Consider what you can achieve, rather than focusing on what you cannot
William Thomson, Founder Scotonomics
As Wynne Godley wrote in his seminal short paper Maastricht and All That, “the power to issue its own money, to make drafts on its own central bank, is the main thing that defines national independence”. Trying to persuade the people of Wales that independence is meaningful, or even possible, without your own currency is a losing strategy. It is a lesson that Scotland wishes it had learnt.
It is always flattering to be given credit where none is due. Dr Ball’s recent opinion piece highlighted my thoughts that Wales should have its own currency and grouped many other opinions under the heading ‘followers of Scotonomics’.
I am absolutely convinced that many people in the Welsh independence movement who support a Welsh currency have never heard of Scotonomics.
Their wisdom, however, I am sure, comes from observation.
Most informed people are aware that over 90% of nation-states issue their own unit of account (the technical monetary operations name for currency/money). Of the remainder, most are partners in a currency union, giving up their own currency but maintaining powerful tools to issue their own debt, like the Euro states.
No similar nation to Wales has ever chosen to use another nation’s unit of account.
In Currency options for an independent Wales, a paper commissioned in 2023 by the Welsh Government, Thibault Laurentjoye concludes, “Wales becoming independent….means that it should aim to maximise its ability to create the policy space needed to achieve its political objectives. For reasons that have been made clear, this report argues in favour of creating a Welsh currency.”
Alex Salmond
Many Welsh indy supporters will also be aware of Alex Salmond’s currency journey. In 2013, Scotland’s First Minister proposed a currency union, very much along the lines that Dr Ball suggests. By 2023, as he explains to me in an interview here, he had changed his mind. A decade too late.
Most commentators in Scotland highlight the currency position as the one thing that ensured our continued life in the Union. Dr Ball’s position is the riskiest of all possible options, and hints at the exceptionalism that comes with a colonial mindset. But others take it much further. Professor Richard Murphy and Common Weal’s Dr Craig Dalzell suggest that had Scotland won its independence with Alex’s plan, we would be in an even worse position as an independent nation than we are as part of this Union! A pretty terrifying idea. The same conclusion would be drawn for Wales if it continued to use Sterling. You need only one historical event to prove the absurdity of that plan.
The lender of last resort
Imagine a COVID-like episode again. As uncomfortable as it is, it is easy to imagine in a world of continuing warming temperatures and habitat destruction. Would the Bank of England, controlled as it is by the UK Treasury, spend billions of pounds buying up Welsh and Scottish corporate debt? Would it gift our governments billions to source medical supplies to save our health services from collapsing? Be happy to pay part of the wages of millions of people who had chosen to leave the union? To increase welfare payments to two states with their own welfare systems? The UK government’s response would be that independence means exactly that. You want to run your own affairs. Then deal with the consequences. And while you are contemplating the unthinkable, what would the response be with Farage as PM?
Those consequences would be borrowing tens of billions of pounds from the Bank of England or international money markets, at eye-watering interest rates. Assuming that the English government was happy to provide Scotland and Wales with the capacity to drive up prices and compete for scarce resources.
The Welsh government, unable to create government liabilities to purchase goods in its unit of account (as the UK did with ease during the pandemic), would have to find money before it could spend it. Raising taxes to cover the costs is impossible in a shrinking economy where most people are at home, unable to work. Without the ability to call on an institution – the Welsh Central Bank – that issues the unit of account used in Wales, you turn the government of a nation into a household. And you accept crushing austerity and a full-blown health disaster.
The everyday business of government
A COVID-like experience would be an extreme case. So, how would the everyday business of the Welsh government proceed using England’s unit of account? It would pay all of its employees in Sterling. It would levy taxes and fines in Sterling. If it wanted to spend more than it collected in taxes, it would have to borrow pounds at rates set by those with the money. It would, in effect, operate very much the same as it does now, with the only change being that it was now able to borrow foreign currency to an extent that could make it insolvent. You can see why things could be even worse.
What difference does issuing a currency make? In brief, when the Welsh government issues its own unit of account, it changes the rules of the game. It now controls where it was once controlled. It is a rate setter rather than a taker.
All government payments, taxes, and fines are made in its unit of account. It creates these units digitally by pressing keys on a keyboard (exactly how the UK government does it now). It never needs to find those units before it can spend them.
