IN our third article, published in The National a week ago, the Scottish Banking & Finance Group described some of the characteristics of what we are calling a “bankers’ currency”. Everyone reading these articles will have felt the effects of such a currency (sterling) one way or another.

An independent Scotland should not copy the UK currency nor its banking and financial system or regulatory regime.

Quantitative Easing (QE) has been in vogue since the Global Financial Crash (GFC) of 2008 and to some extent also during the coronavirus pandemic. So what exactly is QE?

QE is a process whereby the central bank purchases financial assets, such as government and corporate bonds, from banks in exchange for cash. The theory behind QE is that it provides banks with more “liquidity” (cash) that can then be invested in the economy to stimulate economic activity, stop job losses and support business.

But QE doesn’t work because banks will not provide money for investment in productive activity when they do not believe they can make profit for shareholders by investing in business. Instead they just buy new financial assets which they think will generate bigger profits for them. As a result we have witnessed virtually zero inflation in the real economy while the prices of financial assets have soared. It is a speculative financial bubble – the kind of bubble which caused the GFC in the first place.

When it came to the pandemic, the Bank of England side-stepped QE and started buying government bonds (debt) directly. This has provided the money needed to support the UK economy during the pandemic.

The Bank of England has always been able to provide direct finance to the Government – it is the primary function of a central bank. The Bank of England is owned by the Government so the “debt” it now holds need never be repaid. There was never any reason for “austerity” – that was a deliberate political choice.

While the Bank of England has been directly financing the UK Government, it has also provided loan guarantees to the private banks to encourage them to lend to businesses and support them through the prolonged lockdown of the economy.

READ MORE: Here’s why an independent Scotland must take away the monopoly from private banks

This proves that private banks cannot be relied upon to do what is necessary to support the real economy and that it is the Government which has the real power and the capacity to do that.

A government with its own currency and central bank can create whatever money is needed to support economic activity. There is no universal law of nature which says that a government must delegate money creation to private banks – it is a political choice and a product of the history of the UK banking system. It is a bankers’ currency and it can be changed if there is the will to do so.

People everywhere felt the impact of the GFC and the banker’s currency. Here is a list of the adverse consequences for ordinary people:

- Falling house prices and negative equity

- Foreclosures and homelessness

- Massive losses of personal wealth, with the biggest impact upon the poorest

- A decade of austerity because governments insisted “debts must be repaid” – the mantra of the bankers – banks were bailed out, people were not

- As a result of austerity we have witnessed the growth in food banks, savage welfare benefit cuts, homelessness, people living in squalor, growing social inequality and all the attendant social problems that come with poverty and despair.

All this is unnecessary – it is the result of political choices. It is the result of tolerating a bankers’ currency. We have a choice and we can choose to design a people’s currency and a people’s banking and financial system.

In our next article we will discuss the ways in which we can design a people’s currency and a people’s banking and financial system, based on a decentralised and localised system, supported by a central bank and a network of publicly owned investment banks, alongside a reformed commercial banking sector, regional, community and local banks and a restoration of mutual banking institutions such as credit unions and savings banks.

This domestic banking and financial system must be sheltered from global financial markets so that it remains resilient in the face of financial crises and can continue to provide the banking services people need as well as provide capital for investment in production and real wealth creation.

The SBFG has some ideas but we do not claim to have all the answers – however, we do believe Scotland must have this conversation so that we can find the answers together. One area of interest is to learn more about how banking systems work in Southeast Asian countries. There may well be lessons for us to learn by looking outside the realm of Anglo-American and European finance.