
Bringing back the Somali shilling - gwern
https://jpkoning.blogspot.com/2017/03/bringing-back-somali-shilling.html
======
nowarninglabel
This highlights well some of the conversations I have with folks who want to
replace fiat currencies with cryptocurrencies. Sure, one can design a better
monetary system, but that doesn't mean people are going to want to use it.

You have to incentivize and enable people in order to get them to change.

M-PESA and the similar mobile money telecom products are doing more for
digitizing and disrupting fiat currencies than cryptocurrencies are currently.
Bitpesa is having some success as a bridge between the two, but it's going to
be a struggle for any cryptocurrency or token to surpass the usability of
digital currencies tied to the devices they already use and th kiosks /
storefronts around them.

~~~
runeks
> You have to incentivize and enable people in order to get them to change.

It's also possible the incentive will come by itself: if advocates of
commodity money (money with an inflexible supply/stock) are right, inflation
will occur in traditional currencies sooner or later. No better incentive to
store your value in bitcoins than seeing the value you have in traditional
currency slowly erode.

Time will tell whether this will be what introduces regular folks to
cryptocurrency. If I were living in Argentina or Venezuela, it wouldn't take
much convincing to get me to store at least part of my savings in
cryptocurrency.

~~~
lmm
I figure cryptocurrencies work like collectibles, which also naturally
deflate. Compare artworks or antiques or old wine.

What I've never quite understood is how those things align with investment. If
I have $1000, can I predictably make more money by buying $1000 worth of art
than $1000 worth of stock? If so, why? Buffet's "you can fondle the cube, but
it will not respond" would seem to stand, but at the same time artworks and so
on seem to only be getting more expensive.

~~~
runeks
If stuff gets cheaper to produce, and there's a fixed stock of money, I see no
other outcome than deflation. In this case prices simply reflect that goods
can be produced more efficiently.

So, if USD inflation is, say, 5% and bond yields also 5%, then you would
indeed make no money by holding USD-denominated bonds. But I would argue the
problem is with USD inflation in this hypothetical, since bonds also yielded
5% during the international gold standard and yet we had 2% deflation.

I would also argue that money _is_ a sort of collectible; the only difference
is that it's highly liquid. A painting might very well increase in value, but
if you need to sell it quickly (as opposed to waiting six months for the right
buyer) you can easily end up losing money -- if you can even find a buyer on
short notice.

------
cup
This article ignores the fact that no one in Somalia uses the shilling any
more^. In fact no one really uses money any more. Most banking and financial
transactions are done using mobile credit, similar to Kenyas M-PESA.

This has significant advantages for Somalis. Mohamed in Mogadisho can ask his
cousin Mohamed in Minnesota to pay for his meal and all Minnesota Mohamed has
to do is transfer the money on his phone.

Why would Somalis go back to the shilling? If anything they'll just go back to
the USD which has been the staple far longer than anything else.

^Ok I'm being excessive. It is in use but its use is made redundant by access
to mobile technology. Those at the poorer end of society still depend on the
shilling but even the nomadic pasturalists these days have mobiles and conduct
their trade using mobile money.

Edit: One has to wonder if the new TFG in Somalia is re-introducing bank notes
to try to damage the hold that the big Telcos have on Somalias financial
institution. Considering some of the Telcos are in bed with Al Shabab It's
probably in their interest to curtail their power.

~~~
dmoy
I think the article is in violent agreement with you (at least the latter half
of it). It in fact argues just that - they shouldn't go back to the shilling,
precisely because nobody uses it (and instead they should go
dollar/mobile/etc).

~~~
cup
Oh you're right. Strange that the full page didn't load on my phone. My
mistake, thanks for pointing that out.

~~~
an_account
I'm sure you read this as well after it loaded, but the article does mention
that in urban areas most payments are mobile. It's the rural areas using
conferfeits.

------
gumby
> As I pointed out in my old post, there's an old and nagging question in
> monetary economics that has never been satisfactorily answered: why is fiat
> money valuable?

I've always been surprised by questions like this. Why is (say) gold valuable?
The gold supply fluctuates unpredictably depending on gold strikes and without
any consideration for creation of underlying economic value (so is inherently
inflationary, except for gold strikes). The big gold strikes of the 19th
century were each associated with economic boom/bust. But the underlying
utility of gold is low.

