Theoretical Economics Letters, 2017, 7, 1001-1014
ISSN Online: 2162-2086
ISSN Print: 2162-2078
DOI: 10.4236/tel.2017.74068 June 22, 2017
Modeling Currency Flow in an Economy:
The Case of India’s Demonetization in 2016
Frederick Betz*, Timothy R. Anderson, Aurobindh Kalathil Puthanpura
Portland State University, Portland, USA
The 2016-2017 economic event of a sudden demonetization in India can pr
vide an empirical example in which to test the validity of some schools of
monetary theory, particularly the Chartalist School. The Chartalist School di
tinguished three kinds of money: Fiat, Commodity, and Managed Money. T
event provided empirical evidence that this distinction between currencies
an economy is valid and important. The sudden withdrawal of Fiat money
immediately decreased the amount of commodity money, creating an ec
nomic crisis in local Indian commerce. Managed money, as bank accounts
was unable to fill the temporary gap in the supply of money because a large
portion of the Indian population did not have bank accounts. Also the go
ernment did not supply a sufficient number of new 500 and 2000 rupee no
to quickly replace the withdrawn 500 and 1000 rupee notes.
Economics, Financial Systems, Monetary Theory, Methodology
Monetary theory is a major topic in economics with a long tradition and with
several schools of theory. As summarized by L. Randal Wray, monetary theory
identifies three kinds of money: “Fiat Money, Commodity Money, and Managed
Money” . Fiat money issued by government is a form to collect taxes; taxes
must be paid in money issued by a government, fiat money. Commodity money
is the currency used in trade and commerce. Managed money is bank accounts
used to settle debt and credit transactions in trade. The validity of any theory can
be tested by how the models derived in the theory are compared to empirical re-
ality. The validity of monetary theory is important because of the monetary and
fiscal policies implemented upon the basis of theory. Empirical tests of monetary
How to cite this paper:
Puthanpura, A.K. (2017) Model-
ing Currency Flow in an Economy: The
Case of India’s Demonetization in 2016.
Theoretical Economics Letters
April 28, 2017
June 19, 2017
June 22, 2017
Copyright © 201
7 by authors and
Research Publishing Inc.
This work is licensed under
Commons Attribution International
License (CC BY
F. Betz et al.
theory occur in the economic histories of countries. The economic event in 2016
of the demonetarization of the lesser notes of the Indian rupee provided an eco-
nomic event-in which to study the empirical interactions of fiat, commodity, and
managed money in an economy.
2. Historical Case: Demonetization of the Indian
Rupee in 2016
The demonetarization of the Indian Rupee in 2016 is a kind of political-eco-
nomic experiment. John Lanchester wrote: “Two months ago, the world’s largest
democracy embarked on one of the biggest monetary experiments the world has
ever seen. On Nov. 8, without warning or preamble, without discussion papers
or leaks, Narendra Modi’s Indian government invalidated most of the country’s
cash. The 500- and 1000-rupee notes ... were, as of that moment, no longer legal
tender. Anyone in possession of these notes had until Dec. 30 to take them to a
bank and either deposit them or exchange them for other notes. Anyone pre-
senting more than 250,000 rupees in cash ($ 3700) had to provide an explanation
for why he had so much, and proof that he had paid tax on it; the penalty for
unpaid tax was to cough up 200 percent of the amount owed. The two retired
notes represented 86 percent, by value, of all the cash in circulation in India” .
Shashi Tharoor wrote: “On November 8, Indian Prime Minister Narendra
Modi announced that, at the stroke of midnight, some 14 trillion rupees worth
of 500- and 1000-rupee notes—86% of all the currency in circulation—would no
longer be legal tender. With that, India’s economy was plunged into chaos. Mo-
di’s stated goal was to make good on his campaign pledge to fight ‘black money’:
the illicit proceeds—often held as cash—of tax evasion, crime, and corruption.
He also hoped to render worthless the counterfeit notes reportedly printed by
Pakistan to fuel terrorism against India. Nearly a month later, however, all the
demonetization drive has achieved is severe economic disruption” .
