What is Demonetization?
Demonetisation is the removal of a currency unit's status as legal tender, meaning it can no longer be used for financial transactions. It often involves withdrawing and replacing existing currency notes with new ones or shifting to a different monetary system.
Key Features of Demonetization:
- Currency notes or coins lose legal status for transactions.
- It is an economic tool to combat inflation, corruption, and black money.
- It can cause short-term disruptions but may have long-term economic benefits.
Why Do Countries Implement Demonetization?
- To fight inflation – Helps stabilise the economy by reducing excess money circulation.
- To curb corruption & tax evasion – Eliminates counterfeit money and forces illegal cash hoarders to declare wealth.
- To modernise the economy – Encourages digital transactions and financial transparency.
- To transition to a new currency system – Some nations demonetise old currency to introduce a new legal tender.
Examples of Demonetization Around the World
- USA (1873)—The Coinage Act demonetised silver and went to the gold standard to control inflation. However, it led to an economic downturn, and silver was remonetised in 1878.
- Zimbabwe (2015) – Zimbabwean dollar was demonetised due to hyperinflation and the economy switched to US dollar and South African rand.
- European Union (2002) – Countries demonetised their currencies to adopt the Euro for a smooth trade and monetary union.
Demonetisation in India (2016)
On November 8, 2016, the Indian government demonetised ₹500 and ₹1,000 notes which accounted for 86% of the cash in circulation.
Objectives of India’s Demonetization:
- To crack down on black money and corruption.
- To get rid of counterfeit currency.
- To promote digital transactions and a cashless economy.
Problems faced:
- Cash shortage and long queues at banks.
- Slowdown of small businesses that were cash-dependent.
- Economic disruption in the informal sector.
Good:
- Increase in tax compliance and digital payments.
- More bank deposits leading to more formal economic activity.
- Reduction in cash-based corruption and counterfeit currency.
Key Takeaways
Demonetisation is a powerful but risky tool. While it can help eliminate black money, control inflation and modernise an economy, bad execution can lead to economic disruption. Governments must plan and execute such moves carefully to minimize the damage.
