2. Currency and Monetary Policy

Currency is one of the highest-stakes choices in any independence transition. The wrong decision, or the right decision made too early, can hit wages, prices, mortgages, savings and public confidence at once. This section sets out a continuity-first monetary framework: keep sterling as the primary currency from day one; build the domestic institutions needed for financial stability under that constraint; and keep a conditional path to a Scottish currency only when strict, pre-published tests are met.

The positions prioritise stability and are achievable. They draw on the Sustainable Growth Commission framework, international experience of unilateral use of another currency (sterlingisation / dollarisation), ordinary central-banking practice, and the practical constraints confirmed by the Bank of England and independent economists. A formal currency union with the rest of the UK is not available and is not sought. Unilateral use of sterling is legally possible and already describes how the Scottish economy works in practice.

These arrangements are not cost-free. The loss of independent monetary policy and of automatic access to the Bank of England as lender of last resort is a real constraint. It is managed through a Scottish Central Bank focused on stability and regulation, high bank capital and liquidity standards, a fiscally backed deposit protection scheme, substantial reserves, strict fiscal rules and published crisis contingency plans. Continuity of existing sterling contracts, mortgages, savings and pensions is a design rule, not a slogan.

2.1 Sterling as primary currency

Scotland would continue to use the pound sterling as its primary currency from Independence Day. That is the least disruptive option for wages, prices, savings, mortgages, contracts and day-to-day transactions. It avoids the immediate risks of launching a new currency while fiscal credibility and institutions are still being built. Any future Scottish currency is deferred until clear readiness tests are met.

2.2 Legal basis for sterlingisation

Unilateral use of sterling is legally possible and requires no agreement from the UK Government or the Bank of England. Scotland already uses sterling; independence does not extinguish that ability. A formal currency union is neither available nor sought. Sterlingisation is a practical, unilateral arrangement with international precedents. The constraints are real; they do not make continued use illegal or impossible.

2.3 Scottish Central Bank – powers and independence

An independent Scottish Central Bank would be established from day one. Its core functions would be financial stability and banking oversight, prudential regulation and resolution, payment systems, acting as banker to the Scottish Government, and holding and managing reserves. It would not set interest rates or control the money supply while sterling is used. Operational independence from government would be legally protected.

2.4 Lender of last resort

Under pure sterlingisation there is no automatic access to the Bank of England as lender of last resort. The Scottish Central Bank would provide liquidity support to solvent banks against good collateral, within the limits of reserves and fiscal capacity. Additional facilities would be sought but cannot be assumed. This is a genuine constraint of the currency choice. It is managed by strong capital and liquidity standards, reserves, fiscal rules and preparedness — not by denial.

2.5 Deposit protection

A Scottish deposit protection scheme would cover deposits up to a limit initially matching the current UK level. It would be funded mainly by an industry levy, with an explicit government fiscal backstop. Transitional arrangements would ensure there is no gap in protection on Independence Day. Credible deposit cover is especially important when automatic last-resort lending is not available.

2.6 Criteria and path to any future Scottish currency

Scotland could introduce its own currency later, but only when it meets strict, pre-published tests: sustainable public finances and debt trajectory; adequate reserves; a fully operational and credible Scottish Central Bank; demonstrated banking-system stability; and clear evidence that a new currency would better serve the economy. There is no fixed timetable. The Scottish Parliament would make the decision on formal advice from the Central Bank and the independent fiscal institution, with full transparency. Conditions first; currency change only if and when those conditions are satisfied.

2.7 Reserves strategy

Scotland would build and maintain substantial reserves from Independence Day, drawn from a negotiated share of UK reserves (subject to agreement), fiscal surpluses and resource revenues. Scotland would hold reserves mainly in sterling and major international currencies, managed by the Scottish Central Bank under a mandate focused on financial stability and crisis capacity. Under sterlingisation, adequate reserves are not optional; they are central to resilience.

2.8 Treatment of existing contracts, mortgages, savings and pensions

All existing sterling-denominated contracts, mortgages, savings accounts, pensions and other financial obligations remain valid and continue in sterling. No forced conversion at independence. Continuity of contract is a core principle of the transition. If a Scottish currency is introduced later, clear legislated rules and protections for existing sterling obligations would form part of that change.

2.9 Crisis contingency plans

A published contingency framework would rest on high prudential standards, limited but pre-positioned central-bank liquidity support, a fiscally backed deposit protection scheme, a clear resolution regime, reserve and fiscal buffers, and practical cooperation with other authorities on payments and information-sharing. The framework would be transparent and regularly tested. Strong institutions are the primary defence; containment tools are prepared for residual risk. Preparedness is a permanent requirement, not a temporary transition exercise.

Taken together, these nine positions define a monetary regime built for the transition and the early years of independence: sterling for continuity; a capable, independent Scottish Central Bank for oversight and limited crisis tools; deposit protection without a gap; reserves as a strategic buffer; no rewrite of existing household and business contracts; and a conditional, evidence-based path to a Scottish currency only when the state is ready.

The framework does not claim that sterlingisation is costless or that Scotland can replicate the Bank of England’s full toolkit. It claims that continuity of the unit of account, paired with domestic institutions, buffers and fiscal discipline, is a workable and honest design — and that monetary symbolism will not be allowed to override living standards at the moment of maximum institutional stress. That is the foundation on which public finances, debt, taxation and the Wealth Fund (Part 3) must also rest.