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Bringing back the Somali shilling

177 points by gwern 9y ago

cup 9y ago
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 9y ago
  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 9y ago
    Oh you're right. Strange that the full page didn't load on my phone. My mistake, thanks for pointing that out.
    - an_account 9y ago
      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.
nowarninglabel 9y ago
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.
- 1812Overture 9y ago
  It's actually similar to a cryptocurrency in a lot of ways. Decentralized, based on a common algorithm (the design of the 1000 Shilling note), with a price eventually stabilizing on the mining (counterfeiting) cost.
- isubkhankulov 9y ago
  you're comparing a phone sms based payment method to bitcoin. you're missing the charactistic that gives it its killer use case: digital scarcity. the uncensored payment method on top of scarcity is just icing on the cake.
- runeks 9y ago
  > 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 9y ago
    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.
fiatjaf 9y ago
Gold coins are a proof-of-word currency.
- bbcbasic 9y ago
  Proof of weight?
captainmuon 9y ago
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.
- jjawssd 9y ago
  In practice at scale a high quality replica is far cheaper to make than the note it denominates
- statusgraph 9y ago
  This is precisely what is happening in Somalia (as noted in the article), although in the inverse: the value of the money fluctuates (down) with the cost of production.
- deleted 9y ago
  [deleted]
- hueving 9y ago
  Isn't that basically the same as trading gold coins?
- petters 9y ago
  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.
omegaworks 9y ago
>Panama has been using the dollar for decades, and this hasn't prevented it from becoming one of Central America's most successful n̶a̶t̶i̶o̶n̶s̶ tax havens. https://www.theatlantic.com/business/archive/2016/04/panama-tax-haven/476766/ https://www.theatlantic.com/business/archive/2016/04/panama-... Fixed that for you :) Control over your currency is critical for maintaining national sovereignty, and the author waves it away like nothing. Just take what the EU forced upon Greece: https://en.wikipedia.org/wiki/Greek_government-debt_crisis_countermeasures#Economic_and_social_effects_of_austerity_measures https://en.wikipedia.org/wiki/Greek_government-debt_crisis_c...
- 5thaccount 9y ago
  Why restrict it to the nation then? Why not city currencies? There are lots of countries - like India and China - where the gap in income between regions is larger than between countries. It's a weird concept money, and I wonder what the right level is. I doubt it is optimised at the country level, but then a "better" notion like demographic similarity may be impractical, even if better, e.g. one currency for Northern Italy and one for Southern may be difficult to sell even if preferable, and ditto a unified Basque/southern French currency, or an eastern seaboard Yuan and a country China currency.
  - lmm 9y ago
    As a Londoner I suspect we'd all benefit from having different monetary policy in London and the rest of the UK. The argument I've heard is that fiscal and monetary policy have to be applied together, so it makes sense to have currency controlled at the same level as taxation.
- pseingatl 9y ago
  Panama only ever had its own currency for a few years beginning in 1941. When Panama separated from Colombia, it used dollars. An anti-American president was elected and proposed a national currency. No one accepted it. He was soon deposed later. Panamanian coins are the same size, weight and composition of U.S. coins and are minted by the U.S. mint. Panama retains the Kennedy-size half dollar and did not adopt the new US $1 coin.
jordanb 9y ago
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 9y ago
  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
  - crdoconnor 9y ago
    Most of the metrics which he's looking at which improved under southern Somalia's anarcho-capitalism happened because of an increase in remittances. I don't think anybody's arguing that if Somalis didn't have legions of relatives abroad sending them money the humanitarian disaster would have been even worse. The security implications of living with a system of competing warlords (or 'insurance companies', in ancap terminology) are also massively glossed over.
  - redblacktree 9y ago
    > 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.
    - lowpro 9y ago
      There is a difference between Anarchy and libertarianism. Most libertarians want less government, not no government.
      - 9y ago
smitherfield 9y ago
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 9y ago
  The article emphasized that the counterfeit currency cost about the same amount to make as the actual trading value of the currency.
  - an_account 9y ago
    But the article also claims that the central bank would have to buy the counterfeit (and legit) currency at a premium, so that it's worth it to the citizens to exchange.
    - protomyth 9y ago
      The premium looked pretty small and I would imagine the buyback would probably exclude anything that wasn't in circulation at the time it happened shortening the time table for something that needs to be shipped in.
  - smitherfield 9y ago
    Yes, but that's just begging the question — where is value being created in this equation?
    - protomyth 9y ago
      I could see value if they went to the dollar in their conversion but I, like the article, am unsure what the value in new shillings are.
    - lmm 9y ago
      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 9y ago
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 9y ago
  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 9y ago
Why "proof-of-work"? Also, does it have any relation to blockchain's proof-of-work concept?
- alister 9y ago
  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
gumby 9y ago
> 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.
- snarf21 9y ago
  Very interesting comments. I've been thinking a lot about UBI and the one thing I still can't work out is if we are going to just have to print tons of money to be able to make it actually universal (meaning not for people < $50K). Some will still be creating real value for their income so how much is that money devalued by the amount that is given for free via UBI? Will this just cause massive inflation? (I guess I should take some economic theory classes somewhere..)
  - skywhopper 9y ago
    Consider that in many western economies, inflation has been perilously low for a decade or more. Japan, Europe, and the US all have extremely low inflation today. This leads to some problems we don't usually hear economists worry about--namely that debt-financed personal investments like a home mortgage or a student loan become much more onerous to people who have taken on that debt in the last 20 years. Since such debts tend to have fixed payments over fixed periods, a reasonable rate of inflation would ensure that the real cost of paying off those debts goes down over time, and even if everything else gets more expensive, you still end up with more discretionary income over time, even if your real wages never go up compared to inflation. But with 1% or lower inflation, those debts become a decades-long constant drag on an individual's discretionary income, which may never grow. For real assets, such as homes, inflation also ensures that homeowners actually accrue equity over time, in addition to shrinking debt payments. All of that is to say, we could do with a couple of decades of 3-4% inflation. Implementing UBI very likely would trigger some inflation, but if there's one thing central banks know how to do and have the power to do, it's clamping down on inflation. Other economists have proposed less direct methods of giving money, from burying caches of cash (to create employment and stimulate investment), to dropping money from helicopters. Sure, those examples were tongue-in-cheek, but you can kill two birds with one stone by using government money to invest in rebuilding infrastructure, building high speed rail, curing cancer and diabetes, paying for more and better public education from pre-K through college. That money pays off in multiple ways: more people have jobs, you stimulate moderate inflation and wage growth, and in the end you have all new infrastructure, new treatments for disease, and a better educated population. Better still, all that money will get spent by all these people with more money and better jobs on buying better housing, newer cars, better food, more luxuries, and that money can make our corporations more profitable and faster-growing... Yet I fear we are all headed the other direction on these things.
dredmorbius 9y ago
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.
deleted 9y ago
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IanDrake 9y ago
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 9y ago
  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.

