Money/Stateless Somalia
This case study summarises William J. Luther’s account of the monetary mechanism that operated in Somalia after the collapse of its central government in 1991. It examines how note-production incentives affected a currency that continued to circulate without a central monetary authority. Page references below follow the 26-page author manuscript revised on 26 August 2015; the journal article has different pagination.[1]
Continued acceptance and the denomination constraint
Old Somali shilling notes continued to circulate after the central government collapsed. Unofficial issuers, including businessmen and regional authorities, contracted with foreign printers for copies of familiar notes. Users generally accepted denominations that had circulated before 1991, while lower-value notes became impractical. Production therefore concentrated on the 1,000-shilling note, the largest established denomination. New Somali shillings circulated in a limited part of North Mogadishu, but did not displace the older currency throughout the country.[2]
Luther distinguishes the continued acceptance of money from the regulation of its supply. One explanation of continued acceptance stresses established expectations that other people will accept the notes; another stresses hopes that a future government would honour them. His supply mechanism requires continued acceptance, but does not resolve that disagreement simply by demonstrating that the notes retained value.[3]
Production costs as a restraint on issue
Printing and importing a note was profitable while its exchange value exceeded its production cost. Additional issue increased the supply of notes and reduced their value, progressively eliminating that profit. Because users generally refused unfamiliar higher denominations, an issuer could not obtain wider purchasing power merely by adding zeros to a note. Luther argues that this combination could bring the value of a 1,000-shilling note down to the cost of producing and delivering another acceptable note.[4]
In his account, an increase in demand for notes raises their value and encourages production. A decrease in demand initially reduces their value; producers then reduce or stop new issue while worn notes disappear from circulation. Contraction therefore depends on physical attrition rather than redemption or a promise to buy notes back. The adjustment need not be immediate. A permanent reduction in production costs would permit further issue and lower the currency’s long-run value.[4]
Luther compares the arrangement to a commodity standard and describes the notes as a possible form of synthetic commodity money: they have no nonmonetary use, but supply responds to production incentives. The analogy concerns the supply mechanism; it does not mean that the notes are redeemable in another commodity.[5]
Historical evidence and the long transition
The US-dollar value of the 1,000-shilling note fell from approximately $0.30 in 1991 to $0.03 in 2008. Luther compares monthly FSNAU exchange-rate data from January 1995 to January 2013, covering 40 markets in 16 regions, with estimates of printing and transport costs. Figure 1 plots the notes’ value in current US dollars.[6]
Using printing costs of about $0.01 and assumed transport costs of about $0.02 per note after 1999 gives an estimated total cost of $0.03. On that assumption, convergence occurs only in 2008. Raising the transport-cost assumption would imply an earlier convergence, but would require a further explanation for the lower exchange value after 2008. Luther acknowledges that cost evidence is sparse and largely secondhand, and that direct evidence of printing costs after 2008 is unavailable.[7]
He considers several possible reasons for slow adjustment: initial discounts on unfamiliar new notes, difficulties finding foreign printers, financing requirements and issuers’ efforts to introduce notes gradually. He also interprets the subsequent appreciation of the currency as consistent with the increased expected costs of forgery when central authority began returning. These are explanations offered for the historical pattern, rather than evidence of immediate or unconditional stability.[8]
Conditions and welfare implications
The mechanism depends on continued demand for the currency, resistance to higher denominations and sufficiently stable production costs. Luther explicitly allows that users might abandon cumbersome, low-valued notes, in which case their value could fall to zero. Acceptance of larger denominations or reductions in production costs could also undermine the proposed restraint.[9]
Luther rejects the arrangement as a first-best monetary system. The lengthy depreciation makes it difficult to recommend adopting such a standard on welfare grounds. His more favourable conclusion concerns Somalia after those transition costs had already been incurred and while feasible institutional alternatives remained constrained. Later exchange-rate stability therefore does not establish that the transition was costless or that the system should be adopted elsewhere.[10]
See also
References
- ↑ William J. Luther, “The monetary mechanism of stateless Somalia”, Public Choice 165(1–2), October 2015, pp. 45–58; doi:10.1007/s11127-015-0291-6; author manuscript on SSRN, revised 26 August 2015.
- ↑ Luther, author manuscript, section 1, pp. 4–10, including notes 8–16.
- ↑ Luther, author manuscript, pp. 4 and 9, including note 7.
- ↑ 4.0 4.1 Luther, author manuscript, section 2, pp. 10–14.
- ↑ Luther, author manuscript, pp. 10–14, especially p. 14.
- ↑ Luther, author manuscript, abstract and section 3, pp. 15–21, table 3 and figure 1.
- ↑ Luther, author manuscript, pp. 15–16 and 19.
- ↑ Luther, author manuscript, pp. 19–21 and notes 21–26.
- ↑ Luther, author manuscript, pp. 11–14.
- ↑ Luther, author manuscript, section 4, p. 22.
