Miscellany - odds & ends
These are some of the thoughts & background which inform the choice of a National Currency for Scotland. Ronnie Morrison
No country is an island in terms of international trade and finance and any government which ignores the basic need to balance its exports and imports is guilty of criminal incompetence. The realpolitik of a nation in debt to others is little different from personal debt and the fact that a nation cannot go bankrupt in terms of its own currency does not mean they do not remain physically in debt to foreigners - and that does have moral, political and economic consequences.
Quite apart from the familiar crises we experience every few years, financial sanctions are increasingly being used to influence domestic political decisions. Most recently this has impacted Turkey but the list is substantial including Russia, Iran and Greece. More generally, the neo-liberal formula for financial stability consistently exercises financial dogma as the basis for privatisation, austerity and reduced public investment. Again any government unaware of these influences or unable to counter them will fail the people it represents.
The clear exception to this rule is the United States dollar which is the de facto world reserve currency - not because of the strength of its international balance sheet or unquestioned moral authority, but because of its economic and military power. That is realpolitik and nothing to do with the logic of a balance of payments.
The question is can this reality be challenged by some more natural and rational reserve currency? Gold was the basis of a reserve currency up until 1971 when the US dollar moved off the gold standard but the hard fact is that the dollars reserve status dates back to the end of WW2.
At the Bretton Woods conference of 1944 the British economist J.M. Keynes proposed Bancor as a new world reserve currency – in effect an accounting system which recorded international trade balances and imposed interest penalties to Nations which were either in surplus or deficit – i.e. a sanction which would oblige them to readjust their currencies to values which would encourage a balance of trade.
That did not appeal to the US negotiators as the dollar was in a large trade surplus with the rest of the world and was also linked to the price of gold. Back then realpolitik again won the day.
It’s interesting however that the Governor of the Central Bank of China, which is currently in a huge balance of payments surplus and has a large stock of gold, takes a different view. He has proposed that the IMF should adopt a similar system and both the IMF and the United Nations believe these principles should again be examined in greater detail.
There is of course no indication that the United States would willingly give up the immeasurable advantages of being a reserve currency. However there are suggestions that the new technology of bit coin and the block chain ledger accounting system could present a new way of doing the same job with the US liked it or not. The system appears to be invulnerable to attack or interference.
At present international trade is controlled by the transferring of funds through private banking agencies like SWIFT (and others) which is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes. The US government has intervened in it to enforce sanctions against Russia & Iran.
It is with these and similar considerations in mind that the proposal is to launch the Scots pound is a purely domestic currency not available to international money markets and using dollars and euros and sterling etc. to conduct our imports and export business. This, together with using full reserve banking regulation and Central Bank supervision of accounts and foreign exchange resolves the initial vulnerabilities of the new currency.
There will be no significant legacy of a share of UK National Debt which of course is largely incurred as a result of the fractional reserve system and any new borrowings required to finance imports will be modest. These will be the only “external” borrowings to be secured on government bonds.
This strategy for a Scots currency renders it secure yet flexible to accommodate whatever the future may hold in terms of international trade and financial arrangements.
It is for the reader to decide if this is a radical or a rational monetary policy but this is not a decision purely for expert economic advisors and bankers (remember sharing the pound in 2014). it is a matter for popular sovereignty and literally every citizen of voting age in Scotland will have their say on this and every other matter concerning the Constitution of Scotland. If we are to protect our democracy then each one of us must participate.
Fractional Reserve FAQs
Re-printed from Appendices of Moving On 2014 edition
Q You advocate full reserve banks – what’s wrong with the present fractional reserve system?
A This is not widely understood and is best answered by a diagram –
Q. Why is an independent currency so important?
A Because using someone else’s currency binds you to their financial ethics – essentially their banking regulations. Scotland will need a stable banking system and public investment based on need and not on borrowing.
Q Where’s this extra money to come from?
A Exactly where it comes from at present – the people – our savings, investments and pensions will be the core of the banking system. The vast bulk of UK lending (75%+) remains residential mortgages and until 1986 funded entirely by Building Societies which were full reserve institutions.- until acquired by the banking system using ‘notional credit’.
UK household savings & pensions in 2009 were £4,024 billion – more than twice total bank loans and mortgages.
Q What if savers are not prepared to invest in the banks?
A It is up to the banks to make it an attractive investment Government will provide additional credit. But the Government would always step in if necessary.
Q Ah! You contradict yourself – you condemn ‘printing money’ but advocate precisely that! How is that justified?
