Demonetisation in US on 14 July 1969: How relevant is it for comparing with India’s demonetisation in 2016?

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
50 100 500 1000 5000 10000
1939 7598 5553 460 919 191 425 20 32
1945 28515 20683 2327 4220.0 454.0 801 7 14
1950 27741 19305 2422 5043.0 368.0 588 4 12
1955 31158 22021 2736 5641.0 307.0 438 3 12
1960 32869 23521 2815 5954.0 249.0 316 3 10
1965 42056 29842 3540 8135.0 245.0 288 3 4
1968 50961 36163 4186 10068.0 244.0 292 3 4
May-69 50399 35529 4158 10166.0 244.0 292 3 5

In %age terms the table looks like this:

Total Currency in Circulation Small Denom High Denom
      50 100 500 1000 5000 10000
1939 100.0 73.1 6.1 12.1 2.5 5.6 0.3 0.4
1945 100.0 72.5 8.2 14.8 1.6 2.8 0.02 0.05
1950 100.0 69.6 8.7 18.2 1.3 2.1 0.01 0.04
1955 100.0 70.7 8.8 18.1 1.0 1.4 0.01 0.04
1960 100.0 71.6 8.6 18.1 0.8 1.0 0.01 0.03
1965 100.0 71.0 8.4 19.3 0.6 0.7 0.01 0.01
1968 100.0 71.0 8.2 19.8 0.5 0.6 0.01 0.01
May-69 100.0 70.5 8.3 20.2 0.5 0.6 0.01 0.01

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:

High Denom  
  Small Denom Rs. 50 Notes Rs. 100 Notes Rs. 500 Notes Rs. 1000 Notes Rs. 5000 Notes Rs. 10000 Notes Total Currency
1970-71 50.9 48.1 1.0 0.5 0.0 100.0
1971-72 50.1 49.2 0.7 0.0 0.0 100.0
1972-73 49.1 49.6 0.7 0.3 0.2 100.0
1973-74 50.5 48.2 0.5 0.4 0.4 100.0
1974-75 50.3 48.5 0.5 0.4 0.3 100.0
1975-76 49.5 1.2 48.1 1.2 0.3 0.0 100.0
1976-77 45.1 8.8 44.6 1.3 0.2 0.3 100.0
1977-78 41.4 10.9 46.9 0.6 0.2 0.001 100.0

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..

Advertisements

3 Responses to “Demonetisation in US on 14 July 1969: How relevant is it for comparing with India’s demonetisation in 2016?”

  1. ashok singhania Says:

    please look in to this demonotisation with refrence to benami property act. now all transaction need to be recordeded. otherwise any thing you purchase becomes benami. the king has got right to consficate and put in jail for period of 1 to 7 years.
    perhaps govt of india has become biggest goonda organisation on earth with this dracion law. as per money please analyise it as debt free money produce by govt. it ratio with bank money or total deposist.

  2. Mahendra Singh Says:

    Fantastic article. Good research. People are completely off-base when they compare 2016 with 1969 in US. I heard this recently by people when traveling in India, and I knew that it cannot be true. So i was looking to research and found your article. It explains well.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: