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  He also pointed out the considerable administrative difficulties involved in covering nearly 5,700 offices of scheduled and non-scheduled banks. The Governor’s concluding remarks, as recorded by Sundaresan, were as under: ‘Sir Chintaman Deshmukh felt that we may not get even as much as `10 crore as additional tax revenue from tax evasion and that the contemplated measure, if designed to achieve such a purpose, has no precedent or parallel anywhere. If value is going to be paid for value (no matter whether such value is in lower denomination notes), it is not going to obliterate black markets. His advice is that we should think very seriously, if for the object in view (as he deduces from the declaration form), whether this is an opportune time to proceed with the scheme.’

  Finally, reflecting a dilemma that successive RBI Governors have faced in opposing a government directive, Sundaresan reported that Governor Deshmukh stated: ‘Provided government [is] satisfied on the points of (i) sparing harassment to the unoffending holders and (ii) a worthwhile minimum of results in the shape of extra tax revenue, he does not wish to object to the scheme as drafted, if government wish[es] to proceed with it, notwithstanding the administrative difficulties involved.’4

  Though not comparable in scale and magnitude to the problems faced in 2016, the demonetization of 1948 caused considerable difficulties to people. It also did not produce impressive results.

  The Times of India archives report that in West Bengal, a pundit had to postpone the marriage of his daughter. The `1,000 notes he had scraped together for her marriage were no longer legal tender. In Nainital, a big businessman fell over and died from heart failure when he went to hand in his `1,000 notes.

  At the time of demonetization in 1946, currency notes of the value of `1,235.93 crore were in circulation, of which high-denomination notes (`1,000, `5,000 and `10,000) totalled `143.97 crore. The Report of the Board of Directors of the Reserve Bank mentions that notes of the value of `134.9 crore were exchanged. Thus, notes worth only `9.07 crore, or 6.2 per cent, were ‘flushed out of the system’, not having been presented.

  The Times of India archives reveal that in the first ten days, currency notes worth `47 crore were deposited across India. Bombay led with `27 crore, followed by Calcutta with `7 crore, Karachi with `3 crore, Lahore with `2.5 crore and Madras with `60 lakh. New Delhi, as a newly constructed government town, apparently did not register.

  Summarizing the impact of the 1946 demonetization, the Direct Taxes Enquiry Committee in its interim report observed, ‘Demonetization was not successful then, because only a very small proportion of total notes in circulation were demonetized in 1946.’

  In his criticism, Sir Chintaman, delivering the memorial address at the Dadabhai Naoroji Memorial Prize Fund Lecture in February 1957, said:

  It was really not a revolutionary measure and even its purpose as a minatory and punitive gesture towards black-marketing was not effectively served. There was no fool-proof administrative method by which a particular note brought by an individual could be proved as the life-savings of the hard-working man who presented it or established as the sordid gains of a black-marketer. Another loophole of which considerable advantage was taken was the exemption of the Princely states from scrutiny or questioning when such notes were presented by them.

  In 1954, new high denomination notes of `1,000, `5,000 and `10,000 were reintroduced.

  Viewed in perspective, though the 1946 demonetization failed in its objective of curbing black marketing and did pose several administrative challenges, it did not cause widespread distress to the general public. It is estimated that the high denomination notes of `1,000, `5,000 and `10,000 were only held by three per cent of the population, and as they were certainly not used for daily transactions, the impact of the 1946 note ban on the common man was limited.

  Technical Demonetizations Between 1946 and 19785

  The demonetizations that took place during this period were essentially technical in nature. They involved the conversion of currencies of the Princely States and foreign territories into Indian rupees, and, in 1957, the demonetization of coins, as India moved coinage to the metric system.

  1949 The princely state of Kutch issued currency in the form of silver coins called Koris. It was subdivided into 24 Dokda, each of 2 Trambiyo. The Kori remained the currency of Kutch till 1949 when it was demonetized and replaced by the Indian rupee at the rate of 1 rupee = 3.5 Koris.