177 points by gwern 9y ago

cup 9y ago

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 9y ago
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 9y ago
  Oh you're right. Strange that the full page didn't load on my phone. My mistake, thanks for pointing that out.
  - an_account 9y ago
    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.

nowarninglabel 9y ago

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.

1812Overture 9y ago
It's actually similar to a cryptocurrency in a lot of ways. Decentralized, based on a common algorithm (the design of the 1000 Shilling note), with a price eventually stabilizing on the mining (counterfeiting) cost.
isubkhankulov 9y ago
you're comparing a phone sms based payment method to bitcoin. you're missing the charactistic that gives it its killer use case: digital scarcity. the uncensored payment method on top of scarcity is just icing on the cake.
runeks 9y ago
> 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 9y ago
  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.

fiatjaf 9y ago

Gold coins are a proof-of-word currency.

bbcbasic 9y ago
Proof of weight?

captainmuon 9y ago

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.

jjawssd 9y ago
In practice at scale a high quality replica is far cheaper to make than the note it denominates
statusgraph 9y ago
This is precisely what is happening in Somalia (as noted in the article), although in the inverse: the value of the money fluctuates (down) with the cost of production.
deleted 9y ago
[deleted]
hueving 9y ago
Isn't that basically the same as trading gold coins?
petters 9y ago
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.

omegaworks 9y ago

>Panama has been using the dollar for decades, and this hasn't prevented it from becoming one of Central America's most successful n̶a̶t̶i̶o̶n̶s̶ tax havens. https://www.theatlantic.com/business/archive/2016/04/panama-tax-haven/476766/ https://www.theatlantic.com/business/archive/2016/04/panama-... Fixed that for you :) Control over your currency is critical for maintaining national sovereignty, and the author waves it away like nothing. Just take what the EU forced upon Greece: https://en.wikipedia.org/wiki/Greek_government-debt_crisis_countermeasures#Economic_and_social_effects_of_austerity_measures https://en.wikipedia.org/wiki/Greek_government-debt_crisis_c...

