The advent of currency dates back to the Indus Valley civilisation. Kingdoms issued royal seals, coins made of gold, silver and copper that kept changing with rulers and dynasties, until 14th century, when under Muhammad bin Tughlaq, Tankas – copper and brass coins to replace gold and silver coins, were introduced. Though they were in short supply. His experiment failed with counterfeits flooding the market, thereby making way for minted coins having a unique seal. In 1735, Nadir Shah devalued currency that led to a surge in inflation, and withdrawing his decision subsequently.
Though fast forwarding to 1923, Dr B R Ambedkar, through his book ‘Problems of Indian Rupee’, recommended changing currency every 10 years to curb inflation and black money. Following the suit, India’s first demonetization move in 1946 met with a little success with only 6.3% of high value currency notes being exchanged.
Later in 1978, an Independent India announced withdrawing 1000, 5000 and 10,000 rupee notes. This, to curtail hoarding of food items, prices of which were soaring on account of black money. However, the scheme failed as Rs 130 crore of high-value banned currency still existed in the economy. Most of this didn’t come back in the system.
Not just this, there have been a series of such moves world-over. In 1982, Ghana stopped 50 cedis notes, which made black economy to flourish. It wasn’t long before Nigeria also banned usage of old notes in 1984, and its economy collapsed. In 1987, when Myanmar’s military government demonetized, the move backfired and people started hoarding foreign currencies losing faith in their economy. In 1991, Erstwhile Soviet Union withdrew large ruble, which turned counterproductive leading to slide in public confidence in government. In 1998, Russia again phased out high value tenders that went off smoothly. Australia issued polymer bank notes in 1996 to stop counterfeiting of paper notes. South Korea too demonetized in 2009 only to withdraw it later.
Most recently, Zimbabwe demonetized its currency as economy collapsed & inflation reached unprecedented heights in 2015, and June 2016 saw Saudi Arabia banning options and derivatives on riyal’s USD peg.
Just a fortnight back, Venezuela banned 100 bolivar and the country went in total chaos and looting. Further, Euro Zone would stop issuing the 500 Euro note post 2018 and will bring 100, 200 Euro banknotes. Australia has proposed to ban AUD 100 to fight black money.
History tells us whilst others used demonetization as a tool to give instant result, PM Modi used it after slew of initiatives. Jandhan bank accounts, direct bank payments for NREGA and subsidies, push on UPI, IMPS, digital wallets, NPCL, tax collection at source on cash transactions >2 lakh were some of them.
His timing after a good monsoon, cleansing of banks’ balance sheets and putting infra / manufacturing projects on fast track to negate short-term impact of note ban is impeccable may just turn him a winner in a game lost by others.
