What a fascinating article, reality is sometimes remarkably and amusingly counterintuitive. I would've never guessed a culture would accept counterfeit currency en masse.
If a 1000 shilling note is only worth 4 US cents, does buying stuff require a small mountain of bills?
Here are some costs for food in Somalia (USD):
Loaf of Fresh White Bread (1 lb) 0.86$
Rice (white), (1 lb) $0.54
Eggs (regular) (12) $2.37
Local Cheese (1 lb) $2.19
So, not exactly dirt cheap, paying in 4 cent increments.. imagine if you carried around only nickels, a backpack may be needed just to carry the cash. What if you want to buy a car, motorcycle, or bicycle? Where would you even store all that cash, haha.
One thing I don't fully understand, TFA says a 1000 shilling note is worth $0.04USD (meaning, $1USD would equal 25000 shillings), but when I searched for the exchange rate online, everywhere says $1USD converts to about 575 SOS (Somalian Shillings). Can anyone here enlighten me about what's going on with the shillings?
"A total of 1000 coins strung together were referred to as a chuàn (串) or diào (吊) and were accepted by traders and merchants per string because counting the individual coins would cost too much time. Because the strings were often accepted without being checked for damaged coins and coins of inferior quality and copper alloys, these strings would eventually be accepted based on their nominal value rather than their weight; this system is comparable to that of a fiat currency."
It's happened in the ancient Near East as well. Coins were expensive to mint, and sometimes there simply weren't enough of them in circulation. So, counterfeits tended to be accepted as legitimate currency.
In fact, it was here on HN just about a month ago:
(Edit: There's a post farther down-thread that linked this well before I did. Please give that post an upvote instead of this one as I neglected to check first.)
> when I searched for the exchange rate online, everywhere says $1USD converts to about 575 SOS (Somalian Shillings). Can anyone here enlighten me about what's going on with the shillings?
Official exchange rates and actual exchange rates can diverge a lot[0]. Here's the UN's estimates of exchange rates (for, I think, internal accounting purposes- not something to particularly rely on), which puts the rate at 24,300 shillings to the dollar.
[0] often this means that you can easily legally sell dollars for the currency at the official rate (ie, at a huge markup), but good luck buying dollars with the currency at the official rate. Maybe you can in very small amounts, or if you are politically connected.
> For some time now Somalia has been partially dollarized economy. U.S. dollar banknotes are the most popular paper currency, with old shillings being used in small payments and in the countryside. Mobile payments are extremely popular, but they are usually denominated in U.S. dollars, not shillings, and tend to be prevalent in cities where network coverage is best.
I do wonder how a somewhat valuable metal like copper would work here. The copper standard. Go by the weight of the coin times the spot price of copper. Then the govt can’t keep printing more but I gyess they’d have to be on board
Quarter pounder. Yeah maybe it would have to be some kind of a fractional currency. Or some more suitable metal. Silver would work but the price is a bit volatile. There already exists “bullion” silver coins that fit the bill
I think the argument of the article is that the banknotes' value is bounded below by the cost of the paper. If it costs more to print banknotes than they're worth, nobody will print more and as circulating notes wear out you'll get deflation.
Dollarized mobile money payments via Hormuud Telecom's EVCplus / Sahal / Zaad networks are dominant, and mobile coverage is pretty extensive. They have an API and a full Islamic commercial banking infrastructure.
I have more personal experience in the Republic of Somaliland, which is a de-facto independent state in the north. In Somaliland, the government set a regulation that requires all mobile money transactions < $100 USD to be done in Somaliland Shillings. Somaliland Shillings are often used as change in any small USD cash transactions. The Somaliland Shilling is pretty stable. It was trading at ~9600 / USD last spring, and I don't think it has moved much since then.
Regularly transacting in physical USD is a huge pain because people will only accept virtually perfect bills with the latest design. It makes sense to an extent because it's costly to replace damaged bills.
Dollars are and will continue to be a huge part of Somali trade - the Somali diaspora and business community regularly trade in Ethiopia, Kenya, and beyond. I don't think you'll find anybody using Somali shillings in Somaliland either. There's also limited value / opportunity for any constructive monetary policy because there's very little conventional debt or interest. I agree with the author that there might be some value in introducing local coinage for small transactions, but anything more is likely to be counterproductive.
- shameless plug to anyone at YC - take a look at my S24 application and you can see a website that uses the Hormuud mobile money API. Email and I'll give you some more test info for this payment flow (it's not in the demo)
- If you're really interested in mobile money APIs or payments in Somalia, I'll share more if you email my handle @gmail.
When people elsewhere talk about Somalia, they usually include Somaliland in that definition, international recognition of the latter being what it is.
It's all very silly IMO given that Somaliland has been de facto independent for over 30 years now, and is the most functional part of the former Somali Republic.
