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  The amazing thing was the Weimar Republic still had practically no gold bullion, and the Rentenmark was not redeemable in gold. However, people and debtors had the confidence that issuance would be strictly controlled. Thus, hyperinflation in the Weimar Republic was controlled mainly due to the trust and credibility in the issuing authorities.

  Nathan Lewis in his article lays out a great lesson in how demonetization and remonetization can control hyperinflation: ‘No preparation was necessary. No staff was necessary. No time was necessary. The only thing that was necessary was a clear policy, namely to maintain the value of the Rentenmark equivalent to a pre-war gold mark, and a clear means to accomplish this policy, by restricting the supply of Rentenmarks to maintain its value.’

  A year later, a new Reichsmark replaced the Rentenmark at 1:1, and the period of hyperinflation in Germany drew to a close.

  Hungary Post-World War II27

  After World War II, Hungary recorded the worst case of hyperinflation in modern history, with prices rising by 1,50,000 per cent every day. In 1944, the highest denomination of Hungary’s currency, the Peng, was 1,000 Peng. In July 1946, at the peak of the crisis, the highest denomination note was 1028 Peng!

  As in many other instances of hyperinflation, the root of the problem lay in war. As a German ally during World War II, Hungary had borrowed to support the German war effort (debts that were never repaid) and had largely escaped destruction. However, by 1944, it had become a battlefield between Germany and Russia. More than half its industrial capacity and factories were destroyed. Transportation could not function, railway lines and bridges were destroyed, and the retreating German and Soviet armies appropriated any functional machinery.

  After the War, the Allied powers ordered Hungary to pay the Soviet Union huge War reparations, which it could not afford. The Hungarian government believed that inflation would reinvigorate the economy, regenerate productive capacity, and create jobs.

  As Brian Taylor says:

  The government literally flooded the country with money to get the economy going again. Money may not have grown on trees, but it certainly flowed off the printing presses… the hyperinflation made it even more difficult for the government to collect taxes, so they introduced the Milpeng (1,000,000 Peng), which in turn was replaced by the Bilpeng (1,000,000,000,000 Peng), which was replaced by the inflation-indexed Adopeng. But even the indexed Adopeng succumbed to the inflation. By July 1946, there were 2 million trillion Adopeng to the Peng.

  The Milliard Bilpeng, the highest denomination note in this sequence (also the highest denomination note ever printed), was equal to a billion trillion Peng, which astonishingly, was only worth about US 12 cents!

  The Hungarian economy could only be stabilized by the introduction of a new currency, and therefore, on 1 August 1946, the Forint was reintroduced at a rate of 4,00,000,000,000,000,000,000,000,000,000 (400 octillion) = 4×1029 Peng, dropping 29 zeros from the old currency.

  The stabilization worked, and prices remained relatively stable in Hungary until the 1960s. And as for all the old Peng, they were thrown away because they were worthless!

  Two other instances of demonetization which were successful are noteworthy.

  European Union

  The first was the demonetization of European currencies when the Euro was introduced in 2002. This was a major and very complex demonetization as it involved introducing a new currency in 12 countries, while withdrawing their respective national currencies. This major demonetization was successfully implemented because of the painstaking planning that preceded the step and also because the old currencies remained convertible for an extended period of time.

  Australia

  In order to tackle the problems of both counterfeiting and wear and tear of the paper currency, Australia between 1992 and 1996 replaced all paper-based notes with polymer banknotes, after an initial trial in 1988.

  As the objective of the demonetization was very specific, very well planned, and executed prudently over an extended period, it was successful, without any negative impact on the population or the economy.

  My Perspective

  In principle, demonetization is not a bad thing. It is merely a tool, well-suited in certain specific circumstances, and most effective if planned meticulously and executed efficiently.

  It is the best way for a government to tackle economic problems such as hyperinflation, and to signal that it is serious about pursuing more responsible macroeconomic policies in the future. It is also the only way to replace currencies following a geo-political event, such as India’s 1947 Partition or the formation of the European Union in 1992.

  It is not suitable as a means to tackle problems such as endemic corruption or black money, as India has tried to do. Not once, but thrice! It does not address the root causes of the problem. It is also a disastrous measure, if poorly planned and hastily executed.

  The social turmoil and violation of human rights when money is forcibly expropriated, especially from the very poor, can have very long-term economic and political consequences, as is evident from the experience of several countries shared in this chapter.

  Policies such as demonetization can only be effective where systems are democratic and institutions are accountable, for then, there is a chance of a reasoned debate where all factors are assessed and the consequences on all sections of society are thoughtfully considered.

  Sadly, for India, the planners of demonetization overlooked the overwhelming evidence that would prove it would not succeed, ignoring in their wisdom the lessons both of economics and of history.

  4

  The Human Impact

  Before you do anything, stop, and recall the face of the poorest, most helpless, destitute person you have seen, and ask yourself ‘Is what I am about to do, going to help him?’

  – Mahatma Gandhi

  On the day demonetization was announced, my mother and I had just arrived in Delhi, breaking journey for a few days on our way to Ajmer and Pushkar. The note ban had us scrambling to try and exchange notes to manage expenses for our travel. It proved to be more difficult than we imagined, and we each spent several hours in bank queues – only to end up with a few unusable `2,000 notes.