It can tax to better effect. It can tax wealth to remove power from the wealthy, not to fund itself. It can tax to change behaviour.
As only government-created money in the Welsh unit of account can initially purchase Welsh government debt, it takes control. It can set the rate of ‘borrowing’ at 0%, or 2% or whatever level it wants. It could also decide not to issue any long-term government liabilities.
It can allocate sufficient funds and set a tax rate to ensure there is no unemployment in Wales.
If a COVID-like experience arises, it can, with 100% certainty, provide those units of account to any individual or institution in Wales. And it does this without a single unit of debt denominated in a foreign currency, such as Sterling.
Should a global event smash against the Welsh economy, it can devalue its currency rather than undergo austerity.
Powers
These are the powers that open up to a Welsh government that issues its own unit of account. It will be up to the Welsh government and its citizens which powers it decides to use.
As Dr Ball and I are supporters of independence for Wales, it is essential to focus on the things that bring us together rather than the differences we have. In both identifying the importance of currency, we are certainly on the same page. But it is, of course, important to defend one’s position.
I am one of the most realistic economic commentators who support Scottish independence. Independence is only a means to deliver the ends of a more progressive economy. If the wrong type of independence is chosen, our nations will not be more prosperous. Even if we do, it will be through both chance and good judgment. As independent nations, we are in for a torrid time. But as part of the Union, we are powerless.
As I wrote in the Nation in June, “Both new nations [Scotland and Wales] will be bound to a moribund larger nation….The amount of debt held by the Scottish and Welsh private sectors in Sterling may slow our progress towards prosperity. With a desire to avoid fiscal austerity, our currencies may have to be devalued. Tough decisions lie ahead.” If I am selling snake oil, who would buy it with that sales schtick?
As an institutional economist, I have a worldview that differs from the mainstream neoclassical-informed economic commentary and its accompanying ‘learned helplessness.’ This enables me to fully grasp the potential of independence in Wales and consider what you can achieve, rather than focusing on what you cannot.
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William Thomson of Scotonomics is exactly correct about the power that our own currency would bequeath to an independent Cymru. That and a fair taxation system would be the most powerful tools we as a nation could utilise to reshape our destiny towards sustainability and the elimination of poverty. I challenged Dr John Ball some years ago to say why a sovereign country would not want to control all the economic levers it could have at its command? As yet, I have not had a reply. We can see the poverty of this perspective in the successive Westminster governments since… Read more »
I’m not prepared to answer this fairy tale in detail, Andersen has again shown his knowledge of economics is questionable.
He managed to get Thatcher into his response, what would you have done without her?
I am not aware that he “challenged (me) some years ago.” If he had sat in and listened to my talk at the Yes Cymru conference in Aberystwyth, or bothered to attend the countless meetings I have addressed on the economy, he would have heard my view.
I ask him, and Thomson – answer the issues I raised in my article.
See my above comment saying I will happily discuss/debate all these issues with you as that is a better format than t*t-for-tat comments. However, I know I will never persuade you of your ignorance. So my responses tend to go to people who are open to being challenged.
OK. First point, please feel free to correct, is that currency is primarily a store of value, must be exchangable etc. This is true of a commodity-based currency. Wales will have a fiat currency. It will be unpinned to a large degree by the domestic demand for that currency, which will be very high as taxes and fines and everything bought in Wales will have to be made in that currency. In this very practical sense, the institutions create the value in the currency. This commodity-based appreciation of money is one of the reasons I suggested your textbook (fixed exchange… Read more »
A fiat currency does not remove the need to sell bonds to foreigners if a country is running a current account deficit that is not fully covered by inward private investment. 28% of UK government debt (£430 billion) is held by foreigners, as is 30% ($8.5 trillion) of US government debt. The balance of payments has to balance.