I'm from neither. I've personally traveled in and around Hargesia so I have more hands on experience with payments there as a consumer vs. Mogadishu and surrounding areas.
I agree that having counterfeit bills be accepted on par with "genuine" ones is counterintuitive. I disagree that it's not rational. As I implied with the quotemarks, once there is no central bank or central government, a "genuine" bill is merely one that was printed earlier than "counterfeit" ones. As discussed in comments, in such a scenario, bills (whether "genuine" or not) become commodity currency like gold coins.
I seriously doubt that Somalis kept using shillings out of confidence that they would be worth something again; such hopes would have disappeared years ago. The author alludes to the real reason but doesn't explore it: The currency is still convenient for use where actual dollars, or electronic versions, are not available. Shades of Fallout's bottle caps.
I'm not surprised that the IMF would encourage the return to a sovereign currency. IMF has historically been non-encouraging of dollarization, despite its consistent track record of a) working when instituted by the government (Panama, Ecuador, El Salvador), and b) being preferred by the people when they lack confidence in the official currency (Argentina, Myanmar, Somalia itself, and pretty much the entire rest of the non-developed world).
(Disclaimer: Note that I do not necessarily agree with some/any/all of the political positions and/or ideologies espoused by this blog. That being said, it seems to be an interesting blog with the central topic being all things Money related...)
> "There was a chronic shortage of small change in ancient economies, so even poor quality fakes were accepted in markets for lack of anything better. Authorities tended to ignore such forgeries"
We're seeing the same thing again in this article.
The Iraqi Swiss Dinar is another example of a currency surviving without a central bank -- in that case, even with the central bank directly opposed to the continued circulation of the currency.
The Somali Schilling has fascinated me for years - because it's living proof about how mediums of exchange work - all people have to do is believe that something is worth something.
The something is unimportant, could be slips of paper, rocks, bits of shiny metal, trees, really anything - there object need have no intrinsic worth - it doesnt even need to be portable either, just that people agree X object changed hands and Y person owns it now.
Or they believe that something will happen if they don’t have it.
If I impose a tax on you in Simolians, and I have the power to enforce it by confiscating all your assets and your liberty then you will obtain whatever amount of Simolians I demand as that is almost certainly the cheaper alternative.
Then the exchange value of the currency is down to what you have to do for me to get me to issue Simolians.
It's sort of like trading with chunks of gold, the value of the chunk of gold is what you can purchase, but in this case it's specially printed paper which can be traded for a value of a little more than it costs to make specially printed paper
Why would you start with the de facto denomination instead of with a higher one? Tired of carrying bricks of 1000 shilling notes? Here’s a 20k shilling note so you can carry ten instead of a brick.
That's not how it works. There's no authority over the production of the shilling - anyone can make them, and they therefore trade at the cost of production.
Which means that regardless of the number you print on the notes, if buying something took a brick of them at the old denomination, it will take a brick of them at the new one too.
Can you pass around a crypto currency physically? I don't think so.
The main reason is that you are thinking in the context of a "modern" country, try to travel around villages in Africa and you'll see why cash is still king.
Somewhat recently a lot have started using extensively mobile cash, using literally any phone which can make calls (which I think is genius in terms of accessibility).
Of course, you could base their mobile cash off crypto but that doesn't make any difference to the user.
But that requires a strong and stable mobile network infrastructure which one cannot take for granted over here.
When the taxing authority disappears notes and coins drop to their commodity value which may then appreciate like classic cars if they become rare - as the old Reichmarks have done.
I'm a bit skeptical that this article tells the complete story. Who is printing these counterfeits? What are their incentives? Why not just keep printing more and inflate the currency into oblivion?
Because you can only counterfeit the old notes, which have already been inflated to the oblivion: the largest note (1000 shillings) is $0.04. Because the cost of producing a remotely passable counterfeit is also approximately $0.04, the currency is now stable-ish.
If you produce a shiny new 10,000 note, nobody will recognize or accept it.
If a 1000 shilling note is only worth 4 US cents, does buying stuff require a small mountain of bills?
Here are some costs for food in Somalia (USD):
So, not exactly dirt cheap, paying in 4 cent increments.. imagine if you carried around only nickels, a backpack may be needed just to carry the cash. What if you want to buy a car, motorcycle, or bicycle? Where would you even store all that cash, haha.One thing I don't fully understand, TFA says a 1000 shilling note is worth $0.04USD (meaning, $1USD would equal 25000 shillings), but when I searched for the exchange rate online, everywhere says $1USD converts to about 575 SOS (Somalian Shillings). Can anyone here enlighten me about what's going on with the shillings?
Edit: Thank you @roywiggins for explaining! https://news.ycombinator.com/item?id=39944411