Demonetization in 1946 and 1978: Stories from the past
Prior to last week’s announcement by Prime Minister Narendra Modi that high denomination notes would stop being legal tender from 9th November, there were two similar instances in India.
The first instance was in 1946 and the second in 1978 when an ordinance was promulgated to phase out notes with denomination of Rs 1,000, Rs 5,000 and Rs 10,000.
The media in terms of numbers was limited in 1946 and 1978 when compared to 2016. But given the importance of the decisions, it did trigger coverage.
Newspaper and magazine archives of the 1946 decision do not seem to be available online. Therefore, I relied on Reserve Bank of India commissioned history of India’s central bank to get an idea of how a stakeholder perceived the decision.
The following extract of RBI’s history volume is sourced from “Mostly Economics,” a blog on economic developments in India.
According to RBI’s relevant volume:
“Sir Chintaman Deshmukh (governor) felt that we may not get even as much as Rs. 10 crores 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. Provided Government are 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 to proceed with it notwithstanding the administrative difficulties involved.”
It was not the first time an RBI governor was skeptical of government’s move to strip currency of legal tender characteristic at short notice.
In 1978, when Janata government proclaimed an ordinance, some of the media coverage of the development was available online.
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