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Concept of Demonetisation
Concept of Demonetisation
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In simple terms, demonetisation can be described as a process of withdrawing a currency unit of its status so that it further ceases to be a legal tender. Thus, after the process demonetised notes are not accepted as the rightful currency for any type of transaction. When demonetisation is performed, a new currency is introduced that takes over the old demonetised currency and the new ones may be of the same denomination or higher than their predecessor. The impact of replacing a legal currency status can be huge on the economic transactions that take place within a country as it can stabilise the economy as well as create unrest.
The concept of demonetisation is quite old as the first recorded instance comes from the United States of America (USA) in 1873. The USA framed the Coinage Act of 1873 which confirmed the removal of silver and the gold standard was adopted in its place as the legal tender. However, the process led to a contraction in the supply of money and as a result of it, an economic depression for five years was experienced by the country. Again, in 1969, under President Richard Nixon, the country demonetised all currencies over hundred dollars so that black money could be wiped out of the system. This move was very successful and it even led to the development of the country’s banking system.
The first demonetisation Indirectly, crowding out may also occur as a result of social welfare. Individuals and businesses are left with less discretionary income when governments raise taxes to implement or expand welfare programs, which can reduce charitable contributions. As a result, the government's spending on social welfare can be offset by a reduction in private sector contributions to the cause. In a similar vein, individuals who are currently covered by private insurance may choose to switch to the public option when public health insurance programs like Medicaid are established or expanded. Private health insurance providers may be forced to raise premiums as a result of having fewer customers and a smaller risk pool, resulting in further reductions in personal coverage. Government-funded infrastructure development projects can cause another type of crowding out by making it undesirable or even unprofitable for private businesses to operate in the same market area. This frequently occurs with bridges and other roads, as companies are discouraged from building toll roads or participating in other similar projects by government-funded development.
The RBI governor of the time was not very enthused with the idea. However, as these notes were only a small percentage of the overall money stock, there was no major impact on the supply or prices of necessary items. Finally, in 2016, denominations of 500 and 1000 ceased to be legal tenders and Indian demonetisation thus saw three instances of the same.