Dr Craig Dalzell: A National Bank For Scotland

This is a guest post by Dr Craig Dalzell, who is head of research at Common Weal. The post originally appeared on his personal blog.


The Croatian National Bank shall be the central bank of the Republic of Croatia.

The Croatian National Bank shall be autonomous and independent, and shall report on its work to the Croatian Parliament.

The Croatian National Bank shall be managed and its operations shall be conducted by the Governor of the Croatian National Bank.

The organisation, purpose, tasks and remit of the Croatian National Bank shall be governed by law.

– Article 53, The Constitution of the Republic of Croatia.

Today sees the launch of my latest contribution to the Common Weal White Paper Project on the very important topic of Central Banking in an independent Scotland.

It has received a front page splash in The National which can be read here alongside a summary by me here.

And the paper itself can be downloaded here

 

If, as I hope we should, Scotland uses the opportunity of independence to launch our own sovereign currency then we’ll need to set up our own Central Bank.

My paper outlines the principles that we’ll need to examine and follow as we design that bank.

One thing that I should make quite clear though before we do that is the distinction between a Central Bank and a Retail Bank.

The Central Bank isn’t the type of bank that you’ll be able to put your savings into and there are good reasons for this. The purpose of the Central Bank is to maintain the stability of the currency, to guarantee trade between financial sectors and to regulate the economy (especially the financial economy). If it is too directly involved in providing savings and loans to consumers then there is the temptation that it can start setting interest rates and inflation targets to benefit itself, rather than the economy as a whole – a clear conflict of interest.

Onto the paper – one thing that has come out of this research is the diversity of opinion amongst even central banks as to the range of powers that they should have and how they should use them.

I’ve tried to give an outline of those options though it’s clear that none of them is particularly “better” or “worse” than any other. Anyone who simply assumes that the way the Bank of England does things is the only possible way or that Scotland must (or must not) follow that model may be in for a surprise.

It is inevitable that some will ask how much a Central Bank will cost to set up and run. Is this cost going to be another

blow for indy?

Simply – No. A country Scotland’s size could expect to run a Central Bank with a budget of around £140-£200 million per year depending on how much it is charged to regulate the financial sector or to gather and analyze economic data.

But it’s important to realise that Central Banks are generally profit-making enterprises. They make money on seigniorage (the profit involved in the process of printing and issuing money), they make money by providing financial services like clearing, they make money by issuing loans, and they make money by buying assets like government debt (via instruments like QE).

And if we’re smart enough to ensure that our Central Bank remains owned by the government (as many but not all countries do) then those profits would be given straight back to the Scottish Treasury. The Central Bank would pay for itself within a few years and then remain a self-sustaining source of revenue. And that’s even before the impact of adding several hundred – perhaps up to a thousand – very skilled, well-paid jobs to the Scottish economy.

Another point to consider is the concept of Central Bank Independence (CBI).

This is the idea that a bank should remain not just outside of the retail sector but that it should be detached from and not be influenced by the nation’s government.

There are essentially two extremes to this and the history of central banking is one of a constant push and pull between advocates of these extremes.

The first says that politicians absolutely cannot be trusted with levers of power such as the ability to “print money” or “set interest rates”. That they’d tend to pull the first one hard and keep it pulled and pull the second one in time with election cycles rather than economic necessity. It is this principle which drives laws such as the Maastricht Treaty which actively prohibits Central Banks from printing money and giving it directly to the government.

On the other extreme is the principle that says that such intervention is sometimes required – the 2008 Financial Crisis being a case in point. The prohibitions of Maastricht meant that European banks had to find loopholes in order to provide the funds that were desperately needed – hence why QE took the form that it did. This principle also says that detached, “independent” Central Banks run the risk of drawing their talent from a very narrow pool where political appointees, academic economists and other bankers look only to their own ranks. That such an important organ of government as the Central Bank can do this may run contrary to the principles of a democracy.

To ease this – and because something like an elected Central Bank governor carries obvious problems of its own – some banks try to draw on a wider pool by opening their governing boards to people like trade unionists, industrial and agricultural representatives or third sector bodies.

Sometimes these “stakeholder” boards are given actual voting power; often they are merely advisory. Either way, they allow a bank to develop a compromise-system where the demos of the country is better represented, where expertise about the economy is better drawn upon but also where the highly technical skills required for policy implementation remain with the governor and the implementation board.

The history of central banking is a long and shifting one. The evolution has been constant and there’s no reason to believe that it won’t continue – especially as we enter a new phase of economic thinking and new models of governance continue to be tried and tested. Scotland can learn from any of the many models of banking that are out there and if we choose to, it is eminently possible that we could add to that rich history with our own distinct approach.

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Dr Craig Dalzell

Craig is the Head of Research of Common Weal and runs a politics and economics blog: https://thecommongreen.scot

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