A Case of Private Supply of Money in Stateless Somalia

Since the collapse of the state in 1991 and the subsequent crashof the domestic currency, the Somali economy starved for liquidityto facilitate economic recovery and means to replace ageingbanknotes. In the long absence of effective state authority,forged banknotes from factions competed to fill the void andbecame accepted. In much the way that Milton Friedman predicted,the consequent unregulated private supply of money seeking tocapture seignoirage income soon raised prices, destabiliseddomestic markets, eroded the market value of Somali shillingbanknotes and reduced it to pure commodity money. However, theexperience did not lead to an infinite price level simply becausethe money issuers were unwilling to add zeros to denominationsin fear that the public will not accept them. Rather, as themarginal cost of importing and injecting new reprints on existinghighest denomination neared its exchange value, the incentiveto import more banknotes subsided, and domestic prices startedto stabilise. Incredibly, at this very low exchange value, theSomali currency survives and retains its service value, andreal cash balances have actually increased.