By Dr. Suleiman Walhad
December 15th, 2022
Fiat money is generally defined as the currency issued by a government through its central bank. Such a currency is often backed by the economy of such a government. Fiat money is not based on the value of any commodity and, in fact, is created out of thin air. It exists because the government issuing such currency has assigned a value to it and declared it. Here is where the term “fiat” a Latin word roughly meaning “let it be” comes from. The value is often assigned in comparison with another currency or currencies and mostly, after the Second World War, all currencies are assigned values in comparison with the United States Dollar. The United States Dollar was, in an agreement in Bretton Woods, New Hampshire, United States, in 1944, assigned a value with respect to Gold and accordingly, the United States Dollar became the measure of other currencies. Up to and until the early 1970s, such standard was fixed and working, when the United States of America, issuer of the United States Dollar, decided to remove its parity to the gold and the currency became a “Petro-Dollar”. Petrol and petroleum products were introduced because it was and still is the largest commodity traded in the world on a daily basis. The United States Dollar supported by petrol continues to be, till today, the currency against which any other currency is measured, simply because most countries of the world need to have United States Dollars to pay for its purchases of petrol and petroleum products. Some currencies may be measured against a basket of currencies but that is rare, and the United States Dollar remains the main measure of other currencies, to the extent some countries only use the United States Dollar and not even their currencies.
Fiat currencies are often controlled by the central banks that issued them on behalf of their countries. Central banks then control the stability of such currencies and their supply in the market. Fiat currencies offer certain advantages in comparison to commodities of high value such as gold or silver. They can easily be moved and carried in comparison with equivalent values in Gold in and silver and other similarly high value commodities. They can also be stored more easily. Since they are printable or mint-able by the central banks, they can be increased or decreased at will by the central banks or by the government at will, as opposed to rarer metals of high value such as gold or silver. Once too much of such a currency is printed or minted, it can lose value easily compared to other currencies such as the United States Dollar. This often gives the United States Dollar a major economic prowess, which it uses against other countries which may not see eye to eye with the United States on world issues or important matters that may affect lives and economies of countries.
It is often said that heavy debt and the inability of a country to raise enough United States Dollars to pay for essential goods causes many countries to fail. Although this is true, the fact that the United States Dollar has recently been used as a weapon to make many countries kneel, has turned the currency into a weapon. Many countries have been cut off the international money and financial systems. Even individual and domestic organizations are sometimes targeted, which has given rise to the development of Bitcoin and other cryptocurrencies that are difficult to understand and control.
The world of money is undergoing changes resulting from the deglobalization started by the “America First” policy of President Trump and which may have led to the growing development of other organizations as the BRICS in opposition to the IMF and its sister company the World Bank, which together formed the central pillar of international finance and money over the past seventy odd years. The fact that many countries now use their own currencies to pay for their trade obligations or other currencies and more specifically for their oil and gas imports, other than the United States Dollars speaks volumes on the trend. This is being re-enforced by the weaponization of the United States Dollar and the currencies allied to it such the European and British currencies.
Where are we heading then and more specifically, where is the Horn of Africa States going? As far as the region is concerned only the Djibouti Franc remains pegged to the United States Dollar in the region and hence is the most stable currency. The Somali Shilling does not exist any more and other local currencies such as the Somaliland Shilling play significant roles in some of the markets. The Somali Shilling is no longer under the control of the central banks and is printed by fraudsters in the length and breadth of the country. The value of the Ethiopian Birr is declining. The Nakfa does not go beyond Eritrea. Should they continue in these fiat currencies, or should they prepare for the uncertain times ahead? I would say they should prepare and stack gold and other valuable commodities such as silver.
Cryptocurrencies are on the rise and government control over money supply will be limited in the future unless governments also come in the market to control it and/or stabilize it. Cryptocurrencies are the assets of individuals or parties that are unknown and can disappear and reappear in another form any time and hence are unpredictable. The peer-to-peer ability to trade directly between two parties or multiple parties in digital currencies is no more than a roost to entice people away from fiat currencies controlled by governments. These are far-fetched thoughts, and perhaps, the best way to avoid the pitfalls of fiat or digital money is to revert back to actual currencies with intrinsic values such as those of gold and other high value commodities.
Rampant inflation in the region is mostly due to the high import bill of the region as it literally imports most of the consumables in the region as opposed to local production. If the governments of the region can impose limitations to the import bill, then local production will rise. The fiat currency which is generally considered as debt-based should also be removed from the market and instead, the government should mint gold out of the gold produced in the region and those who produce goods in the region should be paid in gold. This would attract many traders and entrepreneurs from working on the import business and spend their energy on producing the consumables the market needs in the region. Producers would then compete in quality and efficiency and the regional economy would improve and grow. At least it would not be tied to wiles of others, such as the de facto fiat currency of the world, the United States Dollar.
The use of gold as a currency would help in the decolonization of the monetary system of the region, which remains todate tied at the hip to the international monetary system led by the United States Dollar. This does not mean that the region should not trade with the United States of America. By all means the region should maintain a good relationship with it and pay for its trade with the country in gold, as it should also with other parts of the world. Maintaining good relations with others help governments concentrate on local economy development and providing better services for the region’s population. But maintaining a gold currency of the region will help it secure its economic independence and this would add on to its political independence, which has so far been sick in bed.
Use of gold with a stable value would lessen inflation, improve local production, link money supply to a physical commodity, and would not allow or assist import deficits as happens today. It would reduce conflict within the region and hence allow people to concentrate on economic development, not only to produce the region’s food requirements but also all the other day to day requirements of the region including clothing, equipment, shelters and housing. This would lead to development and maintenance of water and water reservoirs and dams and renewable energy in the form of hydropower, wind power and geothermal as the region sits on one of those most seismic parts of the world.
Fiat currencies lose value as they can be printed without any limitation, theoretically, of course. They can, therefore, cause inflation as has been seen many times in many parts of the world, in the past. The monetary systems of the Horn of Africa States region currently are based on fiat currencies, and some are not even printed by the Government such as the Somali Shilling. If the region has to develop collectively together, it would, perhaps be better if they all started together with gold as the currency. This would allow stability and would be a safe haven against inflation. This would also avoid debates and arguments on what new currency to be used or the choosing among the prevailing currencies. It would reduce the import bill and would encourage local entrepreneurs to produce goods locally. This would contribute to the growth of the economy and hence the peace and stability of the region. Conflicts in the region result, in the main, from competition on the currently low available resources.
Note gold is a stable currency and it has an intrinsic value. It is a commodity. Fiat currency has the value assigned to it by the issuing government and its authorities. It has no intrinsic value. In the long run, gold always wins and why not use it as the currency.
Willian Rees-Mogg is reported to have said, “To prefer paper to gold is to prefer high risk to lower risk, instability to stability, inflation to steady long-term values, a system of very low-grade performance to a system of higher, though not perfect, performance.” Why not start afresh with a gold currency in the Horn of Africa States?
1 thought on “The Horn of Africa States Fiat Money Versus Gold”
This is not just ordinary article but a lecture at an Ivy college. What I am wondering is where has this genius brother been? He is the ocular proof that given the will, chance, peace and stability the entire Horn of Africa has the intellectual horsepower needed to solve its grinding economic and political problems. This article has taught this economics layman engineer a thing or two about currencies. Now, where is my book, brother?