The end of an auld West Lothian song

The Scottish National Party leader Alex Salmond loves causing trouble (as many contemporaries of mine from the University of St Andrews relish as well). He must be grinning, because despite losing the independence referendum in Thursday, he has really put the Westminster politicians in a stew.Before the vote, to buy off wavering Yes voters, all the main political parties in Westminster signed a pledge to give more powers to Scotland anyway. On Friday, UK Prime Minister David Cameron correctly declared that if Scotland was getting more power, then people in Wales, Northern Ireland – and particularly England, the only bit of the UK without devolved powers – would expect nothing short of the same. He is right, even if that reality only made itself plain after the more-powers pledge had actually been signed. And having set the idea running, he realizes that he has to initiate a House of Commons vote on English devolution before the June 2015 UK general election.

Labour leader Ed Miliband is currently refusing to back any such plan, calling it a 'back of the envelope constitutional change'. He has a point: Westminster politicians are remarkably cavalier about how they change the UK's constitution. A small public company cannot change its rules just on a majority vote of the directors, so why should a large government be able to change its rules on a simple majority in Westminster? But his real concern is to ensure that the large number of Labour MPs that Scotland sends down to Westminster can still vote on everyone else's business, the 'West Lothian Question'.

The impish Alex Salmond will be chuckling at the stooshie he has created. Some say we should devolve powers down to the English cities and local authorities. Others say we need a proper English Parliament. A few talk about barring Scottish MPs from voting on English-only laws.

But devolution of power to the local authorities is a non-runner. We have been promised it for decades, but it has never really happened, and nobody trusts that it will now. As for an English Parliament – well, we have seen the expense of the Scottish one (the extravagant building alone cost ten times its original estimate) and its notoriously poor quality (stuffed, inevitably, with failed local councillors and superannuated MPs).

The simple solution to devolution, all those years ago, would have been to form English, Scottish and Welsh parliaments out of their respective Westminster MPs; and have them meet at Westminster in the mornings on their own country business, then together on UK business in the afternoon. Yes, there will be a few arguments about which matters are 'UK' and which are 'English'. But the solution is costless, and without adding an extra tier of government, you get home-grown politicians of some quality deciding home-grown issues. It is the obvious solution for England. And the end of an auld West Lothian song.

An independent Scotland should use the pound without permission from rUK, says new ASI report

Today the Adam Smith Institute has released a new paper: "Quids In: How sterlingization and free banking could help Scotland flourish", written by Research Director of the Adam Smith Institute, Sam Bowman. Below is a condensed version of the press release; a full version of the press release can be found here. An independent Scotland could flourish by using the pound without permission from the rest of the UK, a new report released today 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.