Some people complain about a central bank "controlling" the money supply
(let's not forget that you "create" money when you use your credit card and
"destroy" it when you pay your bill), so monopoly there. That's a fiat too.

In terms of value, the shilling case makes more sense if you think of money in
its role of signalling (there are lots of bananas available right now so the
price is going down -- don't bother to go harvest some more until the price
goes up) rather than as a store of value. That's why people don't worry about
counterfeits. Presumably the actual measure of wealth there is not monetary --
perhaps land, more likely some kind of family/community strength.

As robots drive the marginal price of goods and services very low and humans
live on UBI, the signalling role will become more significant than the wealth
role.

~~~
hashkb
> let's not forget that you "create" money when you use your credit card and
> "destroy" it when you pay your bill

Can you elaborate on that? My understanding is: when you swipe your credit
card, Visa loans you money and pays it to the merchant. When you pay your
bill, Visa gets money from your bank. How is that creation or destruction of
money? Seems like value is conserved to me.

~~~
ithkuil
I believe the parent poster was mentioning the modern ability of commercial
banks to actually create money through loans. There are many places to read
about it, I quickly found [http://positivemoney.org/how-money-
works/advanced/how-commer...](http://positivemoney.org/how-money-
works/advanced/how-commercial-banks-create-money/) but there might be better
sources

~~~
hashkb
That article seems like an oversimplification.

Isn't the bank is still on the hook for its liabilities? It might be playing a
dangerous game, but it's betting against a bank run (which are rare) and on
itself having enough liquid cash on hand to handle withdrawals during
reasonable circumstances. We all know banks invest our cash (in loans and tons
of other vehicles) in order to earn their profits (and our interest.)

------
captainmuon
I crazy idea I had was using counterfeiters to mint money.

Make it so that the manufacturing cost of a $100 bill is $100 minus the amount
you want the counterfeiter to make, so for $1 say $99. Include tons of
security features, use silk, gold, diamond dust, whatever. Then just let the
market do it's thing.

Have money testing machines that shred fake bank notes at sight. You may or
may not want to keep punishments for using fake bank notes. You just want to
keep a little bit of pressure to keep the manufacturing costs so high that you
control monetary supply. (Now that I think about it, supply of bank notes !=
monetary supply. You'd have to physically print A LOT to shift the value of a
currency notably.)

There are a ton of reasons why this wouldn't work or wouldn't be a good idea.
For one, a complete waste of resources. Also, you wouldn't have as much
control over the money supply. And advances in technology change the
production rate and profits from printing rapidly.

All of those caveats also apply to Bitcoin, of course.

~~~
petters
That is similar to have e.g. gold coins as currency. That is inefficient
because it is hard to create enough of the currency for the economy to
function optimally. It is also quite expensive.

~~~
r00fus
Not only that, it's relatively easy to counterfeit - a modern currency note is
probably harder to counterfeit (easier to validate) than a gold coin.

~~~
logfromblammo
I wouldn't say that it's _easy_. You at least need some tungsten, uranium-238,
rhenium, platinum, iridium, osmium, or chengdeite (Ir3Fe) most of which are
nearly as expensive to obtain as actual gold. Any other material that is
denser is probably also radioactive, and only available from nuclear fission
reactors.

    
    
      Os  22.59 kg/L  $13k/kg   $294k/L
      Ir  22.56 kg/L  $22k/kg   $496k/L
      Pt  21.45 kg/L  $29k/kg   $622k/L
      Re  21.02 kg/L  $69k/kg  $1450k/L
      Au  19.30 kg/L  $40k/kg   $772k/L
      W   19.25 kg/L  $50/kg    $960/L
      U   19.1  kg/L $150/kg   $2900/L
    

The obvious choice for counterfeiters would be tungsten. A gold bar that has
been hollowed out and filled it with tungsten is detectable with ultrasound.
Counterfeit tungsten coins with known dimensions can be detected by measuring
electrical resistance, or by doing a "ring" test, which is striking the coin
with a hard object and listening to the sound it makes. The difference between
the sound of a gold coin and a tungsten fake is clearer than the difference
between a genuine B20 bell-bronze crash cymbal and a cymbal made from cheap
brass. The gold coin will ring, while the tungsten coin will barely sustain a
dull thunk.

The other noble metals are available in extremely limited supply, and usually
comparable in value to gold or platinum anyway.

