Effects.of.

Demonetization

By:.Saransh.Upadhyaya.
2k17/me/1549
What.is.Demonetization?
Demonetization.is.the.act.of.stripping.a.currency.unit.of.its.stat
us.as.legal.tender..It.occurs.whenever.there.is.a.change.of.nati
onal.currency:.The.current.form.or.forms.of.money.is.pulled.fro
m.circulation.and.retired,.often.to.be.replaced.with.new.notes.or
.coins..Sometimes,.a.country.completely.replaces.the.old.curre
ncy.with.new.currency.

The.opposite.of.demonetization.is.remonetisation,.in.which.a.fo
rm.of.payment.is.restored.as.legal.tender.

Understanding.Demonetization
Removing.the.legal.tender.status.of.a.unit.of.currency.is.a.drast
ic.intervention.into.an.economy.because.it.directly.effects.the.m
edium.of.exchange.used.in.all.economic.transactions..It.can.hel
p.stabilize.existing.problems,.or.it.can.cause.chaos.in.an.econo
my,.especially.if.undertaken.suddenly.or.without.warning..That.
said,.demonetization.is.undertaken.by.nations.for.a.number.of.r
easons.

KEY.TAKEAWAYS
 Demonetization.is.a.drastic.intervention.into.the.economy.t
hat.involves.removing.the.legal.tender.status.of.a.currency
.
 Demonetization.can.cause.chaos.or.a.serious.downturn.in
.an.economy.if.it.goes.wrong.
 Demonetization.has.been.used.as.a.tool.to.stabilize.a.curr
ency.and.fight.inflation,.to.facilitate.trade.and.access.to.m
arkets,.and.to.push.informal.economic.activity.into.more.tr
ansparency.and.away.from.black.and.gray.markets.
Demonetization.has.been.used.to.stabilize.the.value.of.a.curren
cy.or.combat.inflation..The.Coinage.Act.of.1873.demonetized.si
lver.as.the.legal.tender.of.the.United.States,.in.favor.of.fully.ado
pting.the.gold.standard,.in.order.to.stave.off.disruptive.inflation.
as.large.new.silver.deposits.wer.discovered.in.the.American.W
est..Several.coins,.including.two-cent.piece,.three-
cent.piece,.and.half.dime.were.discontinued..The.withdrawal.of.
silver.from.the.economy.resulted.in.a.contraction.of.the.money.
supply,.which.contributed.to.a.recession.throughout.the.country
..In.response.to.the.recession.and.political.pressure.from.farme
rs.and.from.silver.miners.and.refiners,.the.Bland-
Allison.Act.remonetized.silver.as.legal.tender.in.1878.

In.a.more.modern.example,.the.Zimbabwean.government.dem
onetized.its.dollar.in.2015.as.a.way.to.combat.the.country’s.hyp
erinflation,.which.was.recorded.at.231,000,000.percent..The.thr
ee-
month.process.involved.expunging.the.Zimbabwean.dollar.from
.the.country’s.financial.system.and.solidifying.the.U.S..dollar,.th
e.Botswana.pula,.and.the.South.African.rand.as.the.country’s.le
gal.tender.in.a.bid.to.stabilize.the.economy.

Some.countries.have.demonetized.currencies.in.order.to.facilita
te.trade.or.form.currency.unions..An.example.of.demonetization
.for.trade.purposes.occurred.when.the.nations.of.the.European.
Union.officially.began.to.use.the.euro.as.their.everyday.currenci
es.in.2002..When.the.physical.euro.bills.and.coins.were.introdu
ced,.the.old.national.currencies,.such.as.the.German.mark,.the.
French.franc,.and.the.Italian.lira.were.demonetized..However,.t
hese.varied.currencies.remained.convertible.into.Euros.at.fixed.
exchange.rates.for.a.while.to.assure.a.smooth.transition.

