00:00
Good evening, everybody. It is a great pleasure to warmly welcome
00:05
you to the RSE tonight on such a chilly evening as well. It's a
00:13
pleasure to have our guest speaker with us here tonight.
00:16
But before I introduce him to you, let me just say it's such a
00:20
pleasure to have everybody here in person tonight. So John was
00:24
saying earlier to me that it's the first time you have been in
00:27
Edinburgh for quite a long time, almost two years. I think it
00:33
feels to me like it's the first time I've been out of my house,
00:37
probably in a roundabout at the same time. My name is Professor
00:41
Nicola McEwen. I'm a professor of territorial politics or with
00:45
a great interest in this topic here tonight as a representative
00:50
of the RSE. Delighted to introduce our guest speaker this
00:56
evening, Professor Sir John Kay, also a fellow of the RSE, and
01:02
one of Britain's leading economists. His work is centred
01:07
on the relationships between economics, finance, and business
01:11
and he has had a very distinguished career which will
01:14
be familiar to many of you. Spanning academic work, think
01:18
tanks, business schools, company directorships, consultancies,
01:22
and investment companies. John has been a fellow of St. John's
01:26
College, Oxford since 1970, and has held chairs in the London
01:31
Business School, University of Oxford and at the RSE. And he's
01:36
been very closely connected with the Scottish constitutional
01:40
debate having served on the First Minister standing Council
01:44
on Europe in the last parliamentary session, and also
01:49
a very prominent commentator on the economics of independence
01:53
and in particular, on the issues of currency, which will be the
01:56
subject of his talk this evening. I look forward very
02:01
much to hearing his take on the very substantially different
02:07
context in which the constitutional debate is being
02:11
conducted or will be conducted them in the years to come.
02:18
Following Sir John's talk, we will hear a response from
02:22
Professor Graeme Roy and Graeme is a professor of economics and
02:26
Dean of external engagement in the College of Social Sciences
02:29
at the University of Glasgow. Between 2016 and 2021. He was
02:36
director of the Fraser of Allander Institute at the
02:38
University of Strathclyde, and prior to that was a senior
02:43
economist, economic advisor within the Scottish Government,
02:47
including during the crucial period leading up to the 2014
02:52
independence referendum. After Graeme has responded, there will
02:56
be an opportunity for you to ask what will doubtless be
02:59
insightful and hopefully challenging questions. They're
03:03
both to Sir John and to Graeme. And without further ado, I will
03:08
hand over to Sir John Kay.
03:20
Thank you, Nicola, there is probably no issue, which cause
03:24
more difficulty in the 2014 referendum campaign than the
03:31
issue of currency for Scotland. And it's an essential I think,
03:36
that before we engage in a renewed debate on Independence
03:41
issues, that we are much clearer about the issues and the
03:45
background to this particular question. When Sir Walter Scott,
03:52
left, Abbotsford, dying to try and recuperate at Naples, we can
04:00
imagine that he took with him a bag of sovereigns. They'd be
04:05
have they would have been gold sovereigns, and they would have
04:08
had on the, the head of King George he might have taken a
04:16
letter of credit from a Scottish bank with him to Naples. Hello,
04:21
no, we know that. So Walters credit was not such that he
04:24
would necessarily have been pre approved for the American
04:28
Express card. But he would then have changed these in Naples,
04:35
for Neapolitan piastres, which would have borne the head of
04:39
King Ferdinand of the Two Sicilies. That was the 19th
04:44
century Victorian world, in which currency consisted of gold
04:49
or gold coins, and occasionally for banknotes, which are
04:54
referred to gold that was kept in the vaults or supposed to be
04:57
kept in the vaults of commercial banks. And because it wasn't
05:02
always kept in the vaults of commercial banks, the central
05:06
government took over a monopoly of note issue, towards the
05:10
middle of around the world towards the middle of the 19th
05:13
century. That's a world which we call the world of chartalism of
05:19
national currencies that are associated with sovereignty, in
05:24
the particular sense that they're even associated with the
05:27
sovereign of a particular country. And that's a world that
05:31
came to an end essentially, in 1914. The period between the two
05:38
wars was a period essentially of economic chaos. And after the
05:42
Second World War, there was an attempt to restore some kind of
05:47
stable global monetary order. It was encapsulated in the Bretton
05:52
Woods agreement reached in 1944, which JM Keynes was one of the
05:58
major architects. But that world essentially broke down in the
06:04
late 1960s and early 70s. I'm going to apologise now because
06:11
I'm going to take through through what is in effect,
06:15
Introduction to money and banking 101. For those of you
06:19
who get interested in going on, perhaps even to further courses
06:23
and money in banking, I can tell you there is a 10,000 word
06:27
paper, which elaborates the concepts I'm going to introduce
06:31
tonight. But I think unless we understand these basic concepts
06:36
of money and banking, and money transmission, we're not going to
06:40
understand the issues there are other particular issues which
06:44
you are going to face in Scotland. And I did, I remember
06:49
doing the course in money and banking 101 in the city,
06:53
University of Edinburgh, it was the year was 1968. And the
06:59
course was delivered by Innes Smith, not I fear, the most
07:03
inspired lecturer of the of the University of Edinburgh. But
07:08
Innes Smith passed away in the 1980s. And by the time he had
07:13
passed away, the world he was describing to us in these
07:17
lectures had also passed away. In 1967, the pound was devalued
07:25
against the dollar. Harold Wilson famously indeed
07:29
notoriously said, the pound in your pocket has not been
07:33
devalued. But it had been, and in the early 70s, inflation in
07:39
Britain actually reached 27%. In 1971, President Nixon took
07:47
America off the gold standard. He broke the link between the
07:51
dollar and the gold and gold at which the bank, the Federal
07:55
Reserve System was ready to buy and sell gold at a fixed price.
08:00
And that was the end forever, of the gold standard which had
08:04
prevailed in the 19th century.
08:08
In 1968, in a rather more mundane event, Barclaycard
08:14
introduced a credit card into the UK, which was beginning of
08:18
the plastic cards that are today ubiquitous, and other principle
08:23
ways nowadays, in which we actually make payments or
08:28
everyday payments. Innes Smith told us a lot about what we call
08:34
fractional reserve banking. And you will still people hear
08:39
people throwing around the phrase of fractional reserve
08:42
banking. But that was the idea that banks needed to keep a
08:47
fraction of their deposits with the Bank of England. And that
08:52
was a mechanism by which the Bank of England control the
08:55
money supply. That control mechanism was abandoned in 1973.
09:02
And from the 1980s banking regulation has been principally
09:06
governed by the international banking agreements, which were
09:10
reached in Basel in the 1980s.
09:19
Notice that they were international banking
09:23
agreements, because the internationalisation of money
09:27
and banking was a central part of the change, which had
09:31
occurred. In 1968, when I was a student, there was still
09:38
exchange control. In order to in order to take a foreign holiday,
09:45
you had to obtain foreign currency, and you were limited
09:50
to 50 pounds of currency a year, which wasn't a great problem if
09:54
you're a student, but it would have been a considerable
09:57
problems. To me, nowadays I'm afraid And that exchange control
10:04
extended not just to individuals and households, but to firms and
10:09
institutions. So when I began running the investment portfolio
10:14
of my Oxford college St. John's, in the 1970s, the only way we
10:19
could invest in foreign securities was to pay something
10:23
called the dollar premium to obtain part of a limited pool of
10:28
securities. And finally, most difficult to understand, but in
10:33
the long run, most important in the 1960s, the grew up something
10:39
called the Euro dollar market. And the Euro dollar market
10:44
consisted of American and European banks, borrowing and
10:50
lending to each other in London, outside the purview of the
10:55
Federal Reserve System. And that was essentially the end of
10:59
national control of domestic money and banking, and the
11:04
origins of the international financial system that we now
11:08
have today. So today, we live in a very different world. It's a
11:15
world in which you can buy a cup of coffee, anywhere from Aarhus
11:20
to Los Angeles and pay with a plastic card in whatever the
11:26
local currency is, and that will be debited in whatever currency
11:33
you choose to hold your account. We live in a world in which
11:40
firms maintain their accounts in many in many currencies, and
11:47
preserve their accounts present their public accounts in
11:50
different currencies. For example, although Vodafone, BP,
11:55
AstraZeneca are among the largest of British companies.
