Digging through India demonetization history — 12 Jan 1946 (Saturday) and 16 Jan 1978 (Monday)

Warning upfront: This is a long long post..

One is trying to break his head over both ongoing effects of demonetization (demon) and the historic bit as well. There are so many articles on the history bit that one is just confused. So here is more to the confusion.


Let me start with some trivia. It is interesting to see the similarities in the dates of previous two demons. Both were in Jan with just four days away from each other – 12 Jan 1946 and 16 Jan 1978. One could call it the Jan demon! Even the days are just seperated by the Sunday. In the third one, the date is 8 Nov 2016 which was a Tuesday. So you have 8, 12, 16 series. Next one whenever could be on 4th or 20th of perhaps December!

First Denom — 12 Jan 1946 (Source: RBI History 1935-51, pg 706)

There is hardly any data on this. So, one is overtly reliant on RBI’s first history  volume.

The idea seems to have come from the colonial master Britain where 10 Pound notes were called back:

Soon after the war, while Government were giving attention to ways and means of
averting the expected slump, thought was also given to check black market operations
and tax evasion, which were known to have occurred on a considerable scale. Following
the action in several foreign countries, including France, Belgium and the U.K., the
Government of India decided on demonetisation of high denomination notes, in January
1946. It is interesting that as early as April 7, 1945, in an editorial on the tasks before the
new Finance Member, Sir Archibald Rowlands, the Indian Finance referred to the action
of the Bank of England in calling in notes of ₤ 10 and higher denominations and suggested
similar action in India as ‘one more concrete example for the Indian Government
to follow in its fight against black market money and tax evasions which have now
assumed enormous proportions ‘.

Media has informed us how RBI Governor resisted the second demon in 1978. But interestingly, RBI top brass was not happy with the idea in 1946 as well:

It is not known when the Government authorities started thinking
on the demonetisation measure, but the final consultation with the Governor and Deputy
Governor Trevor took place towards the end of 1945, when Mr. N. Sundaresan, Joint
Secretary, Ministry of Finance, called for a discussion, for which he had earlier prepared
a note and the drafts of the Ordinances to implement the scheme. According to a note
recorded by Mr. Sundaresan, it would appear that the Reserve Bank authorities were not
enthusiastic about the scheme. The Governor stated that the Finance Member had given
him the impression that the scheme would be launched only when there were signs of the
onset of an inflationary spiral. The Governor saw no special signs of such a situation. ‘It
appeared to him that the main object of the scheme was to get hold of the tax evader. The
Governor wondered if this could be called an emergency to justify the promulgation of an
Ordinance, just before the newly elected Legislative Assembly met. The Governor wanted
Government to be satisfied that there was no harassment to honest persons. As a
currency authority, the Bank could not endorse any measure likely to undermine the
confidence in the country’s currency.

Subject to these observations, the scheme as drafted by Mr. Sundaresan was considered
by the Governor to be theoretically all right, but he and the Deputy Governor pointed out
the considerable administrative difficulties involved in covering nearly 5,700 offices of
scheduled and non-scheduled banks. The Governor’s concluding remarks, as recorded by
Mr. Sundaresan, were as under:

Sir Chintaman Deshmukh 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.

This was pre-independence. So one was concered about princely states as well:

The Governor agreed that about 60 per cent of the notes would be in the Indian States
and so co-operation of the State Governments was very necessary. Apparently he had
some doubts about this. According to Mr. Sundaresan, the ideal thing was to block high
denomination notes, but this course was not favoured by either the Finance Member or
the Governor.

So just 40% of notes were in British India. This is interesting as well. How come the figure was so less?

This is contrasting to the relations between Govt and RBI as we are made to believe. But whether there were initial quibbles, we will only get to know when the history of this period is written.

So, based on whatever inputs the govt came out with 2 ordinances on 12 Jan 1946, which was declared a holiday. First ordinance asked banks to furnish info about currency holdings of various denominations (Rs.100, Rs. 500, Rs. 1,000 and Rs.10,000). Second was about telling public that denominations of Rs. 500 and above were demoned. Rs 100 was spared.

