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 1,000-rupee notes - India's two highest-denomination bills, then worth around $7.50 and $15, respectively - 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 presenting more than 250,000 rupees in cash, or $3,700, 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. To see what a big deal this is, you have to appreciate the nature of the Indian economy. 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 “informal” or “unorganized” economy, which runs overwhelmingly on cash.
The short-term results of Mr. 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. (This despite an admirable push for financial inclusion on the Indian government, which led to 175 million new bank accounts between 2011 and 2014.) The government has brought out a new 500-rupee note and a new denomination, a 2,000-rupee note, but there isn't enough of the new cash to replace the old, nor will there be anytime soon.
From the outside, you have wonder what on earth would make it desirable to undertake an experiment of this scale and apparent recklessness. As it turns out, there are good reasons for having doubts about the way cash works in the contemporary economy. In a brilliant and lucid new book, “The Curse of Cash,” the Harvard economist Kenneth Rogoff gives a fascinating and thorough account of the argument against cash. There are two main pillars to it. The first and more wonkish concerns something called the “zero lower bound.” Because official interest rates can't be set below zero - if they were, people would just hold cash instead - the tool kit of monetary policy has a built-in limit. This might sound like a small point, but as Mr. Rogoff explains, “the zero bound has essentially crippled monetary policy across the advanced world for much of the past eight years.” If central banks could go below the zero bound, as a cashless economy wo
uld allow, they could in effect force people to spend their money and thereby kick-start the economy.