12:00
AstraZeneca and BP present their accounts and dollars. Vodafone
12:07
presents its accounts in euros. Most international trade is
12:14
actually invoiced in dollars 20% of road Europe into invoicing of
12:21
exports is basically done in Europe, in euros in the rest of
12:26
the world, more than 80% of exports are actually invoiced in
12:33
dollars, more than half of all the dollar notes in circulation
12:40
are outside the United States, and of cross border transactions
12:47
in the world. 60% take place in dollars and 20% in Europe. The
12:54
point I'm trying to make, and it's perhaps the central point,
12:58
which you need to take away from this evening, is that decisions
13:02
about currencies, about what medium of exchange, unit of
13:07
account, people will use are no longer simply the purview of
13:12
governments. They're made by the decisions of households,
13:17
businesses, and financial institutions. That's the world
13:21
we live in. And we should stop thinking in terms of that 19th
13:26
century world in which there was a national currency with a
13:30
sovereign whose head was on the back of the gold coin. It's very
13:35
misleading, if we think about it, in these kind of terms. So
13:40
much has changed since these lectures which Innes Smith
13:44
delivered in 1968. But there's some basic things which have not
13:49
changed.
13:52
In 1968, and before 1968, and after 1968. These were basics of
13:59
understanding money. Money is something called transferable
14:04
debt. That's something which was actually laid out in a great
14:08
book in the mid 19th century by a Scottish economist Douglas
14:12
McLeod. He said that the the idea that money, that debt could
14:17
be transferred from one holder to the other was one of the
14:21
greatest inventions of the human race. That's perhaps overstating
14:25
it a bit. But it was a very important invention. And if you
14:29
think about it, every time you make a financial transaction,
14:33
what you're doing is you're making that in terms of
14:36
transferable debt. When you pay for something in cash, you take
14:40
out of your purse or your wallet and note, which says, the Bank
14:45
of England will pay you so much, and you pass that over to
14:49
someone else. And they are then in a position that the Bank of
14:52
England will pay them so much. That's not mostly how you
14:56
nowadays make these transactions. However, by far
15:00
the commonest way of making transactions is you make a bank
15:04
transfer. When you pay your electricity bill, what happens
15:09
is you transfer a debt from the Bank of Scotland to you. And
15:16
that becomes a debt of the Royal Bank of Scotland to Scottish
15:21
power, it's a matter of transferable debt. And you will
15:24
notice that the government is not a party to any of these. And
15:29
the final way in which you make payments today, is by using
15:32
plastic cards, and is quite complicated when you do what you
15:36
do when you make a card payment. But what you're doing is you are
15:41
incurring a debt to your credit card issuer, which is then
15:45
transformed through the mechanisms of visa and the like,
15:49
into a debt from the merchant you're buying the goods from a
15:54
debt from a merchant to the merchant from the Merchants
15:59
Bank. So in each of these transactions, there is debt
16:05
being transferred from one person to another. And that's
16:09
the mechanism by which money operates in a modern economy.
16:14
And you'll see that the least important of these is actually
16:18
the payment of cash. The other thing that Innes Smith told us
16:23
was that money has three principal functions, the role of
16:27
medium of exchange, which I've just been explaining, the unit
16:33
of account, the way in which you keep track of your spending, and
16:38
your income, and the store of value. It's a way of keeping
16:42
money of keeping value to use on a different occasion. And
16:47
whatever the basis of money is, and whatever monetary systems
16:51
have been adopted, money continues to fulfil these
16:55
functions. That slide is the introduction to money and
16:59
banking 101. And everyone should if not have it engraved on their
17:04
mind, at least remember what it says. Then there's a question of
17:10
what we actually mean by money in the UK. And if I asked you
17:15
what, how much money you have, and this being Britain, I would
17:19
never actually dream of doing so. But if I were to ask you
17:23
what how much money you have? You would answer probably in one
17:26
of two ways, or you interpret the question in one of two ways.
17:30
You would think I was asking how much you had in your purse or
17:33
wallet? Or you might think I was asking how rich you are. But
17:39
actually an economist asking how much money there is it this is
17:43
not what an economist means by money. An economist means by
17:48
money means well, I'm afraid one of several things. And I'm going
17:53
to talk about three of these things, which are helpfully
17:57
labelled M0, M1 and M4, these are not ways of getting to Leeds
18:04
and to Bristol. These are actually measures published by
18:08
the Bank of England, of the money supply in the UK. M0 is
18:15
notes and coins in circulation, plus commercial bank reserves at
18:20
the Bank of England. And you'll see that M0 amounts currently to
18:26
96 billion pounds, which may seem to you rather a lot.
18:32
But actually, it's both rather a lot and not very much in fairly
18:38
obvious senses, is rather a lot in the sense of that if I look
18:44
at the largest component of M0 which is notes and coins in
18:49
circulation, and observe that 65 billion pounds, that amounts to
18:55
1000 pounds for every man, woman and child in the United Kingdom.
19:02
That amounts to about 3000 pounds per household in the
19:06
United Kingdom. And I don't know how many of you often have 1000
19:13
pounds on your person of 3000 pounds in your household? I
19:19
certainly don't. And I don't despite I suspect being well, I
19:24
don't suspect I know, being a good deal richer than the
19:27
average person in the UK. We need to ask where is all this
19:33
money. And the evidence seems to be that a very large part of it
19:38
is in the illegal or semi legal economy. And further evidence
19:43
for that is produced by the fact that if we look at dollars, and
19:47
euros we discover for example, that more than half the Euros in
19:52
circulation are in euros notes, or 500 Euro diamond
19:59
denominations or larger, I noticed the last time I went
20:03
into a frozen French supermarket a month or two ago, they didn't
20:07
notice saying 500 euro notes are not accepted. These are not
20:12
things which anyone would use in, in the normal way of
20:16
transactions. So money is on the one is, on the one hand, there
20:21
is rather more money in circulation than there should
20:24
be, which is why a lot of people have written rather welcoming,
20:28
the idea that cash is, is dying, because the other part of it is
20:32
that cash is dying. I think every one of you in this room
20:37
knows how you are making less and less use of cash, and how
20:42
the pandemic has actually greatly accelerated the way in
20:47
which you no longer use cash. Cash is now used in less than
20:51
20% of retail transactions in the UK. And during the pandemic,
20:57
the amount of cash withdrawn from Cash Machines has fallen by
21:01
30%. I confess I'm getting that figure, I was surprised just how
21:06
small it was. So M0 is notes and coins, plus commercial bank
21:13
reserves at the Bank of England. That's the monetary base, which
21:18
Innes Smith taught us to give a lot of attention to the reason
21:23
for that was that it was that it was on that monetary base that
21:27
M1 and M4 were built. What M1 is his UK household and business
21:34
Sterling deposits with the UK bank banks. And you will see in
21:39
contrast to M0 of 96,000,000,00 M1 is nearly 25 times that it's
21:51
2000 290 billion. And finally, there's M4, which is not just
21:58
household and business Sterling deposits with the bank with UK
22:02
banks is the broadest measure of the money supply. And that
22:06
includes, for example, commercial paper issued by large
22:10
companies. What you will learn from that is that physical money
22:15
actually plays a minor role in the modern economy. This is just
22:20
some numbers to give you some sort of perspective on all of
22:24
this. Remarkably, we have three figures which are very close to
22:29
each other. There's UK national income, there's the UK
22:33
government debt. And there's UK M1 basic money supply, which all
22:39
by coincidence at the moment are currently rather similar
22:43
numbers. We have a government deficit, which is pretty large
22:47
by any normal standards. And M4 is a bit larger than M1, but not
22:53
a great deal more physical money plays a minor role of all in all
22:58
of this, which is why when people talk about currency
23:02
choices in Scotland, and write essays on which famous Scots
23:07
would be portrayed on five pound or 50 bawbee notes, they're
23:13
engaging with a debate which has no practical significance, and
23:18
no practical relevance.
