On November 8th India surprised their people by removing legal tender status from 500 and 1000 rupee currency notes which had comprised 86% of the notes previously circulated. In one day India had undermined the monetary security value that people had saved the legal currency for. Replacement notes are being issued that will have monetary value backed by the force of more effective government taxation, as commerce is nudged into electronic forms of money. The transition involves significant hardship for an economy in which 98% of transactions use cash. The transition was made suddenly so that average people wouldn’t have the opportunity to convert their saved wealth into other forms of money like gold or bitcoin. Earned wealth had been lost in a day, for any that had trusted fiat currency as money.
Luke Rudowski is in Gao India sharing his experience with currency turmoil, in what is likely the early stages of economic collapse. Surprisingly, people are optimistic for the future and commerce now endures without currency:
Merchants continue to serve people as they’ve always done, but instead of collecting fiat notes as payment they lend obligations to purchasers. Within a week the economy switched to using obligations as currency. Perhaps it shouldn’t be much of a surprise, India already operated in a form of anarchy and average people are turning to increased anarchy to compensate for state currency failure.
Author Eric Frank Russell showed in a 1962 novel called “The Great Explosion” how obligations could function as currency under a state of anarchy. His book was intended to show anarchy as the ideal. An excerpt of that novel was republished as “And Then There Were None…” and can be read here:
The use of obligations as currency is what is practical for survival today in India, but consider what this really means. Merchants have become lenders in a currency that may be extremely difficult for borrowers to later repay. Merchants will become obligated to other suppliers too. A practical amount of new currency must circulate for economic activity to continue. New currency must be brought into circulation quickly enough to avoid supply disruptions, but Gresham’s Law shows that the newer and more valuable currency will go into hiding. If the new currency supply is too great then merchants will suffer, if the new currency supply is too little then most of the population will become slaves to debt.
There will be incredible winners and losers in India’s new future. Government will certainly have more control over everything people do, and that was the goal of their actions. The poor are the ones most harmed through increased taxation and debt. Many have lost dreams that savings were toward. Obligations may find excuses rather than repayment. People will move and hide to escape debts. Prices will increase to cover the cost of unpaid debts. Disappoints will percolate slowly toward the upper class until the force that backs fiat currency becomes necessarily overt. India will grow a well financed police state to ensure compliance.
Dire consequences in India depend on how well people are able to avoid the new currency entirely. If obligations could be exchanged for the obligations of others in an open market, and rarely satisfied with fiat currency notes, then the economy could entirely bypass all the control that government intends. Trust reputations must be developed. The Ripple currency is a crypto-currency that is designed to be an obligation ledger and exchange. The accounting of obligations and trust relationships is maintained in a distributed blockchain ledger with cryptographic proof. Gasoline obligations can for example be satisfied by giving chickens to others at the agreed exchange rate. A variant of it called Stellar was created in an attempt to avoid US regulatory destruction of the original Ripple ideals. It is open-source, so if necessary then create a variant that better suits the needs of India.
Indians were not given the opportunity to avoid wealth destruction by converting to more secure forms of currency. Most are left with a system of debt and obligations that can become unbearable at the discretion and benefit of government and wealthy. Use the wealth and freedom you still have to avoid becoming slaves later. The government intended to take wealth through currency exchange…and then no currency was traded.