  1954 The French territories in India (notably Pondicherry) were transferred to the Indian Union on 1 November 1954 (the de jure transfer took place later, on 28 May 1956). Notes in the French territories were issued by the Banque De l’Indochine, and were in the denominations of ‘Roupie’ 1, 10 and 50. These notes continued in circulation until they were demonetized in 1954 and replaced by Indian currency.

  1957–59 In the Princely State of Hyderabad, coins were issued in the name of the Mughal Emperor till 1858. Thereafter, they were struck independently and were named the ‘Hali sicca’. Paper currency was only issued in 1918, under the Hyderabad Currency Act. The new currency was denominated the Osmania Sicca and printed in denominations of 1, 5, 10, 100 and 1,000. After the accession of Hyderabad in 1949, the Osmania Sicca remained in use until 1957, when it was replaced with Indian currency. A grace period of two years was given for exchange, and the Osmania Sicca was finally demonetized in 1959.

  1961 The Portuguese retained the territories of Goa and Daman and Diu in India till 1961. Paper currency in the Portuguese territories was called the ‘Rupia’ and was issued in denominations of 5, 10, 20, 50, 100 and 500. The monetary system consisted of Reis, the Tanga and the Rupia, with one Rupia consisting of 16 Tanga. From 1906 onwards, the Banco Nacional Ultramarino issued currency for the Portuguese territories in India. In 1959, the denominational unit was changed from the Rupia to the Escudo, with 1 Escudo consisting of 100 Cent avos. The Escudo remained in circulation till 1961, when Goa was annexed to the Indian Union. It was then demonetized and replaced by the Indian rupee.

  Demonetization of Coins

  In 1957, another technical demonetization took place – this time of coins, when India adopted a metric system for coinage.

  Earlier the rupee consisted of 16 annas or 64 pice (1 anna = 4 pice). In September 1955, the Indian Coinage Act was amended, dividing the rupee into 100 ‘paisa’. The rupee however, remained unchanged in value and nomenclature. The Act came into force with effect from 1 April 1957, when the old coins were demonetized. For ease of public recognition, the new decimal paisa was termed as ‘Naya Paisa’ and issued in denominations of 1, 2, 3, 5, 10, 25, 50 naye paise and 1 rupee. In June 1964, the term ‘Naya’ was dropped.

  The 1978 Demonetization6

  Despite the poor outcomes of the 1946 demonetization, the call to undertake another demonetization arose again in the mid-60s.

  In 1965, facing demands by the opposition to curb black money and use demonetization as a tool to do so, the then finance minister, T.T. Krishnamachari, said in Parliament that ‘Demonetization was neither feasible nor would produce results.’ He felt that estimates of black money were hugely overinflated and what did exist had been converted to ‘bonds, property and shares’, all beyond the reach of demonetization.

  In 1970, Ceylon conducted a radical demonetization of `100 and `50 notes. Their experience would have sounded eerily familiar to those who lived through India’s 2016 note ban.

  ‘Long unhappy queues snaked their way to the Kachcheri (district secretariat) clutching wads of old notes for exchange. Strangely enough no “bloated capitalists” were to be seen. Labourers, teachers, market vendors, butchers, bakers, joss-stick makers and housewives lined up for cash to buy their daily needs… The Kachcheri and Banks laboured mightily, well beyond office hours, before they wearily shut up shop till the next day. Bitter and frustrated latecomers left for home now clutching their worthless paper money which could buy them nothing.’7

  Ignoring the outcomes being reported from Ceylon, the Opposition began to pressure the government,
led by Prime Minister Indira Gandhi, to follow the Ceylonese example to counter black money. In response, she set up a commission on direct taxation under Justice Kailas Nath Wanchoo, to suggest measures ‘to tackle black money and corruption’.