23:22
If you ask what these numbers imply for an independent
23:25
Scotland, then your starting point is to think that Scotland
23:29
is about 8.5% of UK. That's something that you can apply to
23:36
national income, Scottish National Income is about 160
23:42
billion, about 8%. of the UK figure. Scottish government
23:47
debt. Well, we don't know what it would be. But it seems
23:50
reasonable as a starting point, to say that government debt
23:54
would end up one way or another being prorated across the
23:59
nations of the current UK, so that we'd be talking about a
24:04
Scottish government debt, which might be of the order of 170 100
24:09
80 billion pounds. If it was a current times, we will be adding
24:18
a great deal to that government debt every year. But hopefully
24:23
government debt levels, government deficit levels will
24:26
fall to lower levels than this. On the other hand, we have to
24:32
accept the fact that it's likely that an independent Scottish
24:36
Government would begin with a rather larger government deficit
24:40
than its pro rata share of the UK deficit today would imply so
24:46
these are basic numbers which we need to understand in all of
24:51
this, but to emphasise once again, what I believe is the key
24:57
point for you to take away from this evening. Decisions about
25:01
what currency are going to be used in an independent Scotland
25:06
are decisions which are going to be made not primarily by people
25:10
deciding what money what notes they have in their wallet,
25:15
they're going to be decided by what debt they hold, what short
25:19
term assets they hold, what deposits they make, and the
25:23
currencies in which they choose to make these deposits. That
25:28
means the what currency is used in an independent Scotland is
25:33
not exclusively, or even primarily a matter for the
25:38
Scottish Government. It's a matter for mobile Scots, like
25:43
myself, it's a matter for Marks and Spencers and Sainsbury's.
25:48
It's a matter for Wood Group and Bailey Gifford. It's a matter
25:51
for what cab drivers in Edinburgh choose to use to end
25:55
what the Balmoral hotel chooses to you do, the decisions these
25:59
people make in terms of the currencies they use, the units
26:04
of account they deploy, and the stores of value they choose to
26:08
use. These decisions are every bit as important as those made
26:13
by the Scottish Government. That doesn't mean that the Scottish
26:19
Government has no role it does. Government has basically three
26:25
functions in relation to currency. The first is that
26:29
government determines something which is called legal tender,
26:33
each jurisdiction, each legal jurisdiction has something
26:37
called legal tender within that jurisdiction. If you want to
26:44
understand the unimportance of that in the modern world,
26:47
Scotland is the paradigm case. Because in Scotland by
26:52
historical accident, the only thing which is currently legal
26:56
tender, is coins issued by the Royal Mint. That means the only
27:02
strictly legal and definitive way of paying off your mortgage
27:07
is to turn up to your bank with a pile of coins, you should
27:11
reckon about 1000 kilos per 100,000.
27:16
of debt to repay. Of course, your bank will not be grateful
27:21
for this, and nor will you cabdriver. For that matter. I've
27:26
never offered a cab driver attempt pound note and had him
27:30
turn round and say look, that's not legal tender, gov. What
27:34
matters is the medium of exchange, which people are
27:37
prepared to accept. And that is not there is very different from
27:42
what from what legal tender is. Government can determine that,
27:47
but it's of no practical importance. The second role of
27:51
government is of course, that government can pass legislation,
27:56
and it can pass legislation to convert private contracts. Now
28:02
on some of what is written about this currency debate, that is
28:05
something which it is envisaged that government would do. So a
28:10
Scottish Government could pass a law that says in any existing
28:14
contract that says one pound read 10 bawbee or something
28:19
instead, now it's possible to pass such legislation. And the
28:24
paradigm recent example of such legislation was the European
28:29
regulations, which implemented the euro, which said, for every
28:34
contract that refers to the French franc, for example, where
28:38
it says 6.56 French francs now read one euro. That's
28:47
legislation that government could pass. But recall, think of
28:51
the conditions that made it possible to introduce that
28:56
provision. Firstly, you will not in reality, changing the values
29:02
of any one's current contracts, because the European exchange
29:07
rate had remained fixed relative to each other for 10 years prior
29:12
to the introduction of the euro, so that no one saw themselves as
29:17
either gaining or losing as a result of this change. Secondly,
29:22
all contracts in French francs were made under European law.
29:30
And that means that they were all made under the jurisdiction
29:34
to which this applied, it is manifestly not the case. And it
29:39
is very far from being the case that all contracts in Sterling,
29:44
are made under Scottish law. In fact, it's not necessarily the
29:48
case that contracts between Scots or involving Scots, which
29:54
are expressed in pounds are made under Scottish law. There are
29:59
basically two ways in which a Scottish Government could
30:02
introduce legislation of this kind. One is it could say that
30:07
the Scottish parliament met in secret last night. And it is
30:11
passed a law that changes all your pound contracts to bawbees.
30:17
The results of that that would be that you would spend the next
30:20
few days looking at the small print of every agreement which
30:24
you would ever signed. And you would incur a lot of surprises
30:28
when you did that, you would discover that the relevant
30:32
jurisdiction was in many cases, it was in a large proportion of
30:37
cases a jurisdiction outside Scotland. And you would also
30:41
discover that in many cases, it wasn't that clear what the
30:45
jurisdiction was. The result of that would be that the courts
30:51
sort of, of Scotland and indeed elsewhere, would be clogged for
30:56
many years with a result in cases which people would
31:00
implement. And more than that, since people would feel that
31:03
gained and lost or lost as a result of these transactions.
31:08
This would be open to challenge and European Human Rights
31:12
provisions to which Scotland would presumably be a signatory.
31:17
This isn't far from frivolous.
31:21
Train drivers, who drove trains from parts of the Czech
31:26
Republic, to parts of what is now Slovakia have been in the
31:31
European Court for many years. Some of them live in the Czech
31:35
part of the country, some of them lived in the Slovak part of
31:40
the country, and what are their pensions payable in. This is an
31:46
issue which we potentially have in spades. If we do this. On the
31:50
other hand, we could say that the Scottish, the Scottish
31:53
Parliament will be debating this legislation next week, or more
31:58
realistically, in three months or a years time. And in that
32:03
case, a great many people would be taking contracts, their bank
32:08
accounts, the credit cards, their loans, other things
32:13
outside the jurisdiction of Scots law, and the need a great
32:18
many financial institutions would be unwilling to make
32:21
contracts, which might be subject to the jurisdiction of
32:25
Scots law. This was in fact a mess. As I've described, in
32:30
Czechoslovakia, when things broke up, it will be a mess, on
32:34
a scale ordered orders of magnitude greater if Scotland
32:38
were to do this. I think if there is a second important
32:42
lesson, which I'd ask you to take away tonight, it is the
32:47
lesson that the people who are advocating Scottish independence
32:52
should make clear that it would not be in the intention of an
32:56
independent Scottish Government to introduce legislation of this
33:00
kind, that a change to new currency would apply only to
33:06
agreements private or public, which were made after the date
33:10
of the change, there would be no intention of introducing
33:14
legislation. of that kind. It is hard to exaggerate the damage
33:21
which could be done by a failure to recognise the importance of
33:26
this issue. That means it will be up as I've described, to
33:31
firms, governments and others, to decide firms, households and
33:36
others to decide after the transition after the
33:40
introduction of a new Scottish currency, whether they wish to
33:44
make these contracts in a new bawbee or whether they wish to
33:51
carry on with their old Sterling arrangements. Now, I imagined
33:56
some people would choose to convert their bawbee the bank
34:01
accounts to bawbees out of patriotic fervour. I imagine
34:05
others might feel the opposite way and want to maintain
34:08
Sterling. But people who are not interested in political
34:11
statements, and might well prefer the familiar to the new,
34:16
what would be the reason for making contracts in bawbees,
34:22
it's not very obvious that the introduction of a new currency
34:26
is very attractive to people in Scotland, or to firms in
34:30
Scotland. Which brings us to the third area in which governments
34:35
can affect choices in this area, which is it's open to the
34:38
government to choose its own unit of account. Indeed, that
34:42
would be the natural mechanism by which a new currency was
34:45
introduced, that a Scottish Government decides from now on
34:50
it will pay its employees in bawbees and it will collect
34:54
taxes in bawbees one might note immediately that the Scottish
35:00
Government does not employ directly that many people. But
35:04
the bulk of Scottish public expenditure goes through either
35:08
local councils or NHS Trusts. And it might be assumed that the
35:13
government could expect or indeed require that these
35:18
agencies would follow the government's own provisions and
35:22
roll recommendations. But that doesn't necessarily have any
35:28
implications for what private sector agents would do. To take
35:34
a ludicrous counter example, if the Scottish Government decided
35:38
to adopt the Russian Ruble or the European or the Vietnamese
35:42
Dong, as its unit of account, or for that matter, if it decided
35:47
to adopt Bitcoin, as its unit of account, then probably what
35:52
would happen would be people would simply convert as they
35:55
received their wages and salaries in Dongs to to some
36:02
more familiar currency like Sterling. And similarly, people
36:06
would do the same on the other side of the ledger when they had
36:09
to pay their taxes. There are quite complicated issues here.
