This blog had earlier pointed to insights from the two historical episodes of India’s demonetisation in 1946 and 1978. There was another post on how Pakistan demonetised the Indian Rupees in its country post Partition.
One thing which keeps striking you all the time why does the Government keep reintroducing these high denomination notes? Infact, the first time they were demonetised in 1946, they were reintroduced as early as 1954! I was (once again) scanning RBI History volume (1951-67) to understand what was the thinking behind the reintroduction.
A major feature of currency management during these years was. the reintroduction in 1954 of notes in denominations of Rs 1,000, Rs 5,000, and
Rs 10,000. High denomination notes were de-monetized by an ordinance in 1946, but the idea of reissuing them commended itself to the Bank when the
Rural Banking Enquiry Committee (1950) remarked on the need to provide adequate facilities for converting and exchanging notes and coins throughout the country. The Bank felt that while the problem could be tackled partly through ensuring that the Imperial Bank and state governments augmented the handling and storage capacities of their branches and treasury offices respectively, the reintroduction of high denomination notes would help reduce the physical quantity of notes in circulation.
The bill to promote the reissue of high denomination notes was passed by Parliament in December 1953 amidst fears of members that they would encourage ‘black-marketeers’.
The Bank commenced the issue of Rs 1,000, Rs 5,000, and Rs 10,000 notes from April 1954. These notes were completely different in their design, watermark, and colour scheme from the pre-1946 notes. The new 1,000-rupee proved the most popular of the three, its circulation by the end of the year amounting to Rs 32 crores, compared with Rs 5 crores for the 5,000-rupee note and Rs one crore for the 10,000-rupee note.
Just eight years back they were demonetised due to black marketing and again reintroduced fearing black marketing!
Further, there was this thinking that these high notes will lower the pressure on Rs 100 notes and lower. Well, it did not work out as people feared the high notes will be demonetised again. Moreover, there was this concept of registered notes under which people registered their notes with RBI to mitigate forged notes and also exchange them in future:
Until 1956. it was the practice for notes of denominations of Rs 100 and above in circulation to be ‘registered’ in the books of the Issue Department.
Under the Bank’s note refund rules, a mutilated currency note in the ‘registered’ category could be exchanged only if its number was visible on the presented portion or, where such notes were lost or destroyed, the claimants were in a position to declare the number. In order to meet such claims without any loss to itself, special registration sections in the Bank’s Issue Offices maintained a record of all ‘registered’ notes issued and cancelled.
‘Registered’ notes were still in vogue in several countries, but they made up a negligible proportion of the total circulation. In India, however, 100-
rupee notes made up nearly two-fifths of the total circulation. The introduction of high denomination notes in 1954 was expected to reduce the demand for 100-rupee notes and ease the work of the registration section.
But thanks perhaps to public fears of demonetization of the new notes, this expectation was not fully realized, with the circulation of 100-rupee notes falling merely from Rs 620 crores in 1952 to Rs 550 crores at the end of 1955. With the increase in their use, the public did not find it practicable to keep a record of the 100-rupee notes in their possession. In any event, work in the registration sections of the Bank had expanded so greatly and fallen into arrears to such an extent that ‘registration’ no longer facilitated the settlement of claims.
The Bank’s executives did not wish to rock the boat. Registration arrears continued to pile up, and by the end of 1954 they amounted to 1,65,000
working days. With necessity staring it in the face the Bank finally abandoned registration from July 1956.
However, the Government thought of restarting registration. Why? It feared forged notes were coming from Pakistan and other countries. Sounds so familiar to the narrative of today:
Within a year, however, the Finance Secretary proposed reintroducing note registration and tightening note refund rules as a safeguard against forgeries. The Bank felt a security thread was the safer precaution, but was moved to reopen the subject in 1959 following the increased circulation of counterfeit 100-rupee notes printed reportedly in Pakistan, the Middle East, and South Africa.
The basic design of the 100-rupee note had remained almost unchanged since 1950, and the Master of the note press himself thought a change was overdue. Reviving registration too, was considered but never pursued seriously both because of the enormous work it involved, and the problems that would be posed by the notes issued or exchanged during the ‘dark’ period, in Ambegaokar’s words, of over two years during which registrations had been discontinued. Registration now made sense only if its introduction coincided with that of newly designed 100-rupee notes, and all the old notes were demonetized forthwith. Since this too would have created enormous organizational problems, not to talk of avoidable panic and unrest, the Bank advised the government against resorting to so drastic a measure.
This time is different?
As this blog keeps saying, the matters of money and banking keep going in circles under different names.
Issues like hoarding unaccounted money (don’t like the word black somehow) in high denomination notes are hardly new. Same is the issue of using these HD notes for counterfeiting and terror financing.
The Governments tell us by scrapping these notes that these threats have increased and create this fear amidst minds of people. The fear is an easy way to pass these measures onto people.
Then they restart these notes telling us that they have better security features which shall be difficult to be forged/counterfeited this time. Also, suddenly governments refigure that these high denominated notes are needed to help people engage in high value transactions.
We see both these elements in one go this time. Old Notes of Rs 500 and Rs 1000 have been scrapped. Rs 500 is being reintroduced with new features (and errors!) and RS 2000 is going to be issued for the first time.
And for all you know, the currency printing business is managed by few highly elite European firms. There is always threat of these security measures being shared with others. Ironically, the recent shift to plastic money is also going to favor some of the elite Western firms only. So much in the name of national threat and its security..