Harvard Professor Larry Summers says demonetisation costs exceed benefits
Surprised by the 'dramatic' Indian decision to ban higher currencies in India, Harvard Professor, Lawrence Summers (Larry) and PhD candidate Natasha Sarin said in a blog post on Monday that this was the ‘most sweeping change in currency policy that has occurred anywhere in the world in decades.’
While the scholars justified the government’s decision to ban these notes was understandable, however, they said, “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.”
India does not have a clear definition of what is legal tender and what is not, given commercial practices in India, the scholars said.
Questioning the extent to which this exercise would be lasting or not the scholars said that those who had to escape the government’s trap have already done so.
“We strongly suspect that those with the largest amount of ill-gotten gain do not hold their wealth in cash but instead have long since converted it into foreign exchange, gold, bitcoin or some other store of value. So it is petty fortunes, not the hugest and most problematic ones, that are being targeted,” Larry and Natasha said.
The scholars said they had earlier mulled over the demonetisation of the $100 bill and the 1000 Swiss Franc but said that the $100 bill was sparsely used among the top 1% of the American income distribution while the Rs 500 note was commonly exchanged in India.
“…nothing in the Indian experience gives us pause in recommending that no more large notes be created in the United States, Europe, and around the world. 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,” the scholars said.