  The committee’s interim report in 1970 recommended demonetizing high-value banknotes. However, the final report, submitted in December 1971, said nothing further on this matter and acknowledged that: ‘Demonetization was not successful then because only a very small proportion of total notes in circulation were demonetized in 1946.’8

  In any event, Indira Gandhi did not undertake a demonetization. Various reports attribute this to the fact that the Wanchoo recommendations were publicly known, which may have ‘resulted in black money operators getting rid of high-value currency notes.’9 Geo-political factors such as the Bangladesh war and the delicate state of the economy at the time may also have weighed on Indira Gandhi’s mind.

  However, later that same year, the Jan Sangh, the precursor to the BJP, adopted demonetization in a resolution at a party conference in Jaipur. The Times of India reported: ‘The resolution said between high prices and high taxes, the citizen was being “crushed”.’

  In 1977, the Janata Party, led by the Prime Minister Morarji Desai, came to power. The Jan Sangh was a part of the coalition, and, therefore, it was no surprise that demonetization was high on the agenda of the new government.

  On 16 January 1978, the High Denomination Bank Notes (Demonetization) Act came into effect announcing that all high denomination notes (`1,000, `5,000 and `10,000) would cease to be legal tender with effect from midnight that day. Thus the `1,000, `5,000 and `10,000 notes (which post the 1946 demonetization had been reintroduced in 1954), were now illegal for the second time.

  These notes could be exchanged at designated offices of the RBI and notified branches of SBI and other banks until 19 January (effectively allowing only two days for exchange as 17 January was declared a bank holiday). A detailed declaration form had to be submitted in triplicate, along with the notes for exchange.

  Like its previous avatar, this demonetization was also cloaked in secrecy! The Reserve Bank of India’s History, Volume III details the sequence of events.

  On 14 January, R. Janaki Raman, a senior official from the chief accountant’s office in RBI, was asked to go to Delhi on ‘some urgent work’. Despite being told to go alone, he took an assistant and when they reached, they were told they had 24 hours in which to draft a demonetization ordinance. They were forbidden from communicating with RBI headquarters in Bombay. Fortunately, they managed to get a copy of the 1946 ordinance and used it to draft the new one! After the ordinance was drafted, it was sent to the President, N. Sanjiva Reddy, for assent.

  On 16 January, the nation was informed through All India Radio’s (AIR) 9 a.m. news bulletin that `1,000, `5,000 and `10,000 notes were being withdrawn from circulation. The bulletin added that all banks and treasuries would be closed the next day, 17 January 1978.

  The Times of India reported that long queues formed in front of RBI and SBI offices from very early in the morning. Additional counters were set up but, according to the RBI history, 18 January ‘… started with utter confusion over the issue of declaration forms at the Reserve Bank headquarters at Bombay and working hours were stretched to 6.30 p.m.’ Tempers were high, particularly among those in queues and foreign tourists who were stranded without cash.

  Press reports suggested that many holders of high denomination notes did not turn up personally at bank branches to exchange them. Instead, they reportedly sold them to others who could present them at the bank with less suspicion. Various reports estimated that approximately `20 crore worth of high denomination currency notes were exchanged at a discount for small denomination notes.

  The press also reported that, despite all precautions by the RBI, secrecy was not well maintained and `1,000 notes were already out of circulation a week before the demonetization announcement. It was also alleged that a large quantity of high denomination notes was sent to the Gulf countries a few days before the ordinance was announced, which, in due course, were presented to the RBI through official channels.10

  Senior journalist Jay Dubashi wrote for the India Today, ‘The move was directed at freezing the secret funds of politicians, especially Indira Gandhi’s Congress.’ Morarji Desai was reported to have said, ‘…the Congress party had been spending money like water.’ Indira Gandhi had reportedly denied these allegations saying, ‘…even a ten-rupee note is a luxury to me.’

  Like his predecessor Sir Chintaman, I.G. Patel11 (RBI Governor 1977–1982) too was not in favour of demonetization. In his book, Glimpses of Indian Economic Policy: An Insider’s View, Patel wrote that, when the then Finance Minister, H.M. Patel, told him about the step, he asserted ‘…steps like these rarely have striking results.’

