had a look at Kazakhstan, mainly, I think that you’re not going to learn from much from Kazakhstan, except in a negative sense. On the other question, which is about the EU. This is a complicated issue, which would deserve a whole paper on its own. I find it hard to see as things are at the moment, Scotland making a straightforward application for membership of the EU. There are two issues there. One is that Scotland has in spades, the Northern Irish border question. And I think there is a little point about talking about Scottish membership of the EU, until we see how that evolves. And what solutions are found, if indeed any can be found, to the problems within which the Northern Irish border raises. The second issue is that what are the commitments which a Scottish Government would have to take on if it joined the EU? Well, it would have to accept that the the Euro is the currency of the EU, and that there is an aspiration to join the EU one day, one day might be a very long way away. And I imagine that would be quite widely accepted. The other is that there are specific provisions in the EU about adherence to Maastricht criteria and the like, which Sweden has succeeded in interpreting in a rather evasive way. At the moment, we have the rather bizarre position of Montenegro, which cannot comply, which although it’s on the point of joining the EU, cannot actually comply with this condition of the EU, the reason being that the key and visualise is you aligning your currency with the euro. But since currently, Montenegro does not have a currency that uses the euro, it is not possible for it to align its currency with the euro. It is not beyond with the wit of man to think of a solution to this problem. But the finding of that self evident solution depends on political will. And the history of the EU I think is in general, if there is political will, technical problems will be solved. If there is no political will, they will turn out to be insoluble. So I think that takes one to what Nicola will know more about than I do by some measure, which is I think the largest the other large problems Scotland has in relation to the EU, is secession prospects in other states, such as Spain, Belgium, and conceivably Italy. And the question becomes in prospective Scottish membership, how much political drive there would be from a major members like France and Germany, to bring Scotland into the EU. But that’s a political matter. I don’t feel competent to discuss any further. But I don’t think this issue of Scottish relationship to the euro is actually the main issue about Scottish affiliation or membership of the EU.

Professor Nicola McEwen FRSE 1:14:53
I’ll refrain from commenting further and hand over to Graeme.

Professor Graeme Roy 1:14:56
Yeah, so your question is exactly my point in that and what John does and what the broader option about different currency options? Well, is there anyone who argues that isn’t a solution to Scotland’s currency question is wrong, it’s not sufficient just to see that Scotland can’t be independent because it doesn’t have an option because it does have options. And but it will require a huge transition. So the question for me to the Unionist side, it’s not sufficient, just simply just to point to technical difficulties, if you don’t have a story to tell about what the future of the union is, equally, though, what John’s highlighted and spoken about this evening, is that you can find solution to currency. But there’s lots of big issues in there. There’s constraints, there’s pressures, trade offs, there’s long transitions. So if you’re going to go through that, what’s the argument and people posing independence? What do you gain by putting all of going through all of those transition and all those challenges there? And that, for me, is the fundamental question. So it’s okay to talk about technical issues. But the duty is also on people advocating independence and advocating, what’s the point of this? And what is the objective that we’re trying to achieve?

Professor Nicola McEwen FRSE 1:16:02
Thank you, we have time for at least one other round of questions, maybe a little bit. Yes.

Kate Forbes MSP 1:16:13
Thanks very much. And thanks for that. You talked about the three reasons why some would advocate moving to an independent currency as quickly as possible. And one of those reasons was quantitative easing. And I guess my question is, would it be such a great loss not to be able to conduct quantitative easing?

Professor Nicola McEwen FRSE 1:16:32
Any other questions just now? Yes, gentleman here. And apologies Cabinet Secretary, it’s hard to recognise anyone in a mask.

Audience member 1:16:49
Good evening, Dr. Tim Rideout, convener of the Scottish currency group, and also the author of the SNP conferences, policies on currency. And most recently, on Sunday, we decided to start the preparations for the Scottish Reserve Bank as the new Central Bank of Scotland. Can anyone on the panel identify any relatively advanced modern economy that has ever sought to use the currency of another country?

Professor Nicola McEwen FRSE 1:17:18
One more, if we have one more? Raise your hand bit higher. Oh, maybe it’s Yes. Yes. Sorry.

Audience member 1:17:37
Economics 101 question, but in the Danish model, or Ireland before 1979? How do you peg a currency to another currency? Does it need a ERM type solution? Or is there some other mechanism?

Professor Nicola McEwen FRSE 1:17:49
Great, thank you. I think all of these were for you, John. Right.

