Anil Bokil, member of the Pune-based ArthaKranti Pratishthan is seen as the person behind India’s demonetisation drive in 2016. Despite the fact that this exercise is hardly anything new and has been done twice in the past (with little success), we take it to be some new thing designed by someone else.
Mr Bokil in this latest interview in ToI points to demonetisation in US on 14 July 1969:
There have been many countries where demonetisation was implemented and it failed. Do you feel India is going in the same direction?
On July 14, 1969, US went for demonetisation of all notes above $100 which produced excellent results. We believe the new Rs 500 and Rs 2,000 notes are purely temporary and their proportion in the total currency money will be kept limited. We do not need 500 or higher denominations since daily disposable income of the majority of our population is less than Rs 100. For demonetisation to be effective and sustainable, the tax system should be revenue sufficient/neutral. Otherwise, government literally prints money. This causes inflation, leading to the practical need for higher denominations. Replacing the current flawed taxation system with banking transaction tax alone will take this transformation to the desired end.
BTW, 14 July 1969 is also when India nationalised its banks which till 8 Nov 2016 was seen as the biggest moment of Indian monetary history. This time too we see some linkages in form of India’s demonetisation and election of US President.
Anyways, back to US demonetisation in 1969. US Treasury website says:
What denominations of currency notes is the Treasury Department no longer printing?
On July 14, 1969, David M. Kennedy, the 60th Secretary of the Treasury, and officials at the Federal Reserve Board announced that they would immediately stop distributing currency in denominations of $500, $1,000, $5,000 and $10,000. Production of these denominations stopped during World War II. Their main purpose was for bank transfer payments. With the arrival of more secure transfer technologies, however, they were no longer needed for that purpose. While these notes are legal tender and may still be found in circulation today, the Federal Reserve Banks remove them from circulation and destroy them as they are received.
The July 1969 Federal Res Bulletin says:
Use of these large denominations has declined sharply over the last two decades, and the need for them appears insufficient to warrant the added cost of production and custody of new supplies. The large denomination notes were first authorized primarily for inter-bank transactions by an amendment to the Federal Reserve Act in 1918. With demand of them shrinking, printings of new notes of these denominations were discontinued in 1946 and the supply that was on hand at that time has now diminished to the point where continued issuance of such notes would require additional printings. Surveys have indicated that transactions for which the large demonination notes have been used could be met by other means such as checks or $100 notes.
All existing supplies of large denomination bills at the Federal Reserve Banks will be turned over to the Treasury for destruction as will circulating notes that find their way back to the Reserve Banks in the normal course of business.
So both the Treasury and Federal Res say that high notes were taken out as one could now transact higher amounts using better means like checks. In today’s world, we have replaced checks with digital payments. Overall idea is the same.
Moreover, the data was showing that transactions in Higher denom notes above $500 was indeed declining over the years. This is unlike India where we saw transactions actually rise in Rs 500 and Rs 1000 over the years.
I just dug up the data from the July 1969 Federal Reserve Bulletin. It shows the following:
|Total Currency in Circulation (in $ million)||Small Denom||High Denom|
In %age terms the table looks like this:
|Total Currency in Circulation||Small Denom||High Denom|
So, basically by 1969 the share of high denom notes (from USD 500 onwards) had shrunk from 6.5% to 1.2%.
This is actually quite similar to the data in India’s currency data in 1978:
|Small Denom||Rs. 50 Notes||Rs. 100 Notes||Rs. 500 Notes||Rs. 1000 Notes||Rs. 5000 Notes||Rs. 10000 Notes||Total Currency|
So, the Indian Government could have actually also added in 1978 that these notes were hardly in use, thus we can knock them off the system.
The trends are so different now. Rs 500 and Rs 1000 form 86% of the currency and are held by large number of people. The comparisons of India’s 2016 drive can hardly be comparable to US drive in 1969. It was actually India’s 1978 drive which was quite similar to US 1969.
Whatever the outcome of the demonetisations in 2016. it is great time to learn and figure monetary history..