  He added, ‘Most people in possession of black money rarely keep their ill-gotten earnings in the form of currency for long. Thinking that black money is stashed away under mattresses or suitcases is naïve… And in any case, even those who are caught napping – or waiting – will have the chance to convert the notes through paid agents as some provision has to be made to convert at par notes tendered in small amounts for which explanations cannot be reasonably sought.’ Yet the government was insistent, and so ‘…the gesture had to be made, and produced much work and little gain.’

  Strangely enough, Finance Minister H.M. Patel12 had himself described demonetization as ‘not worthwhile’, a few years earlier. In an article, in the October 1972 issue of Gujarati periodical Nireekshak, Patel listed three factors: high tax rates, controls, and corruption, as contributing to the growth of undisclosed, black money. He said unless these were addressed, there was ‘…little point in grappling with shadows until we destroy the conditions which encourage black money.’

  Commenting on the large volumes of cash transactions in India, he noted in the article, ‘Agriculture is not subject to income tax and demonetized notes declared by farmers, large, medium and even small, will have to be accepted without question. Farmers may well help holders of black money to escape the net of demonetisers.’ Stating bluntly, ‘A little thought should convince those who demand demonetisation so vociferously that it would not achieve anything, not even uncover hoards of black money or prevent its re-emergence,’ Patel added, ‘All that it would do for certain would be to inflict a great deal of hardship on a great many innocent people and to increase corruption immensely.’

  It is, therefore, not clear why the Finance Minister agreed to the 1978 demonetization. Defending the move after its completion, however, he refuted the idea that the move could harm trade and industry saying demonetization ‘…would affect smugglers who were in any case on the fringes of trade and industry.’ He also declared he was pleased. The Times of India quoted him as saying somewhat cryptically, ‘You will see me smiling whatever the result!’ Such are the mystifying compulsions of politics!

  The value of high denomination notes in circulation on 17 January 1978 was estimated at about `180 crore. Of these, notes worth `20 crore or 11.1 per cent were not submitted for exchange and therefore extinguished. Like the preceding demonetization of 1946, the note ban of 1978 had no discernible impact on either black money or corruption.

  The `500 note was once again reintroduced in October 1987–88, while the `1,000 notes were reintroduced in November 2000, both with the portrait of Mahatma Gandhi and a watermark of the Lion Capital of Sarnath.

  In an interesting side note, it was Yashwant Sinha, then Finance Minister in the Atal Bihari Vajpayee-led NDA government, who introduced the High Denomination Bank Notes (Demonetisation) Amendment Bill, in December 1998 to reintroduce `1,000 notes. Addressing the Parliament, he said, ‘The Congress Party Government under Prime Minister P.V. Narasimha Rao had proposed this in 1994, and that the United Front government had also ‘decided to go ahead’ but “political events intervened and they could not bring the Bill before this House”. However, lookin
g at the justification and background recognised by two previous governments, the NDA government also proposed to go ahead with this.’

  Finance Minister Sinha refuted the erstwhile Janata Party argument that ‘the availability of high denomination banknotes facilitates the illicit transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes.’ He said he was ‘sure that the honourable members of this august House will share my view that the root cause for illegal transaction lies not in notes of high denomination but elsewhere.’ Sinha also stated that during the decision-making process, the government was aware ‘that the ISI is printing counterfeit notes and that fake notes are being circulated in this country.’ He declared that ‘a number of steps through the Ministry of Home Affairs and through the intelligence agencies’ had been taken and added that there would be no let-up in initiating ‘strongest possible action against any foreign agency which tries to disrupt our system by bringing into this country currency notes which are fake or counterfeit.’

  2014–15: Demonetization of pre-2005 High Denomination Notes

  In January 2014, the Reserve Bank announced that after 31 March 2014, it would completely withdraw from circulation all `100, `500 and `1,000 notes issued prior to 2005, as they had fewer security features compared with banknotes printed after 2005. The notes could be exchanged for their full value and the RBI clarified that all pre-2005 notes continued to remain legal tender.