The Big Reverse Read online

  The Reserve Bank advised the public that they could easily identify the notes to be withdrawn, as the notes issued before 2005 did not have the year of printing on their reverse side (in notes issued post 2005, the year of printing is visible at the bottom on the reverse).

  The process of removing the older notes from circulation continued for nearly two years with the deadline for exchanging the notes finally being extended till December 2015. Over 164 crore pre-2005 currency notes of various denominations13 were shredded in the regional offices of Reserve Bank. The face value of the shredded currency notes was around `21,750 crore.

  The move caused no disruption to the public and was implemented smoothly.

  From the history above, it is clear that both of India’s experiments with demonetization, in 1946 and 1978, were undertaken for the same major reason as stated by Prime Minister Modi – to tackle black money. Clearly, neither experiment succeeded for the very good reasons pointed out by Governors Deshmukh and I.G. Patel. Regrettably, it appears that these learnings were ignored while making the decision to demonetize once again in 2016.

  Experiences of Other Countries Which Demonetized to Curb Corruption

  Several countries have tried to use demonetization as a measure to tackle corruption and black money. The Sri Lankan experiment has been mentioned earlier. The experiences, of other countries, as briefly outlined below, have been uniformly unsuccessful, just as India’s past demonetizations were.

  Ghana14

  After it gained independence in 1958, Ghana moved from currency issued by the West African Currency Board (WACB) to the Ghana pounds, shillings and pence. In 1965, Ghana adopted the decimal system, and introduced Cedi notes and Pesewa coins. The name ‘Cedi’ was derived from the word ‘sedie’ meaning cowrie, the shell money which was in wide circulation till the nineteenth century. The ‘Pesewa’, very similar in sound to our paisa, replaced the Ghana pence.

  In late January 1982, the Ghanaian government demonetized the 50 cedi note. The official reasons stated were: To mop up excess liquidity in the system; to ease inflationary pressures; to crack down on tax evasion; to punish corrupt politicians; to crush currency smuggling and thereby to shore up the external value of the currency.

  Excerpts from an article in the Ghana web, by George Ayittey, describe what happened as a result: ‘The government insisted that the withdrawal of the 50 cedi note was not against the poor or the genuine rich, but rather it was meant to withdraw excess liquidity in the hands of a few greedy and corrupt businessmen.’

  Citizens were given two weeks to deposit these notes in their banks in return for chits that were supposed to be redeemed later. They never were. Ghana shut its borders for two years.

  When the news of the demonetization leaked out, many people in Accra and other parts of the country went on shopping sprees before the 12 February 1982 deadline to get rid of their notes. Many rural Ghanaians folks had to trek for miles to the nearest bank in highly inaccessible regions of the country to exchange their money. Missing the deadline meant that a whole lifetime of savings could be lost forever.

  Then on 13 February 1982, a day after the deadline for the deposit of the demonetized 50 cedi notes, the government announced that account holders whose balances exceeded 50,000 cedis would be subject to investigative probes to determine their compliance with tax obligations. The public reacted by shunning the banking system and conducting business strictly on a cash basis. The loss of confidence in the cedi and the subsequent flight from the currency resulted in soaring black market rates. Within one year, the black-market rate jumped from 40 to 100 cedis to the dollar.

  In one stroke, this inane policy shattered confidence in the currency and dealt a devastating blow to the banking system, from which it took years to recover. For more than a decade after the currency change, Ghanaians shunned the banking system, leading to large amounts of cash being held outside the system. Which fool would put his money in a bank and invite a tax audit?

  Nigeria15

  Once a thriving agrarian economy, by the 1980s, Nigeria had become a classic example of the phenomenon known as ‘the oil syndrome.’

  This is best described by economist Helen Kitchen:

  In pre-oil days, Nigeria’s GDP was growing at an annual rate of 4.5 per cent, agriculture was the leading economic sector, and Nigeria was one of the world’s largest exporters of peanuts, palm oil, and cocoa… Oil income rose dramatically – from $189 million in 1964 to almost $24 billion in 1981. This rapid influx of foreign exchange and the massive increase in funds available to the government for public spending set in motion a self-perpetuating cycle of hyperinflation.