The significance of this event in India provides an empirical case to under-
stand the role of money in a modern economy, not just in India’s economy. John
Lanchester further wrote: “Many Westerners have become so used to discussing
China as the most populous country in the world, with 1.357 billion inhabitants
that they forget India is just behind it, with 1.252 billion. Of that total, only 12
million pay income tax. That’s an astonishing number: 99 percent of Indians
don’t pay tax. The majority of Indians work in what economists call the ‘infor-
mal’ or ‘unorganized’ economy, which runs overwhelmingly on cash. The
short-term result of Modi’s move has been, unsurprisingly, chaos: huge lines at
A.T.M.s and banks, farmers unable to buy seeds to plant crops, weddings and
property transactions canceled, piles of illicit cash shredded or burned. Some
workers have been forced to choose between earning a day’s pay or spending the
same day waiting to deposit money in a bank. Many of the poor don’t have bank
accounts at all” .
The rupee currency is fiat currency, issued or withdrawn by a government.
However, in formulating the policy to withdraw the fiat notes, the Prime Minis-
F. Betz et al.
ter had not anticipated the impact upon the commodity money of India. Shashi
Tharoor wrote: “Far from being a masterstroke, Modi’s decision seems to have
been a miscalculation of epic proportions. The announcement immediately trig-
gered a mad scramble to unload the expiring banknotes. Though people have
until the end of the year to deposit the notes in bank accounts, doing so in large
quantities could expose them to high taxes and fines. So they rushed to gas
pumps, to jewelry shops, and to creditors to repay loans. Long queues snaked in,
out, and around banks, foreign-exchange counters, and ATMs—anywhere where
people might exchange the soon-to-be-defunct notes. But, upon getting to the
front of the line, people were often met with strict withdrawal limits, because, in
a display of shocking ineptitude, not enough new currency was printed prior to
the announcement. Worse, the new notes’ design prevents them from fitting in-
to existing ATMs, and their denomination—2000 rupees—is too high to be use-
ful for most people, especially given that the government’s failure to print
enough smaller-denomination notes means that few can make change” .
It is important to distinguish between the functions of money as fiat (taxes)
and commodity (trade) because, in all cases, money is a kind of “ticket” to an ac-
tivity, to a “performance”. For example, John Maynard Keynes wrote: “Money is
the measure of value, but to regard it as having value itself is a relic of the view
that the value of money is regulated by the value of the substance of which it is
made, and is like confusing a theatre ticket with the performance” .
Money, both as ticket and as performance, was highlighted in the case of In-
dia. Geeta Anand and Hari Kumar wrote: “The ban is intended both to curb the
flow of counterfeit money and to take aim at terrorist organizations that rely on
unaccounted-for cash. It is also expected to help the government clean up a sys-
tem that has relied on cash to pay bribes and to avoid taxes. But the announce-
ment, made on national television in both Hindi and English, led to an imme-
diate upheaval in the country. Abolishing the current version of the 500 and
1000 rupee notes, worth about $ 8 and $ 15, will effectively remove 80 percent of
the currency in circulation” .
These rupee notes of 500 and 1000 were principally used as commodity mon-
ey in commercial trade within India. Hence, at least 80% of the trade in the In-
dian economy was impacted. Geeta Anand wrote: “Under the plan, people are
allowed to exchange the old bills for new ones of 500 and 2000 rupees, but only
at banks or post offices, where their exchanges will be monitored and anyone
with a large amount of cash will have to explain its source. The changes, meant
to combat corruption and tax avoidance, have thrown the country into chaos”
Economic “chaos” was not the intention of the government for the policy
change. But in fact, “chaos” was the “performance”. What was the intention?
Geeta Anand wrote: “The idea was to expose and penalize people holding huge
amounts of cash they could not account for, primarily money on which taxes
have not been paid. Most of the so-called black money is held in 500- and
1000-rupee notes. Someone who goes to a bank or post office with more than
F. Betz et al.
250,000 rupees in cash, or about $ 3700, has to explain the source of the money
to the tax authorities. People who can explain how they earned the money and
show that taxes were paid can keep it. But those without a good explanation will
have to answer to the tax authorities” .
