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Demonetization

Reviewed by Annapoorna | Updated on Sep 30, 2020

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What is Meant by Demonetisation?

Demonetisation means an act of stripping the legal tender status of currency units. It happens whenever there is a change of any national currency. It involves the withdrawal of the current form or forms of money from being circulated usually replaced with new notes or coins. Seldom, a country entirely replaces the old currency with new currency.

Remonetisation is the opposite of demonetisation, wherein a payment form is restored as a legal tender. Pulling down the legal tender status of a unit of currency is a drastic interference into an economy since it directly affects the day-to-day business.

It can help in bringing stability to the existing problems or may cause chaos in an economy if it goes wrong. The move can negatively impact the economy, especially when introduced abruptly without warning. That said, demonetisation is taken up by countries for various reasons.

Uses of the demonetisation are as follows: - To stabilise the currency and fight inflation, - To promote trade and access to markets - To bring transparency in informal economic activities, away from black and grey markets

Demonetisation Across Globe

Demonetisation has been practised to stabilise the currency value or fight inflation.

In the USA, the Coinage Act of 1873 demonetised silver as its legal tender, to fully adopt the gold standard. This move was made to ward off any disruptive inflation as significant as new silver deposits that were discovered in Western America. The circulation of various coins, including two-cent piece, three-cent piece, and half-dime was suspended.

The removal of silver from being circulated in the economy led to the contraction of the money supply. In turn, it contributed to a downturn throughout the country. The Bland-Allison Act remonetised silver as a legal tender in 1878, to put an end to recession and political stress from farmers and silver miners.

More recently, the government of Zimbabwe demonetised its dollar in 2015. It was a measure to fight the hyperinflation recorded at 231,000,000 per cent. It removed the Zimbabwean dollar from the country's financial system. It fixed the Botswana pula, the U.S. dollar, and the South African rand as the country's legal tender to stabilise the economy.

Certain countries have demonetised currencies to facilitate trade or establish currency unions. A case of demonetisation for business purposes occurred when the countries under the European Union formally started using the euro as their daily currency in 2002.

When the physical euro bills and coins were launched, the old national currencies, such as the Italian lira, the French franc, the German mark were demonetised. However, these different currencies continued to be convertible into euros at fixed exchange rates for some time to ensure a smooth transition.

Demonetisation in India

Demonetisation was tried as a tool to modernise a developing economy that is cash-dependent and to fight crime and corruption involving counterfeiting and tax evasion. Accordingly, the Indian government demonetised the Rs 500 and Rs 1000 face-valued currency notes in 2016, the two most prominent denominations in its currency system.

These notes accounted for 86% of the country's circulating cash. With no indications, India's Prime Minister Narendra Modi announced to the country's citizens on 8th of November 2016, that those notes would have no value with immediate effect. As an alternative arrangement, citizens could deposit or exchange these old notes for newly introduced Rs 2000 and Rs 500 bills by the end of the year.

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