Strokes and Seizures

Another valiant stroke of genius against tax-dodgers who will likely benefit only Modi’s government. That invalidating 86% of the circulating cash would cause seizures (and strokes) apparently carried now weight with the knights of taxing righteousness. Of course, the technical difficulties (new notes are different in size thus seizing up the ATMs) and the logistical execution causing chaos, cannot but afford one the opportunity to remember the launch of Affordable Care. And, certainly, no one would want to see Modi…stricken by…“forces”.

Some JPM guy tells FT that there is no precedent for this kind of “shock therapy”. Striking statement—countries were afflicted with overnight monetary (and fiscal) changes in the Eastern part of Europe after WWII, for example. In one case, in 1947, the new Soviet-imposed communist authorities in Romania exacerbated the inflationary pressures associated with the just concluded war by flooding the market with new banknotes in the 5M lei (!) denomination on a total circulation of 50,000 billion lei (NGR). It played to the market psychology (to expect further inflation since the National Bank just issued the 5M note).

This intentional savings and value-destruction was a prelude to a “stabilization” that was necessary in any case but was delayed until propitious for the government. Thus softened-up, “the market” later acquiesced to sudden (3 day) confiscation of all kinds: currency (at ridiculous trade-in rates and amounts under very low thresholds), goods (the communist government had bought peasant’s whole summer of ’47 grain crop and private companies’ inventories with old cash) and valuables (gold, etc.).

Naturally, just as today in India, the poor were the most impacted. Not only were the “stabilized” values extremely low, but the exchange took place at the banks, which were unavailable in rural areas which hosted most of the population. (In another parallel, the banks took in the whole amount one brought in but only exchanged up to a very low threshold, keeping the rest as “credit to be settled at a later time”—which never came.)

Modi’s aim is to em-bank the Indian people, to gain “transparency”, etc., while garnishing his plan with threats of tax audits and the humiliation of having people’s fingers inked. Beyond the feasibility of the economics of micro-micro-banking, this combination will likely leave out a significant amount of cash  (from people’s savings) that will not be exchanged—much to the benefit of the government: “seigniorage”…in spades. Armed with this new purchasing power, who knows to what heights transparency can be taken by Modi’s government.

And on yet another parallel, the well-to-do in India, just as the ones on 1940’s Romania, already protect their money (in foreign accounts, etc.) and, as UChicago professor and former recent Bank of India governor, Rajan, explains, “the clever” will “find ways around this program”. The erstwhile “bourgeois” dealt and saved in specie or foreign currency, and acted on their mistrust of the communists by not exchanging their valuables in hopes of a political “stabilization” (“vin Americanii!”) which did not happen.  That this eventually led to the gross injustice of their show trials and then their demise in the late ‘40s and early ’50s is a parallel not yet drawn—and it hopefully never will be.


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