  Meanwhile, thousands of Nigerians were abandoning the farming areas every year to seek the higher paying jobs that were available in the cities. By 1980, oil earnings accounted for over 90 per cent of Nigeria’s foreign exchange, and agriculture had shrunk from 58 per cent of total GDP in 1964 to 20 per cent. From a position of food self-sufficiency, this largely rural nation had slipped into a significant dependency on food imports (over $2.2 billion annually as of the early 1980s).

  The global recession of the early 1980s brought oil revenues plummeting downwards and Nigeria’s foreign debt accumulated to almost US$ 16 billion. In a military coup on 31 December 1983, Major General Muhammadu Buhari ousted the President, Shehu Shagari, at a time when the country was facing an acute economic crisis.

  The new military government promised a crackdown on corruption and inefficiency. As a key step, General Buhari demonetized the Nigerian Naira, issuing new banknotes with a different colour and forcing the replacement of old ones within a limited period.

  The presumption was that money stashed away by corrupt politicians and greedy businessmen would be flushed out of the system.

  The result was catastrophic for the economy. As reported in the publication West Africa:

  The Nigerian public reacted by shunning the banking system. Rather than deposit their savings at banks, several people went on spending sprees, buying among other things, cars, airline tickets, anything that could later be sold. Why should Nigerians keep their savings in commercial banks? To survive, the banks had to offer fantastic rates to attract depositors and invest in highly speculative ventures. Many did not make it and the banking system nearly collapsed.

  Nigeria’s demonetization had severe long-term consequences for the economy and particularly the banking sector. The results continued to be felt almost 10 years later.

  A report in the African Business dated October 1993 stated, ‘In November 1992, the Central Bank of Nigeria declared 46 banks as insolvent. By 1 September 1993, literally all the commercial banks in Nigeria were unable to meet their obligations to customers. Depositors were in most cases not allowed to withdraw amounts in excess of Naira 1,000, irrespective of their credit balances.’

  As a result of his failed economic policies, Buhari was ousted in a coup the following year. However, he remained active in Nigerian politics and was re-elected as President in May 2015.

  Burma/Myanmar:16 Demonetizations of 1964, 1985 and 1987

  In the early twentieth century, Burma was the second wealthiest country in South East Asia, after the Philippines. It controlled a wealth of natural resources, especially teakwood and petroleum. It was also one of the largest exporters of rice in the world.

  Until 1943, the official currency of Burma was the Indian rupee, when it was replaced by the Burmese kyat. After Independence in 1948, Prime Minister U Nu embarked on a policy of nationalization. By the 1950s, rice exports had fallen by 66 per cent and mineral exports by 96 per cent. General Ne Win seized power through a military coup in 1962, and embarked on an economic scheme called the ‘Burmese way to Socialism.’

  Bertil Lintner’s article in the Washington Post is succinct:

  The Burmese army seized not only political but also economic power. What the generals branded ‘the Burmese Way to Socialism’ meant that most private property was confiscated and handed over to military-
run state corporations. The old mercantile elite, largely of Indian and Chinese origin, left the country, as did many of Burma’s intellectuals. Before the 1962 coup, Burma had one of the highest living standards in Southeast Asia and a fairly well-educated population. Afterward, its prosperity fled along with its best and brightest.

  In 1963, banks in Burma were nationalized. The Burmese could only hold one account in one bank with each account having not more than a balance of kyat 10,000 per month or kyat 50,000 per year. Account holders could make withdrawals of kyat 5; however, they were only permitted to make a maximum of two withdrawals per week.

  As part of their economic programme, the Ne Win government demonetized the kyat thrice, each time with little or no compensation. Woefully, each demonetization failed and only compounded the economic distress of the people, leading to a situation where citizens had little faith in their currency or banks, and chose instead to keep their savings in gold, jewellery, or land.