  Describing the scenes outside banks, The New York Times reported:

  Thousands of security forces were deployed to keep the peace at India’s banks, where crowds of people had formed jittery, snaking lines in the early morning, desperate to exchange now-useless currency notes... Many people on the street said they were stunned and angry. Brawls broke out in lines outside banks, where many had to stand for hours, uncertain whether the stockpile of bills would run out... Poor migrants to the city said the sudden move had stranded them without enough money to eat.1

  Government spokespersons were swift to dismiss stories of hardships faced by Indians as ‘anecdotal claims’. However, since demonetization touched every single person and household in India, anecdotal evidence of the hardships people had suffered was plentiful. People ask why there were no riots in India, if demonetization was as disruptive as these anecdotal stories seemed to indicate it was.

  There are some who believe people were scared to protest, for fear of being branded anti-national or unpatriotic. There were reports of people being abused or beaten up when they spoke against demonetization. An example of this was Lallan Singh Khushwaha, a painter, who was beaten up in southeast Delhi’s Jaitpur area. He sustained head injuries. When he criticized the step taken by the government, a person identified as Ashiq verbally abused him. ‘When I asked him the reason, he started hitting me and asked how I could criticize the Prime Minister. Soon after, others joined him. I sustained injuries on my head and started bleeding,’ said Khushwaha. He said that only when some people intervened, was he spared.2

  Another explanation was that people simply had no time to protest; everyone was struggling to get enough cash to stay afloat. Also, perhaps there was an element of comparative Schadenfreude in the general public. A fee
ling of – even if I lose one eye (standing in the queue, loss of wages, etc.) the fat cats will lose two (their ill-gotten millions).

  A third explanation is that the generosity and open heartedness of our people helped and sustained those around them. Our family experienced this first hand.

  Though we had very little usable cash, we put our faith in God and proceeded on our journey. Co-passengers in the train generously shared their food. The auto rickshaw driver took us to our hotel – accepting whatever meagre spare change we had. The Khadim3 at the Ajmer dargah paid for our lunch. Even those seeking alms gave their blessings not expecting anything in return for everyone understood that cash was scarce. At Pushkar,4 the catastrophic impact of demonetization was visible on the distressed faces all around us. Villagers, for whom this was a major annual income-generating event, sat resignedly waiting in vain for buyers. There were tourists aplenty, but no one had money that they could spend and everyone was spending long frustrating hours in ATM queues instead of at the fair.

  On return to Delhi, we had dinner with a family friend who ran a successful brass export business from Moradabad. He employed skilled artisans on daily wages, based on the export orders he received. In 2016, he had received good orders for the Christmas season, and had taken on 2,000 workers. That evening he told us that he had let most of them go, as he could not pay their wages. ‘It’s crazy,’ he said. ‘I have the orders, I have the workers, and I have money in the bank, but I can’t pay my workers and so will not be able to fulfil my orders. This has happened twice before. Once during the Mandal riots,5 when I suffered a loss of `8 crore, and the second time during the Babri Masjid riots,6 when I suffered a loss of `12 crore. I don’t know what my loss will be this time…’

  In December, our domestic staff too experienced the effects of demonetization. Without claiming to have any premonition about demonetization, but simply to make payments more seamless, I have been, for a long while, paying salaries digitally on the first of each month to our household staff, directly into their accounts. Our old family retainer transfers part of his salary home also digitally, by standing instructions to his bank. And on the second of each month, his wife, accompanied by her daughter-in-law, makes the 15 km bus journey, from her village to the nearest bank ATM, to draw money for the family’s monthly expenses. In December 2016, she had to make 15 exhausting trips to the bank before she was finally able to draw `2,000.

  Others were not so fortunate. Newspaper articles started reported increasing numbers of deaths of people who had been waiting endlessly in queues for their money. On 9 January 2017, the West Bengal Chief Minister, Mamata Banerjee, shared a detailed list of 120 persons who had died as a result of demonetization. Appendix 4 contains the tragic details of individuals who died waiting in queues, or committed suicide out of desperation. There were also reports of death of patients who did not receive timely medical treatment because their relatives had no money to pay hospitals or doctors.

  The demonetization deaths were, however, denied by the government. Responding to a question on 17 March 2017 in the Lok Sabha on the total number of people who died during the demonetization period and compensation that would be provided to the families of the deceased, the Minister of State for Finance, Arjun Ram Meghwal, said, ‘The government has not received any “official report” on deaths during the course of currency exchange and withdrawals following demonetization.’7

  Middle-class Indians faced tremendous inconvenience as their hard-earned cash was impounded in banks and they had to spend hours trying to withdraw minor amounts. But it was the poorest Indians who suffered the most. Demonetization destroyed both their income and their meagre wealth. Laid off from their contract jobs or unable to sell their produce and forced to take on high cost loans because their own life savings were locked up, the poorest Indians were pushed further into penury and hopelessness.

  Some of their stories are narrated below, with grateful thanks to the respective publications who published them.

  Many other stories remain untold.