36:15
But the question then becomes, what is the quantity of the new
36:19
Scottish Bawbee that has been issued relative to the quality
36:23
of the Scottish bawbee which is being demanded? Initially, there
36:29
would probably be rather more Scottish Bawbees, probably be a
36:33
shortage of Scottish Bawbees, people would be looking for it
36:37
to pay their taxes scrambling around to get money to pay
36:42
taxes. And you could easily imagine a situation where a good
36:45
deal of speculation about what the ultimate value of the Bawbee
36:49
was going to be, there are two alternatives for the government.
36:54
It either agrees that it will accept both salaries and, and
36:59
taxes on a basis that there is a fixed exchange rate between the
37:04
Bawbees and the familiar currency of sterling, in which
37:08
there's nothing very much of substance has changed. Or the
37:12
government decides to do something to leave this alone.
37:17
In which case, of course, police constable Burns, who receives
37:22
his check, or rather, his bank transfer in Bawbees is pretty
37:28
much at the mercy of global financial markets. And I have to
37:33
say, having my research assistant having given a small
37:37
talk to a group once about this issue in London, we've already
37:43
received a couple of calls from hedge fund managers in the city,
37:48
who are interested in the opportunities for speculation,
37:52
which this kind of which this kind of introduction might
37:56
provide. So I hope you got the idea that currency transitions
38:03
in a country like Scotland, are not very easy. That is not to
38:08
say they are impossible. And there are certainly examples
38:12
around the world of currency transactions. The two most
38:17
relevant currency transitions, currency to induce transitions
38:21
in relatively rich and advanced countries. There are applicable
38:27
ones seem to have happened quite a long time ago, and took quite
38:33
a lengthy transitional period, in order to introduce the most
38:38
rapid is probably Singapore for which it ran transition round
38:43
from 1965 to 1973. Perhaps the most relevant analogy for
38:48
Scotland is Ireland, where the transitional period actually ran
38:53
from 1922 to 1979, in which Britain Ireland was continuing
39:01
to use sterling as absolutely nothing and happened to 1979, in
39:08
which the Irish pound was finally allowed to engage in a
39:14
free float. You have an even longer transition actually in
39:17
Australia, which introduced the Australian pound in 1910. And it
39:25
wasn't until 1983, that there was a free floating Australian
39:30
dollar. As I say these transitions took a long time.
39:35
And they are by also quite a long time ago. There are no
39:39
analogies for transitions of this kind in the modern world
39:45
among relatively rich and advanced countries. And the
39:49
closest analogy one can find is actually Greece, which decided
39:53
not to make the transition out of the euro in the early years
39:59
of the last decade. The other recent transitions are all to do
40:04
with the collapse of the Soviet Union, in which a whole range of
40:08
countries in Eastern Europe adopted their own currencies in
40:15
place of the Russian Ruble, we can take you through some of the
40:19
history of what happened in these countries. But I think
40:23
there are two lessons which we will quickly take away. One is
40:27
that we don't want to do in Scotland, a lot of the things
40:31
which were done in these countries. And the second part
40:35
of the lesson is that these things were possible by virtue
40:39
of the authoritarian regimes and unsophisticated financial
40:44
systems with which these these countries emerged from
40:50
communism.
40:53
So if it's difficult to do this, we need to ask the question, why
40:57
do we actually want to do it? And the argument which seems
41:02
persuasive at first, is we need in Scotland to be able to have
41:07
an independent monetary policy. How could we be an independent
41:12
country, unless we're free to have our monetary policy to fix
41:17
our own interest rates to determine our own money supply
41:21
to set our own exchange rate? Well, here again, it's useful to
41:26
look at experience in other countries. If we look in Europe,
41:32
they're probably three countries, it's natural to look
41:34
at, the three Scandinavian countries of Norway, Denmark,
41:39
and Sweden, each of which are outside the Eurozone. Denmark,
41:45
however, has successfully pegged its currency to the euro, since
41:49
the formation of the euro and Norway as essentially sui
41:53
generis because of Norway's heavy reliance on oil revenues
41:58
and the dependence not just of the monetary system, but the
42:01
whole Norwegian economy on that particular source. The most
42:05
relevant case is probably Sweden. And this is the history
42:10
of the Swedish exchange rate. And you will see how much it has
42:16
deviated from the euro over the last 20 years in which the
42:21
answer is honestly not very much. The fluctuations of the
42:30
Swedish Kroner against the euro are much smaller than its
42:34
fluctuations against the dollar. The international value of the
42:38
Swedish Kroner is essentially driven by the exchange rate of
42:43
the euro against the dollar, rather than the exchange rate
42:48
and autonomous exchange rate. And actually, as will emerge
42:54
rather clearly here. Sweden has very limited capacity to pursue
43:01
an independent monetary policy, you can see that they tried.
43:07
They tried particularly in ahead of the financial crisis, where
43:13
they were rather sensibly slower at lowering interest rates than
43:18
other countries. The other attempt was when after the
43:21
financial crisis, they tried to raise interest rates faster than
43:27
was happening in Europe and the rest of the world. They tried
43:31
that for a bit. But the result was that the Swedish Kroner rose
43:36
that were though there were strong objections from Swedish
43:40
exporters. And then the end, Sweden decided broadly to revert
43:45
to the European nror the amount of monetary freedom that Sweden
43:50
has exists. That is not that great. And if I look at the
43:54
other clear analogy, which would be Canada and the United States,
43:59
I find basically the same thing that the Canadian dollar has
44:04
almost always sat at a 20% discount to the American dollar.
44:10
That premium that that difference discount was briefly
44:15
eliminated in 2010. When people rightly saw Canadian banks as a
44:22
rather sounder bet than American banks. But one's faith in
44:27
American banks returned. As the financial crisis abated, the
44:31
Canadian dollar returned to its normal discount. We could do
44:38
quantitative easing in Scotland as well, I suppose. That means
44:44
buying up long term government debt and replacing it by short
44:48
term government debt, which the British government has done on a
44:52
huge scale over the last decade.
44:56
We have difficulty doing that here because there wouldn't be
44:58
any long term Scottish Government debt to begin with to
45:02
buy. I guess a Scottish Government could just start
45:05
going around buying other things. There's no reason why
45:08
you can't engage in quantitative easing, by buying shops and
45:13
offices and property of other kinds. And you could borrow
45:17
short term in order to pay for that, you might find that people
45:22
were not very enthusiastic about lending money to the Scottish
45:25
Government on a short term basis in order to do it. And finally,
45:30
for those who are really passionate about having an
45:34
independent Scottish currency, it's worth thinking for a moment
45:38
about the Jersey option. Jersey, as those of you who have visited
45:42
Jersey will know as Jersey pounds, Jersey pounds are trade
45:48
at one to one with the pound sterling, and Jersey residents
45:55
keep their accounts in pounds. And nobody asks whether they're
46:00
Jersey pounds, or English pounds, because there is no
46:05
practical difference. What they do have is rather pretty notes.