  1964 The Demonetization Act of 1964 declared 50 and 100 Burmese kyat illegal overnight. These notes were to be surrendered at receiving centres within a week. Reimbursement was offered in varying time frames depending on the amount. However, any amounts deposited over kyat 4,200 would be scrutinized and subjected to tax. The redemption deadline was repeatedly extended and when it finally ended four months later, only about 78 per cent of the notes were returned. Due to both logistical problems and also fears of tax scrutiny, many Burmese did not exchange their notes. Both the kyat 50 and 100 notes were reintroduced later.

  1985 On 3 November 1985, the 20, 50, and 100 kyat notes were demonetized without warning. kyat 25, 35 and 75 notes were introduced in their place. Limits to cash deposits and deadlines similar to the 1964 demonetization were set – with similar unhappy results for the people. In an act of expropriation rarely seen before, only 25 per cent of cash surrendered was reimbursed.

  1987 Two years later, on 5 September 1987, Ne Win announced Myanmar’s third demonetization, without warning or compensation. The government demonetized the 25, 35 and 75 kyat notes and instead issued notes of kyat 45 and 90.

  Ananth Karthikeyan, writing in Mint, described the process: ‘Not even a semblance of an official reason was given this time. 60–80 per cent of notes became worthless overnight, but no exchange or compensation was provided. The Junta soon allowed reimbursement for up to K100, only so that restive students (who were now penniless) would have enough money to leave the cities and return home, instead of rioting in the cities.’

  The economic chaos that resulted as a consequence of the disastrous demonetizations and economic mismanagement by the Junta led to widespread riots (referred to as the 8888 Uprising), and eventually a military coup by General Saw Maung.

  In 1989, the country’s name was changed from Burma to Myanmar, and new Myanmar kyat notes were issued. This time, however, the old Burmese kyats were not demonetized, but were left to simply fade away through wear and tear.

  Soviet Union and Russia:17 Demonetizations of 1991, 1993 and 1998

  1991 On 22 January 1991, the President of the USSR, Mikhail Gorbachev, signed a decree demonetizing all 50 rouble and 100 rouble banknotes (issued since 1961), and restricted monthly bank deposit withdrawals of new notes to 500 roubles, from the state-owned Sberbank (Savings Bank). The Vremya (Time) television news programme broadcast this news at 9.00 p.m.

  The purpose of the demonetization, named the Pavlov Reform after its architect, the Minister of Finance, Valentin Pavlov, was officially to ‘…remove counterfeit roubles allegedly being brought into the Soviet Union from abroad.’ The government proclaimed that this measure would freeze the assets of speculators, corrupt officials, illegal businesses, and end counterfeit money.

  Notes could be exchanged for only three days, i.e., 23–25 January. Each person was allowed to exchange up to 1,000 roubles. After that, only special commissions had the right to allow the exchange of larger sums until the end of March 1991.

  Long lines of people immediately formed at savings banks. The demonetization was described as a ‘cruel blow to honest citizens’ as their lifelong savings, often as much as 15,000–30,000 roubles (a fortune in the erstwhile Soviet Union), vanished overnight. While the demonetization invalidated one third of the money in circulation, almost 14 billion roubles, or 10.5 per cent of the entire money supply, was confiscated from citizens through this step.

  By April 1991, food, transport and utilities prices had risen from 100 to 300 per cent. The standard of living in the country plummeted, as hyperinflation took hold. GDP fell by 20 per cent compared with 1990, and the budget deficit reached an estimated 20–30 per cent of the GDP. By the end of 1991, the economy of the USSR was in shambles.

  The 1991 demonetization undermined the people’s trust in the Kremlin and caused a complete loss of confidence in both the government and in President Gorbachev. He faced a coup attempt that August which destroyed his authority and led to the breakup of the Soviet Union in the following year.

  1993: On 24 July 1993, the new Russian government, headed by Boris Yeltsin, announced a demonetization of all banknotes issued prior to January 1993. Citizens were given two weeks, until 7 August, to exchange up to 35,000 roubles (equivalent now to only US$ 34) for new notes.

