CHAPTER 6

Demonetization in Other Countries

As a monetary measure, demonetization has been implemented in other countries, too. One can find a series of moves toward demonetization the world over in the past. This chapter seeks to provide an understanding of why various countries embraced demonetization. Many countries implemented demonetization and benefited from the move, whereas some others failed at it. Almost all countries that had done demonetization had some common objectives—to curb inflation, corruption, and black money—and their government decided to demonetize their high-value denomination notes to get rid of these problems. In fact, India’s Economic Survey 2015 to 2016 refers to over 20 countries resorting to demonetization with different purposes and different rationale, and with varying results.

The United States

Demonetization is currently prohibited in the United States, and the Coinage Act of 1965 applies to all U.S. coins and currency regardless of age. In 1969, the United States under President Richard Nixon declared all bills above $100 null and void in the country to curb the existence of black money and restore the country’s sheen. The move was highly successful and is claimed to have been the start of development of the American banking system. The $100 bill is the most widely circulated denomination till date and, presently, is the highest value of denomination in production.

The United Kingdom

The highest denomination banknote in the United Kingdom is £50, which is essentially 50 to 100 times the smallest denomination note of £1. The United Kingdom effected demonetization by withdrawing the £10 note in 1943 and subsequently in 1945 when an Order in Council was passed empowering the Bank of England to withdraw all its notes after giving a month’s notice. Again, in 2010, the UK government asked banks to stop handling €500 notes after a report revealed that they were mainly used by criminals.

Other Countries

In 1982, Ghana stopped 50 cedis notes, which made black economy to flourish. It attempted to tackle tax evasion and empty excess liquidity. This made the people of the country support the black market, and they started investing in physical assets, which obviously made the economy weak.

In Nigeria, an anticorruption crackdown was conducted by the military government led by Muhammadu Buhari in 1984. The government issued new currency notes with new colors so that old notes would be rendered unusable within a limited time frame. However, the debt-ridden and inflation-hit country did not take the change well, with the result that the country’s economy collapsed.

In 1987, when Myanmar’s military government demonetized around 80 percent value of money to curb black money and corruption. But this led to a political dispute among the members of the government and subsequently to economic disruption, which, in turn, led to mass protests, resulting in deaths of many people. The move backfired and people started hoarding foreign currencies, losing faith in their own currency.

In January 1991, the Soviet Union, under the leadership of Mikhail Gorbachev, withdrew 50 and 100 ruble notes in order to eliminate black money and increase the currency value. The notes accounted for a third of the total money in circulation. This demonetization was carried out along with other financial reforms as part of its economic reform, which resulted in a significant increase in food, transport, and utility prices. The move turned counterproductive, leading to a slide in public confidence, which brought down his authority as it did not go well with the citizens. This also influenced subsequent developments, resulting in the August Coup of 1991 and the Belavezha Accords of December 8, 1991, which led to the dissolution of the USSR. An attempt was made in 1998, which led to a successful redenomination of the ruble, where three zeroes were removed from the denomination of the currency. This was followed by another currency switch in 2010, when two more zeroes were removed from the old currency that went off smoothly.

In Congo, Dictator Mobutu Sese Seko’s administration laid out the back-to-back currency reforms along with a plan to withdraw the obsolescent currency from the system in 1993. The reform was not well received by the public and resulted in increasing economic disruptions. Mobutu was ousted in 1997.

In Malaysia, Prime Minister Tun Dr. Mahathir Mohamad undertook a demonetization exercise back in September 1998 during the Asian financial crisis. That year, Bank Negara announced the demonetization of RM500 and RM1000 denominations and its cessation to be legal tender from July 1, 1999. Members of the public would continue to accept RM500 and RM1000 currency notes at full face value only up to June 30, 1999. During this period, members of the public were encouraged to exchange RM500 and RM1000 currency notes for lower denominations or deposit them at any branch of commercial banks or at any finance company within Malaysia. For the holders of RM500 and RM1000 currency notes abroad, appropriate arrangements were made to facilitate the exchange of these currency notes.¹ This provided some experience with decommissioning the 500 and 1,000 ringgit denominations after the 1997 Asian financial crisis.

The European Union

In the recent past, a very successful currency changeover operation was carried out in Europe, when twelve EU countries introduced their single currency, the Euro, on January 1, 2002. The countries that joined the European Union in the beginning phased out their respective currencies and adopted the Euro in 2002.