46:09
And the States of Jersey Treasury encourages people to
46:14
use Jersey notes, because they earn a small amount of senior
46:18
rich income from the basis of doing this and Jersey has
46:23
sensibly maintained a reputation for conservatism in financial
46:28
markets, couldn't be the financial centre it is if it
46:31
didn't do that. And it limits the total amount of Jersey notes
46:37
which can be printed, by law 125 a million pounds, which might
46:45
equate to perhaps 6 billion in the case of Scotland, which
46:49
would roughly equate to the total of the Scottish bank, the
46:53
likely use of currency in Scotland. This would be an
46:59
innocuous way of doing it. We asked the States of Jersey where
47:04
they thought all these notes were because even 125 million
47:09
pounds, it's quite a lot relative to the size of the
47:13
Jersey population. And it seems unlikely that money launderers
47:17
are making much use of Jersey palms. And their guess which is
47:21
probably mine is that there are quite a lot of people who went
47:25
to Jersey, and then ended up bringing back one or two Jersey
47:29
notes, which they either couldn't be bothered to change,
47:32
or which got pushed up in the washing machine when they wash
47:37
their shorts after their Jersey holiday. This is actually not
47:42
entirely frivolous. Because introducing a Scottish currency
47:47
in a way that would give a Scottish Government options for
47:51
the future could be done by imitating this rather palate
47:55
introduction of a currency, which certainly does not involve
47:59
the kind of problems which I have been describing.
48:04
But let me sum up what I think it's important for everyone in
48:09
this audience to take away. The first important point is that
48:14
this is not simply a matter of what the Scottish Government
48:18
will do. The modern world is not like that anymore. And the
48:23
Scottish Government can influence the choices, which is
48:26
private sector makes, but it cannot determine it. The second
48:32
is that we need to accept with some realism, to the degree of
48:37
economic independence, which a Scottish Government could
48:40
actually enjoy in the modern world is limited. And this is
48:45
especially true in monetary policy, where because of the
48:48
growth of international financial markets, of which
48:52
Scotland is inevitably part. And indeed, Scotland profitably
48:57
trades in international financial markets. Sadly, there
49:01
are one or two institutions in the first decades of this
49:05
century, who didn't manage to trade profitably but our asset
49:09
managers continue to do so. So the degree of independence which
49:15
we can have in that world, in that international financial
49:20
world is limited. And that's just the way things are for a
49:24
small country. Indeed, today I rather wonder how much real
49:29
power and real influence the Bank of England has, that our
49:34
reverence for the Bank of England derives from an era when
49:38
it was much more authoritative in the world than it is today.
49:42
And important decisions about global money are taken in
49:46
Frankfurt by the European Central Bank in Washington by
49:50
the Federal Reserve, and perhaps to an increasing degree in
49:55
China, although that's still quite a long way off. We do not
50:00
have a chartalist world anymore in which money is associated
50:05
with a nationality and sovereignty. And we need to put
50:08
these ideas out of our mind. I think if there's a lesson for
50:19
us, it is first do no harm, which, as you will know, comes
50:24
from Hippocratic Oath. I've had Hippocrates flanked by Adam
50:31
Smith, a great small Scottish economist on the one hand, and
50:35
Nicola Sturgeon on the other. First do no harm is I think, a
50:39
central tenant, which ought to be part of the heart of this
50:44
debate. An ill considered transition can do a great deal
50:51
of damage, both to the credibility of a Scottish
50:54
government, and to the credibility of a Scottish
50:57
financial system, inept discussion of transition can
51:02
also do a great deal of damage to the potential credibility of
51:05
a government and to the Scottish financial system. That means we
51:10
should not go into this debate hastily, or any transition
51:14
hastily, without having carefully planned and prepared a
51:19
runway and a strategy for doing that. If you're prepared to
51:25
envisage an extended transition, there are no limits to the
51:29
ambitions which you can have. Thank you.
51:40
Thank you very much for that remarkable tour de force. And
51:44
what I should have said at the beginning, is that we are audio
51:47
recording tonight's event. So at the risk of sounding like I do
51:53
when I tell my kids to do their homework in revision, if you did
51:56
want to do that money in banking 101 all over again, it will be
52:00
available on the RSE website. Thank you very much. And we will
52:04
open for discussion and questions. But first of all, for
52:07
some provocative thoughts, hopefully. And some responses
52:11
over to Professor Graeme Roy. Thank you.
52:14
Great. Thank you, Nicola. And it's a great pleasure to be here
52:21
tonight. And to give the response to John's remark, a
52:24
real honour to follow Sir John as a hero of mine, and many
52:28
economists of my generation actually first met John when he
52:32
was in the Council of Economic Advisers for the Scottish
52:34
Government. And I was a relatively junior civil servant
52:37
at the time with the view that senior civil servants should
52:40
never be questioned ever. And remember one of the meetings we
52:43
had a presentation from a polished civil servant to add
52:47
all the policy strategy buzzwords who had all the the
52:50
infographics, all the PowerPoint presentations, all the buzzwords
52:54
and at the end of the presentation, the chair invited
52:56
comments. And Sir John said in that quiet, but powerful voice
53:00
of himself. But very nice presentation. Thank you. But you
53:03
didn't actually tell us what the point of it is you're trying to
53:05
do. Queue an immediate quick redraft of the programme for
53:09
government. So the point about what I want to do tonight is
53:12
wrangle through Professor Kay's proposition line by line. And
53:16
hopefully we'll get a chance to do some of that in the q&a. I
53:19
wanted to offer us some reflections on the context in
53:22
which his remarks sit. Now clearly we have a long journey
53:26
to go before the referendum is called let alone held. And I
53:29
hope John doesn't mind me speaking on behalf of both of
53:33
those who may say that any kind of political crystal ball
53:36
gazing, we're delighted that Professor McEwan will handle all
53:39
of those tricky questions. But one of the things that really
53:42
interests me is the extent to which the context has changed
53:46
over the last seven years. And that sets the backdrop for the
53:49
issues that Sir John has touched on. Now, of course, not
53:52
everything has changed. So Yes, supporters will argue that
53:56
Scotland has the economic strengths to be an independent
53:58
nation. Indeed, Andrew Wilson co tonight has argued that Scotland
54:02
would be the richest newly independent country in history
54:05
and will point to examples others from New Zealand to
54:09
Scandinavia as evidence of have the power to do things
54:12
differently. Likewise any better together refresh campaign will
54:16
return to familiar arguments that Holyrood already has a lot
54:20
of power to influence day to day life in Scotland. And will no
54:23
doubt point to recent issues from ferries through to
54:27
education and health outcomes, as a counter to any argument of
54:30
decisions taken in Scotland are always for the better. And
54:33
arguments will also I'm sure be put forward for all our
54:36
strengths. The Scottish economy has challenges that could be
54:38
exposed, at least initially under independence, not least
54:42
our higher public expenditure expenditure. And just as the
54:45
financial crisis provide a real important backdrop in 2014
54:49
unionists I'm sure argue that COVID provides an illustration
54:52
of the benefits of financial pooling and sharing. So debates
54:56
many ways will tread familiar grounds. But where are the
54:59
differences and why might that mean for the currency debate? So
55:03
well, firstly on the economy, the decline in oil revenues,
55:06
COVID-19 and weak growth even before the pandemic poses some
55:10
challenging questions for those planning a smooth transition to
55:13
independence. jeres numbers this year show a fiscal deficit of
55:17
above 20% of GDP. Now that will come down quickly. But no longer
55:22
can we hope that the relative gap and spending in Scotland can
55:25
be closed by oil revenues. But clearly, Brexit has done the
55:29
Unionist case no favours either. And it's not just in trade as
55:32
the area that we hear most of the debate on the economy. But
55:35
Scotland's demographic outlook is much more challenging than
55:38
for the UK as a whole. So the loss of freedom of movement for
55:42
me is arguably a much more serious blow to Scotland's long
55:45
term growth potential than the barriers that have been erected
55:48
on trade. Which brings me to my second reference, and that's the
55:51
political at the policy and constitutional perspective.
