Mauritius had to demonetise (i.e., remove banknotes from circulation) the whole of its banknotes in 1998.
It was not a demonetisation exactly of the type decided on 8th November last in the case of India by the Indian authorities.
In the latter case, the political objectives are apparently to flush out of the system huge amounts of black money that would have been hoarded by domestic tax evaders and counterfeit Indian currency notes in denominations of INR500 and INR1000 notes, allegedly introduced into India by Pakistan in order to stoke up terrorist activities in India. Around 85% of India’s total official currency in circulation is concerned in this exercise.
Righteous objectives but also stress to the public
The two political objectives were generally widely initially supported in India. It is the stress caused to innocent people at the bottom and to economic activities by limiting the amount of old banknotes that can be exchanged in fixed periods per week, the slow pace at which this is happening and the deadline of 31st December 2016 set for completing the full banknote exchange, that has affected people the most.
In practice, this means that past 31st December, in a few days from now, the banknotes cannot even be exchanged. The leftover unredeemed balance of banknotes in these two denominations will then represent an enormous windfall gain for the Reserve Bank of India, the issuer of the banknotes whose liabilities they are. Banknote holders who couldn’t carry out the exchange will be the losers.
There is a price to pay for the clean-up. There are seemingly endless daily queues at banks and ATMs in almost all parts of India, sometimes the hapless person being told, when his/her turn came, that the bank or ATM has run out of the new currency notes replacing the old ones. Imagine the plight of all those in the queue behind. Business is seriously affected, especially in activities which deal in cash and not through bank transfers. This chaotic situation will undoubtedly have adverse economic consequences. The psychological distress due to daily frustrations of otherwise honest citizens has been amplifying. With time, it now looks as if this entire exercise was not efficiently thought-out and coordinated.
One can hope that, past this seemingly depressing management of the demonetisation in India, reliefs will be provided to all those who have unjustly suffered if simply to repair some of the damage done. Only posterity will tell whether India will come out stronger after this exercise and that the old rot will not settle in again soon enough. One hopes that this exercise will ultimately be to India’s advantage.
An efficient banknote exchange
In 1998, in Mauritius, the entire banknote issue of the country had to be replaced within a given timeframe agreed in court, the replacement having been occasioned by the unfortunate hierarchical displacement of the Tamil script appearing on the banknotes in the previous set. The context was different.
Given the agreed timeframe for replacement of the to-be demonetised banknotes, the Bank of Mauritius actively caused the new replacement banknotes to be printed well in time and in quantities enough to replace the entire previous banknotes in circulation before the actual banknote exchange began. Our officers in the Banking and Currency Department of the Bank of Mauritius left no stone unturned to make the entire operation a flawless success. Everything was done to ensure that the banknotes were physically in place wherever they ought to be before the replacement.
The changeover was smooth and effective. There were no adverse economic repercussions. The only problem – which reflects the classic reaction of certain members of our population – was the last-minute turnout at commercial banks by numerous persons nearer the day fixed for the final redemption of the impugned preceding banknote issue, despite previous communiqués having already informed the public of the deadline. But everybody was finally served.
The element of trust
It is very important to bear in mind the confidence factor when it comes to banknotes. These are usually issued by central banks which command respect and authority from the whole community. Each banknote is in fact an expression of the central bank’s debt towards the banknote holder for the amount stated thereon.
Dating back to the ancient tradition inaugurated some three centuries ago by the Chief Cashier of the Bank of England who signed up on the banknotes issued in the UK or by the Commissioner of Currency in the former British colonies, our banknotes state: “This note is legal tender for” the specified amount. In other words, it gives an assurance in law that the holder of a banknote is lawfully entitled to be paid back the stated amount by the issuer, notably the central bank.
People accept the banknote on trust against this promise of the central bank, though most would not be aware of this element. It is only at its own risks and perils of losing its credibility that any banknote-issuing authority will overlook this fact, this commitment of the highest order to honour an obligation to the banknote holder.
As technology moves economic exchanges in the future free from central-bank-cash (e.g., if bookkept Bitcoins were to become, instead of banknote dollars, pounds and euros, a universally accepted medium of exchange replacing central bank cash), our transaction habits will change. Much of the way we deal at present will vanish. Digital bookkeeping may replace central bank banknotes in circulation. But recent mismanagements with Bitcoin itself show that there should be an ultimate giver of confidence of the last resort to users of currency in whichever form. A credible central bank could still be that final pillar of public confidence even if physical money were to give way to an entirely digital money system someday.