People were given 10 days for exchange which meant first helpline ended at 23 Jan. This was later extended to 9 Feb where people had to give explanations on why they could not in first ten days.

What about princely states? Some declared similar ordinances:

The provisions of the second Ordinance, which was applicable to British India, were
also extended, with suitable modifications, to the Administered Areas on January 22,
1946. Many Indian States also issued parallel Ordinances. States which did not enact
such legislation were required to exchange their holdings of demonetised notes before
March 7, 1946.

The outcome? Almost a failure as most of the notes were exchanged and hardly anything got demoned:

The measure did not succeed, as by the end of 1947, out of a total issue of Rs. 143.97
crores of the high denomination notes, notes of the value of Rs. 134.9 crores were
exchanged. Thus, notes worth only Rs. 9.07 crores were probably ‘demonetised ‘, not
having been presented. The results of the demonetisation measure were summed up by
Sir Chintaman, in his Dadabhai Naoroji Memorial Prize Fund Lectures, delivered at
Bombay in February 1957, as under :

It was really not a revolutionary measure and even its purpose as a minatory and
punitive gesture towards black-marketing was not effectively served. There was no
fool-proof administrative method by which a particular note brought by an individual
could be proved as the life-savings of the hard-working man who presented it or
established as the sordid gains of a black-marketer. Another loophole of which
considerable advantage was taken was the exemption of the princely States from
scrutiny or questioning when such notes were presented by them. In the end, out of a
total issue of Rs.143.97 crores, notes of the value of Rs.134.9 crores were exchanged
up to the end of 1947 as mentioned in the Report of the Board of Directors of the
Reserve Bank. Thus, notes worth only Rs.9.07 crores were probably “‘demonetised “,
not having been presented. It was more of “conversion “, at varying rates of profits
and losses than “demonetisation “.

So, as this blog argued earlier demon means currency stock should decline. At that time, one did not introduce any new currency and exchanges were made with Rs 100 and lower.The success of demon then was seen as lower amount of exchange of notes.

This time on one hand we are taking away old notes of Rs 500 and Rs 1000 but exchanging them with Rs 500 and Rs 2000 (with new Rs 1000 to come in later). So, it is a straight forward conversion if one looks at just the basics. Though, this time as far more number of people hold Rs 500 and Rs 1000 and many in unaccounted, it will have to be seen how many are returned. The lesser the conversion more it will become a case of demon.

This is strange if one looks at it. In 1946, the idea was to demon but it became more of a conversion. In 2016, we are calling it demon but it is actually conversion. However, lesser the conversion, it but could become demon. Talk about going in circles with words.


Second Denom — 16 Jan 1978 (Source: RBI History 1967-81, RBI Balance Sheet, RBI Currency and Finance Report)

The Finance Minister H.M. Patel in his budget speech on 28 Feb 1978 remarked:

The demonetisation of high denomination bank notes was a step primarily aimed at controlling illegal transactions. It is a part of a series of measures which Government has taken and is determined to take against anti-social elements.

As  the FM did not say anything about the success of the exercise, one can almost guess that it did not create much impact like in 1946.

The story of second exercise starts with a telephone call made to Mr. R Janakiraman, a senior official in the chief accountant’s office in the Reserve
Bank on 14 January 1978. He was said to come to Delhi for urgent work regarding exchange control. On reaching Delhi, he was asked to wrote the demon ordinance within 24 hours. He asked for the previous ordinance as a guidance. All communications with RBI were shut to ward off any speculation.

Then on 16 Jan 1978, the ordinance was announced via All India Radio at 9 AM.

The Ordinance provided that all banks and government treasuries would
be closed on 17 January 1978 for transaction of ‘all business except the
preparation and presentation or the receipt of returns’ that were needed to
be completed in the context of demonetization. For purposes of the Negotiable
Instruments Act, 1881, 17 January 1978 was deemed to be a public
holiday notified under the Act.

