As the US escalates its military intervention in Somalia and drought and disease continue to decimate the country, a surprisingly resilient and resourceful currency system teeters on the verge of an overhaul. And in the process, it teaches us a lesson about cryptocurrencies.
JP Koning’s piece from last week on the Somali shilling is an excellent read, touching on the history, economics, philosophy and sociology of currency. He takes a deep look into the monetary system of a country without a government and without a central bank.
In the Somali economy, the old shilling notes have continued to circulate for the past 20 years, along with new, counterfeit notes. The interesting part is that the counterfeit notes are easily distinguishable from the old ones, but are generally accepted anyway. They became part of the currency, although they were not issued by any central bank. Counterfeiters created currency.
This shines a light on the tenuous nature of central bank-issued paper. Currency is what we say it is. In the absence of a central bank to enforce acceptance, we can designate something else as our coin if we wish.
It also underlines the resilience of money. With no central bank, why were the shilling notes accepted at all? JP presents some theories, all of them compelling: while inertia probably played a big part (might as well continue doing what we’ve always been doing, no reason not to), the one that I find most intriguing is that Somalis always assumed that a central bank would one day re-emerge and grant validity to the old (and the counterfeit) notes.
That is what is happening. A central bank formed in 2009, and, with the help of the IMF, is planning to buy the counterfeit notes from the public. It remains to be seen at what price, but the concept of validating whatever currency is currently in circulation (because hey, we weren’t here, so whatever) highlights the philosophy that money is whatever the central bank says it is.
Or maybe not. US dollars are also accepted as currency, especially in the cities. In fact, dollars are the most common medium of exchange. So, again, money is what the people say it is.
Counterfeit dollars are also in wide circulation. They, obviously, won’t be tolerated (since that’s not up to the central bank, they have no sovereignty over the US currency). According to CNBC, the US Secret Service has been brought in to help weed them out.
The case also highlights the need for some sort of monetary control. The enthusiasm of the printers of fake shilling notes led to inflation in the double digits and a currency in which over 95% of the notes in circulation are “unauthorized”.
Although, if there was no central bank, who’s to say the new notes were “fakes”? They weren’t treated as such by the users. There was no official authority to say that they weren’t real. So, why are we calling them “counterfeit” rather than “alternative”?
Perhaps because of the legacy of central bank power. Perhaps because the idea of anyone printing currency is too chaotic for us to process. Perhaps because experience has shown us that the “common good” requires a central authority.
This could go some way toward explaining the psychological resistance to bitcoin and other cryptocurrencies. We are so used to money being authorized by official institutions, and so averse to the idea that anyone can come in and complicate things, that we instinctively reject the idea of a viable alternative.
You’ll have heard the old adage that to really understand how something works, you need to break it. Thus a society ravaged by violence, famine and a lack of public infrastructure ends up revealing what money is and how it works. It can also teach us all that, while the current system is faulty, it is better than no system at all.
In addition, it shows that bitcoin is unlikely to replace national currencies. Governments, even fragile ones, like to exert some control over monetary policy. However, just as the US dollar ended up circulating along with the Somalian shilling, bitcoin can co-exist. In the end, the market will decide which currency it prefers.