Why had the government not anticipated the impact of the withdrawal of fiat
money on the trade with commodity money? Geeta Anand further wrote:
“Overnight, people found themselves lacking the currency for basic transactions,
like buying food, fuel and other necessities. Retail businesses came to a standstill
because people hoarded the little cash they had for food and other needed sup-
plies. To avoid tipping off tax cheats, the government did not print the new bills
until after the announcement, nor did it recalibrate automated teller machines to
dispense the new 500- and 2000-rupee notes. Long lines formed at the few
A.T.M.s that were operating, and many ran out of bills, infuriating those who
had stood in line for hours. Since then, the printing presses have churned out
more than $ 40 billion in currency, but the government was initially forced to
limit A.T.M. withdrawals to 2000 rupees, or about $ 30, at a time. The limits are
now 2500 rupees per A.T.M. withdrawal and 24,000 a week from a bank. The
government says it will take three weeks to recalibrate India’s estimated 200,000
Fiat money was a real problem to the government, because few taxes were be-
ing paid, with less than 1% of the populace paying taxes. Geeta Anand wrote:
“Unaccounted-for cash, or black money, is a huge problem for the country, be-
cause it keeps money out of banks where it could be lent to others, helping busi-
nesses grow and driving economic growth. Black money also sharply reduces the
taxes collected by the government, and hence services available to the public.
About a third of business in India is done with black money. In a heavily regu-
lated economy, businessmen frequently bribe government officials into giving
them licenses and other approvals. Government officials invest much of this
money in real estate, then understate the amount they actually paid. So not only
is the property purchased with black money, but the sellers pay less tax than they
should because the prices have been understated. Routine transactions, like pay-
ing a hairdresser, are largely carried out off the books to avoid paying taxes” .
The “performance” of the event continued on, after November 2016. Geeta
Anand wrote: “Will Mr. Modi pay a political price? Indians have exhibited re-
markable patience with the currency ban, but only on the promise that it will
actually accomplish what he says it will and the government can quickly get the
new bills into circulation. The government is working feverishly to distribute
them, but lines and public frustration are growing ... The ban could end up sub-
stantially damaging Mr. Modi’s own promise of jobs and economic develop-
And the people who paid the economic price of the event were not the wealthy
in India but the merchant, working, and farming groups. Geeta Anand and Hari
Kumar wrote: “In the winding lanes of Chawri Bazar, one of Delhi’s oldest
wholesale markets, paper merchants sat slumped in their stores, pondering how
F. Betz et al.
to make the transition to the new economic order ushered in by the Indian
prime minister two weeks ago. ‘This is like curse of God on us,’ said Gian Pra-
kash Gupta, 60, a soft-spoken paper wholesaler who was crammed into a closet-
size office this week with two other men, three hanging statues of Hindu gods
and stacks of broadsheet paper. The power was out, despite the garlands of elec-
tric wire that hung over streets too narrow for cars, and Mr. Gupta lamented,
‘We do not know how to use computers, how to do online transactions, how to
use card-swiping machines.’ The business of traders like Mr. Gupta, whose op-
erations lie partly in the vast informal economy that makes up around 20 per-
cent of India’s gross domestic product and more than 80 percent of its employ-
ment, has been virtually paralyzed since Nov. 8 ...” .
