Press Release: An independent Scotland should use the pound without permission from rUK

  • An independent Scotland using the pound outside of a currency union would have a more stable financial system and economy than it has now or than a currency union could provide.
  • ‘Adaptive sterlingization’ – a combined policy of unilateral use of GBP without a formal currency union and reform of Scottish banking regulations – would reduce risk-taking and increase competition in banking, significantly reducing the prospect of large-scale bank panics and financial crises.
  • The ‘dollarized’ economies of Latin America – Panama, Ecuador and El Salvador – provide strong modern-day evidence that banking systems do better without central lenders of last resort.

An independent Scotland could flourish by using the pound without permission from the rest of the UK, a new report released today (Thursday 21 August) by the Adam Smith Institute argues.

The report, “Quids In: How sterlingization and free banking could help Scotland flourish”, draws on Scottish history and contemporary international examples to argue for the adoption of what it calls ‘adaptive sterlingization,’ which combines unilateral use of the pound sterling with financial reforms that remove protections for established banks while allowing competitive banks to issue their own promissory notes without restriction. This, the report argues, would give Scotland a more stable financial system and economy than the rest of the UK.

According to the report, adaptive sterlingization would allow competitive, private banks to issue their own promissory notes backed by reserves of GBP (or anything else – including USD, gold, index fund shares or even cryptocurrencies like Bitcoin). With each bank given powers to expand and contract its balance sheet relative to demand, this system would be highly adaptive to changes in money demand, preventing demand-side recessions in modern economies such as the ones that led to the 2008 Great Recession.

The report’s author, Sam Bowman, details Scotland’s successful history of ‘free banking’ in the 18th and 19th centuries and the period of remarkable financial and economic stability which accompanied it. Historical ‘hangovers’ from this period, like Scotland’s continued practice of individual bank issuance of banknotes, are still in place today, making Scotland uniquely placed for a simple transition to the system outlined in the report.

The report highlights evidence from ‘dollarized’ economies in Latin America, such as Panama, Ecuador and El Salvador, which demonstrate that the informal use of another country’s currency can foster a healthy financial system and economy.

Under sterlingization, Scotland would lack the ability to print money and establish a central bank to act as a lender of last resort. Evidence from dollarized Latin American countries suggests that far from being problematic, this constraint reduces moral hazard within the financial system and forces banks to be prudent, significantly improving the overall quality of the country’s financial institutions. Panama, for example, has the seventh soundest banks in the world.

The report concludes that Britain’s obstinacy could be Scotland’s opportunity to return to a freer, more stable banking system. Sterilization, combined with reform of Scottish financial regulation that:

  • removed government liquidity provisions to illiquid banks,

  • established mechanisms to ‘bail-in’ insolvent banks by extending liability to shareholders, and

  • shifted deposit insurance costs onto banks and depositors rather than taxpayers,

would improve standards and competitiveness in banking, while significantly reducing the prospect of large-scale bank panics and financial crises.

Commenting on his report, the Research Director of the Adam Smith Institute, Sam Bowman, said:

The Scottish independence debate has repeatedly foundered on the question of currency, but if Scots look to their own history they will find that their country is a shining example of how competition in currency and banking can ensure a stable and effective banking system. Scotland’s free banking era was an economic and intellectual Golden Age, and its system of competitive note-issuance was recognised by such thinkers as Adam Smith as one of the root causes of the country’s prosperity during this time.

The examples of Panama and other dollarized Latin American economies are proof that countries can thrive when they unilaterally adopt another country’s currency. Combined with a flexible, adaptive banking system, the unilateral use of another country’s currency can instill a discipline in a country’s financial sector that neither a national currency nor a currency union can provide. Scotland’s banking system is almost uniquely primed for such a system of ‘adaptive sterlingization’. The path outlined in this paper would go almost unnoticed by the average Scot – until the next big economic shock, when they might just wonder why their system was so much more stable than that of the country they’d left behind.

Notes to editors:

The Adam Smith Institute takes no position on the Scottish independence referendum and produces research for public information purposes only.

For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@adamsmith.org / 07584 778207.

The Adam Smith Institute is an independent libertarian think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

 

Sam Bowman is quoted in The Freeman on Britain’s student debt problem

Research Director of the Adam Smith Institute, Sam Bowman, was quoted in The Freeman on Britain’s growing student debt problem.

The core difference between the British and American systems lies in the terms of repayment. American students typically have to start repaying 6 months after they graduate. Opportunities for loan forgiveness are extremely limited, and loans cannot be discharged via bankruptcy. By contrast, British students don’t have to start repaying until they are earning £21,000 ($36,000) per year. They must then pay 9 percent of their gross income as long as they stay above the threshold. Their outstanding balance is automatically forgiven 30 years after it became eligible for repayment. Also, the loans do not appear on their credit report.

“The thing people worry about with debt is that they won’t be able to pay it back. The way this is structured means that is not a worry ever, and it doesn’t follow you around until your old age,” says Sam Bowman, Research Director at the Adam Smith Institute, a free-market think tank.

Bowman finds it helpful to understand loan repayment as a tax. “You can either think of it as a graduate tax or it’s the best debt in the world,” he says. “It makes sense to think of it as a graduate tax, a specific kind of tax on a specific action that is designed to offset the cost of that action.”

Read the full article here.

“Sweet FA – Why foreign player crackdowns hurt English football” is featured in The Telegraph

A new report from the Adam Smith Institute – “Sweet FA – Why foreign player crackdowns hurt English football” – is featured in The Daily Telegraph.

Greg Dyke’s plan to cap the number of foreign players in English football has been denounced by The Adam Smith Institute, which claimed there was “practically no relationship whatsoever” between that and the performance of the England team.

A report by the influential think tank also warned that artificially limiting the amount of overseas talent in the Premier League would harm its clubs’ ability to compete in the Champions League and Europa League.

One of the key recommendations of Football Association chairman Dyke’s commission on English football this summer was a limit on the number of non-European Union players in the English game, which, it was claimed, would increase the number of England-qualified footballers.

The received wisdom has been that a bigger domestic talent pool is the panacea to the national team’s travails at major tournaments, a view directly challenged by research conducted by the Institute’s head of policy, Ben Southwood.

Read the full article here.

The report, written by ASI Head of Policy Ben Southwood, finds that the Football Association’s plan to crack down on foreign players in the Premier League would damage the league’s quality and success in European club competitions, without any benefit to the English national team’s performance.

Read the full report here: “Sweet FA – Why foreign player crackdowns hurt English football”