Like I wrote the other day, I love it when I get support from a better source than I for one of my posts. Yesterday, it is that Scotland CAN use sterling without permission from the UK or a formal currency union. In fact, two or three of the banks in Scotland have their own currency, denominated in sterling of course, and my readers recall that the Clydesdale Bank has particularly beautiful notes.
So it elated me so much that I posted this before I went out to cut grass this AM that Sam Bowman, research director at the Adam Smith says: YES Scotland can use sterling just like Panama uses the dollar and has no central bank either!
In practical terms, there’s virtually nothing stopping any country in the world from using any other country’s currency as its own. Indeed, some countries already do this – notably, the ‘dollarized’ economies of Panama, Ecuador and El Salvador.
So Scotland could keep using the pound with or without a currency union. The difference would be that a ‘currency union’ would force the Bank of England to consider Scottish interests when making decisions about things like setting interest rates, and – crucially – acting as a lender of last resort to Scottish banks, lending to them when they were illiquid.
The much bigger issue is whether Scotland could manage without a central bank acting as a lender of last resort. The answer is that it could – and has.
Between 1716 and 1844, Scotland had no central bank. The era of ‘free banking’, as it was known, was a success. Its financial system was stable and its economy boomed: in one hundred years, Scottish GDP per capita rose from being less than half of England’s to almost the same.
And if you don’t like the Panama example, consider this:
Consequentially, Panaman banks are remarkably stable and have been praised by the IMF and the World Economic Forum, which ranks Panama’s banks as the seventh soundest in the world. Because Panaman banks do not have a public safety net to fall back on, they have to act far more cautiously. All three of the Latin American dollarized countries – Panama, El Salvador and Ecuador – have been praised by a Federal Reserve Bank of Atlanta for their financial stability, arising because of their unusual monetary arrangements.
If Scotland were to go it alone, it could do with surprising ease. Scottish banks already issue their own banknotes which are treated as interchangeable with the pound sterling. Nothing would need to change after independence – banks would treat their sterling reserves as ‘base money’ on which they could issue more or fewer promissory notes according to demand.
So, Sandy’s right! Again! (If Alex Salmond needs help with this message, I know a certain blogger…) Scotland has a currency and can use sterling. Should Scotland be a free member of the nations of the world, a status that was taken without consent?
Scottish independence is not going to be decided by economic facts and what’s best for the nation – it probably is better for the UK to stay together. It will be decided by an emotional appeal of – we ought to be free. Alex Salmond, who almost should not be written in the same sentence as William Wallace, ought to appeal to this desire to be free. Make our own decisions. Go listen to the scene from Braveheart where Wallace (Mel Gibson) calls for the Scots to fight for freedom (I don’t do movie clips for copyright reasons but it’s on Youtube):
“…tell them they can take our lives but they can’t take our freedom!”
By the way, the Panamanian banks have the seventh best banking system in the world! Who knew? With no central bank? Guess who was RIGHT again! Yep – former Cong. Ron Paul. Right again.