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Positively Valued Fiat Money after the Sovereign Disappears: The Case of Somalia


William J. Luther


Kenyon College

Lawrence H. White


George Mason University - Department of Economics

April 2, 2011

GMU Working Paper in Economics No. 11-14

Abstract:     
Economists commonly invoke sovereign powers to explain the acceptance of unbacked paper money at a positive value. The government accepts or compels taxes paid in the money (makes it publicly receivable) or compels creditors to accept it (grants and enforces legal tender status). Thus fiat money is thought to rely on enforcement of a literal fiat or decree. The case of Somalia defies this account: following the state’s collapse in 1991, unbacked paper Somali shillings continued to circulate at a positive value. We explain how historical acceptance, or “inertia,” can sustain the ongoing acceptance of unbacked money even in the absence of ongoing sovereign support. Although sovereign power might be necessary to launch a fiat standard, we conclude that it is not a necessary condition for its survival.

Number of Pages in PDF File: 31

Keywords: Belief, Focal Point, Inertia, Learning, Monetary Regime, Monetary Standard, Money, Search, Self-fulfilling Prophecy, Somalia, Somali Shilling

JEL Classification: B52, E00, E41, E42, D83, C71, C73

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Date posted: April 4, 2011 ; Last revised: August 21, 2014

Suggested Citation

Luther, William J. and White, Lawrence H., Positively Valued Fiat Money after the Sovereign Disappears: The Case of Somalia (April 2, 2011). GMU Working Paper in Economics No. 11-14. Available at SSRN: http://ssrn.com/abstract=1801563 or http://dx.doi.org/10.2139/ssrn.1801563

Contact Information

William J. Luther (Contact Author)
Kenyon College ( email )
Gambier, OH 43022
United States
HOME PAGE: http://www.wluther.com
Lawrence H. White
George Mason University - Department of Economics ( email )
4400 University Drive
Fairfax, VA 22030
United States
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