Would postal stamping the old notes have helped in cash crunch?

JP Koning’s blog is the goto blog for monetray history especially post demonetisation.

In his recent post, he highlights how the postal stamping of old notes could have helped the government tide the cash crunch.

He starts with how the government missed a monetary historian in the team:

When Indian PM Narendra Modi and his small group of would-be monetary architects were putting together their plan to suddenly demonetize the 500 and 1000 rupee note and replace them with new notes (including a new 2000 rupee note), they must have been missing a monetary historian. That’s because there is a long history of nations that have suddenly demonetized the entire existing circulating paper issue and introduced a new paper currency. These rapid switches have tended to follow a well-trodden script, one that Modi did not follow. Had he chosen to adopt it, the last two months might have been less chaotic.

One wonders how many monetary historians there are in India after all? Leave historians, one does not even know whether the government consulted its own Finance Minister and Chief economic adviser. Even role of the central bank officials in the exercise is unclear. If the key central bank officials were indeed privy to the information one is stunned to see the inadequacy of the whole exercise.

Anyways, coming to the main point:

He says the government could have avoided the pain by saying only stamped old notes shall work for sometime . Over time as new notes would come in, the old ones could have been withdrawn.

One challenge faced by any prospective note switcher is to print the new currency fast enough to replace the legacy notes. When the switch is a slow one that is planned long beforehand, like the euro introduction, this is not an issue. In the case of a rapid switch that cannot be prepared for, however, the printing challenge is overwhelming. In India’s case, pre-printing notes was not the answer. Because its goal was to catch a large number of cash-users with undeclared cash, the rupee switch had to be sudden—printing large batches of notes ahead of time might have tipped off the prey. Without enough currency, however, an economy undergoing a switch is cursed to endure a temporary cash crunch, as India has experienced. To cope with the period between the demonetization of the old notes and the issuance of new ones, nations have resorted to an old monetary trick called overstamping.

He picks example of such a switch in Czech and Slovakia partition:

The 1993 conversion of old Czechoslovak koruna into new Czech and Slovak money is the best modern example of a successful rapid currency switch that resorted to overstamping as an expedient. With the January 1993 dissolution of Czechoslovakia into Slovakia and the Czech Republic, the public also anticipated an ensuing breakup of the still-circulating Czechoslovak koruna into two national currencies. Since Czech was expected to be the more economically robust of the two nations, depositors began to move their paper money and bank accounts to the Czech side of the border to ensure their savings would be held in the stronger of the two soon-to-be currencies.

Anxious to put an end to capital flight before it crippled the monetary systems of the fledgling nations, the Czechs and Slovaks were forced to introduce new monetary units ahead of schedule. Unfortunately, the banknotes hadn’t been printed yet. As a temporary expedient, the monetary authorities decided to affix different coloured stickers, or stamps, to existing Czechoslovak banknotes in order to demarcate them as either new Czech koruna or new Slovak koruna.

In executing a currency switch, there are several advantages to printing and affixing stamps to existing legacy notes rather than relying entirely on new banknotes. Stamps take far less time to design and print than banknotes, they can be rapidly distributed thanks to their small size, and they are cheaper to store. In the case of Czechoslovakia, for six days in February 1993 all koruna banknotes were brought in so as to have the proper Czech or Slovak stamp affixed to them (below is a legacy koruna note with a Czech stamp on it). After the six day period passed, any unstamped currency was declared worthless. Cross border movements of cash between Czech and Slovakia were made illegal for that period and cash withdrawals from banks suspended.

Once the new notes had been printed up, Czechs and Slovaks could bring their stamped legacy notes to the bank to get new ones. All in all, it was a relatively smooth currency switch.

Interesting.

Would postal stamps have done the trick? Well the issue of not having access to branches for large number of Indians would remain. But then here  post offices could be used to do the job given their wide reach.Post offices were found highly wanting in cash exchange exercise but could be more effective in their core activity of giving stamps.

However, this would remain a logistical nightmare. India is just too large and one would need huge number of postal stamps distributed across the country. Moreover, the large printing of postal stamps would mean another Ministry would have to be called for duty. We know that as the number of players increase in any such arrangements in India, the end result is just chaos.  We are fairly entrepreneurial as well and this would have most likely lead to all kinds of other problems – fake stamps, all kinds of trading/markets in stamps and what not.

Also,  am not sure whether the Czech example strictly applies here. This is a case of Czechs and Slovaks partition has more parallels with India-Pakistan partition where we saw a currency switch as well. It will be interesting to read details of the switch in 1947. In both these partition cases, it was expected that the switch would happen. Infact in India-Pakistan case also the monetary units had to be declared before the time given the break down of the monetary arrangements.

Contrasting with 2016, all we did was to move people from an old note to a new one within the same domestic boundary. This case is more in line with India’s own history the difference being the much larger scale this time. The postal stamping could have alleviated the pains but not by much. This will (hopefully) be revealed only in RBI’s later history, that why a central bank refused to learn from its own history?

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