Previous reports determined that an independent Scotland should maintain its own currency. This report outlines how and why Scotland should form a central bank to manage that currency. The philosophy behind why a central bank is important is outlined with extensive reference to modern and historical precedents. Scotland’s central bank would be self-funded and self-sustaining once established and, indeed, should be publicly owned so as to generate a return for the Scottish Treasury.Credits—
Dr Craig DalzellDownload Now
One of the likely early priorities for an independent Scotland will be the founding of a new central bank. These institutions play an important role in government policy and regulation. How they are set up and what relationship they have with other functions of government plays is also crucial in determining the national outlook on macroeconomic policy.
However, as this paper demonstrates, the history of central banking is long and constantly evolving depending on the circumstances in which countries find themselves at any given time. Even today there are many models of what a central bank may look like and there is certainly no one “correct” answer to be applied. This paper examines the history of central banking, the roles and responsibilities of central banks, how they fund themselves and culminates in a proposal for a central bank for an independent Scotland.
― The history of central banking covers nearly 350 years with the oldest institutions, like the Bank of England, being formed initially as purely commercial ventures.
― As economies and political institutions have grown, shrank, expanded, globalised and suffered shocks, the roles of central banks gradually became immersed into the policy-making functions of governments.
― Broadly speaking, the roles and responsibilities of central banks cover areas such as currency issue, financial monitoring and regulation, price stability, trade stability, and financial clearing between commercial banks.
― However, each central bank places its own weight on each of these priorities and some countries split roles – especially regulatory roles – between other specialised offices.
― Central bank independence – the idea that central banks should not be influenced or controlled by governments – gained traction in the early-to-mid 20th century and largely remains the current policy today. The temptation for politicians to subvert the central bank and align macroeconomic policy to political advantage is powerful.
― However, sentiment has varied at times and many have queried whether a bank operating completely independently of government makes for efficient policy or can be compatible with democratic governance and accountability.
― Post the 2008 Financial Crisis and the increasing interventionism by central banks through programs such as QE, the discussion about central bank independence has been re-opened.
― One suggestion to increase democratic accountability within an “independent” central bank could be to adopt a “stakeholder” model of board governance whereby the board is made up not just of bankers but of representatives from other public spheres such as trade unions, agricultural and industrial representatives and other similar bodies.
― The cost to administer a central bank scales strongly with the size of the host country. A central bank in a country the size of Scotland could expect running costs of around £140- £200 million per year. However, central banks are usually profit-making enterprises once operational.
― A Scottish central bank could expect to employ between 350 and 1,000 people depending on roles and responsibilities.