In today’s Finshots, we talk about high denomination currencies and what’s happening to them.

The Story

The year is 1685. Jacques De Meulles, an administrator of a French Colony in North America is embroiled in a bitter dispute with the Governor back home. The confrontation reaches a tipping point when a minister delays shipment of silver coins meant to reach his military outpost. He runs out of coin soon enough and has to deal with the imminent prospect of delaying payment to his troops. But then he finds a workaround. He starts using playing cards as placeholders. He promises to redeem it with actual coins when the next boat arrives. And the soldiers begrudgingly comply. However, to everyone’s surprise, the playing card program takes off. Cards begin to float around as actual currency. Even official attempts to thwart the new program falls flat. And within a couple of centuries, paper money becomes the de facto instrument for trade.

Now bear in mind, Jacques De Meulles wasn’t the first man to conceive this idea. The Chinese did it much before him. But once De Meulles adopted it, the advent of paper money took off in a massive way. Cash became king and the cost of transactions dropped precipitously. But with digital transactions taking over, there is a big debate surrounding the role of paper money in the modern world. As we wrote in on our articles earlier —

Although we like to think there’s very little cost associated with carrying cash, it simply isn’t true. We pay to access cash all the time. We pay for it while we travel to banks, ATMs or other access points that disburse cash. We pay for it when these institutions charge a convenience fee. We pay for it when we queue at the salary office and wait for obscenely long hours. We pay for it when we experience accidental loss or theft and more importantly, we pay for it by foregoing better opportunities. After all, cash held at home yields no interest. And slowly but surely, these costs begin to add up. For instance, residents of Delhi together spend 60 lakh hours and 9.1 crores to obtain cash.

This debate is even more relevant when you consider high denomination currency, say a ₹2000 note.

At the time of demonetisation, the government rationalized that this new note would offer cost benefits. For instance, if RBI wanted to push ₹10,000 into the ecosystem, they could do it by printing just 5 notes. And when you are dealing with hundreds and thousands of crores, reduced printing costs translate to higher savings. Also, ATMs can’t hold a lot of money unless you load them with high denomination bills. So there was cautious optimism that the ₹2000 note would be a welcome addition. However, for people transacting with the currency, it was anything but pleasant. They struggled to offload the currency and the transaction costs were ridiculously prohibitive. I remember this one time when I was desperately trying to get rid of one of these notes and I had to offer more money simply to exchange the damn thing. So it’s no wonder that the ₹2000 note is falling out of favour.

Banks aren’t actively pushing it. RBI isn’t printing these notes anymore. And they are becoming a rare sight in ATMs these days. In fact, the Central Bank hasn’t printed a single ₹2000 note since June 2018. And it doesn’t seem as if this trend is going to reverse. Which brings us to the next question — What happens if the ₹2000 is slowly phased out?

Well, I suppose that depends on who you ask.

Some people would say we’d actually be better off. As one report notes —

High denomination notes are the payment instrument of choice for those evading taxes, committing crimes, financing terrorism or giving or receiving bribes. Cash offers anonymity, leaves no transaction record and is universally accepted. High denomination notes are the form of cash which enable large sums to be paid, moved and stored with minimum cost and detection risk. From the criminals’ perspective, high denomination notes are far more attractive than bank transactions.

More importantly, since the government can’t tax these transactions, they lose out on revenues as well. Meanwhile, if you are arguing that people use these notes to conduct legitimate high-value transactions, remember there’s UPI, Paytm and Net Banking. It’s so much easier to deal with these tools than use actual physical currency. And don’t get me wrong I am not saying that the ₹2000 note is cursed or it's evil. Bad people will find a way to finance bad things even if all high-value notes were phased out. All I am saying is that although the note looked cute, it probably wasn’t very useful. Maybe in a parallel universe where there’s no UPI, no credit cards, no Net banking the ₹2000 note is having a field day. But right here right now, I don’t see a lot of people crying over the disappearance of this fabled G̶P̶S̶ ̶N̶a̶n̶o̶c̶h̶i̶p̶ currency. And that’s just facts.

Until next time…

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