Scotland’s Independence Vote, Bitcoin, and the Myth of Free Scottish Banking

scotland independenceAlthough Scotland has yet to vote whether or not to secede from the United Kingdom, pundits have already begun debating how an independent Scotland should structure its society - specifically its monetary policy.

Theorists have noted that, if the Scots vote "yes" on the independence referendum, Scotland could prove a perfect testing ground for large-scale bitcoin implementation. Naysayers argue that free banking systems are unsustainable, pointing to the so-called "free banking" era in 18th and 19th century Scotland. Consequently, if Scotland's independence vote passes and bitcoin becomes Scotland's currency of choice, the system will inevitably collapse. However, a closer examination of Scottish monetary policy during this era reveals that although Scottish banks had freedoms not afforded to most modern banks, their banking system was not free.

Also read: An Independent Scotland Powered by Bitcoin?

[divider]CCN[/divider]

Scotland's Independence Vote and Bitcoin

scotland voteOn September 18, Scotland will vote whether or not to secede from the United Kingdom and reestablish itself as an independent nation. Using web and social data, Microsoft's Bing search engine predicts the Scots will vote "No" on the referendum by a 51.9% to 48.9% margin (although the Yes percentage has trended up on the eve of the vote). Scotland's independence vote gives the Scots the chance to peacefully restructure their government and economy on a large scale, an opportunity that, due to the rarity of secession, is not often afforded to first-world nations.

Mainstream news outlets love Scotland's independence vote, too, because it allows them to create clickbait articles under the guise of exploring Scottish policy options. Their pundits have eagerly debated how Scotland should tackle subjects such as EU-membership, taxation, and welfare. However, some of the most heated debates involve monetary policy--beginning with what currency an independent Scotland should adopt.

As CCN noted, Scotland would likely retain the British Pound Sterling, adopt the Euro, or--as a last resort--establish their own national currency. However, that reality has not prevented cryptocurrency proponents from proposing that the Scots adopt either bitcoin or the patriotic-themed Scotcoin.

Scotland would not be the first nation to experiment with cryptocurrency on a large scale. Ecuador announced plans to ban bitcoin in favor of establishing its own centralized digital currency, and former U.S. Mint Director Edmund C. Moy has stated he believes the U.S. Government is privately discussing ways to co-opt cryptocurrency technology and implement it into its own monetary system.

Bitcoin and Free Banking Policies

bankOf course, Scotland could not actually adopt bitcoin as a "national" currency, because bitcoin is a distributed cryptocurrency free from the whims of central banks. However, if Scotland declined to establish a national currency, instead adopting a free banking system, bitcoin would have the potential to flourish, a potential unrivaled by any other nation.

Free banking naysayers argue that during the 18-19th centuries Scotland operated according to free banking policy, and the system ultimately collapsed so badly the British government was forced to step in and award the Bank of England a monopoly on currency-issue.

In fact, the issue has gained so much attention that Guy Debelle, assistant governor of the Australian central bank, weighed in on the subject. As quoted by the Guardian (and reproduced as clickbait by numerous outlets), Debelle ascribes to the theory that Scotland has already tried and failed to implement a free banking system.

Those guys have a bit of experience with competing currencies back in the 18th and 19th centuries. So I suppose one possibility is, if the vote for independence actually gets up, they're going to be short a currency, given that the last time we talked Mark Carney is not entirely clear that he wants to let them use the pound anymore.

The Scots can go back to experimenting with a multitude of currencies, bitcoin and the like, and we can just sit back and see how it goes. A nice natural experiment about the future of money in Scotland – again. Because as I said, they tried this in the 18th and 19th centuries. It worked for a while, but eventually it fell apart.

History would seem to judge in favor of free banking's opponents, except that Scottish banking during the 18-19th centuries was not truly free.