Devices that test for the density of gold coins are already cheap and widely
available. Using a Fisch device and dropping the coin onto a countertop is
just as easy as using the counterfeit detector marker, checking the watermark
and color-shift inks, and looking at the security strip under a UV light.

------
smitherfield
If the central bank is buying counterfeits with the new currency, won't that
encourage the creation of more counterfeits just so they can be exchanged?

~~~
protomyth
The article emphasized that the counterfeit currency cost about the same
amount to make as the actual trading value of the currency.

~~~
smitherfield
Yes, but that's just begging the question — where is value being created in
this equation?

~~~
lmm
Once there's an established currency it becomes practical to make notes that
are worth a lot more than they cost to produce, which is a direct cost saving
for the same amount of currency in circulation and gives a currency that's
more practical (don't have to carry as many notes around). And having the
money supply under deliberate control should lead to more consistent inflation
which makes it easier for individuals and businesses to plan/budget etc.

------
colanderman
Maybe I'm slow but I'm missing the proof-of-work aspect here? The article
certainly doesn't mention it. Are you (gwern) referring to the work of the
counterfeiters?

~~~
gregschlom
The bank notes are valued at what it costs to make them (paper, ink, shipping,
plus small margin). If you want to do the work it takes to make one, you can
make one and the note will be accepted on the market.

------
laex
Why "proof-of-work"? Also, does it have any relation to blockchain's proof-of-
work concept?

~~~
alister
The article doesn't use the words "proof-of-work" \-- it's the person who
posted it to HN who gave that title. But I see the analogy.

A proof-of-work currency (1) prevents uncontrolled inflation or devaluation,
(2) should be difficult to generate the currency (i.e., a lot of work), (3)
but easy to check the currency (i.e., check that the work was done).

The Somalias presumably have a threshold of quality at which they'd accept a
fake shilling. I'm sure they wouldn't accept a blank piece of paper. They
probably wouldn't accept a black and white photocopy. At some point, the
quality is good enough[a] that they'd accept it even knowing that it was not
produced by the government.

That satisfies the basic idea of proof-of-work: (1) It prevents out-of-control
inflation, (2) involves a fair amount of work (professional printing), (3) but
you can decide at a glance if it's good enough to accept it.

[a] Just for interest, this is what a real one looks like:
[http://banknote.ws/COLLECTION/countries/AFR/SOM/SOM0037.htm](http://banknote.ws/COLLECTION/countries/AFR/SOM/SOM0037.htm)

------
IanDrake
I always hated fiat currency, but I think I've come to grips with its
necessity. The one thing a gold standard currency can't seem to do is control
demand for it, thus its value can skyrocket.

When you think of currency as a commodity, under a spiking demand their is no
way to control supply so you get deflation.

Rampant deflation maybe more destructive than inflation unless negative
interest rates were to become socially acceptable, which I don't think is
realistic.

Without negative interest rates deflation makes repayment of loans impossible
and rewards hoarding which will continue the deflation cycle.

~~~
yuhong
The thing I really dislike is how the US economy is based on credit and
consumption. The Federal Reserve probably basically regulate how fast money is
printed so it has value, which is then often used to import goods from for
example Japan or China. These countries then buy treasury bonds.