About employment, Geeta Anand and Hari Kumar also wrote: “Day laborers
were waiting for work this month in Gauhati, India ... As is common in India,
the workers said that although they had worked on Hero MotoCorp’s shop floor,
wearing company uniforms, they had been formally employed by other contrac-
tors, meaning they could be let go more easily without benefits. Sunil Kumar, 28,
who had been earning 15,000 rupees a month, about $ 220, at Hero, said he had
been supporting his wife and two children when he lost his job without notice
Nov. 29. They immediately cut milk, green vegetables and fruit from their diets,
including for their 3-month-old and 3-year-old children ... ‘This is like a massa-
cre for us,’ he said. ‘My livelihood is gone after the cash ban. What do I do
now?’ ... In Noida, a satellite city of New Delhi, hundreds of unshaven men in
rumpled clothing stood recently at a three-way intersection called Khoda Labor
Chowk that is a gathering place for people seeking work. Before the currency
ban, they told us, they would be hired most days, earning 400 to 600 rupees, about
$ 6 to $ 9, for a day of carpentry, floor tiling or masonry. But since the ban, most
interviewed said, they had worked for only a week each month, at best, and even
on the few days when they were hired their wages had fallen by half” .
The demonetarization also impacted consumer prices. Geeta Anand and Hari
Kumar wrote: “The decline in vegetable demand is so steep that the prices of
eggplants, potatoes, cauliflower and tomatoes dropped between 42 percent and
78 percent (the NCDEX Institute of Commodity Markets and Research said). In
the first month alone after the currency ban, micro and small-scale service in-
dustries cut staff by 35 percent (the All India Manufacturers’ Organization said,
based on a survey). It released a study this month saying that job losses in a va-
riety of industries, including automobile parts, infrastructure and construction,
would swell to as much as 35 percent by March. Most economists believe the
economy will rebound, but nobody knows how long it will take” .
By the middle of March 2017, it became evident that Modi’s political party
(and India) would survive the economic crisis. On March 14, 2017, Amy Kazmin
and Simon Munday wrote: “When Indian banks open today, the era of cash ra-
tioning that followed Narendra Modi’s cancellation of most of the county’s cur-
rency will have come to an end ... The severe liquidity squeeze has already eased.
India’s supply of legal tender in circulation has risen to $ 158 bn, mostly in
F. Betz et al.
freshly printed Rs 500 and Rs 2000 notes ... ‘A lot normality has already come
into the market,’ said Romesh Sobti, chief executive of InsusInd Bank. ‘You
don’t see queues for cash anywhere’ ... However, private banks such as Axis
Bank, HDFC and ICICI are still trying to damp the hunger for cash, with new
fees on cash transactions ...” .
3. Case Analysis
One can use an analytical framework of the cross-disciplinary societal perceptual
space in order to analyze the case, as to key societal factors in the historical
event, shown in Figure 1 .
Applying this to the demonetarization event, the key factors of the event are
inscribed in the graphic box, as shown in Figure 2.
INDIVIDUAL—Prime Minister Narendra Modi.
SOCIETY—The society is the Indian nation, in which about one third of the
economy conducts commercial transactions in cash. It is also a heavily regulated
economy, with government bribery common and frequent.
ACTION—Prime Minister Narendra Modi demonetarized two Indian cur-
rency bills of 500 and 1000 rupees, allowing (over a finite period) people to ex-
change the old bills for new ones of 500 and 2000 rupees at banks or post offices.
However, the policy was implemented without the government preparing for it.
When people went to the banks to exchange rupee notes, the banks quickly ran
out of cash. People stood in lines, but were still not able to exchange notes. The
economy nearly stopped, since 80% of commercial transactions were in cash.
But then unable to be exchanged, the currency crisis continued for three
Figure 1. Societal perceptual-space event box interactions of an individual & society are
mediated through reason & action and through groups & processes.
F. Betz et al.
Figure 2. India demonetarization 2016.
REASON—Modi’s plan was to collect taxes on monetary transactions in the
“black market” where taxes are not paid on transactions. He wished to expose
and penalize people who were holding large amounts of cash in 500 and 1000
rupee notes. If people attempted to exchange more than 250,000 rupees (about
$ 3700), they would have to explain the source to tax authorities. If they could
explain how the money was earned and taxes were paid on it, they could keep it,
otherwise not. However, the plan did not include the interaction between fiat
money and commodity money in India. The government had issued fiat money,
intended to pay taxes; but it was also used as commodity money for commercial
GROUP—The groups involved were the Indian government, central bank,
local banks, small merchants, Indian wealthy, Indian middle-class, and Indian
employees and farmers.