  All other savings could be deposited into a State Savings bank, but would be frozen there for six months at a low rate of interest. Foreigners could exchange no more than 15,000 roubles of old notes. Those Russians, who were outside the country during this period could exchange their notes later, if they were able to prove they were away from the country. As the country started to panic, President Yeltsin increased the exchange threshold to 1,00,000 roubles (about US$100).

  The Prime Minister, Viktor S. Chernomyrdin, said that roubles dumped into Russia from the former Soviet republics were outnumbering those printed by the central bank, making control over the money supply more difficult. He said there was a sufficient supply of the new banknotes, which featured the white, blue, and red Russian flag. The central bank said the move ‘…would eliminate outdated and counterfeit notes, many of them issued during the Soviet era and still bearing the likeness of Lenin’ and that their estimate was that 20 per cent of Russia’s money supply consisted of older notes held in former, neighbouring Soviet republics.

  Pavel S. Bunich, a well-known economist, summed up the 1993 Russian demonetization by stating that the short-term economic impact would not be as significant as the demonetization of 1991, because the hyperinflation that followed 1991 had already destroyed the savings of many Russians. However, it would cause people ‘…to judge that once again their government has deceived them’, given that the move was once again confiscatory in nature.

  By September 1993, the economic situation exacerbated the political opposition to the Yeltsin government. The parliament tried to depose Yeltsin, who responded by dissolving the parliament and calling for new elections. Street battles erupted in Moscow between supporters and opponents of Yeltsin. This constitutional crisis climaxed on 4 October with the military shelling the parliament under Yeltsin’s orders.

  The 1993 demonetization did not strengthen the rouble but led instead to serious economic complications both within Russia and its neighbours, the former Soviet states, whose currencies were linked to the rouble. Russia tried to negotiate the establishment of a new type of rouble zone, but did not succeed.

  The 1993 demonetization nevertheless achieved an important goal – it gave Russia a single set of valid banknotes, instead of a variety of rouble notes of different colours and sizes.

  1998 The successive demonetizations of 1991 and 1993 and confiscation of savings had led to Russians losing confidence in their currency.

  Russia had effectively become a demonetized and/or a multi-currency economy, where trade and business were not primarily conducted in roubles, but in foreign currency. US dollars were widely used and, by early 1998, it was estimated that the value of the dollar stock in Russia was greater than the value of the rouble stock!<
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  There was also extensive use of barter in business-to-business transactions. According to the Russian Economic Barometer Survey time series report, the share of barter in industrial output had risen from five per cent in early 1992 to almost 50 per cent in 1998.

  The only silver lining of the previous demonetizations and economic chaos that followed, as stated by the Finnish economist, Pekka Sutela, was ‘…if money and financial institutions are little used, their collapse will not bring the whole economy down.’

  Preparation for the demonetization of 1998 started in August 1997. Learning from the experience of 1991 and 1993, exchange of the old banknotes occurred gradually from 1 January 1998 until 2002.

  The new rouble was worth 1,000 old (1993) roubles. The design and appearance of the new notes did not change, except only the zeroes were removed! Its intent was simple – to reduce the nominal value of money in circulation, and as citizens were given adequate time to exchange their money, confidence returned.

  This demonetization had a positive impact on money circulation and was welcomed by citizens, as it simplified calculations and accounting. Strengthened by the other fiscal and monetary measures, the rouble, though significantly devalued, gradually regained its role as the major currency of Russia.

  Zaire18

  Colonial rule ended in Belgian Congo on 30 June 1960, when the newly independent Republic of Congo was formed. The first five post-independence years were marked by political upheaval and secessionist movements. In 1965, General Mobutu seized power in a military coup and renamed the country the Republic of Zaire (derived from the Portuguese name of the Congo river – Zaire). The currency of the new Republic was also called the zaire.

  As the Congo was rich in natural resources, especially uranium, it became one of the focal points in the Cold War between the Soviet Union and the US. Mobutu’s rule was characterized by widespread cronyism, endemic corruption and economic mismanagement.