The Somali Shilling

by Finbar Feehan-Fitzgerald

The Austrian School has consistently argued that a “traditionalist” approach to inflation yields the most accurate understanding of the causes, and the cure, for inflation. Austrian economists maintain that inflation is, by definition, always and everywhere simply an increase in the money supply over and above the demand for money, which in turn leads to a higher nominal price level for assets, as the real value of each monetary unit is eroded, losing purchasing power and, thus, buying fewer goods and services.

Given that all major economies currently have a central bank supporting the private banking system; money can be supplied into these economies by way of private bank-created credit, or debt. Austrian School economists, therefore, regard the private banks and the state-sponsored central bank as the main cause of inflation in an economy, where the bulk of the money supply is created through debt.

Due to the disruptive and dislocating effects of inflation, many Austrian School economists support the abolition of central banks, and advocate instead a return to money based on a commodity. Money could then only be created by finding and putting into circulation more of the commodity. In the absence of a return to commodity money, many Austrian analysts predict catastrophe for the economy.

In 1991, the collapse Mohamed Siad Barre’s Democratic Republic of Somalia, and subsequent descent into chaos, saw the emergence of a new commodity currency; a currency worth its paper, ink, and transport costs.

Prior to the collapse of the state, the national currency of Somalia was the Somali shilling (SoSh). The value of the SoSh had been diminished by a reckless monetary policy pursued by the central bank in an attempt to gain seigniorage for the government. Just how reckless this policy was is made clear by the fact that the total quantity of currency in circulation in 1985 was 3.8 billion SoSh, but had increased to more than 155.7 billion SoSh by 1990. Indeed, immediately preceding the collapse of the state, the central bank was looted and ‘’lower denomination banknotes littered the streets outside the Central Bank for days’’ such was their worthlessness (Abdurahman 2005, p. 56).

Not supprisingly, the collapse of the state saw the collapse of all governmental institutions – including the central bank. Since the collapse of the Somali Central Bank in 1991, four currencies have gone into circulation in Somalia: the Na’ Shilling, the Somaliland Shilling, the Balweyn I, and the Balweyn II.

The Na’ Shilling was introduced in northern Mogadishu in 1992 and again reissued in 2001. It is a distinct note that does not resemble the pre-1991 note. It has, however, failed to gain widespread acceptance, and instead circulates mainly within a single clan.

The semi-autonomous region of Somaliland has established its own central bank, and issues its own currency, the Somaliland shilling, intended to be circulated exclusively, and act as legal tender within the territory.

In 1997, a south Mogadishu leader issued the Balweyn I note, which is a forgery of the pre-1991 central bank notes. Similarly, a Puntland administration (central bank) has issued the Balweyn II, another forgery of the pre-1991 SoSh. Both notes are widely accepted forgeries of the pre-1991 SoSh.

The Somali public have, despite the collapse of and, until recently, continued absence of a Somali central bank, not changed their expectation of the currency’s exchange value.

Although the Balweyn notes can be distinguished from each other and the pre-1991 currency, the Somali public have treated them all as the same currency. This has led to the peculiar situation where, rather than competition limiting the amount of inflation and seigniorage in each currency, there has been competition for seigniorage in the same currency. Nonetheless, rather than leading to unbounded inflation, Somalis have limited inflation by refusing to accept anything larger than the pre-1991 denominations. This has placed an upper limit on inflation, and has actually allowed for a relatively stable monetary system to emerge.

It has been estimated that it costs $0.03 to print and import new bank notes into Somalia. When the first Balweyn notes began to circulate in Somalia in 1997, they traded for about $0.12. By late 2001, competition for seigniorage had pushed the value of a 1000 SoSh note down to approximately $0.04. This has transformed the Somali Shilling into ‘’commodity money,’’ worth its paper, ink and transport costs. A scenario Milton Friedman (1960, p. 7) predicted decades earlier when considering how such a monetary system might work stating:

So long as the fiduciary currency has a value greater than its cost of production – which under conditions can be compressed close to the cost of the paper on which it is printed – any individual issuer has an incentive to issue additional amounts. A fiduciary currency would thus probably tend through increased issue  to degenerate into a commodity currency – into a literal paper standard – there being no stable equilibrium price level short of that at which the money value of currency is no greater than that at which the money value of currency is no greater than that of the paper it contains.

This has meant further printing of the money is no more profitable than any other investment. So after an initial bout of inflation, prices have stabilised, and the currency has, in fact, appreciated slightly, as imports of new reprints has slowed.

Nonetheless, although the currency provides some stability, it is not without its problems. To make purchases of any significant size, large bundles of money are needed. For this reason, it is used alongside US dollars. The Somali people’s use of the currency in absence of a state monopoly, however, is testament to its relative success; as is the fact that it circulates with easy convertibility 50 km within the Ethiopian border; whereas the Ethiopian Birr has little circulation in Somalia.

 References

Abdurahman, Mohamed Dalmar. 2005. Monetary and Exchange Rate Policies, 1960-2001: The Experience of Somalia. Bloomington Authorhouse.

Friedman, Milton. 1960. A Programme for Monetary Stability. New York: Fordham University Press.

Finbar Feehan-Fitzgerald

http://mises.org/daily/6060/Private-Law-in-the-Emerald-Isle