------
fiatjaf
Gold coins are a proof-of-word currency.

~~~
bbcbasic
Proof of weight?

------
dredmorbius
Money as a concept is interesting, and many of our conventions for thinking
about it don't stand up well to scruitany. A few realisations I've had over
the past few years:

1\. Prices are ratios. A price is the ratio of how much X you will exchange
for some Y. "Two dollars per dozen eggs" is the ratio of dollars to eggs.
(William Stanley Jevons observed this in the 19th century.)

2\. Money is, generally, _the most universal_ exchange medium, within a given
region. In this article, Somalia utilises _both_ US dollars _and_ Somali
shillings.

3\. Most currencies take their names from either units of _weight_ or of
_quality_ : Weight: Pound, peso, mark, shekel, livre, penny, denarius (and
dinar, dinero, etc., subdivision of 10), dirham (also drachma, from dram). The
Japanese ryo.

For _quality_ : dollar (referring to the high-quality silver of Jochimstaller,
Germany), franc (Francorum Rex), ducat (from ducato, related to _duke_ ).
References to royal imprimateur are common: royal, real, crown, kron, kroner,
etc. Guilder, Guinea, gineih, zloty (from gold). Toponyms (afghani, bolivar,
etc.) are also common, and refer to the authority of the issuing nation.
Sterling (star-like silver). Ruble and kopek both refer to the cutting off of
slivers of silver from a bar. Rupee again refers to silver.

There are some exceptions, of course. Scudo and piaster refer to shape, as do
yuan and yen. Florin refers to the flower inscription (arguably a mark of
quality or merit).

4\. Whilst Gresham's Law applies -- poorer quality coin _of a given
denomination_ will drive out higher quality, there is _also_ quite frequently
a flight _to higher-quality alternative currency_. So: in Somalia, the
Shilling is used for general trade, but dollars for larger transactions, where
both value and acceptability matter.

5\. Many regions and periods have seen what were effectively multi-currency
systems. With stable rates of exchange between copper, silver, and gold, the
English currency Adam Smith describes (at ... great ... length) in _Wealth of
Nations_ is actually one of _three independent currencies_ largely used for
different types of transactions: copper for retail, silver for wholesale, and
gold for finance. The farthing (four-thing -- one fourth of a penny) was
nearly 1/1000th the value of a pound sterling (240 pennies, or 960 farthings).
Twenty pounds was a good income for a labourer. If you consider a farthing as
essentionally a dollar, then those 20 pounds are an annual income of about
$20,000.

6\. There are multiple drivers for currency value. Clamshells (the origin of
"clams" as a term for money) were used in the US for small transactions.
Obtainable (with some work), exchangeable, relatively easily accounted for.
Convention, agreement, assurances of legal currency, mandates for tax payments
in currency, standards for international exchange, commodities trade (think
oil), etc., all play a part.

7\. Virtually all currencies, _specie or fiat_ , devalue over time. Again,
Smith addresses this ... at length.

------
jordanb
As an aside: I've been waiting for Libertarians to declare Somalia to be
heaven on earth. I wonder why they've never picked up on the obvious real-
world example of a nation with no central state government with a monopoly on
violence?

~~~
baddox
You probably haven't looked that hard. Somalia case studies are ubiquitous in
libertarian (anarchist-leaning) circles. The general claim seems to be that,
yeah, stateless Somalia is way worse than high-functioning governments like
the United States, but better than its neighbor states and better than it was
before it became stateless.

Leeson's article is probably the best on the topic:

[http://www.peterleeson.com/Better_Off_Stateless.pdf](http://www.peterleeson.com/Better_Off_Stateless.pdf)

~~~
redblacktree
> Somalia is way worse than high-functioning governments like the United
> States

Yet my libertarian friends on Facebook all seem to want to tear the enitre
government down.

~~~
afsina
What many libertarians want is decentralization. As much as possible. They
probably want to get rid of all powerful Federal Government but local
governments (as small as possible) and confederations are usually fine.

~~~
thanksgiving
And now we will soon have "separate but equal" restrooms in Texas.

I find state rights advocates to be the worst™ people in the world. They
advocate for state rights when it suits them. Absolutely hypocritical bunch.

We've decided as a nation that there are some rights and responsibilities that
we have regardless of where we live within this nation. How many times do we
have to fight for civil rights?

~~~
whatshisface
You're making the strange assumption that the federal government will always
be be more in line with your own political views than your state government.
After all, at the end of the day a hard-right state is less bad for liberals
than a hard-right country, because only in the first case can they try to find
a job in California.

~~~
lostcolony
Yes, he's assuming the government will not be terrible to live under. But
saying "at least with local government, terrible governments will be
localized" is a copout. Can we have non-terrible governments? If so, it makes
sense to try and ensure everyone has one.

~~~
afsina
To me this is like telling "Government will be right for everyone this time,
if we tweak the parameters right". Applying rules of Empiricism to large scale
governing will just make things worse as long as people have very different
world views.

Besides, locality has inherent advantages such as familiarity, cultural
similarity and accountability. So at least some local governments will be
probably suitable for your liking.

~~~
thanksgiving
I've lived in a small, rural town in Texas and a big city in New Jersey. While
the dynamics of local power are very different, I never felt like anybody in
power was accountable to _me_ (I am a nobody).

The power of two or three wealthy families is readily visible almost like a
movie in a small town. The power structure in a bigger city from what I can
gather is a little bit more complex since there are more players. However, I
don't think "the powers that be" in a local level are any more accountable to
the governed in a localized setting than in a national setting.

I mean think about the last HOA you lived in and tell me you felt the power
structure there was "fair".

