According to free market think-tank the Adam Smith Institute (ASI) if Scotland goes independent it would have to continue to use the pound unofficially and without the permission of the Bank of England (BoE). As the Westminster parties and the BoE have sent strong signals to Scotland that a currency union would not be available in the post-independence age, other options have to be considered.
Three Scottish banks presently issue their own promissory notes, which are redeemable 1:1 with pounds issued by the BoE, a system dismissed by the ASI report as an “economically insignificant curiosity”. Further, the report notes that the largest ‘Scottish’ banks aren’t even Scottish at all; the Royal Bank of Scotland and Lloyd’s conduct the majority of their business in England and their depositors are mostly English.
This fact alone means that under present European Union banking law, in the case of Scotland voting to leave the UK these banks would have to move to the City of London to continue trading legally.
It isn’t all doom and gloom though, if a future independent Scotland was willing to take a radically free market approach to banking, it could reap benefits. Using Panama as an example of a nation without it’s own currency, the ASI suggests Scotland abandons the idea of a central bank at all and frees all commercial banks in Scotland to print their own notes.
Without a central bank and ‘lender of last resort’ to fall back upon, banks would be less willing to take risks, leaving scotland in a stronger position to weather the storm should another financial crisis come.
Adam Smith himself is regarded to be the world’s first modern economists and wrote the seminal text Wealth of Nations. Smith lived and worked during the golden era of Scottish free banking, when there was no central bank and “Scotland had one of the world’s most stable and robust banking systems”.
According to the BBC, the ‘no’ campaign group Better Together has described a Panamanian answer to Scotland’s currency woes as a “disaster”.