Can Scotland really be economically self sufficient?

On November 30th, the Scottish First Minsiter, Alex Salmond, marked St. Andrew's Day by unveiling his Government's plans for a referendum on Scottish Independence. Scotland has been part of the United Kingdom since 1707, when the Scottish Parliament voted to join the English parliament. The Scottish Parliament was subsequently reformed, within the Union, and with limited powers in 1999. While political historians continue to keenly debate the reasons for the Union, there is no doubt that it was gainful in the long run, and its hard to imagine the Industrial Revolution, so dependent on inputs from both sides of the border, being so successful without Scottish participation. The Union also gave Scotland, a country typical of Braudel's thesis of mountain nations less able to support their population, the access to the 'British' Empire that it had long craved.

One of the reasons for Union was that Scotland's own imperial adventure of the 1690s, the Darien scheme, had ended in an abject failure. This was a scheme that saw the formation of the Company of Scotland, which raised at least £400,000 in Scotland, as well as some funds in England, totalling roughly a fifth of Scotland's wealth at the time. The company sent colonists to claim territory in Panama, despite its being territory claimed, though not occupied by, Spain. The attempt to establish a colony called New Edinburgh failed abysmally, with only 300 of the original 1,200 colonists surviving the attempt, with tropical fever claiming the lives of most of the Scots. Tragically a second ship was despatched from Scotland because, in an era before electronic communication, it was not known that the first had failed, with similar results. The loss of savings through the scheme was not surprisingly catastrophic and union with England allowed Scots access to the Empire without incurring future risk. As I demonstrated in my PhD thesis, Scots went on to become very successful foreign investors, in agriculture in Australia and New Zealand, and in mining and cattle ranching the US, among ventures in many other industries and countries (note - the link is to a shorter seminar paper). It seems unlikely that these ventures would have occurred without the long run economic recovery made possible from Union through the agricultural and then industrial exports of the 18th and 19th centuries, many of them to a growing London economy.

Salmond has long claimed that Scotland would be better able to allocate its own resources if it were independent. To do this he has previously pointed towards smaller independent countries in Europe such as Luxembourg, Ireland and Iceland. Both of the latter have suffered disproportionately from the credit crunch, with top-heavy property based economies collapsing while creditor nations, themselves under pressure, sought recompense. The collapse of Iceland's banking system forced it to seek a £6bn emergency loan from the International Monetary Fund; unfortunately much of this will end up being spent recompensing savers abroad. Had Scotland been independent during the present crisis, then with RBS alone loosing around £24bn in 2008 the country would also have been driven to seek aid from the IMF; the whole of Scotland's GDP was £86bn in 2006 (although this excludes oil and gas revenue). To cover this loss alone Scotland would have been forced to spend a more than a quarter of its GDP. Oil and gas revenue might provide some temporary boost but are unlikely to remain substantial in the long term; a smaller economy would also provide more limited opportunities for the profitable reinvestment of these revenues. While the UK is struggling with national debt created by the recession, with the bailout of the banks not even shown on the national balance sheet, the chances of the UK economy growing significantly seem much greater than that of Scotland's alone. Nicholas Crafts writing in 2005 showed that Scotland had a market potential only around 35% of that of London in 1985, because the country continues to find itself on the European periphery. An independent Scotland would undoubtedly be pushed further to the periphery as European business activity centralises further into the London-Brussels-Ruhr-Zurich corridor; surely better for the country to continue to take advantage of its continuing connection to the wider UK so that it can have a more active stake in this centralisation.

Further Reading:

Crafts, N.F.R., 'Market Potential in British Regions, 1871-1931', Regional Studies issue 39, pp. 1159-1166.

Prebble, J., The Darien Disaster (London, 1968).

Tennent, K.D., Owned, monitored, but not always controlled: understanding the success and failure of Scottish free-standing companies, 1862-1910, unpublished PhD thesis, LSE, 2009.

RBS insist they've learned from their history

Today the Royal Bank of Scotland (RBS) submitted a document to the Scottish Parliament's inquiry into 2008's banking crash, insisting that the bank has accepted responsibility. Those executives believed to be responsible for the crash, of which RBS was at the epicentre in the UK, had left the business. Time will tell whether RBS truly have learned from their previous errors or whether similar mistakes will be repeated in future.

RBS would have done well to have heeded the past example of the City of Glasgow Bank, the ghost of which has stalked Scottish banking since its collapse and bankruptcy in 1878. Infact this collapse came just twenty one years after the collapse of the Western Bank of Scotland in 1857, from which the lessons had already supposedly been learned. In a time when Scotland's 'public' banks (those with Royal Charters), the Bank of Scotland and Royal Bank of Scotland had very conservative lending and deposit regulations, as well as very small branch networks, banks such as the City of Glasgow Bank attracted a great diversity of business and personal customers from the new middle classes. Many investors from the middle classes were also shareholders. What was unknown to most of these customers was that the bank's directors had fallen into the influence of a small group of Glasgow merchant houses which managed to borrow (a then) large sum of £5m between them with no likely repayment schedule. By comparison the deposit base was £8m; eventual net liabilities were shown to be £6m. Money had also been lost gambling on US railroad securities, and in gambling on mining stocks and in Australasian farming.

The bank was closed suddenly by the directors on the 2nd of October 1878; the doors of each branch were locked and there was no possibility of a Northern Rock style run. Rumours about the security of the bank had been circulating for some months on the London market, where confidence in the bank's bills had been falling. The closure of the bank rendered this paper useless, as well as making it impossible for depositors to reach their funds. At this time there were no government bailouts for banks, nor government deposit insurance. Depositors were eventually fully repaid from calls for payment made to the shareholders, who eventually faced calls of £2,675 against a £100 holding. At this time banks did not have limited liability as it was thought this would reduce public confidence in them; this meant the shareholders were liable for all of the bank's debts. Many of the shareholders themselves ended up being made bankrupt, although they were given shares in the Assets Company Ltd., which pooled many of the bank's remaining assets which were still of value, giving them some recompense in the longer run. And the directors? They didn't just lose their jobs - they were sent to prison.