PROCESS—Process was the termination of currency notes of 500 and 1000
rupee and replacement with new 500 and 2000 rupee notes. The process did not
go smoothly because (1) replacement currency notes were not ready in time and
(2) many Indians do not have bank accounts and (3) there were limits on the
withdrawal of money. Also (4) the ATMs were not quickly recalibrated for the
new currency nor supplied sufficiently with it.
did not provide the results intended
by the Reason
to increase taxes
). This was because in the Process (commercial
transactions), the fiat currency (500 and 1000 rupee notes) had been providing
two functions in Indian society: fiat money to pay taxes and commodity money
to facilitate trade in the cash-based economy. Because of the government’s lack
of appreciation between these two functions, the withdrawal of fiat money (500
and 1000 rupee notes) also removed the commodity money from the cash-based
Thus the immediate impact of the demonetarization was economic chaos
INTERNAL COMERCIAL TRADE
80% ECONOMY IN CASH
F. Betz et al.
in a principally cash-based economy
with the impact falling heavily on the
poor and middle classes but not upon the wealthy.
Shashi Tharoor wrote: “India’s previously booming economy has now ground
to a halt. All indicators—sales, traders’ incomes, production, and employment—
are down. Former Prime Minister Manmohan Singh estimates that India’s GDP
will shrink by 1% - 2% in the current fiscal year. But, as is so often the case, the
impact is not being felt equally by all. India’s wealthy, who are less reliant on
cash and are more likely to hold credit cards, are relatively unaffected. The poor
and the lower middle classes, however, rely on cash for their daily activities, and
thus are the main victims of this supposedly ‘pro-poor’ policy. Small producers,
lacking capital to stay afloat, are already shutting down. India’s huge number of
daily wage workers can’t find employers with the cash to pay them. Local indus-
tries have suspended work for lack of money” .
Finance in the agriculture sector was particularly affected. Shashi Tharoor also
wrote: “The informal financial sector—which conducts 40% of India’s total
lending, largely in rural areas—has all but collapsed. India’s fishing industry,
which depends on cash sales of freshly caught fish, is wrecked. Traders are losing
perishable stocks. Farmers have been unloading produce below cost, because no
one has the money to purchase it, and the winter crop could not be sown in
time, because no one had cash for seeds ... Hospitals are turning away patients
who have only old banknotes; families cannot buy food; and middle-class work-
ers are unable to buy needed medicine. As many as 82 people have reportedly
died in cash queues or related events. Furthermore, it seems likely that many of
the short-term effects of the demonetization could persist—and intensify—in the
longer term, with closed businesses unable to reopen. It could also cause lasting
damage to India’s financial institutions, especially the Reserve Bank of India,
whose reputation has already suffered” .
Moreover the government’s goal of decreasing “black money” might not be
achieved. Shashi Tharoor wrote: “Perhaps the worst part is that these sacrifices
are not likely to achieve the government’s stated goal. Not all black money is in
cash, and not all cash is black money. Those who held large quantities of black
money seem to have found creative ways to launder it, rather than destroying it
to avoid attracting the taxman’s attention, as the government expected. As a re-
sult, most of the black money believed to have been in circulation has now
flooded into banks, depriving the government of its expected dividend. On top
of all of this, the government’s plan does nothing to control the source of black
money. It will not be long before old habits—under-invoicing, fake purchase
orders and bills, reporting of non-existent transactions, and blatant bribery—
generates a new store of black money” . Black money’ is fiat money used in
economic transactions, which is not taxed.
