Credit Scotland

Credit Scotland

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By Chris Cook

The reality underpinning modern finance capital and monetary & fiscal systems long represented financial pornography which no decent newspaper would publish. However, the continuing financial crisis since 2007 has brought into the light all manner of details and practices previously hidden, and many of the myths which constitute modern economics are now being dispelled.

One of the interesting aspects of the Scottish independence debate is that new national monetary and fiscal systems must be built from scratch.  Clearly, 21st century problems cannot be solved by 20th century solutions – the irony is that structures and instruments which pre-date modern finance by hundreds, if not thousands of years, point the way to sustainable and decentralised monetary and fiscal systems.

Private Credit

As everyone who shops in Scotland will know, private Scottish currency already exist in the form of private bank-notes denominated in £ and issued by three Scottish banks: Clydesdale Bank, Royal Bank of Scotland and Bank of Scotland. This issuance is backed – somewhere in a vault in the Bank of England - by Bank of England notes, including £1m notes known as 'Giants', and £100m notes known as 'Titans'. 

But most modern money in existence in Scotland does not consist of paper currency, but rather consists of accounting entries in banking systems which are denominated in £ symbols. All of this modern money was created by private banks as credit when they lent and spent, and indeed two thirds of modern money in Scotland came into existence when private banks made mortgage loans secured against Scottish property. ie most of Scotland's money is debt-based but backed by Scottish land.

Public Credit

One of the greatest myths and misnomers of political economy has long been the existence of National Debt. 

Prior to the advent of modern central banking in 1694 with the incorporation of the (then private) Bank of England, UK sovereigns funded their expenditure directly – Treasury to Taxpayer (T2T). They did this simply through the sale to tax-payers of sovereign credit instruments denominated in £ and originally accounted using as a record the 'stock' portion of a split tally stick. Tax-payers were therefore able to prepay their taxes, for which privilege of course they demanded and received a discount from the Exchequer.

This reality of UK sovereign funding in the era before modern banking survives in the very language we use. The tax return was the accounting event when the stock credit instrument was returned to the Exchequer to be matched against the counter-stock and cancelled, the tax obligation being thereby satisfied. The rate of return on the tax-payer's investment in pre-paying his tax was literally the rate over time in which the tax-payer realised his profit from the initial discount by returning the stock to the Exchequer. 

So by way of example, a £2 discount on £10 of stock, would give a  25% profit on the £8 investment when the stock was returned in payment for tax due. If this profit is achieved in 1 year, there is a rate of return of 25% per annum; over two years, 12.5% pa; over 5 years, 5% pa and so on. It will be seen that there is no compound interest (money for the use of money) in relation to the stock credit instrument. There is instead an exchange of value over time against value over time.

So the reality of UK sovereign funding is and always has been that most of the UK so-called National Debt consists of dated (a small amount is undated) fixed interest-bearing 'gilt-edged' stock. In other words, by funding through prepaid taxation the UK's National Debt is better viewed as a dated National Credit not a million miles away from interest-bearing preference shares in UK Plc. 

Banking as a Service

A simple but radical approach for funding Scotland's public investment  in productive individuals and productive assets could be for direct – Treasury to Taxpayer - Scottish Treasury issuance of £1.00 denominated credit instruments. This could even be locally via Treasury Branches as in Alberta in the 1930's – but in this case would be under the risk management of banking service providers.

So these service providers would no longer take credit risk, but would rather manage risk on behalf of the public, under the supervision of a monetary authority. 

It'll never work?

Firstly, during the First World War the UK Treasury issued £1.00 denominated Treasury notes and these 'Bradburys' circulated as currency. So there's no problem with direct Scottish Treasury issuance of credit, whether as paper currency, Titans and Giants, or in virtual form. 

Secondly, Hong Kong has never had a Central Bank, and instead – like Scotland – has three private clearing  banks which issue Hong Kong's currency privately under the supervision of the Hong Kong Monetary Authority (which also issues coins and small denomination notes). The HKMA also acts to defend the Hong Kong dollar's peg against the US dollar. When the rate sinks below 7.75 HKD to the $ the HKMA sells Hong Kong Dollars and buys $ and when it rises above 7.85 HKD to the $ they use their $ reserves to buy and support the HKD. So there is no need for a Scottish Central Bank (or the Bank of England) either.

Finally, since there are certain shipping risks that Lloyds of London will not cover, ship-owners formed Protection and Indemnity (P&I) Clubs which acted to mutually insure these risks, and the same brokerage firm – Thomas Miller - has acted as a risk service provider to manage these risks for 135 years. 

So there's no problem with mutual guarantee of credit risk in respect of the credit necessary for the circulation of goods and services. Who needs Visa and  Mastercard anyway? The credit is that of Scottish businesses and customers who use these credit card systems: not that of the banks who own them. Could we see a new generation of community credit cards – or more likely, generic mobile credit services managed by banking service providers.

Currency – Don't Go There

Scotland's credit – which finances the circulation of goods and services and funds long term investment in productive assets - may be based directly upon the productive capacity of Scotland's productive assets and productive people. In an age of direct instant connections there is no longer any need for banks as middlemen to intermediate credit risk, although there is a need for risk management or banking as a service. 

The irony is that far from resisting such a transition to service provision, it is entirely in the interests of current banks to make the transition, because as a service provider the only finance capital they need is that necessary to cover operating costs, and the human and intellectual capital necessary to provide the best possible service.

So Scotland's monetary system of credit creation, exchange, clearing and investment does not require a currency at all – virtual or otherwise – from the Bank of England.  £ denominated paper notes may continue to be issued by Scotland's banks precisely as now, except that they could be backed by Scottish Treasury Giants and Titans which would simply be undated Treasury prepay credit notes again denominated in £. 

Credit Scotland

The Scots may continue to keep score in £, or they may choose to keep score in some other unit of account like the €. It is no more possible to run out of such a unit of account than it is possible to run out of metres or kilogrammes.

However, it is certainly possible to run out of credit. Scotland would have to maintain their credit through enabling investors in Scotland's National Credit – which rather than issuing multiple differently dated interest-bearing stock, could simply be a single consolidated class of undated Stock . Investors would thereby obtain a reasonable rate of return on an investment in prepaid Scottish taxation. 

There would be no risk of default, because such undated credit is not debt: the risk for the investor is that the rate of return from purchases by tax-payers of Scottish stock would be slower than expected because the tax collected is lower than expected. 

Again Scotland could learn from Hong Kong, where up to 30% of government income came from land use value, in their case from the sale of long leases, or from Denmark, where a similar percentage was raised locally from taxing land rental values. It's unsurprising that the relatively few owners of land in Scotland have never been particularly keen on land value taxation. 

The other – internationally credible - source of future taxation underpinning Scotland's National Credit  will of course be Scotland's massive endowment of energy, both in the forms of carbon fuel, and renewable energy. So the truth is that in today's connected economy, the currency debate has moved on.

Whatever the result of the vote on September 18th the Bank of England need have no role to play. The Credit is Scotland's.


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