How would Scotland start its own currency?
Does an independent Scotland need its own currency?
Yes it does. To manage its own economy, secure its own domestic finances, to protect its banking sector, to be able to respond in the event of emergencies and if it seeks to join the EU, an independent Scotland will need to have its own currency. It might choose to join the Euro one day but until it does it will need the infrastructure of a proper money system in Scotland.
Is this really hard?
There is a lot that needs to be done but most of it is fairly routine. There are countries in Europe that have changed their currencies in the last years and the processes are well known. But to get it right, while the steps are largely routine the importance of supporting the public and businesses to adapt to the new currency is crucial, especially with issues like pensions and mortgages.
So how do we start?
We need to set up a central bank to manage the currency. It then needs to go through a range of technical processes to create things like payment systems (like those use to transfer money to accounts), clearing systems (how banks send money to each other) and digital currency (this is how banks set up accounts in a new currency and people can exchange a Scottish currency into other countries' currencies). But there are existing international standards that are followed for almost all of this and none of it is usual.
How will new bank accounts be created?
There will be a transition to a new currency, probably about three years (as there was with the introduction of the Euro). This is the period when all the work gets done but it is also when households and businesses are helped to move to the new currency. All the big banks work in many currencies and so they are fully equipped to accommodate a new one (that is what the 'digital currency' at the central bank is for). Any bank with significant numbers of customers in Scotland will want to keep their customers' business and so will offer bank accounts in the Scottish currency. A small number of customers who have accounts with unusual banks with few customers in Scotland might potentially have to open a new account with a bank which offers Scottish accounts.
So what happens to bank customers' accounts?
Customers then have two options – they can either change their existing account over to the new currency or set up a new account. They will have to have a bank account in a Scottish currency at the end of the transition period (to pay taxes and get paid) but at what point over the three years they make the shift is up to them. Some will choose to keep two accounts, one in Sterling and one in the Scottish currency, particularly in situations where they want to keep a pension in Sterling or have other income from outside Scotland. Standing Orders will automatically be moved to the new currency for anyone who redenominates their existing account (shifting to the new currency). Direct Debits are 'taken' from the account by whoever is being paid so the transition will be dealt with at their end.
And what happens to mortgages?
This will depend on the nature of the mortgage. People with mortgages near the end of their repayment may just want to complete payments in Sterling. For those whose mortgages have longer to run most will want to convert to the Scottish currency, which again is straightforward for their lender. There is a legal requirement to allow people to move their mortgage so anyone who has a mortgage with a lender who refuses to convert the mortgage can simply move to a lender who will. There is one category of people who this may affect negatively – those with special mortgages such as fixed interest mortgages or where there are 'early redemption' charges. Here their lender could charge them for moving. As this is unfair, a sum to compensate them for the total cost of fees is included in the costings for how much it would take achieve independence.
And pensions?
The state pension is a separate issue. For private pensions there are two options – you can keep your pension in Sterling or you can move it to a pension fund in the Scottish currency. Indeed you can do a combination of both if you want. Scottish pension funds can redenominate from Sterling to the Scottish currency.
What about businesses?
Almost all big businesses already operate in different currencies so adapting to a new currency will be straightforward for them. Small businesses will fall into one of two categories – if they trade only in Scotland then they can convert their bank accounts and systems to the new currency. If they trade across the border with the rest of the UK they may want to set up a new Scottish bank account and keep both (which is what many companies in Ireland do, one in Sterling, one in Euros). Businesses will buy from other businesses as before. Smaller businesses may need support to take payments in Sterling if they don't have the systems to deal in two currencies (for example, if their website doesn't have multiple currency options).
What about notes and coins?
There are a small number of companies which print banknotes and mint coins and they would be commissioned to produce the Scottish notes and coins. It is very much worth holding a national competition to design the new money as there is a surprising degree of interest in what is actually on notes so it is good to keep the public involved. Introducing cash is the last thing you do so a switchover day must be set. Then just before switchover day the new money would be distributed to shops and banks and at midnight the new currency would be legal tender in the shops.