Back to the future with Scottish currency

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ISRS Senior Research Fellow, Chris Cook discusses his framework for an independent Scotland to use the pound, a plan A Plus.

The article was posted on the Financial Times, Alphaville on February 17, 2014.

The rejection by all the Westminster parties collectively of the SNP’s Plan A for a post-independence UK currency union has elicited a string of possible Plan B solutions, several of them already considered and rejected as inferior to Plan A by the SNP’s expert group of ‘wise men’.

But the current debate is ill-founded, since the UK can have no more control over who uses the £ symbol as a unit of account, than they can have control over the use of metres and kilogrammes. As for currency, which is not necessarily the same thing as a unit of account, any number of countries ‘peg’ their currencies to a stronger currency as a unit of account.

The Republic of Ireland pegged their currency to the £ sterling for decades, and Hong Kong firstly pegged their currency to the £, and then after a brief and unhappy flotation, pegged their Hong Kong $ to the US dollar. Other countries go further, such as Ecuador and Panama, and actually use another country’s currency, which increases the dependence of these nations on that country’s monetary and fiscal policy.

All of the current Plan A and B proposals involve the creation of currency by a central bank – whether the Bank of England or the European Central Bank – and the creation of credit by private banks. But my proposal – let’s call it Plan A Plus – is complementary to the existing proposed Plan A, since it envisages a different monetary and fiscal architecture.

One of the subjects of my research as a Senior Fellow at the Institute of Security & Resilience Studies, University College London has been whether there may be possibilities for the future arising out of practice in the past. Because clearly UK sovereigns did fund their expenditure for many centuries before the Bank of England came along in 1694; while trade and enterprise also flourished long before the Joint Stock Company came along perhaps 400 years ago.

Sure enough, it is here – Back to the Future – where the basis of a Plan A + may be found.

Treasury to Taxpayer (T2T)

The credit of sovereigns was and is based upon their capacity to levy and collect taxes, and for centuries sovereigns raised funding to fight wars and carry out public works on the basis of their credit. The king’s treasury would propose to tax-payers – most taxes were land-based in those days – to prepay taxation at an agreed discount, let us say a £2 discount for a £10 tax pre-payment, usually made in kind, such as in goods or services provided to the sovereign.

The taxpayer would receive a record of prepayment, which was the half of a split ‘tally stick’ known – interestingly – as the ‘stock’, with the ‘counter-stock’ being retained by the Exchequer. When the tax was due, the tax-payer would take the £10 stock instrument to the Exchequer; it would be matched; the obligation to pay £10 tax would be met; and the taxpayer would realise a profit of £2 or 25% on his prepayment.

The accuracy of this explanation of national accounting remains indelibly in our language today, firstly in the origins of the phrases Tax Return, which was the accounting event of a physical return of a token, and secondly, in the phrase Rate of Return, which was actually the rate over time at which the (say) 25 per cent profit from the discount could be realised: the more tax you paid, the faster was the rate of return of the stock.

The use of the word Stock in its original meaning of an undated credit instrument has also fallen into disuse. It has been replaced by the twin peaks of finance capital: Equity (permanent shares of ‘Common Stock’ or Joint Stock’ in a Company legal vehicle) and Debt (temporary interest-bearing Loan Stock) and of course the government gilt-edged stock or gilts, which misleadingly have been termed the National Debt.

So the reality is there is no such thing as a National Debt: it is and always has been a National Credit, based upon the power of the Treasury to levy and collect tax directly from taxpayers.

So this proposed Plan A + is based upon the simple concept of direct T2T issuance of credit instruments by a Scottish Treasury firstly to fund its expenditure and secondly to provide the circulating credit necessary for the facilitation of trade and the creation of productive assets, and productive in every sense – not just productive of profit.

How it Works

The Treasury will simply create and issue whatever credit is necessary. At the operational level, system management, accounting, credit creation and issuance would be managed by service providers who would cover agreed costs, and also have a stake in the outcome, through the use of a partnership structure. A Scottish Monetary Authority would supervise and set standards.

In other words, we would see banks and credit unions transition from a role as middlemen, who come between lenders and depositors and take the credit risk, to pure service providers. This would be fine with the banks, because the only capital they then need is that necessary to cover operating costs.

Surely such a utopian mutual architecture will never work? Well actually, it already does, in the shipping industry where those risks which Lloyd’s of London will not insure have been mutually insured by Protection and Indemnity (P&I) Clubs for some 140 years. These Clubs have been managed by the same service provider – Thomas Miller – for 135 years. What works for shipping risk will equally work for credit risk.

But surely you need a Central Bank as a lender of last resort? In fact this has never been necessary, since the buck has always stopped with the Treasury. Central Banks today operate as the ‘fiscal agent’ of Treasuries, creating modern money as credit and spending it on the instructions of Treasuries.

Great theory, but it’ll never work in practice? Well actually, Hong Kong has never had a Central Bank and the three HK clearing banks issue bank-notes and create credit supervised by the HK Monetary Authority.

Show me the Money

The current rather esoteric position is that the issuance by three Scottish banks of their own series of Scottish bank-notes is backed £ for £ by the Bank of England’s internal issuance of £1 million notes (‘Giants’) and £100m notes (‘Titans’) somewhere in the vaults of the Bank of England.

There is no reason whatever why a Scottish Treasury could not – under the supervision of the Scottish Monetary Authority – create and issue its own Titan and Giant Treasury Notes in virtual or paper form and denominate them in pounds sterling purely as a unit of account. The three Scottish note-issuing banks -and any other prospective note issuers – could then continue to issue notes to fulfil the public requirement for cash, precisely as they do now.

This brings us to the fundamental question of all currency: as the economist Hyman Minsky pointed out “Everyone can create money; the problem is to get it accepted”. In other words, what would be the basis of this Scottish currency, and why should people trust it?

A Matter of Trust

Treasury credit is underpinned by or based upon the tax base, and as we have seen, UK sovereign funding consisted for centuries of Treasury credits issued at a discount and returnable in payment for land taxes.

In 1705 that remarkable Scot, John Law, made a proposal – “Money and trade considered: with a proposal for supplying the nation with money.” – in which he set out a plan for a centrally issued land-backed currency for Scotland. Clearly the world has moved on from the largely agricultural society of that time when most of the economic value arose from the use of land.

However, I believe that Scotland now has – in creating a monetary and fiscal system fit for a 21st century knowledge economy – the opportunity to greatly simplify and make more equitable the future productive value of what has been called the Common Weal of Scotland. The fact that some 500 people (including many foreigners) own more than 50 per cent of Scotland is clearly one avenue to explore.

So perhaps by decentralising the Treasury into Treasury Branches (as was done in Alberta in the 1930s) one could imagine local Danish style levies on land rental value. But instead of these being hoovered up by central government, they could simply be pooled and then re-distributed directly to local people as land levy credits denominated in £s and acceptable in payment for property occupation In this way, those with above average use of the Common Weal of land would make a net transfer to those with below average use.

Similarly a levy on carbon fuel use could be collected and the resulting pool distributed as an ‘energy dividend’ of energy prepay credits, both to alleviate fuel poverty, and to enable direct investment in renewable energy, and above all, in Danish-style community heat infrastructure.

But, one step at a time. Politics is arguably the art of the ‘adjacent possible’, and it is completely possible, straightforward, and above all in the interests of the banks themselves, to make a transition to a direct Treasury to Taxpayer (T2T) credit and currency system managed by a new breed of banking service providers. Meanwhile, Government funding would be raised using the undated prepay tax stock instrument.

In this way Scotland may be the first country to create, and monetise, the National Credit.