Professor Sir John Kay FRSE 1:17:56
Okay, um, I talked about three aspects of having an independent monetary policy. The QE is one, I confess to sharing your implicit doubt that QE has been the marvellous success that the central banks of the world would, would claim it as being. Second question, how does Denmark do it? The answer basically, is that the Danish currency is pegged to the euro at a level which is too low, which means that if Denmark if a Danish currency were allowed to appreciate, were allowed to float, it would certainly appreciate the same is true of the other long term successful peg, which is the Hong Kong dollar, which is pegged to the US dollar, both these currencies would appreciate the result of that is in both cases, there has been some currency flow into these curves into these currencies. And the result is that the monetary boards, the Monetary Board in Hong Kong, and the Danish Central Bank, has had no difficulty in maintaining the peg and basically, itself, Danish Kroner, or the monetary authority in Hong Kong sells Hong Kong dollars in order to keep the exchange rate down. Obviously, if the Scottish Government was pay a Scottish currency was paid compellingly, at some low level, sufficiently low level, and it’s not clear what lower level it would have to be, then one could imagine a similar situation in relation to a peg of the Scottish currency. In answer to the question, is there another case of an advanced country becoming newly independent and using the currency of another country? The answer is no. I’m not quite sure what point that leads to, but the answer is no.

Professor Nicola McEwen FRSE 1:19:54
Thank you. Do you want to add anything?

Professor Graeme Roy 1:19:57
I think there’s a question about quantitative easing. As a as an overall policy objective, I think what we’ve probably seen, I think broadening out into during the pandemic, the ability to have monetary and fiscal coordination, I think is is something which I think is is, I think we still need to see you feel the full essence of that. But I think that’s where probably, I would say that it’s distinct from having a broader discussion about quantitive easing the ability to see what’s happened to the last 18 months about the Bank of England, essentially monetizing the debt as the deficit to a significant extent, and you wouldn’t have that under under sterilization. And the broader point is just quickly, on Tim’s point there about other countries doing that, I think the answer is no. And which I guess gets to my question as well about how that would then be consistent with questions around EU membership, etc. And I know it’s all part of a negotiation. But then if there’s no precedent for that, and how would then the EU approach that view of, of, of not having another currency?

Professor Sir John Kay FRSE 1:21:00
So Graeme, we might notice the point that the Bank of England is doing quantitative easing, for us, whether we like it or not, and that would continue to be the case, whatever currency of Scottish government used, the spraying short term debt around in substitution for long term debt is something that spills over the borders of the jurisdiction in which the transaction takes place. That’s back to the point I made at the end, which is that we greatly exaggerate the amount of influence which the Bank of England has relative to European Central Bank, and which the European Central Bank has relative to the Fed. Essentially, we’re all small players of this world now. And that’s, in a sense, the answer to the the point which I think was being made in asking, has any advanced country done it, it’s not much point really.

Professor Nicola McEwen FRSE 1:22:01
Can I ask, banking and money 101 question too, if part of the political rationale for independence now is to reoriented Scotland towards the European Union, in light of Brexit. Would there be sense if one was to suggest pegging a currency to another more stable and established currency to peg it to the euro, rather than to the pound.

Professor Sir John Kay FRSE 1:22:32
There’s a lecture coming in economics and banking 101 on optimal currency areas, which are to do with your trading patterns, and the things that follow from that. And there’s a chicken and egg issue here, basically, Scotland’s trading battons at the moment, are far more aligned towards our towards our UK than they are towards Europe. If they became more aligned towards our EU, it would be more sensible, it would be sensible to start looking towards the euro. And, indeed, to go back to the theme of what I was saying, Scottish firms and Scottish institutions would be doing that anyway, as Scotland became more involved with the EU, it’s not just a matter of what the government does, and pegging currencies is difficult, especially in the in the modern world, of rather aggressive financial speculation. We shouldn’t forget that back in 1992, Soros and a small group of speculators were able in inverted commas to break the bank of England, they made the they made the obtaining of a peg simply impossible, by virtue of the full volume of money they could throw at it. In the case of a Scottish Government, that looks even more scary, because the resources of the global financial system relative to the resources of a Scottish Central Bank, are orders of magnitude different.

Professor Nicola McEwen FRSE 1:24:12
On that note, thank you so much. We’ve come to the end of our event this evening. There will be many others I’m sure, in the months and years to come. The Constitutional debate in Scotland has frustratingly in some ways, in recent times focused on issues of process of whether there will be a referendum whether they can be a referendum. And this was really an opportunity to to explore with the incredible insight offered by Sir John and also by Professor Roy. Some issues of real substance and I think it seems to me that this next year to 18 months offers many opportunities should offer many opportunities for exploring some of these things. In depth, so thank you very much for coming this evening and if you could show your appreciation to our panel in the usual way please.

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