Demonetisation: Learning from failed experiment of Muhammad Bin Tughlaq

9 Nov, 2016

The announcement of demonetisation of currency notes of Rs 500 and Rs 1000 denomination has caused ripples of excitement about the bold decision and anxiety about what’s in store for the Aam aadmi.

One such ruler who tried his hand at demonetising in medieval India was Muhammad Bin Tughlaq (MBT). Tughlaq, ruled Delhi from 1324-51, was known for making bold decisions. Nick named “Man of Ideas”, Tughlaq shifted his capital from Delhi to Deogiri/Daulatabad (near Pune) for easier administration of the Deccan region, a wealthy province. His other bold decision was to demonetize Gold and Silver coins and replace them with copper and brass coins.

According to Ziauddin Barani’s Tarikh-i-Firuz Shahi, this decision was fuelled by Tughlaq’s ambition to conquer the world. To fuel his ambition, Tughlaq needed a huge army and a large treasury to pay them. So, he introduced ‘Token currency’.

Copper and Brass coins were introduced as token currency which would replace the Gold and Silver coins used earlier. However, in his enthusiasm, Tughlaq forgot to retain the right to issue coins with the State. This made forging of coins easy. People with knowledge of alloys turned their houses into a mint. Local Kings and village headmen became rich at the cost of government. These fake coins were not accepted by foreign traders. Coins issued by government lost value as it was difficult to distinguish them from fake ones. The damage was done.

As a last resort, MBT asked for the copper coins to be exchanged for Gold and Silver coins. According to Barani, Delhi was flooded with people wanting to exchange their copper coins and one could see mountains of copper coins in the State treasury!

MBT’s ‘bold’ decision ended as a failed experiment which has served as a guide for future policy makers. Even the Government of India has learnt from past experiments of withdrawing notes of higher denomination in 1946 and 1978. In 1978, the news of demonetisation became public even before the decision was taken. Thus, the surprise element in the announcement made now is one such lesson learnt.   

About the differences in earlier demonetisation exercises and present one, Abhay Pethe, Professor of Economics, Mumbai University said, “The major difference is the enormity of the process. Earlier a significant proportion of people were not affected. Today about 80-85 percent of notes circulating in the economy are of the denomination of 500 and 1000.” Pethe identified another difference and added, “The intent of government then was to curb hoarding of money and its use in the parallel economy. Now it is more towards curbing fake currency and its use for terror financing.”

When asked about new currency notes also running the risk of being forged, Pethe said, “It will be cumbersome to transact huge amounts with notes of small denomination, so need for higher denomination will be felt eventually. Thus, the Rs 2000 currency note. With a different denomination, mixing of new notes and older ones is less. Also, it will take some time for the new notes to be forged.” 

Pethe agreed that withdrawing currency notes in circulation is a short-term measure. “To ensure complete weeding out of fake currency or black money, cashless transactions is the best way. A Cashless economy is preferred because every transaction is recorded, but this can only be achieved when the large population of Indians working in the unorganised sector is brought into the formal economy. Only then will we be able to achieve the ideal of a 100 percent cashless economy”, he said.

For the time being, let’s hope that the purpose with which Government has taken this decision achieves fruition.

Image for representation purpose only.

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