By far the most sweeping change in currency policy that has occurred anywhere in the world in decades: that’s what former US treasury secretary and Harvard economist Lawrence H Summers along with PhD candidate Natasha Sarin say in a blog posting analysing the Modi government’s “dramatic action”.

 Their conclusion, in short, is: “Without new measures to combat corruption, we doubt that this currency reform will have lasting benefits. Corruption will continue albeit with slightly different arrangements.”Of course, the authors have not taken note of prime minister Narendra Modi’s hints and remarks about “new measures” including getting tough on benami properties. That, however, is for future.
Summers admits that he has long advocated kill-the abolition of the $100 note in the US context and the 500 euro note (“aka the Bin Laden”) in the European context.  This is the lesson for the world they have drawn from India’s experiment:

“We were not enthusiastic previously about the idea of withdrawing existing notes from circulation because we judged the costs to exceed the benefits. The ongoing chaos in India and the resulting loss of trust in government fortify us in this judgement.”
They also question targeting a currency note so widely circulation: “most Americans in the top 1 percent of the income distribution do not handle $100 bills on even a weekly basis whereas 500 rupee notes are very widely used in India.

Acknowledging the black money angle, they write, “We recognize that many of those who hold large quantities of cash in India have come by their wealth in corrupt or illegal ways. So, the temptation to expropriate is understandable. After all, as the argument goes, anyone who came by their wealth legally has nothing to fear from coming forward and exchanging old notes for new ones.”
However, they succinctly summarise what many people in India are fuming about: “Most free societies would rather let several criminals go free than convict an innocent man. In the same way, for the government to expropriate from even a few innocent victims who, for one reason or another, do not manage to convert their money is highly problematic.  Moreover, the definition of what is illegal or corrupt is open to debate given commercial practices that have prevailed in India for a long time.”
 

Read the full blog post here:Most sweeping change in currency policy in the world in decades