  Daily Wage Workers

  Daily wage workers were perhaps the hardest hit by demonetization. Subsisting at the bottom of the pyramid, with no savings, no job protection, and no certainty of where the next meal would come from, the note ban was a devastating blow.

  Millions of workers in the informal sector lost their jobs as employers, faced with a cash crunch, laid them off. Those who managed to find alternative work were forced to either accept old notes and then spend hours in queues to exchange them, or work on credit in anticipation of a future payment. Reduced to starvation and destitution, the stories below are illustrative of the havoc demonetization wreaked on their lives.

  Sharda Jhala, a farm labourer from Aravalli district, stares at an uncertain future. Work has dried up after demonetization, and she has had work for barely 20 days at half wages of `100 per day. ‘My husband can’t work, and I am the sole breadwinner of the family,’ says Sharda. ‘I had taken a loan recently to buy a cow. With livelihood becoming uncertain, I’ve cut the food even for the animal…We eat once a day with the resources we have – bajra (pearl millet) and onion or chilli. I hope the situation improves, or else we will be forced to starve.’8

  Munna Singh, a porter at the Azadpur mandi in Delhi, spends his day loading and offloading vegetables and fruits from trucks which come to the mandi. ‘If it is a good day at the mandi, I make anything between `700–1,000. On a bad day, my earnings are never less than `500. But I am struggling to get even `100 now. It is not as if I did not work at all. But everyone wants to pay me in old notes. Some traders for whom I worked last week have promised that I will be paid later,’ said Singh.9

  Basanti Marandi hails from the northern district of Mayurbhanj in Odisha and makes a living as a daily wage labourer. ‘I don’t know if I am to get work today because labour contractors don’t hire many labourers for their work since the government has decided to scrap 500 and 1,000 rupee notes. Even if I go to work, getting wages is again uncertain because the contractors also are short of 100 rupee notes to pay the wages,’ says Basanti while waiting for someone who can hire her for a day’s work. At least 3,000 labourers gathered at Bhubaneswar’s Nayapali labour point are passing through similar uncertain fate. As migrants from almost all parts of rural Odisha struggle for survival, the state of these labourers is symptomatic of the situation of poor people across the state.10

  Tribal Communities

  As per the 2011 Census, India has a population of 104 million tribals, constituting 8.6 per cent of the total population, who live mostly in and around forest areas. As many earn a living by selling minor forest products like honey, berries and herbs, they struggle to make ends meet, even at the best of times.

  Already at a disadvantage due to lower income and education levels and poorer access to banking and health services than the rest of the population,11 tribal communities across the country were hurt badly by demonetization. Demand for their products dropped overnight and they were unable to get cash for the limited produce that they could sell.

  ‘More than a currency crisis, the situation is becoming a humanitarian crisis. The tribal families who come here after painstakingly collecting the minor forest produce by spending up to four to five days in the jungles are forced to return empty handed as we have no money to procure it. It is really a very sad situation,’ said Rajitha K.A., an official at the Scheduled Tribes Cooperative Society at Kallur near Sultan Bathery. ‘But now the business is down to a bare minimum due to the weekly currency withdrawal limit of `24,000 applicable to the society. We are making part-payment for tribal people, who are desperate to hand over the collected produce to us,’ she added.12

  ‘I am anguthachaap’ (thumb impression, indicating one’s illiteracy) said Zumla, a Bhil tribal with a white turban, from the village of Footiya, in Jhabua district, Madhya Pradesh. Footiya is inhabited predominantly by adivasis, or tribals, and does not have a post office, a cooperative or commercial bank, an ATM, or a pub
lic phone booth. He said he had had a bank account, but rarely used it because it took him an hour to walk to the nearest bank branch, 6 km from the village. ‘I don’t know how to use an ATM,’ said Zumla. ‘If I can’t read, how do I know what buttons to press?’13

  Farmers

  Farmers and everyone dependent on agriculture suffered terribly as a result of demonetization. The entire food chain – from traders and transporters, to agricultural labour and daily wage workers, right down to small vegetable vendors – was severely impacted.

  As journalist P. Sainath remarked grimly, ‘Demonetization is spreading agony and misery in its wake across the countryside. If there’s been any stroke, it’s the one the heart of the rural economy has suffered.’14

  After two consecutive years of drought in 2014–15 and 2015–16, most of India had been blessed with plentiful rainfall and a bumper summer kharif harvest. The timing of the note ban could not have come at a worse time.

  Farmers who had sold their produce were stuck with worthless `1,000 and `500 notes as district co-operative banks were prohibited from accepting or changing old notes. Farmers who had not yet sold their crop were stuck as traders at the mandis and Agricultural Produce Market Committees (APMCs) had no cash to pay them. The worst hit were farmers with perishable produce – fruits and vegetables, many of whom were forced to sell their produce for a pittance or watch it rot before their eyes.

  As a consequence, despite a bumper harvest, farmers across the country were unable to pay their farm labour or repay their loans. They could not buy agricultural seeds or fertilizers for the sowing season of the winter rabi crop. As a consequence, not only land-owning farmers but also landless agricultural labour and migrant workers, dependent on agriculture, were rendered destitute.