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Scotland Independence Could Disrupt the Banking System

Written By Geoffrey Pike

Posted September 15, 2014

scotlanddOn September 18, there will be a vote in Scotland on independence from the United Kingdom.

As suspected, most politicians and other defenders of the establishment are completely against this idea, using fear tactics and bribes in order to get the Scottish people to remain in the U.K.

It is no surprise that most of the establishment is against independence for Scotland. They always prefer centralization. And they don’t know the ramifications of this, particularly as it pertains to the European Union. This could potentially cause an eventual breakup of the European Union.

Now Scotland’s two biggest banks are joining the opposition to Scottish independence. Lloyds Banking Group and Royal Bank of Scotland Group both indicated that they would likely move their headquarters to London, or somewhere else in England, if there is a majority “yes” vote for independence. Both banks are partially state-owned.

Part of this uncertainty is because it is unclear if the British pound would remain the currency in an independent Scotland. And since the banks and government are so tightly connected, it just adds to the problems.

The banks rely on the support of the government, along with the central bank. It is a similar scenario in most major advanced countries of the world. Even the so-called private banks are under government regulation and given a backstop by the central bank as the lender of last resort.

What if a State Seceded in the U.S.?

Imagine a scenario in the United States where one particular state decided to secede. What would happen to the banks, little or big, in that state? My guess is that the same thing would happen. They would probably move their headquarters.

In the U.S., banks have the FDIC. While the FDIC is sold as a protection for consumers, it is really important for the banks in our world of fractional reserve lending.

If the FDIC didn’t exist, then the great degree of fractional reserve lending would not exist. If there is a fear from customers that banks are lending out too much money, then this can trigger a bank run. The FDIC has prevented most bank runs (for better or for worse) except for the really insolvent ones.

While the FDIC doesn’t really have much money, it is has the backing of the U.S. Treasury, which has the backing of the Federal Reserve. The Fed can create money out of thin air at any time to save the banks, as we saw in 2008.

If Texas were to secede from the union, and be allowed to do so, what would happen to all of the banks headquartered in Texas? You can use this same example for any other state.

Would the FDIC no longer apply to a bank headquartered in Texas? If not, then the banks there would find themselves insolvent very quickly. All it would take is for a few depositors to get scared and demand a withdrawal of their money.

In this hypothetical example, Texas could form its own version of the FDIC. But this won’t really work unless it also forms a central bank that can fund it. You see the problem here. What is the point of secession if you bring back all of the bad institutions that you are trying to leave behind?

Don’t take this as an argument against secession. I believe decentralization is usually beneficial for liberty in the long run. But this does show the problems we face today because of fiat currencies, central banking, government guarantees, and government alliances with businesses.

These banks in Scotland will leave an independent Scotland because they want to stay solvent. They need the government guarantees and government backing. Otherwise, they won’t be able to compete with all of the banks that do have the government guarantees.

For those who favor independence and secession movements, I would also encourage you to support getting rid of central banking and government guarantees. There is more of a link than many realize and it may become more evident in the coming weeks and months ahead, if Scotland becomes an independent country.