5thaccount 9y ago
Why restrict it to the nation then? Why not city currencies? There are lots of countries - like India and China - where the gap in income between regions is larger than between countries. It's a weird concept money, and I wonder what the right level is. I doubt it is optimised at the country level, but then a "better" notion like demographic similarity may be impractical, even if better, e.g. one currency for Northern Italy and one for Southern may be difficult to sell even if preferable, and ditto a unified Basque/southern French currency, or an eastern seaboard Yuan and a country China currency.
- lmm 9y ago
  As a Londoner I suspect we'd all benefit from having different monetary policy in London and the rest of the UK. The argument I've heard is that fiscal and monetary policy have to be applied together, so it makes sense to have currency controlled at the same level as taxation.
pseingatl 9y ago
Panama only ever had its own currency for a few years beginning in 1941. When Panama separated from Colombia, it used dollars. An anti-American president was elected and proposed a national currency. No one accepted it. He was soon deposed later. Panamanian coins are the same size, weight and composition of U.S. coins and are minted by the U.S. mint. Panama retains the Kennedy-size half dollar and did not adopt the new US $1 coin.

jordanb 9y ago

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 9y ago
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
- crdoconnor 9y ago
  Most of the metrics which he's looking at which improved under southern Somalia's anarcho-capitalism happened because of an increase in remittances. I don't think anybody's arguing that if Somalis didn't have legions of relatives abroad sending them money the humanitarian disaster would have been even worse. The security implications of living with a system of competing warlords (or 'insurance companies', in ancap terminology) are also massively glossed over.
- redblacktree 9y ago
  > 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.
  - lowpro 9y ago
    There is a difference between Anarchy and libertarianism. Most libertarians want less government, not no government.
    - 9y ago

smitherfield 9y ago

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 9y ago
The article emphasized that the counterfeit currency cost about the same amount to make as the actual trading value of the currency.
- an_account 9y ago
  But the article also claims that the central bank would have to buy the counterfeit (and legit) currency at a premium, so that it's worth it to the citizens to exchange.
  - protomyth 9y ago
    The premium looked pretty small and I would imagine the buyback would probably exclude anything that wasn't in circulation at the time it happened shortening the time table for something that needs to be shipped in.
- smitherfield 9y ago
  Yes, but that's just begging the question — where is value being created in this equation?
  - protomyth 9y ago
    I could see value if they went to the dollar in their conversion but I, like the article, am unsure what the value in new shillings are.
  - lmm 9y ago
    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 9y ago

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 9y ago
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 9y ago

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

alister 9y ago
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

gumby 9y ago

> 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.

snarf21 9y ago
Very interesting comments. I've been thinking a lot about UBI and the one thing I still can't work out is if we are going to just have to print tons of money to be able to make it actually universal (meaning not for people < $50K). Some will still be creating real value for their income so how much is that money devalued by the amount that is given for free via UBI? Will this just cause massive inflation? (I guess I should take some economic theory classes somewhere..)
- skywhopper 9y ago
  Consider that in many western economies, inflation has been perilously low for a decade or more. Japan, Europe, and the US all have extremely low inflation today. This leads to some problems we don't usually hear economists worry about--namely that debt-financed personal investments like a home mortgage or a student loan become much more onerous to people who have taken on that debt in the last 20 years. Since such debts tend to have fixed payments over fixed periods, a reasonable rate of inflation would ensure that the real cost of paying off those debts goes down over time, and even if everything else gets more expensive, you still end up with more discretionary income over time, even if your real wages never go up compared to inflation. But with 1% or lower inflation, those debts become a decades-long constant drag on an individual's discretionary income, which may never grow. For real assets, such as homes, inflation also ensures that homeowners actually accrue equity over time, in addition to shrinking debt payments. All of that is to say, we could do with a couple of decades of 3-4% inflation. Implementing UBI very likely would trigger some inflation, but if there's one thing central banks know how to do and have the power to do, it's clamping down on inflation. Other economists have proposed less direct methods of giving money, from burying caches of cash (to create employment and stimulate investment), to dropping money from helicopters. Sure, those examples were tongue-in-cheek, but you can kill two birds with one stone by using government money to invest in rebuilding infrastructure, building high speed rail, curing cancer and diabetes, paying for more and better public education from pre-K through college. That money pays off in multiple ways: more people have jobs, you stimulate moderate inflation and wage growth, and in the end you have all new infrastructure, new treatments for disease, and a better educated population. Better still, all that money will get spent by all these people with more money and better jobs on buying better housing, newer cars, better food, more luxuries, and that money can make our corporations more profitable and faster-growing... Yet I fear we are all headed the other direction on these things.

dredmorbius 9y ago

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.

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IanDrake 9y ago

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 9y ago
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.