As the world was distracted by the U.S. presidential election last week, India’s prime minister made 84 percent of the cash in circulation worthless.
Narendra Modi on Nov. 8 declared that the two largest bills in circulation — the 500 and 1,000 rupee notes — were no longer legal tender.
Citizens in the world’s second most populous nation had no advance warning; Modi simply went on television and told them that the two bills would become worthless at midnight. Indian is the world’s seventh largest economy.
The move wiped out the value of 22 billion banknotes worth $278 billion, The Australian’s Greg Bearup estimated. Those bills composed 84 percent of the cash in circulation in India.
India citizens can take the notes to banks and deposit them, but any deposit of over $500 will have to be explained, Bearup reported. Those who cannot justify the deposit will have to pay a 200 percent penalty on it.
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“In effect, it would cost them more than the value of the deposit,” Bearup wrote. “They may as well throw the money out the window, and this is happening.”
Modi is trying to kill India’s cash economy with the move and force the nation’s people to put their money in banks. Most Indians do most of their business in cash, which is hard to track and tax.
By getting rid of large bills, Modi is hoping to discourage corruption, organized crime and terrorism. As Bearup noted, the move is aimed primarily at tax dodgers and crooked businessmen. Bearup reported on investors who build steel rooms in their rooms and fill them with rupees.
The world should pay close attention to what is happening in India, because Modi is simply implementing a proposal made by mainstream economists. Earlier this year Kenneth S. Rogoff, the former chief economist of the International Monetary Fund, published a book called The Curse of Cash. In it he recommended that governments stop printing paper money and only issue coins. Rogoff believes that cash is bad because it facilitates crime, corruption, illegal immigration, terrorism and tax evasion.
In May the European Union announced that it would stop printing its largest bill, the 500 Euro note. CNN reported that the action was taken because the bill “could facilitate criminal activities.”
“There is a pervasive and increasing conviction in the world of public opinion that high denomination banknotes are used for criminal purposes,” European Central Bank President Mario Draghi told a journalist a few months earlier.
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