55:54
Brexit is clearly the most significant constitutional
55:57
upheaval in living memory. And for Unionists isn't just an
56:01
economic challenge, but one of economic credibility too. So
56:04
putting up trade barriers, with Scottish export markets that are
56:07
larger than Australasia, North America, Africa, South America
56:11
and Asia combined, isn't for me a great example of better
56:14
together. More broadly, in 2014, the choice has been a quite
56:19
different future under independence, obviously, and
56:22
what was seen at the time as being a relatively stable status
56:24
quo, but with Brexit, and that status quo is no different and
56:29
also more uncertain. Also, since 2014, we've had the new powers
56:33
of the Scottish Parliament now, perhaps, not going far enough
56:36
for some, but they have been extended in quite significant
56:39
ways. And I guess in many ways, any argument of further
56:43
devolution was going to cement Scotland's place in the union,
56:46
you know, haven't hasn't really borne borne fruit and
56:49
independence hasn't gone away. But the chart that is
56:52
transition, even in the transition of the Smith powers,
56:55
has shown actually, economic change is actually quite
56:58
difficult to do. And on the one hand, though, we have actually
57:03
seen with the new transfer of powers, if Scotland is given the
57:06
power to do things, they will do it differently, whether it be
57:09
the new five banf income tax system, whether it be the child
57:12
payment that was increased last week, but Brexit and Smith
57:18
powers has shown that change isn't easy, or always has an
57:21
upside. So Holyrood, is having to deal with what happens when
57:25
your tax revenues don't grow as quickly as you would like. We've
57:29
also seen that firsthand, transitioning from one status
57:32
quo to another can bring up some challenges. So in 2014, we were
57:36
told independence could take place in 18 months, at a cost of
57:40
a couple of 100 million pounds. But even if you just look at the
57:43
transfer of the Smith powers, we're talking about 600 million
57:46
pounds to transfer by 11 Social Security benefits, and
57:50
potentially up to a decade from when they were first recommended
57:53
to actually being fully operational. So when we know
57:55
much more, that change is actually quite difficult to do.
57:58
And we've seen it with Brexit. So for all that Brexit has
58:03
created political opportunities for the people advocating
58:07
independence. And for all the protests of Scottish exporters,
58:10
over the mess of the UK is exit from the EU were political
58:13
dynamite for the SNP in many ways. Equally, it's not then
58:17
convincing to wish your way. Challenges was your market,
58:20
which is three times as large as the EU. So a lot of the
58:24
challenges we've seen the last few years, so that change is
58:26
difficult. That's why I think that Sir John's comments about
58:29
the importance of the transition, and carefully
58:31
managed and transition is absolutely crucial, because what
58:35
we've seen even just in a smaller scale from Smith, but
58:37
also through to Brexit is that change is actually quite
58:41
difficult to do. And it's crucial to get it right, it's
58:42
okay to look at the long term. But the short term has really
58:46
important implications, not just immediately for people, but also
58:49
for that the long term potential of your economy. And I guess the
58:52
third element in all of this that's different from 2014 is
58:56
the political dynamics. And if you look at the work of James
59:01
Mitchell and Rob Johns, They've tracked the the growth of SNP
59:05
and what's really interesting on the economic front is at the
59:08
heart of that drive was idea of competence and moderation. And
59:12
that has been crucial to success. And again, referencing
59:16
Andrew Wilson that the famous prawn cocktail dinners that they
59:19
had, I don't know if you had prawn cocktail, but and these
59:22
famous dinners where they toured the board the boardrooms of
59:25
Scotland, to make the case for the economic competence of the
59:29
SNP was very much based on a pro economic growth, a competence
59:34
model that was underpinning that selling of that message in the
59:38
2014 perspective is very much in that same vein as well. So full
59:42
fiscal autonomy was the prize, coordinated financial
59:46
regulation, fiscal stability, limiting how much the Scottish
59:50
Government could borrow membership with the EU, and
59:53
crucially, a shared currency so the idea of competence and
59:57
moderation was the heart of that campaign, but now there's many
60:01
in the yes campaign who are seeking a more radical form of
60:04
independence, irrespective of the challenges on transition.
60:08
Indeed, some of them are now actually in government. And that
60:11
means that the lightning rod for all of this will come on to the
60:13
issue of the currency and issues that Sir John has so eloquently
60:17
set out. And the currency is a question as John mentioned, the
60:21
lack of a plan B was often described as the Achilles heel
60:24
of the yes campaign. And what Sir John's model tries to do is
60:28
building on the work of the sustainable growth commission
60:31
seek to strike that balance between competence and
60:33
moderation. And but also one that learns the lessons from
60:36
2014. And where the economics, I would argue the economics
60:40
policy, and constitutional context looks quite different.
60:43
It doesn't rely on negotiating currency union, and it leaves
60:46
the door open for a future a new currency in the future. As John
60:51
gave us the the money in banking 101 I should also say the
60:55
University of Glasgow offer a really fantastic course. And
60:58
that discounts are available for RSE members. But it reflects the
61:02
way that money operates in the modern society. And crucially,
61:06
in principle, it would limit the risks around assets and
61:10
liabilities and facilitate that trade with the UK is it being
61:14
our largest market and crucially as well, it focuses on investor
61:18
confidence. But like any other any currency option, there are
61:22
challenges that will be useful to pick up into the q&a. So as
61:27
John mentioned, you wouldn't be setting interest rates in
61:29
Scotland. Interest rates be set in the rest of the UK for the
61:32
rest of the UK. That may be okay. If in the long run your
61:37
the importance of an alignment with the UK is key. But if
61:40
independence is about doing something different about
61:43
perhaps aligning more with the with the European Union, then
61:46
people might question and markets might question strategy,
61:49
at least over the long run, you wouldn't typically have a lender
61:52
of last resort Scottish banking system will require some funds.
61:56
Now, you could do that through building up reserves to
61:59
facilitate that day to day clearing that you would have the
62:03
unit a lender of last resort, if instead you didn't have a
62:06
banking sector that relied upon banks and domiciled are
62:10
domiciled in scomp are headquartered in London and
62:13
regulated by regulators down there. So essentially operating
62:17
within to Scotland, that would avoid any issues about having to
62:20
acquire a lender of last resort because you would have it a in
62:24
UK taxpayers and out of London, but it might raise questions in
62:28
the Bank of England about having a large scale banking sector
62:31
opposite operating in what would be for them, a foreign country
62:35
might require banks doing that to hold higher capital ratios
62:39
might require greater regulatory instruments. If they were
62:42
operating into a market, which they were actually controlling
62:46
or regulating anymore, because it was no classified in their
62:49
view as being a foreign market. I think perhaps the biggest
62:53
questions and it'd be really useful to get joins us on this
62:55
is around a macro questions around different currency
62:58
models, not about how money is operating, but actually how much
63:02
money you're generating in your economy. So my colleague at
63:05
Glasgow, Roy McDonald's, put some interesting questions out
63:08
there about your ability to support your economy in a crisis
63:12
if you can't do quantitative easing. So have you got that
63:14
ability to print money when you urgently need it? And questions
63:18
about running a really hard fiscal regime if you've got a
63:21
balance of payments deficit, or you've got a larger fiscal
63:24
deficit in the UK, so how are you generating these pounds?