4. Analysis and Theory: Types of Money
L. Randall Wray wrote: “In conventional analysis, money is used to facilitate ex-
change; its value is supposed to have been long determined by the value of the
F. Betz et al.
precious metal it represented, although under a fiat money system its value is
said to be determined by the quantity of commodities it can purchase. This, in
turn, is a function of the rate of inflation, which is presumed to be under the
control of the central bank. In this view, monetary policy has to do, primarily,
with control of the money supply, while fiscal policy has to do with government
spending, taxing and borrowing. This is quite different from the Chartalist ap-
proach, which can be traced from Adam Smith through to John Maynard
Keynes ... In the Chartalist approach, money is a creature of the state ... The
government does not ‘need’ the public’s money in order to spend; rather, the
public needs the government's money in order to pay taxes” .
In the Chartalist view, the government issues money principally as a way for
the public to pay taxes. This is effective; for if a citizen does not pay taxes, the
government can imprison the citizen. However in an economy, the function of
money for paying taxes is not its only function. Money also functions in com-
modity trade, facilitating the private economy-commodity money. If the gov-
ernment fiat money is stable, not undergoing high inflation, then it can serve al-
so as commodity money. Under high inflation, fiat money becomes worthless as
commodity money. (For example, this happened to the German mark in the
1920s, when the Weimar government printed large volumes of money to pay
reparations to the French and British goverments.)
The Chartalist view does help explain the role of money in the Indian econo-
my in 2016-17. In the event of India’s demonetarization, the government did act
to increase taxes—so the Chartalist theory on money was valid in this event. The
fiat currencies of the 500 & 1000 rupee notes were withdrawn by the government
because they were being used not as Fiat Money but as Commodity Money. But
the government did not appreciate that a sudden withdrawal of the fiat money
would bring a halt to the commercial markets—because the fiat money was also
being used as commodity money in the 80% cash economy.
This is evidence that
the monetary policy in an economy should include the Chartalist perspective
that currency serves several functions as money in a society
the functions of
and managed monies.
Banks also impact the quantity of money through the issuance of credit. In the
Indian case, the government overestimated the role of Managed Money (as bank
accounts) in the economy—the extent of bank accounts were in use by the po-
pulace. Bank accounts are one form of Managed Money in an economy, ex-
panding or shrinking credit in an economy. L Randall Wray wrote: “Hyman
Minsky presented a view of money that was based on the Chartalist approach ...
For the most part, bank money is created as banks ‘make loans’. Money is
unique in that it is created in the act of financing by a bank and is destroyed as
the commitments on debt instruments owned by banks are fulfilled. Because
money is created and destroyed in the normal course of business, the amount
outstanding is responsive to the demand for financing ... The banks, when their
customers apply to them for money, generally advance it to them in their own
promissory notes (
bank checking accounts) ... Because notes (bank checks)
F. Betz et al.
circulate as if they were money, the banker need hold only a fractional reserve
against them” .
In addition to governments issuing Fiat money for tax payments, banks also
affect the quantity of money through the issuance of credit. In the Indian case,
the government overestimated the role of Managed Money in the economy. The
Indian government did not fully appreciate the extent of bank managed money
in the economy—useful to 20% of the economy but not to the 80% of the Indian
economic agents (farmers and laborers who did not have bank accounts and so
could not deposit their demonetarizing rupee notes in bank accounts). Geeta
Anand and Hari Kumar wrote: “The worst affected by the cash crunch are the
country’s hundreds of millions of farmers, produce vendors, small shop owners
and daily-wage laborers who are usually paid in cash at the end of a day’s work”
L. Randall Wray wrote: “In recent years, many theorists have contributed to
the development of an ‘endogenous money’ approach that is in many respects
related to the Chartalist position ... There are two fundamental precepts of the
endogenous money view: (1) the ‘supply’ of money generally expands to meet
the ‘demand’ for money; and (2) the central bank has no direct, discretionary,
control over the quantity of money. To some extent ... most economists (until
the present century) at least implicitly adopted an endogenous money approach.
It is only in this century that the majority of economists have come to accept the
‘exogenous’ money view that the central bank can directly control the quantity
of money and that the money stock can be taken to be ‘fixed’ such that it does
not respond to ‘money demand’” .
