History of Burma’s 3 demonetisations: 1964, 1985 and 1987…

Superb piece by Ananth Karthikeyan in Mint.

He analyses the three demon episodes in Burma:

The demonetization of 1964

The economy, unsurprisingly, plumbed and black markets grew exponentially. The Junta, however, did not pause to reflect. They could not slow down their drive to nationalization everything without losing face and revealing their administrative naiveté. Since they jealously guarded power, they could not delegate responsibilities, install a proper financial system or curtail policies that drove galloping inflation.

Something had to give. The dictator’s mind, moulded by years in the military, now seized upon a blitz-like move. In what was meant to be a masterstroke, large denomination notes, with which the “evil capitalists and deviants” obviously hoarded their money, would be swept away.

The reasoning was as follows: the Indians and the Chinese would be the first casualties and inflation would be halted. Therefore, the people would welcome the move. All deviants who had the gall to live outside the control of the state would be broken. The coterie around Ne Win concurred.

The Demonetisation Act of 1964 declared that all Burmese kyat notes of denominations of 50 and 100 ceased to be legal tender overnight. These notes were to be surrendered to receiving centres established all over Burma.

Reimbursement would be provided if notes were surrendered within a week. For small amounts, spot reimbursement was promised. For amounts between 500 and 4,200 kyats, “timely” reimbursement was guaranteed. Any amount over K4,200 would warrant further scrutiny and the application of an escalating tax.

The Junta’s narrative was wrapped in conflicting themes of divisiveness and social justice. The official declaration of the central bank proclaimed that this revolutionary move was designed to remove social evils: “The purchasing power of the vast sums of hidden money which could be used to embarrass the Government and the economy, by unsocial acts of hoarding and speculation of essential commodities (by foreigners and evil capitalists).”

Drawing upon popular perceptions and memories of Indian moneylenders and financiers, the Junta claimed that foreign capitalists (meaning ethnic minorities who were never given full citizenship) had historically accumulated money that belonged to the real people, thus hindering the Burmese Way to Socialism.

Ethnic Indians and Chinese, already reeling under nationalization, suddenly found themselves destitute. Most of them decided to leave Burma for good. An overwhelming majority of Burmese Indians were small financiers and businessmen—a far cry from the rich and powerful community of pre-war Burma—and now they were even more wretched.

It would take the concerted effort of a number of Indian ministries to bring them to India. The Junta, on its part, did everything to hasten the emigration.

However, the demonetization did not impact just the “evil capitalists” targeted by the government. In a predominantly cash economy, demonetization ruined many ordinary people and small businesses.

78% of notes were returned but it just shook the system:

In the end, the 1964 Burmese demonetization was a dismal failure. The state’s endless hunger for funds resulted in a huge quantum of new denomination notes soon matching the demonetized money. Inflation continued unabated.

The greatest consequence was the loss of confidence in the kyat. People returned to holding wealth in the form of precious metals and stones. Coins were hoarded and there was soon an endemic shortage of small change.

The atmosphere was rife with rumours of further demonetizations.

None of these lessons were learnt and the country saw 2 more demons in 1985 and 1987. In 1985, the purpose was also to widen the tax net which obviously failed as well..

Lessons of monetary history should be learnt well

 

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