According to the Scottish National Party, after the referendum on independence next year, Scotland will be a land of milk and honey. The highest per capita levels of public expenditure in the UK can easily be sustained. The whole of the revenue from North Sea oil and gas will belong to Scotland, regardless of the wishes of England and the Shetland Isles. Scotland can remain within the EU, despite clear statements from Brussels that it would have to reapply for membership, and the near certain Spanish veto this would attract.
None of the massive debts incurred by the Bank of Scotland (the BOS bit of HBOS) and the Royal Bank of Scotland will be allocated to the Scots. And the Bank of England will continue to support sterling as the Scottish currency, whilst at the same time the Scottish government will have complete freedom on economic policy.
Even by the standards of politicians, these are fairy stories pedalled on an epic scale. The Scottish electorate are being treated like children by the SNP.
In the unlikely event of this massive confidence trick working, there will be a great opportunity to conduct a real life experiment with monetary policy. If Scotland chose to remain within what would then become the Sterling Zone, the Bank of England would of course set interest rates and English regulatory bodies would control Scottish banks. The Scottish government would be no more able to set its own fiscal policy than the Greeks or the Portuguese are at the moment. If they tried to be too profligate, the Bank could step in and appoint an unelected Prime Minister, just as the European Central Bank did with Italy, a far larger and more important country than Scotland.
So the obvious answer would be to allow everyone in Scotland to choose their own currency. The idea is not ludicrous. In 19th century America, many different currencies were in circulation, especially in the West, and it was not until the creation of the Federal Reserve as late as 1907 that the dollar became the sole legal tender.
Scottish banks could continue to issue their own colourful notes, but without the back up of a lender of last resort. Economists of the Austrian School in particular argue that this would lead to banks being much more prudent, and that what the world needs is much less, not more, banking regulation. Scotland would be a test bed for the theory.
Why stop there? Bitcoin could be used for transactions, as could air miles or vouchers at supermarkets. Gresham’s Law says that bad currencies drive out the good, but does this law still apply in the modern era? Masses of data would be generated about how trust, in the competing currencies, spreads across networks of individuals.
Regrettably, the majority of the Scottish electorate seem too level headed to vote for independence. But from a purely scientific perspective, this will be a loss to the world.
Paul Ormerod
As published in City AM on Wednesday 15th May 2013
