Money on the Boundary between the Real and the Virtual

Mohammed Adow has written an excellent analysis for Al Jazeera English on the subject of currency management in Somalia. I am not sure he homed in on the right punch line, but he makes a lot of good points. In many ways his report makes for a useful complement to Tristana Moore's BBC report last month on the Urstromtaler. However, while Moore reported on a system that was both highly localized and highly regulated, Adow's account is basically a study in an informal approach to regulation in the absence of any governmental authority:

The collapse of the Somali state in 1991 and the subsequent and the crash of the domestic currency, the shilling, meant the crippled economy was starved of liquidity to facilitate an economic recovery and of any means to replace ageing banknotes.

Without a viable central bank or any other financial authority able to provide such an essential service many people decided to take it upon themselves to do so.

Consequently it is in the Bakaara market, Somalia's biggest, where the value of the Somali shilling is now regulated, largely by a network of guesswork and rumour.

Every morning money exchangers from all over the country call the market to enquire the rate of the Somali shilling against dollars.

In short they have taken on the role of the central bank.

On the surface this seems like a good thing, the sort of story that wisdom-of-crowds advocates love to tell, particularly if they are also free-market ideologues. The basic message is that currency matters most in the market, so the market becomes the vehicle of currency regulation. However, the picture is not as rosy as those evangelists would like it to be:

Mohammed Dhoore is among the people who have come to exchange dollars at the market. A huge pile of notes is his return for a thousand dollars.

"These traders are unscrupulous," Dhoore says. "During the end of the month when there are dollars in the market they reduce the price of the dollar and then a week later they increase it. They are just selfish."

However the traders deny this.

Abdikarim Fodere, a money exchanger, says it is all a matter of supply and demand and the price they put on the dollar depends on its availability in the market and nothing else.

There are no surprises here. There will always be disagreements over questions of regulation. By all rights we should be happy that these disagreements get aired. Unfortunately, disagreements are not resolved by Habermas-style communicative actions that ultimately result in mutual understanding. Rather, they seem to be provoking actions that put the entire system in jeopardy:

Today Somali shillings can be easily printed from Indonesia and inserted into the markets at will.

The government and businessmen have been the biggest culprits in the money printing spree.

There are also reports that some of the money in the markets is printed by underground cartels in the country.

"Our money has been reduced to a commodity like rice and sugar which anyone can just print and bring into the market," Abdikarim Fodere says. "The fake money has eaten into our economy."

The profiteering from fake Somali currency has indeed created more destitution in the country.

It has affected the poorest of Somalia's poor especially those whose wages are paid in the practically useless currency.

In other words the Bakaara market really is not regulating the currency because there are too many easy opportunities to undermine what authority is has (which is based on little more than an agreement about normative social practices).

This analysis is fine as far as it goes (along with an interesting sidebar on the limitations of a single denomination); but I feel it missed out on one of my favorite topics in economics. This is the principle that the value of currency is, and has always been, a "fiction of convenience." In recent time John Kenneth Galbraith was probably one of the most vivid exponents of this position; but, among those with a reputation for wordsmith-craft, Goethe may have been the first out of the gate when he introduced the concept in the second part of his Faust. However, whether your source is Goethe or Galbraith, the principle is the same: currency is only as good as the stories that are told about it and the authority that users of the currency attribute to those stories.

In the context of a secure and centralized government, there is not question about who gets to tell the stories. Those stories may not always be as consistent as we would like, but there is a general agreement over the role of the authorized storyteller. That role is assumed by a "central bank," such as our Federal Reserve. In the absence that "secure and centralized government" in Somalia, the Bakaara market is being recognized as an authorized storyteller. However, as I have previously observed, the best way to undermine a narrative is with another narrative; and that is basically what the counterfeiters are doing. What is particularly sad about this state of affairs is that the merchants in the Bakaara market are in no position to recognize counterfeit currency, so their authority is easily undermined. However, as the old joke about the gambler in Las Vegas goes, "The roulette wheel may be crooked, but it is the only game in town." The market is the only place where Somalis can get the food and other resources necessary to make it through another day; and, as Adow has demonstrated so poignantly, they are the ones who lose the most in this "battle of storytellers." What we are left with is a lesson of the value of centralized governance that should serve as a harsh message to those more academic champions of "self-organizing systems."