63:27
These these Sterling's as a real economy that can operate,
63:32
operate on through the Scottish Scottish economy. And again, one
63:37
of the more political questions will be interesting, perhaps to
63:39
turn to Nicola and all of this would be as and what might be
63:42
the interesting monetary and fiscal requirements the EU might
63:45
require this will sterilization meet these requirements, and
63:49
will the potential more smaller central bank in terms of remit
63:54
satisfy the European regulators and the European Commission for
64:00
joining? And again, a further question for me is how well
64:03
might not having our own currency go down in the new yes
64:07
movement? And Alex Salmond, he's he's talked about saying that
64:11
the construction of a currency in rapid time, she'd be a major
64:13
priority for independent Scotland and the Green Party's
64:17
opposition to retaining Sterling and the political dynamics in
64:20
there are much more complex than they were in 2014. But as Sir
64:25
John said, you know, I think it's really important though, I
64:28
really important caution here is it is really, it's naive to
64:31
think that creating your own currency means that is a
64:34
passport to operating in a world with no constraints. All of the
64:37
choices and currency are by operating under constraints is
64:41
just what constraints do you want to do you want to operate
64:44
under which ones do you want to trade off? And crucially, if you
64:49
make the scale of the transition that much more difficult, and
64:52
perhaps the transition becomes harder to do. Then even if on
64:57
paper, you have greater ability to do things differently, the
65:00
practical realities of that are not going to be true because
65:04
you've because of the constraints you've placed on
65:06
because you've made that transition harder, which I guess
65:09
brings me to my concluding point in all of this, and back to the
65:12
point that Sir John made to that civil servant, and all those
65:15
years ago, which is what's the point? And it's understandable
65:19
that people like us, Sir John, and I will talk about the
65:21
technical issues such as currency, and John should be
65:24
commended for exploring these options. But it strikes me that
65:28
both proponents of both yes and no, and not John or I. But yet
65:32
proponents of yes and no have work to do to set out their
65:35
future vision for Scotland post Brexit post COVID and into a net
65:39
zero world. And in the yes side, many of the ideas in the white
65:43
paper even just that was eight years ago, since the white paper
65:46
policies on cutting corporation tax, cutting air passengers have
65:50
been dropped, policies and childcare have actually been
65:52
delivered. Now, the growth commission did offer interesting
65:56
suggestions. But sadly, that's one part of the report that
65:58
actually is doesn't get the attention it deserves. So how do
66:02
we move on to the, if you're going to go through these
66:04
transitions? What is it you actually want to use these
66:07
powers for? What are you going to do differently? But
66:09
crucially, we need to ask the same questions to the Unionist
66:12
side as well. So what is the new vision for the Union? And
66:17
Stephen Gethins, the former MP and colleague in the Scottish
66:20
Government, with me is pose a really interesting question,
66:23
seeing that while it's right that we questioned politicians
66:25
over independence and its consequences, post Brexit there
66:28
is no status quo. And people deserve answers in the
66:31
consequences of remaining in the union. And it's an interesting
66:34
turn of phrase, but he's right. And it's not enough simply to
66:37
point out about the risks of short term transition to
66:40
independence. If the long term vision for the union is missing,
66:43
might that involve more powers? Or might it be the levelling up
66:46
agenda or so called muscular unionism? And how might all this
66:50
of who make this work? And fundamentally, what does each
66:54
option whether independence or Scotland, remaining in the UK,
66:58
and mean for our ability to tackle the inequalities in
67:01
society, to level up our country into focus on issues that really
67:05
matter to the people of Scotland. So I congratulate John
67:08
on his really thoughtful contribution. In 2014, just
67:11
after the referendum, he said the no verdict in September was
67:14
not the end of the argument. But the beginning, I remember
67:17
thinking that I didn't agree with him at the time, I think
67:20
it's seven years have proven that John was entirely correct.
67:23
And I really hope to continue the discussion in the q&a. Thank
67:27
Thank you, Graeme. Thank you very much. So over to you. If
67:27
you very much.
67:37
you would like to make a comment or ask a question, if you could
67:40
please raise your hand and then one of the staff will come with
67:44
a microphone, which will then be cleansed before it goes to the
67:48
next person so we're COVID safe here.Yes, sir.
67:54
Good evening. Thank you. My name is Dr Kevin Parker. I spent the
67:59
early years the 1990s. In the ex Yugoslav republics of Slovenia
68:03
and Croatia, I was struck by what Professor Kay said about
68:09
the experiences the post Soviet republics. But there you have
68:14
two countries of middling GDP per head, roughly the same as
68:20
Greece, who together have a slightly smaller population and
68:25
Scotland, and who both managed to set up the independent
68:29
currencies and operate them for 10 years in a pretty short space
68:33
of time. I just wondered, if Professor Kay had studied those
68:36
countries. And do you consider that those countries were
68:41
successful in that efforts? Or did they make some of the
68:43
mistakes that you alluded to on the post Soviet bloc?
68:47
Thank you. Thank you. I'll gather a few questions, if I
68:50
mean, to give everyone an opportunity. And anyone else?
68:58
Yes.
69:02
Thank you. I was wondering if Scotland did go independent and
69:07
rejoined the Europe, the EU sorry? Do you think it will be a
69:13
pressure to take on the euro? And if so, what consequences
69:19
would that have? Do you think?
69:23
And we'll take one more.
69:31
Hi, Graeme has not proposed another option to the currency,
69:35
which should be used an independent Scotland. Does not
69:38
seem to be about whether we should be independent or not. So
69:42
what's the point you were making?
69:49
John, would you like to go first?
69:52
Okay, all right. The two addressed to me one was, have we
69:57
looked at the experience of the ex Soviet Union. Yes, we have we
70:01
haven't devoted much time specifically to Slovenia and
70:06
these Balkan countries. But we we've looked at the Baltics and
70:11
some of the Soviet republics. The basic answer to the question
70:15
is, in the end, all these countries managed to come up
70:19
with something. And many of them, there was chaos, or a
70:26
degree of chaos in the course of the transition. In none of them.
70:32
Was there any close analogy to the Scottish case for two
70:35
reasons, both to do with the transition from communism. One
70:39
was the possibility of a kind of authoritarianism, which I think
70:43
would be impossible in Scotland, for example, in Estonia, which
70:48
was relatively aggressively declaring its adherence to
70:53
Europe, it was actually made illegal to use the euro. I hope
70:57
we could to use the Ruble, I hope we could not think of
71:01
having these kind of provisions and in Scotland, the other is
71:06
that by virtue of the transition from Communism, all these
71:09
countries began with relatively unsophisticated financial
71:14
systems by Western European standards. Scotland, by
71:18
contrast, begins with an extremely sophisticated
71:21
financial system by almost any standards. So there is not I
71:26
think, much to be learned, we had a look at Kazakhstan,
71:31
mainly, I think that you're not going to learn from much from
71:34
Kazakhstan, except in a negative sense. On the other question,
71:41
which is about the EU. This is a complicated issue, which would
71:45
deserve a whole paper on its own. I find it hard to see as
71:50
things are at the moment, Scotland making a
71:54
straightforward application for membership of the EU. There are
71:58
two issues there. One is that Scotland has in spades, the
72:04
Northern Irish border question. And I think there is a little
72:10
point about talking about Scottish membership of the EU,
72:14
until we see how that evolves. And what solutions are found, if
72:20
indeed any can be found, to the problems within which the
72:24
Northern Irish border raises. The second issue is that what
72:29
are the commitments which a Scottish Government would have
72:32
to take on if it joined the EU? Well, it would have to accept
72:36
that the the Euro is the currency of the EU, and that
72:42
there is an aspiration to join the EU one day, one day might be
72:47
a very long way away. And I imagine that would be quite
72:52
widely accepted. The other is that there are specific
72:56
provisions in the EU about adherence to Maastricht criteria
73:02
and the like, which Sweden has succeeded in interpreting in a
73:07
rather evasive way. At the moment, we have the rather
73:10
bizarre position of Montenegro, which cannot comply, which
73:15
although it's on the point of joining the EU, cannot actually
73:19
comply with this condition of the EU, the reason being that
73:23
the key and visualise is you aligning your currency with the
73:27
euro. But since currently, Montenegro does not have a
73:30
currency that uses the euro, it is not possible for it to align
73:36
its currency with the euro. It is not beyond with the wit of
73:40
man to think of a solution to this problem. But the finding of
73:47
that self evident solution depends on political will. And
73:52
the history of the EU I think is in general, if there is
73:56
political will, technical problems will be solved. If
74:00
there is no political will, they will turn out to be insoluble.
74:05
So I think that takes one to what Nicola will know more about
74:08
than I do by some measure, which is I think the largest the other
74:12
large problems Scotland has in relation to the EU, is secession
74:17
prospects in other states, such as Spain, Belgium, and
74:21
conceivably Italy. And the question becomes in prospective
74:26
Scottish membership, how much political drive there would be
74:31
from a major members like France and Germany, to bring Scotland
74:35
into the EU. But that's a political matter. I don't feel
74:39
competent to discuss any further. But I don't think this
74:43
issue of Scottish relationship to the euro is actually the main
74:47
issue about Scottish affiliation or membership of the EU.