The Scottish Free Banking Myth

Somewhat ironically, the mainstream acceptance of the Scottish free banking proposition originated from Lawrence H. White, an Austrian economist and a proponent of free banking. White, who is widely considered one of the foremost authorities on free banking, propagated the idea that Scottish banking was free in his oft-cited work Free Banking in Britain. As the title suggests, White focused primarily on British banking, but he devoted a chapter to Scottish banking for juxtaposition.

In both Free Banking and external publications, White contrasts the British and Scottish banking systems, arguing that Scottish banking policy was superior to British because the Scottish experienced far fewer bank failures during the period leading up to the 1845 implementation of the Peel Act, which restricted note-issuance powers to the English central bank. Relative to the privately-held English banks, which could issue bank notes but were restricted in size to force dependence upon the Bank of England, White alleges Scottish banking was a truly competitive market.

Scotland had no monetary policy, no central bank, and virtually no political regulation of the banking industry. Entry was completely free and right of note-issue universal. [1]

According to White, “Each bank held onto its own specie reserves,[2]" meaning Scotland truly operated according to the gold standard so often advocated by Austrian economists. Scottish banks often held English bank notes, but they were not considered legal tender. This diversification prevented the Scottish banks from falling prey to the same financial volatility that characterized contemporary English banks. The Scottish experienced bank crashes (hence the opponents of the free banking system argue Scotland should not pursue it if they become independent), but on a far less extensive scale than the English.[3] Ultimately, Britain's passage of the Peel Act in 1844 ended the era of "free" Scottish banking by creating a banking cartel centralized around the Bank of England.

Debunking the Free Scottish Banking Myth

scotland cliff

In "The Myth of Free Banking in Scotland," a book review published in the Austrian Journal of Economics and later reproduced in The Mystery of Banking, revered historian and Austrian economist Murray Rothbard contends White's assertion that Scottish banking was free prior to the Peel Act is unsound. Initially, Rothbard had accepted White’s conclusions (hesitantly), as he cites him in a short section on Scottish banking in the first edition of The Mystery of Banking. However, upon further research Rothbard determined White’s thesis rests on a “paucity of research” and “thinness of…discussion," leading him to include "The Myth of Free Banking in Scotland" as an appendix to the 2nd edition of his monograph [4]

According to Rothbard, a free banking system requires both freedom from central banking and redemption of demand deposits in hard metals.

For Scottish banking to be "free," its banks would have to be independent of central banking, with each redeeming its notes and deposits on demand in its own reserves of gold.[5]

White alleges the Scots did just this--maintaining specie reserves sufficient to cover its debts--but the behavior of the Scottish banks in response to the English banking crisis of 1797 does not support this assertion. In 1797, a bank run forced English banks to suspend gold specie redemptions. One would assume that the Scottish banks would have let their currency "float" against the devalued English currency since Scottish bank notes would have still been backed up by gold reserves. However, the Scottish bankers panicked when the English suspended specie payments, and they too stopped allowing customers to redeem deposits for gold. Even White acknowledges this fact, confused that the Scottish banks would not act like the independent banks they were.

It is not immediately clear why the Scottish banks did not remain tied to specie and let their currency float against the Bank of England note.[6]

The answer is that the Scottish banks were not truly free. Rothbard contends the actions of the Scottish banks as they had been using Bank of England currency notes as their reserve standard rather than the hard-money standard they claimed to use.

Scottish banks were not free,...they were in no position to pay in specie, and...they pyramided credit on top of the Bank of England....[T]he Scottish banks' eagerness for suspension of their contractual obligations to pay in specie might be related to the fact...that specie reserves held by the Scottish banks had averaged from 10 to 20 percent in the second half of the eighteenth century, but then had dropped sharply to a range of less than 1 to 3 percent in the first half of the nineteenth.[7]

gold-003White tried to account for this shift in Scottish policy by alleging the Scottish banks thought they could use the English reserve notes to redeem specie from the Bank of England on short notice if they needed it, but the action demonstrates that, like modern banks, the Scottish banks had abandoned the gold standard in favor of fiat currency reserves.

