Andrew Lilico: The Hayekian argument for Scottish independence

One of the strongest arguments the SNP has for its Scottish independence proposals seems, oddly, to have passed it by so far, namely that it would establish an independent Scotland as a neo-Hayekian Utopia.  For the SNP's current position (as far as anyone can grasp it) is that Scotland would continue to use Sterling even though it would not be participant in a formal currency union with the UK.  Most press discussion on this has focused on whether Scotland would have a representative on the MPC (no, it wouldn't - glad to have been able to sort that one out for you).  But that is probably the least relevant aspect of the matter.

Of course, countries can simply piggy-back on other currencies.  Panama has used the dollar since 1904; Montenegro since 2002.  The real issue with Scotland's not issuing its own currency, but instead using Sterling, concerns what happens to Scotland's banks.

In a fractional reserve banking system (the normal kind of banking we're used to in developed countries), banks have and require access to liquidity facilities from the central bank.  Without such liquidity facilities, fractional reserve banks would, every now and then, run out of cash, precipitating bank runs and other chaos.  But if Scotland had no central bank, Scottish banks would have no central bank to obtain liqudity from.

Perhaps the SNP imagines that the Bank of England would provide liquidity to Scottish banks.  If so, we can fairly quickly disabuse them of that notion.  If Scotland isn't part of the Sterling zone, there is no way that the Bank of England and, through the Bank, UK taxpayers are going to make themselves liable for the debts of foreign banks.  If Scotland is Sterling-ized, Scottish banks will not have access to last resort lending.

But all is well (or not), because as arch free market types of the so-called "Austrian" persuasion have urged for years, fractional reserve banking is a terrible thing anyway (it's possible I might not intend you to take me entirely literally for the rest of the article from here, but run with me anyway).  So instead of fractional reserve banks, the Scottish banks can become 100%-backed banks.  Or maybe they can all issue their own competing currencies.  I'm sure the SNP will be keen to encourage that.

As a country with centuries of tradition in international banking, Scotland is surely the ideal location for this neo-Austrian utopia to be established.  Freed from the constraints of "central planning" via the central bank, the Scottish banking sector will be stable and efficient.  Any volatility in credit flow to Scottish business, arising from free banking, will surely only be a reflection of the fructifying forces of creative destruction. Embracing this new dynamism, the SNP will surely be ecstatic at the concept of the dead wood of corporatism being cut away from the healthy trunk of Scottish enterprise, heralding a new age in which Scots can revel in discovering their preferences in unhibited market freedom.

I can see the SNP posters now - "Vote Yes for the Schumpeter Effect!"  "Praxeology for all in an Independence future!"  "Ordinal utility, not Osborne-al austerity!"  "Reveal your preferences today!"  People ask where growth might come from - now we have the answer: mass sales of posters of Von Mises in a kilt.

Be careful what you wish for...