Lastly,.demonetization.has.been.tried.as.a.tool.to.modernize.a.
cash-
dependent.developing.economy.and.to.combat.corruption.and.
crime.(counterfeiting,.tax.evasion)..In.2016,.the.Indian.governm
ent.decided.to.demonetize.the.500-.and.1000-
.rupee.notes,.the.two.biggest.denominations.in.its.currency.syst
em;.these.notes.accounted.for.86.percent.of.the.country’s.circul
ating.cash..With.little.warning,.India's.Prime.Minister.Narendra.
Modi.announced.to.the.citizenry.on.Nov..8,.2016.that.those.not
es.were.worthless,.effective.immediately.–
.and.they.had.until.the.end.of.the.year.to.deposit.or.exchange.t
hem.for.newly.introduced.2000.rupee.and.500.rupee.bills.

Chaos.ensued.in.the.cash-
dependent.economy.(some.78.percent.of.all.Indian.customer.tr
ansactions.are.in.cash),.as.long,.snaking.lines.formed.outside.
ATMs.and.banks,.which.had.to.shut.down.for.a.day..The.new.r
upee.notes.have.different.specifications,.including.size.and.thic
kness,.requiring.re-
calibration.of.ATMs:.only.60.percent.of.the.country’s.200,000.A
TMs.were.operational..Even.those.dispensing.bills.of.lower.den
ominations.faced.shortages..The.government’s.restriction.on.da
ily.withdrawal.amounts.added.to.the.misery,.though.a.waiver.on
.transaction.fees.did.help.a.bit.

Small.businesses.and.households.struggled.to.find.cash.and.re
ports.of.daily.wage.workers.not.receiving.their.dues.surfaced..T
he.rupee.fell.sharply.against.the.dollar..

The.government’s.goal.(and.rationale.for.the.abrupt.announce
ment).was.to.combat.India's.thriving.underground.economy.on.
several.fronts:.eradicate.counterfeit.currency,.fight.tax.evasion.(
only.1.percent.of.the.population.pays.taxes),.eliminate.black.mo
ney.gotten.from.money.laundering.and.terrorist-
financing.activities,.and.to.promote.a.cashless.economy..Individ
uals.and.entities.with.huge.sums.of.black.money.gotten.from.pa
rallel.cash.systems.were.forced.to.take.their.large-
denomination.notes.to.a.bank,.which.was.by.law.required.to.ac
quire.tax.information.on.them..If.the.owner.could.not.provide.pr
oof.of.making.any.tax.payments.on.the.cash,.a.penalty.of.200.p
ercent.of.the.owed.amount.was.imposed.
The.plan.to.demonetise.the.₹5,00.and.₹1,000.banknotes.was.in
itiated.between.six.and.ten.months.before.it.was.announced,.a
nd.was.kept.confidential..In.April.2016,.a.report.by.the.State.Ba
nk.of.India.analysed.possible.strategies.and.effects.demonetisa
tion.[26].In.May.2016,.the.Reserve.Bank.of.India.had.started.pre
paring.for.new.banknotes.and.confirmed.the.design.of.₹2000.b
anknotes.in.August.2016..The.printing.of.new.banknotes.starte
d.in.October.when.the.news.stories.of.forthcoming.new.banknot
es.appeared.in.the.media..On.27.October.2016,.the.Hindi.daily.
Dainik.Jagran.published.a.report.quoting.RBI.sources.speaking
.of.the.forthcoming.of.₹2,000.banknotes.alongside.withdrawal.o
f.₹500.and.₹1,000.banknotes..On.21.October.2016,.The.Hindu.
Business.Line.had.also.published.a.report.on.forthcoming.₹2,0
00.banknote.

Prominent.businessmen.stated.after.the.announcement.of.dem
onetisation.that.they.had.received.prior.warning.of.the.move,.all
owing.them.to.convert.their.money.into.smaller.denominations..
A.BJP.MLA.from.Rajasthan,.Bhawani.Singh.Rajawat,.claimed.i
n.a.video.that.wealthy.businessmen.were.informed.about.the.d
emonetisation.before.it.occurred..He.later.denied.the.comments
.