I’m sorry, Lyn, but your statement reflects a common misunderstanding of how fiat currency systems and government bond issuance actually work. You wrote: “A fiat currency does not remove the need to sell bonds to foreigners if a country is running a current account deficit that is not fully covered by inward private investment.” Here’s the issue: When a country like Wales (upon independence) runs a current account deficit, it means it is buying more from the rest of the world than it is selling to it — i.e., spending more on imports than it earns from exports and income… Read more »
Thank you for responding. I am less concerned with the technicalities of monetary operations than with the underlying economic relationships. Any Welsh financial assets accumulated by foreigners must be sold to them, and assets created by governments are usually called bonds or bills. Whether foreigners buy them directly from Welsh government (via a local subsidiary) or on the secondary market is irrelevant for the balance of payments. Hence my statement, ‘A fiat currency does not remove the need to sell bonds to foreigners if a country is running a current account deficit that is not fully covered by… Read more »
Next deposit flight. This is perhaps the biggest misunderstanding. Every single unit of account in Wales is in Sterling and rests on the balance sheets of banks / almost exclusively based in England, or sits in the reserve balance accounts of the Bank of England. Deposits can’t leave because they are not there! There is a more general point to be made about monetary operations, but I think I can leave that for another time. I get the concern for sure. And it is related to your first point, this inherent belief that the Welsh pound will not have value.… Read more »
Keynes said that ‘anything we can do, we can afford’.
If we were sensible about it, and I think that should mean prioritising needs over wants, an independent Cymru, living within its means, could ensure a fair measure of comfort for all of our citizens, and reduce the threats of man-made climate change, government-made recession and pandemics.
Demonstrably, government from Westminster has failed Cymru for hundreds of years. Devolution is a push-me, pull-you game played by lazy politicians in Cardiff and London that has got us nowhere after decades of it.
Annibyniaeth is the future.
You ignore international trade. No country can issue the sovereign currency of another state.
This is not a vision of independence but of isolationism in which the rest of the world has ceased to exist. Fantasy economics indeed.
Au contraire, Lyn E, I envisage Cymru as globally active – but in conflict resolution and diplomacy – joining countries like Qatar (how-qatar-became-the-global-capital-of-diplomacy). And perhaps others like Puerto Rico (without armed forces), Switzerland (armed to the teeth) and the Vatican that seek peace in the world. But, I concede, in trade not so much. You will probably be aware that world trade has been declining since about 2007, not least because of the environmental impact of shipping (and aviation) has become unacceptable. It will continue to decline as surpluses diminish and countries, like ‘the UK’ where it is stated policy,… Read more »
You might want to do some research into how Qatar became the ‘capital of democracy ‘ first of all. Deeply unpleasant, and they knew what they were doing.
My comment was on the article and specifically on trade. It would be more accurate to stay that world trade has stagnated since the financial crash. The decline over the past couple of years has been driven more by geopolitics than by environmental concerns. Self-sufficiency is a reactionary fantasy. Trump is finding out that even the US cannot easily ‘reshore’ manufacturing, and his attempt to do so could be ruinously expensive. Every prosperous small country is an open economy. Your examples of apparently pointless trade across long distances are not that relevant to an independent Wales. Our largest trade partner… Read more »
I have to agree. As someone with a background in this area, these articles come across as incredibly speculative. So many idealised assumptions, oversimplification of macroeconomics and politically unfeasible, if I was being polite. You could blow arguments in a lot of the article- to take one particular point “creates these units by pressing a button.” Technically sovereign currencies can do this but only if there are credible institutional frameworks such as a strong tax collection based, public confidence and international trust with other international private and public institutions. Reality is (from historical precedents) a new currency will face volatility,… Read more »
Thanks, Peter J. You say…these articles come across as incredibly speculative. So many idealised assumptions, oversimplification of macroeconomics and politically unfeasible, Let’s compare today’s reality – ‘fiscal rules’, ‘balanced budgets’, ‘national debt is too large’, ‘pensions invested in the stock market’, ‘high interest rates’, ‘quantitative tightening’, ‘increasing bankruptcies and unstable employment’, ‘low wages’, ‘poor benefits’, ‘control by bankers and the City’, and ‘hungry children’ – just for starters. If you, Lyn E, John Ball, Jonathan Edwards and others want to perpetuate this reality in our Cymru, why bother with independence? These so-called realities are based on fallacies and are destined… Read more »
Frankly this is comment is uncouth. For your interest, I was indy curious but when I saw the intellect behind the movements, I quickly realised this people were leading Wales down a pointless path. Some indy supporters are basically left wing reform voters! Very detached from reality and unable to grasp other people’s opinion.
