HM Treasury has produced a paper which explores the currency and monetary implications of Scottish independence, which is being put to a referendum in September 2014. HM Treasury have stated in the paper that the current system could not continue if Scotland became independent, and it lays out four options for Scotland: (a) join the euro; (b) enter a formal sterling currency union; (c) continue to use sterling with no formal agreement (sterlingisation - akin to dollarisation); (d) introduce a new Scottish currency.
Financial history suggests that there may be a fifth option. In the eighteenth and nineteenth centuries, there was a competitive currency system in Scotland, with competing banks free to issue their own notes and no central bank. Bank notes were redeemable for specie (gold coins). This system worked well in terms of producing a stable currency and stable banking system. Larry White's famous book on this free banking system can be downloaded for free at the IEA website. This fifth option would allay fears that independence would mean the end of Scotland's distinctive banknotes, which are currently redeemable for Bank of England notes (click here).