The weirdest post-independence Scottish currency myth
There are plenty of ridiculous scare stories that have spread about the economy of independent Scotland, from hyperinflation to the classic ‘how are you going to pay?’ » type questions. Yet there is one particular claim from critics of Scottish independence that is so bizarre and beyond reasonable thought that it is almost shocking that it is even printed in mainstream media.
This claim comes from economist and Better Together supporter Ronald MacDonald, who claimed in 2018 (and repeats almost every year) that an independent Scotland would need around a third of a trillion pounds (£300bn ) of foreign exchange reserves to launch its own currency. . This claim is based on the fact that an independent Scotland should peg its currency to the British pound in the short term to avoid drastic price fluctuations.
This statement is false on several fronts. First, no other country similar in size to Scotland in the EU with foreign exchange reserves has anything close to this amount. Bulgaria, with a population of less than seven million, has foreign exchange reserves of around £28 billion, or just over 40% of GDP. Other countries more similar to Scotland are Sweden with £45 billion in reserves (7% of GDP) and Denmark with £55 billion (20% of GDP).
READ MORE: GERS and Scotland’s enduring ‘deficit budget’ myth
Ronald MacDonald’s £300bn comes from comparing Scotland to Hong Kong, which currently has £392bn in foreign exchange reserves. Yet MacDonald completely removes the context of the extremely hostile relationship between Hong Kong and its neighbor China, with a population of 1.4 billion. Hong Kongers, who have their own sense of identity and culture, have pushed back against aggressive Chinese Communist Party (CCP) takeovers that want to suppress their freedom of speech, right to vote, freedom of the press and free elections. Hong Kong’s large foreign exchange reserves are largely a defense against authoritarian power – a political decision to keep monetary policy closer to the United States than to China. Second, Hong Kong also acts as an intermediary between Chinese markets and the rest of the world.
For MacDonald’s £300 billion figure to be even remotely fair, the UK would have to transform itself into an authoritarian state that would seek to completely destroy Holyrood and our basic human rights. Either MacDonald (below) is detached from reality by reading too many political fanfics, or he is deceiving the people of Scotland. I’ll let you draw your own conclusions.
Foreign exchange reserves are typically used when one currency is pegged to another, but launching a new currency with a peg is economic illiteracy. This would leave a new currency under attack from speculators and waste time and resources defending the peg. It would also put pressure on the government to sacrifice domestic politics and possibly implement capital controls, which should generally be deployed as a policy tool of last resort. A new Scottish currency should not play the game of speculators and instead allow the currency to float, allowing the value of the currency to match Scotland’s domestic productivity and costs.
Consider also how reserves act in modern times. Reserves are very limited in their ability to fend off speculative attacks or sudden fluctuations in the exchange rate. When the UK voted to leave the EU in 2016, the value of the pound fell 8% overnight and then 16% in total over the year. Foreign exchange trading took place electronically through software that automatically sold assets in sterling. As sterling assets were dumped around the world, London markets were literally asleep.
The world where forex trading was done primarily over the phone or through in-person meetings is a thing of the past. In the modern era, regardless of the size of our foreign exchange reserves, technology is one step ahead. As the Bank of England has stated, foreign exchange reserves now play a key role in supporting the financial services sector. Since Scotland’s financial services industry is smaller than that of the rest of the UK, there is less demand for foreign exchange reserves.
An independent Scotland would naturally accumulate foreign exchange reserves in fairly large quantities. First, Scottish citizens would be required to pay taxes (along with other bills) in the new Scottish currency, thereby requiring them to exchange their current sterling currency for the new currency. This would have the advantage of allowing citizens to obtain a premium (perhaps between 1 and 3%) and would see a gradual increase in demand for the new currency. In addition to this, an independent Scotland could accumulate Bank of England coins and notes for its foreign exchange reserves. Assuming Scotland has a proportionate share of physical silver, Scotland’s foreign exchange reserves would start at around £60 billion.
An independent Scotland could exchange around a third of its sterling reserves for euros, yen, dollars, francs, crowns and more, diversifying its foreign exchange reserves. These enormously abundant levels of reserves are not necessary for a country of our size, especially if the currency has a floating exchange rate.
Ultimately, there is no specific target that an independent Scotland must meet on its foreign currency reserves. We’ll keep the conversation grounded in reality, while MacDonald sticks to hyperbolic lies.