But specifically what ‘realities are based on fallacies’ are you referring to?!
Aren’t you the fellow who thinks we can print endless money?
Cool story bro.
I recognise that you, Peter J, possess knowledge that I respect and would hope to learn from. But I have not been able to identify anything uncouth in what I wrote. Please elucidate. You then ask me two questions, for which thanks… specifically what ‘realities are based on fallacies’ are you referring to? I listed them – ‘fiscal rules’, ‘balanced budgets’, ‘national debt is too large’, ‘pensions invested in the stock market’, ‘high interest rates’, ‘quantitative tightening’, ‘increasing bankruptcies and unstable employment’, ‘low wages’, ‘poor benefits’, ‘control by bankers and the City’, and ‘hungry children’. These appear daily as commonplaces… Read more »
We should indeed understand how money works. It is true that the state via its central bank creates fiat currency before its government spends it, and that tax and borrowing act to reduce competition for resources that could become inflationary rather than funding government expenditure. But rejecting the dogma of fiscal rules does not mean we should fall into the trap of believing that a central bank is all powerful. A state cannot tax foreigners, nor can it oblige them to accept its sovereign currency as payment for goods or services. Money-financed government expenditure increases demand that can mobilise inactive resources.… Read more »
Cymru Rydd should issue her own currency in the form of notes and coins. There would be no freedom of the individual if we end up with some form of Chinese digital currency , controlled by the state awarding social credits to people and denying individuals the right to spend their money as they wish.
It doesn’t seem wise to test economic experiments unless failure is an option.
Your Covid-19 example does not support your argument.
You neglect that much of what was needed to fight the pandemic (from PPE to vaccines) had to be imported. For that we would still have had to find the (foreign) money before spending it, whether or not Wales had a sovereign currency.
‘Independence is only a means to deliver the ends of a more progressive economy.’ I agree. But considering only what independence could achieve, while neglecting what it could not, lacks credibility. The Bank of England would indeed have no obligation to support the Welsh economy. Nor would any other institutions of a foreign English state, which in some respects would have more control over Wales than Westminster does today. For example, it could close the border to goods and trade. An English government could insist that Wales follows its rules on economy and migration as the price of an open… Read more »
Interesting debate; but the reality is that economics are secondary. Alex Salmond basically said that his 2013 currency union was a political – not an economic – position. He had very clearly calculated that to propose a Scottish currency would turn a large chunk of potential Yes voters against him, so didn’t do it. The same dynamic exists today in my view here. In the final analysis, a significant number of people would not be prepared to take the risk that Dr Ball is right and Mr Thomson wrong. Not that there is going to be a referendum any time… Read more »
Undecided, Salmond and Dr.John Ball are all correct. Scotonomics ie Welsh currency is fine as a distant (possible) aim. MMT not so sure. The realities are Wales is nowhere near ready to be self-sufficient. It may be that we do have enough money to cover our needs. But we don’t have government structures to organise this yet Ireland went through what the English call Doninion Status ie kept the 3 and the Monarchy ( nominally) and got Indy relatively quickly. Because they were practical about it. power comes from running your own armed forces as well as from a Central… Read more »
Yes, I agree – the practical/incremental approach has to be right. I do get the passion behind the Annibyniaeth now sentiments; but it’s naive. My issue short to medium term interim is the fact that the current devolution model is increasingly dysfunctional.
Sorry, but a Welsh currency would be dead on arrival.
That’s simply impossible. If the government makes payments and taxes in that unit of account, it is an absolute necessity for those people in or doing business with Wales to use and value that currency.
There is NO way a Welsh currency would be a success; those business entities wishing to trade with Wales will have next to zip confidence in the new Welsh currency – saying otherwise is just wishful thinking. ‘Sorry, and all that jazz’.
A Welsh government could oblige its citizens to pay taxes in its sovereign currency but it could not make the same demand of foreigners or force them to accept it in payment.