This time public was given even lesser time of 3 days to exchange Rs 1000, Rs 5000 and Rs 10000 notes.

Banks and government treasuries were required to submit information
(in the form of data ‘return’) to the Reserve Bank of high denomination
notes held with them as at the close of business on 16 January 1978. The
notes held would be exchanged for an equivalent value by the Bank. The
general public2 was given three days to surrender high denomination notes
for conversion. After 16 January, notes could be exchanged on tender of
the high denomination notes in person by the individuals themselves or by
a person competent to act on his/her behalf. They had to tender the notes
at the Reserve Bank or at notified banks in the prescribed format with full
particulars giving, among other things, the source or sources from which
the notes came into his/her possession and the reasons for keeping the
amount in cash.

RBI reported similar chaos and development of opportunistic markets/services as we see today:

Long winding queues started forming
in front of the Reserve Bank office right from the morning as also at the
main office of the State Bank of India, to collect declaration forms. According
to press reports on 18 January 1978, the day started with utter confusion
over the issue of declaration forms at the Reserve Bank headquarters
at Bombay and the working hours stretched to 6.30 pm. Enterprising city
printers are said to have made quick money selling forms in sets of three
for Rs 3. As expected, there were frayed tempers and a considerable hue
and cry from the public as well as foreign tourists, especially those who did
not have, or did not care to preserve, documentary proof to support the
exchange of notes. Many tourists were reluctant to fill the forms, particularly
tourists from the Gulf countries. Generally tourists who had a small
number of currency notes of high denomination had their notes exchanged
across the counter.

 What did RBI Governor say on the matter? Not very different from what earlier Governor opined. Just that this time the Governor added that the exercise was done against predecessor govts!

Governor I.G. Patel was not in
favor of this exercise. According to him, some people in the Janata coalition
in the government saw demonetization as a measure specifically targeted
against the allegedly ‘corrupt’ predecessor governments or government
leaders. Patel recalled in his book, Glimpses of Indian Economic Policy:
An Insider’s View, that when Finance Minister H.M. Patel informed him
about the decision to demonetize high denomination notes, he had pointed
out that:

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 naïve. And in any case, even those who are caught napping—
or waiting—will 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. (p. 159)

What were the gains from the exercise?

Well, this time currency actually rose! Leave conversion or demon, this was cumulation (for lack of better word!):

In Rs crore Notes and Coins below Rs 10 Rs. 10 Notes Rs. 20 Notes Rs. 50 Notes Rs. 100 Notes Rs. 1000 Notes Rs. 5000 Notes Rs. 10000 Notes Total
1977-78 1285 1825 690 995 4302 55 17.97 0.11 9170.1
1978-79 1325 1957 779 1440 5369 10870.0
Difference 40 132 89 445 1067 1699.92

So, around 73.1 crore was the demonetised amount (Rs 1000 + 5000 + 10000) in 1977-78.  Compared to this, 1067 crores were added by Rs 100 alone and the rest of the smaller denoms made up another 650 crores.  So, it did not destroy any money stock at all. In 1946, atleast some bit was destroyed. The amount of denoms were also much smaller than seen in 1946 (which is a puzzle!).

This was because Rs 10,000 was barely used. Its volumes were also highly volatile dipping to lows and then rising a bit.  This was because of rumors that the currency is going to be demoned:

Rs. 1000 Notes Rs. 5000 Notes Rs. 10000 Notes Total High Denom Total Currecny in Circ HD as % of otal Currency
1970-71 45.0 21.5 1.0 67.5 4596.0 1.5
1972-73 43.0 19.1 10.3 72.3 5742.3 1.3
1973-74 35.0 25.1 26.0 86.1 6676.1 1.3
1974-75 35.0 23.8 21.6 80.4 6776.4 1.2
1975-76 88.0 22.9 1.3 112.2 7120.0 1.6
1976-77 105.0 18.3 23.9 147.2 8354.3 1.8
1977-78 55.0 18.0 0.1 73.1 9170.1 0.8

What were the reactions back then? Econs had already sen not much impact:

On the day following demonetization, two noted economists, Professor
C.N. Vakil and Dr P.R. Brahmananda, expressed the view that the measure
would not have any enduring effect on money supply, prices of necessities
and problems like low savings, acute poverty, unemployment and industrial
relations, as the high denomination currency notes formed only a small
proportion of the total money supply. They were the authors of the memorandum
titled ‘Semibombla’ submitted to the union government for tackling
the inflationary situation in 1974.