The creation of a single currency for the European Union over the period 1998 to 2000 was the largest demonetization and currency issue exercise in the history. The adoption of Euro resulted in demonetization across the various nations of European Monetary Union. In the first few days of 2002, participating countries distributed about 8 billion currency notes and 38 billion coins through 218,000 bank branches and post offices and 2.8 million sales outlets. During the same period, authorities also collected a large proportion of the 9 billion national notes and 107 billion national coins. Although the context is entirely different, it shows how much preparation is needed in the case of massive currency changeover. The European Central Bank prepared for almost 3 years, with everyone fully knowing about the changeover on a particular day. Printing new notes and minting new coins had already started in mid-1998.

Front-loading banks with new notes and coins started almost 3 months in advance. By December 31, 2001, banks were already front-loaded with almost two-thirds of the cash needed in the next few weeks. About 96 percent of coins in value terms were already there in the banks. All the ATMs were preloaded with new cassettes and were activated at midnight. Most ATMs were designed to provide maximum €10 and €20 notes, as it was thought that large denominations would create a change shortage during the changeover. Except for a few in Italy, most other ATMs worked as expected. Despite the fact that most Europeans normally used cards, it was expected that during the initial period, people will use more banknotes.

Further, Euro Zone would stop issuing the 500 Euro note after 2018 and will bring in 100 and 200 Euro banknotes. The Western world is currently engaged in the discussion on whether or not cash was an outdated means of payment in the 21st century (providing shelter for the “shadow economy” rather than merely simplifying the everyday means of payment). The design for the new €100 and €200 banknotes has been unveiled, ahead of entering the circulation in May 2019. Both the notes would have new security features, aimed at making them more difficult to counterfeit. The new notes are smaller than the current versions, meaning they will fit better into people’s wallets. They are printed on pure cotton fiber paper and, unlike the new Bank of England polymer notes, do not contain any trace of animal products.²

Despite all these preparations, many countries still permitted their legacy currency to remain in circulation for almost 2 months. The European example shows how much advance preparation is required if one were looking for the successful and convenient changeover to new currency notes.³

Australia

It became the first country in the world to release polymer (plastic) notes in 1996 in order to stop widespread counterfeiting. Since the purpose was to replace paper with plastic, changing only the material, it did not have any side effects on the economy. In January 2017, the Australian government set up a task force chaired by Michael Andrew to develop a multipronged policy response to combat the black economy, which was also tasked to look into the future of the country’s highest denomination banknote of $100 as well as potentially restrict cash transactions over a certain limit in Australia. It submitted its final report to the government in October 2017. The final report contained 80 recommendations, which span the whole economy. Australia, much like India, wanted to clamp down on the shadow economy.

North Korea and South Korea

Leader Kim Jong-II brought a sudden change in the country’s currency in December 2009, which resulted in chaos in the wake of economic “reform.” The North Korean regime decided to lop off two zeroes from the face value of the old currency, known as the won, in order to banish the black market, and gave North Koreans less than a week to exchange all their old currency notes for the new ones. The government announced that it would limit the amount an individual can exchange to just 100,000 won—or less than $40—at black-market exchange rates and any amount above that threshold would, in effect, be worthless. In response to the citizens’ immediate and widespread anger, those limits were raised to 150,000 won in cash and 500,000 won in banknotes. The move sought to punish a broad swath of people in the country who had amassed wealth by engaging in black-market trading. Tightening the government control gave a significant blow to the market.

South Korea too demonetized its currency in 2009. However, it had to be withdrawn later.

Zimbabwe

The country demonetized its currency as its economy collapsed and inflation reached an unprecedented height in 2015. Zimbabwe used to have $100,000,000,000,000 note (a one hundred trillion dollar note). The Zimbabwean economy went for a toss when President Robert Mugabe issued edicts to ban inflation through laughable value notes. After demonetization, the values of trillion dollars dropped to $0.5 dollar and the currency notes were also put up on eBay. The 3-month-long process involved the expunging of the Zimbabwean dollar from the country’s financial system and solidifying the U.S. dollar, Botswana pula, and South African rand as the country’s legal tender in a bid to stabilize the economy.

