Thursday, 1 August 2013

Competing Currencies in Somalia

By Finbar Feehan-Fitzgerald

For years a debate has raged in monetary economics over the credibility of the theory that a more stable monetary system would emerge were the system to allow for concurrent currencies operating under no legal restrictions.

One side of the debate, represented most prominently by Milton Friedman, believes that the emergence and acceptance of a new currency would be hindered — and its ability to supplant an incumbent currency all but eliminated — by network effects and/or switching costs.

In general, a network effect results when the desirability of an item depends upon the number of others using it. Since money is demanded due to its acceptability among others for future payment, money would appear to have network effects.

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