So, there you go.

There are both parallels and differences with 2016 episode.

  • Similarities are all three were aimed at curbing black money. Though this time security is an added challenge.
  • In the earlier editions. RBI was mostly against the exercise and was proven right. This time it seems RBI has welcomed the idea (though there could be initial differences which will emerge only later). So, will RBI be proven right or wrong given their current view?
  • The big difference obviously is  the size this time. Previous ones barely impacted common people but this one is huge with 85% of currency out of the system.
  • The first demonetization was a case of conversion. Second of cumulation. Third is projected as a demon but is more of a conversion. Will it be a case of demon? Only time will tell…


15 Responses to “Digging through India demonetization history — 12 Jan 1946 (Saturday) and 16 Jan 1978 (Monday)”

  1. India's Demonetization-What is Next? - Marginal REVOLUTION Says:

    […] Economics has a discussion of two early demonetization in India, one in 1946 and one in 1978, both were focused on the larger bills unlike the current […]

  2. India’s Demonetization–What is Next? | Breaking InTo FUTURE Says:

    […] Economics has a discussion of two early demonetization in India, one in 1946 and one in 1978, both were focused on the larger bills unlike the current […]

  3. India’s Cash Problem | Elaine's Idle Mind Says:

    […] has tried this demonetization strategy twice before, in 1946 and 1978. Both times, the effect was pretty much nil. After the conversion period in 1946, the amount of […]

  4. Prakash Chattopadhyay Says:

    Incidentally I happened to take charge of a bank branch ( at Bokaro Steel City ,) for the 1’st time on the second Indian demonetisation day on 16’th January 1978 , which became a public non-transaction day and I along with the outgoing managar had to be busy in calculating higher dinomination notes ( including notes of Rs 10000/ ) and deposit as SBI BS City.

    • Amol Agrawal Says:

      Thank you so much Mr Chattopadhyay for sharing this bit of personal information. It is really nice to know. How did the measure work out in 1978? Were there queues to exchange such high notes in Bokaro as well?

  5. Demonetization in 1946 and 1978: Stories from the past - TOI Blogs Says:

    […] The following extract of RBI’s history volume is sourced from “Mostly Economics,” a blog on economic developments in India. […]

  6. Kris Says:

    Reblogged this on Swaraj.Opensociety.

  7. Demonetization in 1946 and 1978: Stories from the past – Vinood Poonia Says:

    […] The following extract of RBI’s history volume is sourced from “Mostly Economics,” a blog on economic developments in India. […]

  8. Utpal Chakraborty Says:

    It helped me a lot


    […] topic in INDIA at that time was DEMONETIZATION, so we were told to have a group discussion on NOTEBANDI but it anyhow landed to be a debate…. DEBATE …Whenever heard on news is always […]

  10. VYSHNAVI Says:

    It’s very helpful

  11. India’s Cash Problem – Elaine's Idle Mind Says:

    […] has tried this demonetization strategy twice before, in 1946 and 1978. Both times, the effect was pretty much nil. After the conversion period in 1946, the amount of […]

  12. samir sardana Says:

    I present the largest money laundering operation in the world sponsored by a state

    The Hindoo Notebandi

    The Demo Scam – which no Indian Newspaper reported – as they were all paid off – as they are of the ilk of the Brahmins and Banias.dindooohindoo

    It is the disaster of the Brain of Narendra Modi !

