What will change after the 500 and 1000 bills are discontinued
By: Ali Javed
Tags: Money, Monetary Policy, Economics, Currency

Modi’s decision for discontinuation of 500 and 1000 bills to crackdown the black economy has come as a surprise to most, but to me it appears to be a more elaborate plan to organize the economy into a structure which will be more friendly to the corporates. As somebody who takes immense delight in the deconstruction of purpose behind an action I took upon myself to imagine the results of such a grand scale endeavor. With whatever limited intellectual capacity I possess I was able to point out a few points to myself where such a decision will take into effect. Most of them are general enough that no one would disagree, but a few are more particular.

The withdrawal of the paper money from the economy on such a scale will create a shortage of currency for transactive purposes. This will increase the demand for money (not increasing the net demand but demand for whatever currency is taken out of the economy but is not replaced at present), while the supply reducing at the same time. The supply curve will shift to the left while the demand curve will remain at the same place thus creating a new money market equilibrium where the production will fall in very short term. But as the old money will be replaced by the new notes, the supply curve will again start moving rightwards. Although it will not reach the old equilibrium because a lot of black currency will exit the economy that would have otherwise been used by the political parties during the election, thus injecting high powered currency in the market. This through multiplier effect expands the general economy during elections. This step is good and bad at the same time. Good because the political parties who used to hoard money for campaign purposes will not be able to do now. Bad because the industry is already growing slowly, which would have received some impetus during upcoming elections. In the short run there may be depreciation of currency, but will start readjusting as the currency is replaced. The target people for this policy are not the real holders of the black money (here black wealth). Most of the billionaires who have a lot of black money keep it either in offshore accounts or convert them into assets which are not in the form of liquid currency and thus should be differentiated as Black Wealth. Thus the real effect is on small business enterprises and middle class people who try to evade taxation in order to maximize whatever little profit they make. These people will have to turn their intended paper notes and declare how they earned them thus giving out tax on it. So most (almost all) of the accumulation of the black money will be from the smaller fish creating a false impression that the problem has been solved. This will render more of a political advantage to the ruling party rather than to some real good. Because of the collection of money an impression of an essentially black moneyless economy will be promoted. This will strengthen the idea that the income and wealth disparity persisting in the economy is rather a natural result than an intended purpose. This has already happened in America and the West where 10 biggest corporations of the world hold more wealth that 190 (the counties figure maybe +-10) countries. Due to the enforcement of slabs on the withdrawal of money through ATMs and Banks, there will be less money flowing in the form of paper currency and people will be forced to use online and electronic solutions. This will boost the private commercial banking and thus direction of real high powered money to the big corporates who will finance their projects through loans from currency deposits of the public that will essentially be deterred from withdrawal at a point in time. In short there will be more cash available with the bank at all times to give out loans if such a slab continues.

This is a very preliminary examination of the situation and has not been researched. It is an intuition based approach. I will present a more formal approach in my article with more research backing it.