The economic event of Indian demonetarization does not supply empirical evi-
dence about an endogenous or exogenous money view—as these consider the rela-
tion of supply to demand of money over a long term. However, in a very short
term, an act by a government (such as sudden demonetarization) can impact both
the supply and demand of money.
The immediate flow of commodity money in an
economy can be impacted by sudden changes in fiat money in an economy.
5. Institutional Explanations in the Demonetarization
We continue the analysis of the demonetarization event, in terms of under-
standing the connections between policy and performance in a society. For this
we continue to use the societal dynamics depiction of explanations (between key
factors in an historical event). Figure 3 shows that in a graph format, the con-
nections between six dimensions of the societal perceptual space can provide fif-
teen kinds of explanations possible in a societal event.
The directional controls in any society occur at three levels in the graphic re-
presentations of societal explanations: Control in a Managed System, Control in
a Socio-Technical System, and Control in a Self-Organizing System. The Ma-
naged System in the economic event was the Government of India; the So-
cio-Technical System was Money; and the Self-Organizing System was the In-
F. Betz et al.
Figure 3. Directional controls in a society.
Managed System of Government:
“Governance” by the
initiated an “Action” of
under the Individual’ of
Premier Narendra Modi
by a new “Poli-
. Modi’s “Reason” was to increase collection of
, and his “Idea” was a Mental Model of how currency and taxes inte-
racted. The “Process” involved was
Socio-Technical System of Money:
The “System” of
enabled the “Operations” of
in 80% of
the cash economy, facilitated by the “Technology” of
With an imperfect “Knowledge” of
, the “Action” of
resulted in a temporary societal “Performance” of
The 2016-2017 economic event of a sudden demonetarization in India provides
an empirical example in which to test the validity of some schools of monetary
theory, particularly the Chartalist School. In the case of India, the Chartalist
School distinguished three kinds of money: Fiat, commodity, and managed
money. The event provides empirical evidence that this distinction between the
currencies in an economy is valid and important. The sudden withdrawal of Fiat
money decreased immediately the amount of commodity money, creating an
4. IDEAS: MENTAL MODEL
INDIVIDUAL: PREMIER NARENDRA MODI
5. POLICY: FIAT MONEY
15. SYSTEM: FIAT MONEY
CONTROL IN A
CONTROL IN A
CONTROL IN A
SOCIETAL DYNAMICS EXPLANATIONS
IN INDIAN DEMONETARIZATION EVENT 2016-17
F. Betz et al.
economic crisis in local Indian commerce. Managed Money was unable to fill
the temporary gap in the supply of money because a large portion of the Indian
population did not have bank accounts.
Figure 4 shows the principle explanations in the social-technical system of
money in the demonetarization event.
This analysis of the event emphasizes that money in the Indian society func-
tioned as a technical system of society (socio-technical system) in the societal
. Therein, the two functions of money were as a System of
and as an Operation of
, which were connected
through the Technology of
. This way
of analyzing the money system
emphasizes how the two functions of money are connected through the Tech-
nology of the
connected the two functions of
in only 20% of the population. The economic chaos resulting from the
policy of sudden demonetarization was due to the lack of banking to extend to
all the population (80% of the society). The
ly focused on the cash markets in the economy,
, rather than upon
This analysis emphasizes what went wrong with the government policy. Was
it bad implementation of good policy or bad implementation of bad policy? It
was both. The policy was imperfect because the
of the Individual
of the policy maker apparently did not consider the interactions between fiat and
commodity money in the principally cash economy of India. The implementa-
tion was imperfect because not all the society had banking accounts to accom-
plish the transition of money, and the government did not print a supply of the
new money before implementing the policy. As Shashi Tharoor concluded:
Figure 4. Descriptive form: actual socio-technical system of policy to address taxation issues.
