The Indian government decided recently to withdraw 85% of paper currency. Despite the hair-brained nature of this scheme, ostensibly aimed at reducing corruption and tax evasion, the Reserve Bank of India agreed almost overnight. More intriguingly, it seems to be working. Not in the sense of being a beneficial policy. But in encouraging people to deposit the old notes for something that will be worth something after the deadline.
Why is this intriguing?
Well, a contrasting story, told to me first by former Governor of the BoE Mervyn King, is of the late Sadaam Hussein’s attempt to demonetize the then autonomous area governed by the Kurds, and protected by a Western-backed no fly zone.
Sadaam, who was having a spot of difficulty financing his activities through conventional means, needed to print lots of notes, but sanctions prevented him from buying Swiss-printed dinars. So, partly for this reason, and partly to try to destabilise, Lenin-style, his adversary, the legal tender status of old notes was revoked.
Kurds were invited to make their way to the central bank of Iraq in Baghdad and swap the old notes for new ones. But for reasons we can guess at, they did not think it beneficial to cross the de facto border into the rump of Iraq, or find someone to do it for them. Instead Kurds held onto their old ‘Swiss dinars’, (so-called because they were printed by the Swiss firm De La Rue). They refused to be demonetized, in other words.
These stories remind us that more generally the decision about what is or is not money is a social and collective choice, not one maintained solely by fiat.
The Kurds ignored Sadaam’s edict. Not just, or I would surmise, even mainly out of nationalist fervour [the old notes were not ‘theirs’ after all], but because individually, and collectively, it was judged economically advantageous. Perhaps the expectation arose that at some point a local central bank would be established and the notes would be redeemed [for other bits of paper of course] or Sadaam deposed. In India, note holders might have pondered whether the demonetization would stand or be revoked at some point. Instead it seems that they think they have to give into it.
Governments submitting to dollarisation after debasing their own currencies make the same point. A government gives local currency legal tender status and prints loads of it. Individuals decide to use dollars instead.
These stores provide a caveat to several varieties of what is essentially the same question [what should money be?] that pop up. For example:
Ken Rogoff debates whether central banks should stop issuing large notes. And the caveat in the back of our minds should be: is de-issuing feasible, and will it be accepted?
And Ben Broadbent mulled over whether the central bank should offer its own digital currency. The caveat here being: ultimately, this may be decided by society at large, and by markets: by forces outside central bank control, in other words.