Suppose I borrow your car for a road trip from Mumbai to Lonavala and promise to bring it back safely. But I am a careless driver. I screw up and drive your car at high speed into a large tree. The car is destroyed.
No wonder you are furious with me. But I am a fair minded guy and I promise to make good for the damages I caused. So, I offer to buy you a similar car. But maybe you don’t want a car. Instead of the car, you want me to give you 5 buffalos, 3 chickens, 1 camel and 1 cup of milk from a female tiger in Corbett National Park.
I’ve never bought a buffalo before. I don’t know where the cattle market is. I know even less about where to buy a camel. And how am I supposed to get you the tiger milk! Come on, be reasonable.
But you don’t have to be reasonable. You insist that I OWE you for the car. I can’t get out of this. I must honor my debt.
This is where the government provides a way out.
It’s the concept of legal tender. All I have to do is offer to pay you for the car in Indian Rupees. You can take it or leave it. No, you can’t insist on being paid in chickens or camels or tiger milk. It’s the LAW. If you don’t want the Rupees, you can take a hike. Sad day for you.
So, here is what got lost in the entire slanging match over demonetization. Here is the thing which, had it been communicated clearly by the government and spread around by the media, would have eased much of the pain and panic that we saw over the last one week. The lines are easing now, but even this much pain could have been easily avoided. Rather we would have seen an orderly deposit and exchange of notes at banks until Dec 30, 2016 with minimal inconvenience to the public.
On Nov 8, Narendra Modi did NOT announce a ban on notes of Rs 500 and Rs 1000. All he did was declare that those notes would cease to be legal tender.
In other words, all that happened on Nov 8 is that people of India were no longer under any legal compulsion to accept Rs 500 and Rs 1000 notes as payment. They were just as free as always to voluntarily accept and trade in those old currency notes. At any time during the next 50 days, you could choose a time of your convenience and deposit/exchange those notes at a bank or post office. If you miss the deadline, the RBI would still exchange the old bills until March 31, 2017. Then, why rush?
Here both the government and the media are at fault. In the big Nov 8 speech (or at least in later pronouncements by the PM, the government, the top bureaucrats and the RBI), it should have been clearly communicated that notes had not been banned and people should have been encouraged to keep trading as usual in the old notes as the new currency was slowly pressed into circulation. Instead of doing lazy reporting from long lines, the media should have helped to educate the public. Ok ok…the second suggestion is outright laughable. To expect clear thinking from the media… lol. Especially when so many editors have just lost a lifetime’s worth of black money themselves (we all know the reality).
As long as you can account for the notes you deposit at the bank, there is literally nothing to worry about. The old notes are not worthless…no…not at all! As long as people are willing to trade in them, they are worth just as much as they used to be. The notes are guaranteed by the government upto March 31, 2017 and rather easy to exchange until Dec 30. There was no reason to panic and stand in line last week. Absolutely none at all.
Side note: It could even be argued that the notes would retain worth indefinitely, as long as people are willing to trade in them. Anything can be used to trade, from cups of tiger milk to drops of goblin blood to shiny pieces of paper we call banknotes. Although, this is a bit of grey area, for many countries do criminalize bartering…not for any morally clear reason or right/wrong, but merely because bartering prevents the government from collecting taxes. But I won’t go off here on a libertarian tangent about “what is money” and “fiat currency” and “alternative currencies” and whether we should even have central banks, but the topic is rich and vast. I’ll stop here.