15. SYSTEM: FIAT MONEY
BANK MANAGED MONEY
INDIAN GOVERNMENT 4. IDEAS: MENTAL MODEL
INDIVIDUAL: PREMIER NARENDRA MODI
SYSTEM OF MONEY
F. Betz et al.
“Many Modi supporters claim that the demonetization policy’s problems are a
result of inept implementation. But the truth is that its design was fundamentally
flawed. There was no ‘policy skeleton’, no cost-benefit analysis, and no evidence
that alternative policy options were considered. Judging by the blizzard of policy
tweaks since the announcement, it seems clear that no impact study was carried
However, the economic crisis did motivate the government to attend to public
good. Geeta Anand wrote: “Trying to spur an Indian economy hard hit by its
cash shortage, the government of Prime Minister Narendra Modi unveiled plans
on Wednesday for next year’s budget that would significantly increase spending
on infrastructure, rural areas and antipoverty programs ... The budget also cuts
income taxes to 5 percent from 10 percent for people making between $ 3700
and $ 7400 annually. But he imposed a 10 percent surcharge on higher-income
taxpayers ... Much of the spending in rural areas will go to building roads, with
the aim of increasing efficiency and access to markets while providing jobs, Mr.
Joshi said. The budget also substantially increased India’s expenditure on its ru-
ral employment program, to $ 710 million, the highest ever ... But the main
thrust of the government budget on Wednesday was to try to help the economy,
which has been hurt by Mr. Modi’s cash ban, by most accounts. The Interna-
tional Monetary Fund cut its predicted growth rate for India by one percentage
point this year to 6.6 percent, in large part because of the currency ban” .
From this kind if institutional analysis of the societal event which societal dy-
namics provides, what prescription could one suggest about the policy (except
demonetarization) that the Indian government should have followed? Figure 5
shows the institutional explanations in a
(rather than in the
descriptive form of the earlier Figure 4).
Figure 5. Prescriptive form: socio-technical system of money in a prescriptive demonetarization event.
15. SYSTEM: FIAT MONEY
BANK MANAGED MONEY
INDIAN GOVERNMENT 4. IDEAS: FISCAL MODEL
INDIVIDUAL: PREMIER NARENDRA MODI
SYSTEM OF MONEY
GOVERNMENT FUNCTIONS 9. REGULATING
F. Betz et al.
The Action should have been
, instead of demonetariza-
tion. In this prescriptive societal depiction, the governmental leadership of the
Individual Modi should have focused Policy upon
using an Idea of a
. The government should focus upon reform Regulating to-
, wherein the populace appreciate that taxes pay
for a just and effective government, without bribery. Knowledge should be
based upon a valid
. The point of government is to build an
Infrastructure providing effective
so that the private
markets can create the Performance of
in the country.
In a next paper, we will describe a model of a government fiscal policy, which
is appropriate to and valid for this case of contemporary India.
 Wray, R. (1998) Understanding Modern Money: The Key to Full Employment and
Price Stability. New Economic Institute.
 Lanchester, J. (2017) Should We Trash Cash? New York Times, January 10.
 Tharoor, S. (2016) India’s Demonetization Disaster. Project Syndicate, December 6.
 Keynes, J.M. (2016) The General Theory of Employment, Interest, and Money.
McGraw-Hill, Pennsylvania Plaza.
 Anand, G. and Hari, K. (2016) Narendra Modi Bans India’s Largest Currency Bills
in Bid to Cut Corruption. New York Times, November 8.
 Anand, G. (2016) How Narendra Modi of India Plans to Wipe Out “Black Money”.
New York Times, November 14
 Anand, G. and Hari, K. (2016) Indian Vendors See Empty Stores and Blame a Ru-
pee Ban. New York Times, November 24.
 Anand, G. and Hari, K. (2017) In Its Third Month, India’s Cash Shortage Begins to
Bite. New York Times, January 24.
 Kazmin, A. and Simon, M. (2017) India’s Cash Crunch Draws to a Close. Financial
Times, March 14, 6.
 Betz, F. (2011) Societal Dynamics. Springer, New York.
 Anand, G. (2017) Arun Jaitley, India’s Finance Chief, Aims to Spur Economy Hit by
Cash Shortage. New York Times, February 1
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