Tuesday, February 12, 2013

From Government Fiat Money to Private Commodity Money: the Case of Somalia

Lawrence H. White and William Luther have several papers on the fascinating case of Somalia money after the state collapsed in 1991. Here is an excerpt:
Over the last few decades, much work has focused on potential mechanisms to govern the supply of money in a desirable manner. Interestingly, a rough mechanism seems to have emerged naturally following the collapse of the Somali state in 1991. Without a functioning government to restrict the supply of notes in circulation, Somalis found it profitable to contract with foreign printers and import forged notes. Forgers were constrained since Somalis would only accept denominations issued prior to 1991; larger denomination notes could not be issued profitably. Although the exchange value of the 1000 Somali shillings note fell from $US 0.30 in 1991 to US$ 0.03 in 2008, the purchasing power eventually stabilized, as the exchange value equaled the cost of producing additional notes. 
So even money forgers equate the margins: they continued to create counterfeit notes until the marginal cost of production equaled the marginal benefit. That is, the Somalia notes fell in value until they were worth no more than the paper, ink, printer, electric, shipping, and other costs required to make them. That sounds a lot like commodity money to me. And this led to a stable monetary environment for Somalia despite the failed state. This fascinating monetary experiment runs contrary to the common monetary history of commodity (or commodity-backed) money turning into fiat money. In Somalia, the government fiat money turned into private commodity money. I look forward to seeing what lessons JP Koning, the monetary historian of the blogosphere, draws from this experience. 

8 comments:

  1. David,

    Thanks for the idea. The Luther/White papers on Somalia are great. I read the first one a while back. Maybe if I have time next week I can cook something up on the subject.

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  2. Thanks for the kind words, David. I have an updated version of the monetary mechanism paper that will be posted soon.

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  3. Great, I am going to add it to my money and banking reading list.

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  4. David, this is off-topic but I was wondering if there was a textbook (or book) that adequately expressed your views on macro. Or, what textbook do you use for intro/intermediate macro?

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  5. RV, that is a great question. There is no one textbook, but when I have taught intermediate macro I have used and like the Abel, Bernanke, and Croushore text. For Principles of Macro I use the Cowen/Tabarrok. Josh Henrickson and I have talked about writing a monetary economics textbook some day.

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  7. I hope you do. I used Abel & Bernanke (sans Croushore) a few years ago, and recently picked it up again. Perhaps it's my exposure to market monetarism, but I found A&B somewhat hard to square with the way my thinking has developed...

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  8. RV, here is one reason I do like ABC. When it does the ISLM it includes the FE line, which allows me to talk about the natural interest rate. Not all Market Monetarists think this is an important point, but I do. No book is perfect, but ABC is closet to what I want and is accessible by the type of students I typically teach at a large state university.

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