Philippines

In 2015, the country demonetized its banknotes that had been in circulation for 30 years (introduced in 1985). The new notes, which had been in circulation only since 2010, prevented counterfeiting. From January 2017, the old bills have been demonetized and they no longer have any monetary value.

Pakistan

It phased out all currency notes with old designs to bring in new designs and security features to its currency. In December 2016, Pakistan’s senate passed a resolution to phase out its 5,000 rupee notes in an attempt to curtail black money. In value terms, 5,000 rupee bills accounted for 30 percent of the currency in circulation in the country. Pakistan’s government plans to implement this demonetization over the next 3 to 5 years, in contrast to India’s accelerated approach. Much like India, Pakistan seeks to fight tax evasion and the stashing of illegal wealth.

The Middle East

June 2016 saw Saudi Arabia banning options and derivatives on Riyal’s USD peg. Libya’s central bank started withdrawing old currency in early 2012 in an attempt to restore liquidity after it found that the vast majority of funds were kept outside the banks. In Iraq, even when the Iraqi Swiss Dinar ceased to be legal tender in Iraq, it circulated in the northern Kurdish regions. Despite lacking government backing, it had a stable market value for more than a decade. This example is often cited to demonstrate that the value of a currency is not derived purely from its legal status (but this currency would not be a legal tender).

Venezuela

The South American country, whose inflation rate was to touch 475 percent, announced on December 11, 2016, that it had demonetized the nation’s highest currency denomination of 100-bolivar bill in an attempt to fight speculation and currency hoarding. The Nicolás Maduro–led government gave citizens a 72-hour window before withdrawing the currency, which accounted for 77 percent of the nation’s cash in circulation. The old notes were to be replaced, at some specified time, with new ones in denominations between 500 and 20,000 bolivars. The government believed that cross-border mafia was buying Venezuelan bolivars and selling them for high profits in Colombia. However, the government was forced to give citizens an extended deadline for the use of the 100 bolivar bill after a serious shortage of currency led to violent protests and looting and the country went into a severe chaos.

Table 6.1 provides a snapshot of some countries that had done demonetization. As shown in the table, one may find several instances when governments across the world failed to implement currency reforms. The move backfired in Ghana. In Nigeria, the goal to fix a debt-ridden and inflated economy was not achieved. In Myanmar, the first ever student demonstration was held against this move. In the erstwhile Soviet Union, President Gorbachev faced a coup within 8 months in August 1991 as the move was not a success. The Congo Reform Movement in 1993 resulted in increasing economic disruptions and Mobutu was ousted in 1997. Many other cases of demonetization were from those countries that were struggling to come out of serious economic disequilibrium, and there are countries where the public refused to accept the decision, resulting in a big setback to the government. As regards the recent demonetization, the Economist remarked that “anything India does, Venezuela can do worse. In a dramatic effort to curb corruption, India’s government cancelled all its high-denomination banknotes without any warning. Since 98 percent of transactions in India are done in cash, commerce seized up. It is a huge mess, but India will after a while print enough replacement notes. And it has a plausible plan to help its many poor people join the cashless digital economy” (December 15, 2016).⁴

Table 6.1 List of countries where demonetization has taken place in chronological order

More often than not, the governments and leaders from countries around the world who forced demonetization on people failed to see their dreams come to fruition or faced an ouster. In an attempt to crack down upon the wrongdoings of certain sections, the governments also cause inconveniences to those who have hitherto complied with law and order. How well the resentment among these people is tackled show what determines the success of such an exercise. Lahiri (2016) has pointed out that there were instances when countries like Canada and Singapore discontinued printing some high-value notes and asked banks to return such notes to the central bank without calling them illegal tender. In this context, one must make a distinction between the stoppage of printing of high-value notes, as has happened in Canada and Singapore, and the recent demonetization of high-value notes in India. The important point to note is that unlike these countries, in India, though the old high-value notes could be returned to the RBI, these were no longer legal tenders beyond November 8, 2016. Another difference pertains to the printing of new currency notes. There is not only a new 500 note but also an even higher denomination note than 1,000, namely, 2,000, which has been introduced. History tells us that some countries used demonetization as a tool to have an instant result. In sum, it can be said that countries that have gone for demonetization of their currencies have varied experiences and some of them have worrisome results.

Endnotes