There is little point in responding in detail, for anyone who knows anything about economics will recognise Thomson’s views are naive at best, dangerous at worst. I would though comment on my “position is the riskiest of all possible options, and hints at the exceptionalism that comes with a colonial mindset” to which I take exception. I have spent my life believing – and working for – a sovereign state. What I have presented is careful, research, evidence based economics, not fairy tales. He has changed his mind. In an earlier response, apparently over 200 countries had their own currency,… Read more »
I would be happy to discuss and debate any of the topics we have covered. It would be interesting and hopefully informative for an audience, but let’s be honest, you and I would never agree. You have a textbook understanding of monetary operations based on gold standard thinking. And of course, you are far from alone. These views pour through the current institutions, clogging up any good ideas and continuing to reward the wealthy. That’s what neoclassical economics does. Wales wants to rid itself of those outdated views as much as it wants to be independent. I should have added… Read more »
Even with its own currency, Wales would still be ‘beholden to England’ insofar as anyone wishing to trade or travel across the border would be subject to English rules. We need progressive policies across our island.
I have no idea how long this debate is going to last and I’m a little fed up with unsupported negative attacks. It’s not about text book understanding or the gold standard or indeed neo-classical economics, my article was based on evidence based research, not untried ideas. Your argument is not helped with references to the wealth (of which of course there are zilllions in Wales) or resorting again to insulting me with having “a conservative, colonial mindset.” Personal attacks don’t help your case. There is little point in a debate until you answer the issues I raised in my… Read more »
I have just read a fascinating paper looking at the role of independent central banks, which is highly relevant considering that the Bank of England would be Wales’ central bank under Dr Ball’s currency proposal. It was written by an Australian law academic. “A central bank’s monetary policy can force hundreds of thousands of citizens into involuntary unemployment. In conditions of strong central bank independence, what is the citizen’s recourse if he feels monetary policy is unfair or negligent or biased towards parts of the community? If he complains to the elected Government, he may be told the central bank… Read more »
We should avoid conflating arguments, and so reducing complex decisions to binary choices. The arguments around central bank independence are not identical to those around currency sovereignty. Even if Wales did have a sovereign currency, we would still have to decide how much independence to give our central bank. And that is a continuum, not a binary. The independence of the ECB is embedded in the Maastricht Treaty and would require multi-country agreement to change. That of the BoE is in the gift of the UK Government, which could remove it as easily as Gordon Brown granted it. I agree… Read more »
In an earlier response, I referred to the nonsense in the ‘lender of last resort’ section as a very useful tool for the opponents of independence. That section painted a picture of a dystopian future worthy of our opponents and was self evidently a scare story in support of your ideas – when in doubt, spread fear. To anyone with a modicum of economic knowledge, clearly it made no sense at all, so I decided that it was not worth the trouble of responding. Then I realised, some might believe it. The first section makes no sense. A COVID like… Read more »
One cannot but be struck by Dr John Ball’s contributions to William Thomson’s interesting article. To wit… I’m not prepared to answer this fairy tale in detail, Andersen has again shown his knowledge of economics is questionable. There is little point in responding in detail, for anyone who knows anything about economics will recognise Thomson’s views are naive at best, dangerous at worst. This is the problem with someone pretending he understands economics. I have no idea how long this debate is going to last and I’m a little fed up with unsupported negative attacks. Your argument is not helped… Read more »
The starting point for any discussion on our economic future must be recognition that no country is ‘fully independent’ in the modern world. Not even the most rich and powerful, as Trump discovered in the reaction to his ‘independence day’ tariffs. Nor does any country ‘control all the economic levers’. Everyone is subject to formal agreements, from rules on matters such as international post or telecoms to elaborate treaties like the WTO or the EU. And every business or country has to navigate through volatile global conditions subject to everything from competition and bond markets to climate change and war.… Read more »
Answer. You know very little, other than personal attacks on a hard working and life long nationalist. Please refrain from your carefully worded insults and debate the issue like an adult. As far as I am concerned this matter is now closed and there’ll be no further comment from me. I debate, not insult. Nigel and friends – and other opponents of independence – will be delighted at the disaster economics Thomson describes. I ask again. I presented a very careful, research and evidence based argument against a separate currency and have asked you and Thomson to address the issues… Read more »
It is disappointing that Dr John Ball has again avoided my challenge to answer why an independent, sovereign country (eg. Cymru) would not want to control the economic levers (notably money supply) it could have at its command?
Surely, given his very careful, research and evidence based argument against a separate currency, he would be well-placed to provide a succinct answer.
I deduce that his research is in fact irrelevant if it cannot.