 

Moreover, Rothbard notes how dangerous it is to draw conclusions from the relative stability of Scottish banks compared to English ones.

“[A] dearth of bank failure should rather be treated with suspicion, as witness the drop of bank failures in the United States since the advent of the FDIC. It might indeed mean that the banks are doing better, but at the expense of society and the economy faring worse. Bank failures are a healthy weapon by which the market keeps bank credit inflation in check; an absence of failure might well mean that that check is doing poorly and that inflation of money and credit is all the more rampant.[8]

In fact, opponents of free banking use the example of the mythological free Scottish banking to prove that free banking is inferior to modern central banking systems.

What Will Scotland's Independence Vote Mean for Bitcoin?

Scotland BitcoinHaving shown the fallacy of the Scottish free banking myth, let us examine what Scotland's independence vote will mean for bitcoin. If Scotland remains on the British Pound or can move to the Euro, Scotland's independence vote will likely not affect bitcoin much. However, if Scotland created its own currency (which is unlikely) or adopted a free banking system (which is nearly unfathomable), bitcoin could potentially construct inroads into Scottish commerce.

If Scotland created its own currency, the Scottish people might be reluctant to trust the new currency with their long-term savings. It would take a while for the new currency to gain the trust of the populace, and during that time bitcoin could prove an attractive alternative. At the very least, Scottish citizens and businesses may begin interacting with bitcoin just in case the new Scottish currency does not fare well in the international currency markets. Provided Scotland did not take an antagonistic view toward cryptocurrency, bitcoin could coexist nicely with the new Scottish currency.

 

Bitcoin logoHowever, bitcoin would really have its chance to shine in the unlikely event that Scotland pursued a completely free banking system, meaning that Scots could use whatever currency they wished. Initially, most Scots would likely transact primarily on the British Pound standard due to trust and currency saturation. However, a free system would the Scots to choose among competing currencies, which would include a traditional gold standard and bitcoin.

 

Bitcoin has never had a chance to compete against other currencies on equal footing, so it would intriguing to see how the Scots reacted to it without having to worry about the looming threat of government regulation. But bitcoin would begin the new era of an independent Scotland at a severe disadvantage to the pound and other currencies the Scots are already acclimated to. Currently, bitcoin has little brick-and-mortar infrastructure in Scotland; CoinMap lists only seven brick-and-mortar Scottish businesses that accept bitcoin. While changing to a bitcoin-based society would not be difficult for either individuals or businesses, most people are prone to use whatever currency is most convenient--meaning, of course, whatever currency everyone else is using. Bitcoin is far from reaching critical mass in Scotland, so the transition to bitcoin would be slow--free banking system or not.

Sadly, bitcoin will almost certainly not become Scottish national currency following Scotland's independence vote on September 18. Nevertheless, the fact that mainstream news outlets such as Yahoo, the Guardian, and Mother Jones are contemplating this question with a--mostly--straight face proves how far Bitcoin has permeated the mainstream consciousness.

Notes

[1] Lawrence H. White, quoted in Murray Rothbard, The Mystery of Banking (Auburn, AL: Ludwig Von Mises Institute, 2008), 183.

[2] Lawrence H. White, Free Banking in Britain: Theory, Experience and Debate 1800-1845 (London: Institute of Economic Affairs, 1996), 40.

[3] White, 40.

[4] Rothbard, 270.

[5] Rothbard, 271-2.

[6] White, 42.

[7] Rothbard, 272.

[8] Rothbard, 271.

Images from Shutterstock.

Last modified (UTC): September 18, 2014 9:08 AM

About the author

Josiah Wilmoth

Josiah is the US Editor at CCN, where he focuses on financial markets and cryptocurrencies. He has written over 2,000 articles since joining CCN in 2014. His work has also been featured on ZeroHedge, Yahoo Finance, and Investing.com. He holds bitcoin, but does not engage in day trading. He lives in rural Virginia. Follow him on Twitter @y3llowb1ackbird or email him directly at josiah.wilmoth(at)ccn.com.