A Printing money to bail out banks or rescue any other private enterprise is theft from the people by inflation. Printing money exclusively to finance public building & infrastructure does not dilute the currency – it ensures full private sector employment to build wealth. The Constitution will require all new money to enter circulation as direct payment from the Central Bank for the creation of tangible public assets and only then will the money be paid into the banking system.
Q. Can this contribute to financial stability without impinging upon the rights of the individual and the capitalist system?
A Some freedoms must be restricted by law – the right to murder, steal and defraud. No currency regime can be stable if credit money can be produced for private advantage – either legally as with banks or illegally by counterfeiters. That is why Fractional Reserve Banks are outside the ‘virtuous circle’ Only a stable money system will optimise the exchange of goods and services essential to building real, sustainable wealth. That is genuine capitalism.
Q How will full reserve banking prevent financial manipulation?
A The new Banking Charter precludes creating credit or lending more than the bank holds in its reserves. Trading in securities and the securitisation of primary debt will be disallowed thus preventing speculating using money guaranteed by the taxpayer.
Q What is securitisation?
A Selling your loans and mortgages to the financial markets.
Q Will all this stop ‘Boom & Busts?
A Individuals may still collectively contribute to ‘bubbles’ by speculation or gambling and that should not be prevented but the consequences can be restricted to the participants by requiring all such ‘investments’, and short selling, to be on a cash up front basis.
Q All very well in theory but clever people have always managed to manipulate the money business – how can that be forestalled?
A It cannot, but effective regulation can keep it within bounds. The principle that money is the means of creating real wealth and not wealth in itself requires to be enshrined in the Constitution. Other laws will incorporate changes in Corporate Governance whereby shareholders will be empowered to exercise more influence over the policy of large corporations. The balance between irresponsible greed and responsible enterprise requires to be restored, and the definition of financial fraud extended and recognised as anti-social behaviour.
Q The controls upon capital flows across borders are directly opposed to the current ‘open border’ global investment policy supported by the EU, WTO and IMF. Will this not isolate Scotland?
A Cross border capital always flows into the cheapest source of labour and resources thus emasculating the ability of the Nation State to influence its internal affairs – that must always be unacceptable to a democratically elected government. Nor can full reserve banking operate in a currency regime alongside ‘notional’ credit. Scotland is nimble enough to avoid being bullied.
Q Why advocate exchange rates fixed by the Central Bank rather than the open market?
A Initially the Scots Merk will shadow Sterling, just as the Danish Krone shadows the euro, but it is the responsibility of the Central Bank to maintain its Balance of Payments – not a financial market driven by speculation. When that is stabilised the peg can be removed. Fixed rates also ensure
flexibility in the interpretation of protectionism, free trade and fair international competition. See ‘Virtuous Circle diagram.
Q Would Scotland have a positive Balance of Payments’?
A Yes. For many years the UK has run a consistent deficit accumulating at the rate of £50/60 billion per annum. That is why Sterling is a weakening currency. Scotland would have a comfortable surplus. As a petro-currency the Central Bank would control exchange rates such that the Merk did not rise to a premium which might disrupt normal trading relationships.
Q What will be the main difference be for bank customers?
A Very few – the relatively recent experience of the change to the euro was almost seamless and the novelty wore off within a few days. Sterling payments will be automatically converted to Merks when credited to your account – just as any payment in Euros or dollars is presently converted to Sterling. Similarly payments instructed in a foreign currency will be debited to your account in Merks and transferred in the appropriate currency. Visitors using their credit
cards in Sterling or euro area ATMs will find their accounts debited in their own currency – just as at present. All Banks wishing to conduct business in Scotland
will require to comply with their Charter – a licence issued by the Scottish Central Bank to appropriately qualified businesses.
Q Will the changes affect other Financial Services?
A Securities denominated in foreign currencies, including Sterling, will require to be registered in the name of the beneficial owner – nominees will not be recognised under Scots Law. The reason for this is to prevent unauthorised capital transfer but is also linked to the new laws on corporate governance enhancing the rights of shareholders. The regulation of companies dealing in Insurance, Managing Investments and Pension Funds etc. are unlikely to be materially affected as these perform a socially useful function unrelated to financial manipulation.
Q Is it likely that the Scottish Stock Exchange will be reinstated?
A Yes. Ideally it would be structured to raise private capital for commercial enterprises with share trading as a secondary function. It would be regulated to preclude short selling and a platform for potentially disruptive speculation.
Q Why would anyone wish to defend Fractional Reserve - apart from a banker?