Understanding demonetisation

Demonetisation is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change in national currency. The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with a new currency.

Demonetisation is a drastic intervention into the economy that involves removing the legal tender status of a currency. It can cause chaos or a serious downturn in an economy if it goes wrong.

Demonetisation has been used as a tool to stabilize the currency and fight inflation, facilitate trade and access to markets, and push informal economic activity into more transparency and away from black and gray markets. A famous example of Demonetisation occurred in 2016 when India demonetized 86% of its nation's currency.

Demonetized may also refer to social media or digital content that formerly qualified for revenue distribution but has since been denied income proceeds. Removing the legal tender status of a unit of currency is a drastic intervention into an economy because it directly affects the medium of exchange used in all economic transactions. It can help stabilize existing problems, or it can cause chaos in an economy, especially if undertaken suddenly or without warning. That said, Demonetisation is undertaken by nations for a number of reasons.

Demonetisation has been used to stabilize the value of a currency or combat inflation. The Coinage Act of 1873 demonetized silver as the legal tender of the United States, in favor of fully adopting the gold standard, in order to stave off disruptive inflation as large new silver deposits were discovered in the American West. Several coins, including a two-cent piece, three-cent piece, and half-dime were discontinued.

The withdrawal of silver from the economy resulted in a contraction of the money supply, which contributed to a recession throughout the country.

In response to the recession and political pressure from farmers and from silver miners and refiners, the Bland-Allison Act remonetized silver as legal tender in 1878.

In a more modern example, the Zimbabwean government demonetized its dollar in 2015 as a way to combat the country’s hyperinflation. At its peak, Zimbabwe's hyperinflation reached month-over-month growth of 79.6 million percent growth and year-over-year growth of 89.7 sextillion percent.

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