    Part 1

    Conversion Route (Elementary Level – rest to be submitted at the CIC Hearing)

    • Party A has Rs 1 crore of Old Cash (which is obviously unaccounted) and the choice of paying tax and interest thereon has lapsed as there is no VDIS – and post Demo the deemed tax is 100% at the minimum
    • Party B (Stage 1 Converter) has Rs 65 lacs of New Cash – which is given to Party A in lieu of the Old Cash of Rs 1 crores which is then given to Party C to X as under:
    o Party C to X (Stage 2 Converter) are legal entities who trade in Nil VAT/ST products (or under Exemptions and /or Compounding) and are POS Retailers who then , make manual or backdated E-Bills for fictitious sales of items to unknown individuals and deposit the new cash into the bank
    o Party C to X deposit the cash in banks whose books are open for 30-45 days before the date of announcement of the Demo or whose IT systems allow backdating of E- Bank Statements (within the period of reporting to the RBI and other Regulators)
    • Party Z then taps Party A to convert the New cash Received of Rs 70 lacs into a capital entry to clean the cash at a rate of , say 15%, wiring Rs 59 Lacs to Party A, as a capital receipt etc, and taking the Rs 70 lacs of new cash from Party A
    • Party Z which is basically front for Party B – hands the cash to Party B, after charing the custodial, logistics and security charges
    • Party B then resumes the same chain as in Step 2 above, wherein the rate of the conversion, id.est., 30% keeps rising as the DEMO deadline appears
    • Party A can convert the Rs 50 lacs into cash – new and old – at a premium, at any time that it is required


    • Since converters had the new cash within a day and as per news reports , even before the announcement of Demo, they have to be part of the establishment
    o If the converters had withdrawn the new notes from the bank, the banks would have tipped off the DRI/ED etc and possibly reported to the RBI – in which case they would be raided (but were not) or they would have to explain why large amounts of cash were withdrawn (for labour wages – although wages are not paid in Rs 2000 notes , agri payments etc) and on specific dates and how/why the banks were satisfied about the same
    o Hence, if the converters got the new cash o/s the Banking system – that is fraud and PROOF THAT THE CONVERTERS ARE PART OF THE ESTABLISHMENT
    o If the converters got the new cash from the banks – it is proof of collusion and fraud by the bankers, as past patterns of withdrawal by bank customers (for labour, wages, agri payments etc), would not support the new notes withdrawal
    • Since converters had TO TRANSPORT CASH ACROSS LOCATIONS, IT WOULD HAVE REQUIRED SECURITY OR PERHAPS STATE SECURITY, they have to be part of the establishment as
    o It is impossible that the state would not be aware of the logistics and security
    o It is impossible that the state would not raid the cash movement
    • Since Party C to X, who would have reported drastic increase in cash sales and deposit of cash into the bank , would not be able to support the same by PAST PATTERNS OF RAW MATERIAL PURCHASES AND TRADING PURCHASES AND SUCH LARGE AMOUNTS OF PURCHASES OF RAW MATERIALS IN CASH – COULD NOT HAVE BEEN JUSTIFIED BY PARTY C TO X , W/O THE SUPPORT OF THE ESTABLISHMENT

    • Cash recovered in the “form of old notes” by the “DRI/ED and the Police” – were all recovered from the “so called originators” and “so called garbage dumps”- w/o “a single case of cash recovered” from “the converters/entry operators”

    • No cash was recovered from the “converters/entry operators (Party B and Party C to X, as stated above)”, who are obviously part of the establishment – which is unusual , as the operators would be having the new currency which o Is either kept in a house/safe or o Stocked in the bank (which would have tipped off the DRI/ED etc or o Transferred the cash around in new stocking points and neither of the 2 above points can happen w/o the support of the establishment
    • Since the GDP is still growing on the “computation mode of GDP on expenditure mode”, and there is “no shortage of notes” of less than Rs 100,it would mean that the Industrial agglomerations typified by the SSI and the Cash sector,have been “able to convert the bank deposits”, back into cash – “obviating the purpose” of the notebandi (Rs 100 is assumed,as the wages are paid in that denomination

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