What Happens When A Country Suddenly Gets Rid Of Most Of Its Cash?

What Happens When A Country Suddenly Gets Rid Of Most Of Its Cash?

September 24, 2019 By Greg Rosalsky

Bengaluru, India - November 8: Karnataka Pradesh Congress Committee member sports a caricatured mask of the prime minister of India Narendra Modi and Finance Minister Arun Jaitley as they staged a demonstration on the first anniversary of demonitization on November 8, 2017 in Bengaluru, India.

On Nov. 8, 2016, Narendra Modi, the prime minister of India, stepped in front of TV cameras and announced that the nation would almost immediately begin getting rid of most of its cash.

Indians would have to exchange or deposit their large rupee bills in a matter of weeks — or else the bills would become worthless. Poof. Gone.

The policy was supposed to end corruption, counterfeiting and a large shadow economy; it was also a push to turn India's backward, cash-dependent economy into a modern, electronic one.

But what followed proved to be chaos.

The surprise announcement sent millions and millions of Indians scrambling to exchange their cash. They left their jobs and waited in long lines at the bank. They upended their lives trying to preserve their savings. Businesses, starved of payments, crumbled. The whole story is nuts, and Planet Money has two great episodes that tell it. You can listen to them here and here.

It has now been a few years since India's "demonetization," as Modi called it. And the data are coming in. A new study, forthcoming in the prestigious Quarterly Journal of Economics, gives us a one-of-a-kind look at what this radical policy meant for the economy.

What Happens When You Suddenly Get Rid Of Cash?

Gabriel Chodorow-Reich is an economist at Harvard University, and he and his colleagues quickly saw demonetization as a perfect "natural experiment," a rare opportunity to look at how economic theory plays out in the real world.

You might think that Chodorow-Reich and his team could have just looked at official statistics, like gross domestic product, to get the story. But GDP misses a lot, especially in a country like India, where there is a massive underground economy.

To get around this problem, Chodorow-Reich and his colleagues used other measures, like satellite imagery of lights at night.

When people spend money, restaurants, factories, bars and cars light up the night sky. The idea is more light, more economic activity. Economists have increasingly been using changes in night luminosity, as seen from space, as a way to measure economic growth in places where official statistics are spotty.

India at night, as seen from space.   Wikimedia Commons

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