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November 15, 2016, 2:49 pm IST Sanjiv Shankaran in Cash Flow | Economy, India | TOI

Prior to last weeks announcement by Prime Minister Narendra Modi that high denomination
notes would stop being legal tender from 9th November, there were two similar instances in India.

The first instance was in 1946 and the second in 1978 when an ordinance was promulgated to
phase out notes with denomination of Rs 1,000, Rs 5,000 and Rs 10,000.

The media in terms of numbers was limited in 1946 and 1978 when compared to 2016. But given
the importance of the decisions, it did trigger coverage.

Newspaper and magazine archives of the 1946 decision do not seem to be available online.
Therefore, I relied on Reserve Bank of India commissioned history of Indias central bank to get
an idea of how a stakeholder perceived the decision.

The following extract of RBIs history volume is sourced from Mostly Economics, a blog on
economic developments in India.

According to RBIs relevant volume:

Sir Chintaman Deshmukh (governor) felt that we may not get even as much as Rs. 10 crores
as additional tax revenue from tax evasion and that the contemplated measure, if designed
to achieve such a purpose, has no precedent or parallel anywhere. If value is going to be paid
for value (no matter whether such value is in lower denomination notes), it is not going
to obliterate black markets. His advice is that we should think very seriously if for the object
in view (as he deduces from the declaration form) whether this is an opportune time to proceed
with the scheme. Provided Government are satisfied on the points of (i) sparing harassment to
the unoffending holders and (ii) a worthwhile minimum of results in the shape of extra
tax revenue, he does not wish to object to the scheme as drafted, if Government wish to
proceed with it notwithstanding the administrative difficulties involved.

It was not the first time an RBI governor was skeptical of governments move to strip currency of
legal tender characteristic at short notice.

In 1978, when Janata government proclaimed an ordinance, some of the media coverage of the
development was available online.

A Times of India report (sourced in-house) published on 17th January 1978 said:
A press note issued tonight said that the ordinance had been promulgated because there was
reason to think that high-denomination notes were facilitating the illegal transfer of money for
financing transactions which are harmful to the national economy or which are for illegal
purposes. There has been concern in recent months over the behaviour of agricultural prices
particularly of edible oils. In spite of a bumper harvest agricultural prices are ruling much higher
than after the poor harvest of 1976- 77. Massive imports of edible oil have failed to bring down
prices and the mustard oil price control order has failed miserably to give the consumer his
requirements at the specified rate. There has been a feeling that a considerable amount of black
money has gone to finance hoarding and speculation. The demonetisation of high denomination
currency notes will hit black money hard.

An analysis of the move was written by Jay Dubashi in one of India Todays February editions.
Dubashi reported that the ordinance had a ripple effect on other markets such as gold and
diamond where prices slumped by 5 to 10% within a week. In addition, the old notes were going
at 70% discount in Bombays Zaveri Bazar.

In his report, Dubashi wrote:

Politics apart, the demonetization is unlikely to curb black money in circulation, for the simple
reason that no one really knows how much black money there is in circulation and, even more
important, whether black money can really be defined in precise terms in all its shades.

I.G Patel was governor of RBI when the ordinance was promulgated in 1978. He was not happy
about the government move.

Mostly Economics quotes the relevant part from Patels memoirs which are as follows.

such an exercise seldom produces striking results. Most people

who accept illegal gratification or are otherwise the recipients
of black money do not keep their ill-gotten earnings in the form
of currency for long. The idea that black money or wealth is
held in the form of notes tucked away in suit cases or pillow
cases is nave. And in any case, even those who are caught napping
or waitingwill have the chance to convert the notes
through paid agents as some provision has to be made to convert
at par notes tendered in small amounts for which explanations
cannot be reasonably sought. But the gesture had to be
made, and produced much work and little gain.

It is early days and the context of 2016 is different, but history does not give us reason to be
optimistic.

DISCLAIMER : Views expressed above are the author's own.