74:53
I'll refrain from commenting further and hand over to Graeme.
74:56
Yeah, so your question is exactly my point in that and
75:00
what John does and what the broader option about different
75:03
currency options? Well, is there anyone who argues that isn't a
75:05
solution to Scotland's currency question is wrong, it's not
75:08
sufficient just to see that Scotland can't be independent
75:11
because it doesn't have an option because it does have
75:13
options. And but it will require a huge transition. So the
75:16
question for me to the Unionist side, it's not sufficient, just
75:21
simply just to point to technical difficulties, if you
75:24
don't have a story to tell about what the future of the union is,
75:27
equally, though, what John's highlighted and spoken about
75:30
this evening, is that you can find solution to currency. But
75:33
there's lots of big issues in there. There's constraints,
75:36
there's pressures, trade offs, there's long transitions. So if
75:39
you're going to go through that, what's the argument and people
75:42
posing independence? What do you gain by putting all of going
75:46
through all of those transition and all those challenges there?
75:48
And that, for me, is the fundamental question. So it's
75:51
okay to talk about technical issues. But the duty is also on
75:54
people advocating independence and advocating, what's the point
75:57
of this? And what is the objective that we're trying to
76:00
achieve?
76:02
Thank you, we have time for at least one other round of
76:05
questions, maybe a little bit. Yes.
76:13
Thanks very much. And thanks for that. You talked about the three
76:15
reasons why some would advocate moving to an independent
76:18
currency as quickly as possible. And one of those reasons was
76:21
quantitative easing. And I guess my question is, would it be such
76:25
a great loss not to be able to conduct quantitative easing?
76:32
Any other questions just now? Yes, gentleman here. And
76:38
apologies Cabinet Secretary, it's hard to recognise anyone in
76:41
a mask.
76:49
Good evening, Dr. Tim Rideout, convener of the Scottish
76:53
currency group, and also the author of the SNP conferences,
76:57
policies on currency. And most recently, on Sunday, we decided
77:01
to start the preparations for the Scottish Reserve Bank as the
77:04
new Central Bank of Scotland. Can anyone on the panel identify
77:09
any relatively advanced modern economy that has ever sought to
77:13
use the currency of another country?
77:18
One more, if we have one more? Raise your hand bit higher. Oh,
77:30
maybe it's Yes. Yes. Sorry.
77:37
Economics 101 question, but in the Danish model, or Ireland
77:41
before 1979? How do you peg a currency to another currency?
77:44
Does it need a ERM type solution? Or is there some other
77:46
mechanism?
77:49
Great, thank you. I think all of these were for you, John. Right.
77:56
Okay, um, I talked about three aspects of having an independent
77:59
monetary policy. The QE is one, I confess to sharing your
78:06
implicit doubt that QE has been the marvellous success that the
78:13
central banks of the world would, would claim it as being.
78:17
Second question, how does Denmark do it? The answer
78:21
basically, is that the Danish currency is pegged to the euro
78:27
at a level which is too low, which means that if Denmark if a
78:32
Danish currency were allowed to appreciate, were allowed to
78:36
float, it would certainly appreciate the same is true of
78:40
the other long term successful peg, which is the Hong Kong
78:43
dollar, which is pegged to the US dollar, both these currencies
78:47
would appreciate the result of that is in both cases, there has
78:51
been some currency flow into these curves into these
78:55
currencies. And the result is that the monetary boards, the
78:59
Monetary Board in Hong Kong, and the Danish Central Bank, has had
79:04
no difficulty in maintaining the peg and basically, itself,
79:10
Danish Kroner, or the monetary authority in Hong Kong sells
79:14
Hong Kong dollars in order to keep the exchange rate down.
79:19
Obviously, if the Scottish Government was pay a Scottish
79:22
currency was paid compellingly, at some low level, sufficiently
79:29
low level, and it's not clear what lower level it would have
79:32
to be, then one could imagine a similar situation in relation to
79:36
a peg of the Scottish currency. In answer to the question, is
79:39
there another case of an advanced country becoming newly
79:45
independent and using the currency of another country? The
79:48
answer is no. I'm not quite sure what point that leads to, but
79:52
the answer is no.
79:54
Thank you. Do you want to add anything?
79:57
I think there's a question about quantitative easing. As a as an
80:00
overall policy objective, I think what we've probably seen,
80:04
I think broadening out into during the pandemic, the ability
80:08
to have monetary and fiscal coordination, I think is is
80:11
something which I think is is, I think we still need to see you
80:15
feel the full essence of that. But I think that's where
80:17
probably, I would say that it's distinct from having a broader
80:20
discussion about quantitive easing the ability to see what's
80:22
happened to the last 18 months about the Bank of England,
80:26
essentially monetizing the debt as the deficit to a significant
80:30
extent, and you wouldn't have that under under sterilization.
80:34
And the broader point is just quickly, on Tim's point there
80:37
about other countries doing that, I think the answer is no.
80:40
And which I guess gets to my question as well about how that
80:43
would then be consistent with questions around EU membership,
80:47
etc. And I know it's all part of a negotiation. But then if
80:51
there's no precedent for that, and how would then the EU
80:55
approach that view of, of, of not having another currency?
81:00
So Graeme, we might notice the point that the Bank of England
81:03
is doing quantitative easing, for us, whether we like it or
81:08
not, and that would continue to be the case, whatever currency
81:12
of Scottish government used, the spraying short term debt around
81:19
in substitution for long term debt is something that spills
81:23
over the borders of the jurisdiction in which the
81:27
transaction takes place. That's back to the point I made at the
81:31
end, which is that we greatly exaggerate the amount of
81:34
influence which the Bank of England has relative to European
81:38
Central Bank, and which the European Central Bank has
81:42
relative to the Fed. Essentially, we're all small
81:45
players of this world now. And that's, in a sense, the answer
81:51
to the the point which I think was being made in asking, has
81:55
any advanced country done it, it's not much point really.
82:01
Can I ask, banking and money 101 question too, if part of the
82:08
political rationale for independence now is to
82:13
reoriented Scotland towards the European Union, in light of
82:16
Brexit. Would there be sense if one was to suggest pegging a
82:22
currency to another more stable and established currency to peg
82:27
it to the euro, rather than to the pound.
82:32
There's a lecture coming in economics and banking 101 on
82:36
optimal currency areas, which are to do with your trading
82:40
patterns, and the things that follow from that. And there's a
82:47
chicken and egg issue here, basically, Scotland's trading
82:52
battons at the moment, are far more aligned towards our towards
82:56
our UK than they are towards Europe. If they became more
83:02
aligned towards our EU, it would be more sensible, it would be
83:06
sensible to start looking towards the euro. And, indeed,
83:10
to go back to the theme of what I was saying, Scottish firms and
83:15
Scottish institutions would be doing that anyway, as Scotland
83:20
became more involved with the EU, it's not just a matter of
83:24
what the government does, and pegging currencies is difficult,
83:29
especially in the in the modern world, of rather aggressive
83:33
financial speculation. We shouldn't forget that back in
83:37
1992, Soros and a small group of speculators were able in
83:43
inverted commas to break the bank of England, they made the
83:47
they made the obtaining of a peg simply impossible, by virtue of
83:53
the full volume of money they could throw at it. In the case
83:57
of a Scottish Government, that looks even more scary, because
84:02
the resources of the global financial system relative to the
84:06
resources of a Scottish Central Bank, are orders of magnitude
84:10
different.
84:12
On that note, thank you so much. We've come to the end of our
84:17
event this evening. There will be many others I'm sure, in the
84:22
months and years to come. The Constitutional debate in
84:26
Scotland has frustratingly in some ways, in recent times
84:31
focused on issues of process of whether there will be a
84:35
referendum whether they can be a referendum. And this was really
84:38
an opportunity to to explore with the incredible insight
84:44
offered by Sir John and also by Professor Roy. Some issues of
84:49
real substance and I think it seems to me that this next year
84:54
to 18 months offers many opportunities should offer many
84:57
opportunities for exploring some of these things. In depth, so
85:01
thank you very much for coming this evening and if you could
85:04
show your appreciation to our panel in the usual way please
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