It’s an error to compare today’s demonetization to what happened in 1946 and 1978, for those were simply cases of removal. What’s being attempted today is the wholesale replacement of one financial system — based on cash — with another financial system, based on credit and electronic trade. It’s not a surgical strike; it’s bypass surgery on an unwilling patient.

If we really want to understand what happens when you perform such surgery, we have to look back over two hundred years to the time when cash replaced kind as a form of taxation. In other words, the permanent settlement put into place by that great lover of India, Lord Cornwallis (I am being sarcastic in case you didn’t catch the irony).

First, a few links

The argument over demonetization continues to rage, though the bhakts aren’t as sure of their position as they were even a few days ago. We know for a fact that this will lead to a huge burden on the poor and also on small business. How will a factory owner pay his employees?

No one takes salary on credit.

Two interesting reads:

  1. Amit Varma makes an interesting analogy: that Modi’s demonetization is like Mao asking that all sparrows be killed, upon which the predator-less locusts ate the crops, leading to the disastrous famines during the Great Leap Forward. The analogy is worth reflecting upon. Varma’s libertarian analysis leaves much to be desired.

  2. Mihir Sharma’s analysis of why demonetization is a failure.


Much of the criticism of demonetization is over three things:

  1. Will it work, i.e., will it end black money and corruption? Is cash the primary instrument of corruption?

  2. Who will it hurt? Are the poor and the middle classes going to bear the downside while the richest stash their cash in offshore accounts?

I don’t doubt that demonetization will hurt the poor while the richest continue to find alternative ways of hoarding their wealth, but let’s take a different perspective for a moment:

What if we grant demonetization its claims. Let’s say it will end corruption and finish off the black economy. Will it still be a good thing? What are its intended and unintended consequences?

I see demonetization as a “rational” project, of making the economy more efficient, more transactional and ultimately, driven by finance. It will inevitably make banks more powerful, put data and information (via Aadhaar) at the heart of our society — no surprise that Nandan Nilekani came out strongly in favour of demonetization — and systematically shift economic control away from the corner store and the small business toward large Indian corporations and MNCs.

In fact, it’s explicitly designed to do so. Demonetization is part of making India into a “developed” society.

By the way, changes in finance have been at the heart of “development” for a long time — it was the preferred strategy of East India Company rule, starting with the permanent settlement. So if we want to understand what demonetization might, we should look at the previous abrupt transition in finance, when cash replaced kind as an instrument of taxation. Ironic isn’t it, when we consider that today cash is being set aside in favour of other financial instruments.

The Permanent Settlement

This is not a scholarly article, so I am not going to burden you with references. Here’s how Wikipedia introduces the problem:

The Court of Directors also hoped to guarantee the company’s income, which was constantly plagued by defaulting zamindars who fell into arrears, making it impossible for them to budget their spending accurately.

Yes, I know Wikipedia isn’t always the most accurate source. But if you accept the problem statement, it’s close to what the government defines as the problem today. Black money is an accounting problem. Back then, the accounting discrepancies arose because peasants were allowed to pay their zamindars in kind as well as cash and the zamindars didn’t report all their income. More cash in years of plenty and more kind in lean years when the crop failed.

Unfortunately, what was good for the peasant wasn’t good for the company. They had stockholders back in London looking for profit. The company’s solution: force everyone to pay in cash. That’s what Cornwallis did in 1793, justified then, as demonetization is being justified today, as a service to the people.

Why was the permanent settlement introduced? The way I see it, it was because of black money of those days, i.e., Zamindars weren’t reporting income because it was in kind. The East India Company’s solution: force everyone to pay in cash.

In other words, even two hundred years ago, the interests of financial capital drove monetary policy in India. We know the consequences of that shift. Let me just outline a few:

  1. The shift from subsistence crops to cash crops. Instead of growing food to maintain his family and community, the kisan was forced by his zamindar to grow food that could be sold in the market.

  2. A steady transfer of wealth from India to England. While it’s possible to transport the peacock throne to London, it’s a lot easier to transfer cash. Currency has always been an instrument of control.

  3. Famines: once financial considerations take precedence over sustenance, famines are a natural consequence, especially because monocultured cash crops are more likely to fail than a diverse basket of local grains and plants. There were several famines in the Victorian era, continuing all the way to the Bengal famine in the nineteen forties. Do remember that Bengal continued to export cash crops when peasants were starving to death in the streets of Kolkata.

Conclusion: Permanent Demonetization

Just as the transition from kind to cash was prompted by the interests of capital (industrial capital in 1793) and led to the permanent settlement, I am convinced that the interests of financial capital are at the core of the demonetization policy.

Financial capital wants access to every transaction of ours so that it can skim (or gouge) off the top. Demonetization is popular among the bureaucratic-technocratic class in exactly the same way that the permanent settlement was popular then — they stand to gain enormously!

What does it mean for the rest of us? Will there be new famines? Is this the end of the small kirana store owner? Again, let’s look to Wikipedia to see what the permanent settlement did:

Once the salient features of the Settlement were reproduced all over India, and indeed elsewhere in the Empire, including Kenya, the political structure was altered forever. The landlord class held much greater power than they had under the Mughals, who subjected them to oversight by a trained bureaucracy with the power to attenuate their tenure. The power of the landlord caste/class over smallholders was not diluted in India until the first efforts towards land reform in the 1950s, still incomplete everywhere except West Bengal.

Demonetization should really be called the Permanent Demonetization. It’s a new permanent settlement to completely alter the social and economic structure of India in favour of financial capital. We need a new politics to address these developments.