It was on 16 January 1978 that the country was told that the Janata Party coalition, which had assumed office a year earlier, has decided to scrap Rs 1,000, Rs 5,000 and Rs 10,000 notes.
The Reserve Bank of India’s (RBI) history (third volume) details how things happened.
On 14 January, R Janaki Raman, a senior official from chief accountant’s office in RBI, was informed about the government’s decision to demonetise high-denomination notes and told to draft the ordinance.
After the ordinance was drafted, it was sent to President N Sanjiva Reddy for assent. It was through the All India Radio’s (AIR) 9 am news bulletin that people were informed about the policy decision. It added that all banks and treasuries would be closed the next day, on 17 January.
It was in the early 1970s that the Wanchoo committee made recommendations about withdrawing the bank notes while talking about the menace of black money in the country.
However, these recommendations could not be publicised for the fear of it being counterproductive – black money operators could get rid of high-value notes.
In his article for India Today, Jay Dubashi wrote that the move was directed at freezing the secret funds of politicians, especially Indira Gandhi’s Congress. Morarji Desai, the then Prime Minister said that the party had been spending money “like water”. Gandhi had reportedly denied allegations saying that “even a ten-rupee note is a luxury to me”.
What’s interesting to note, however, is that IG Patel, the then RBI governor, was not in favour of the step. He felt that many in the government perceived the step as a measure targeted at the “corrupt predecessor government or government leaders”.
In his book, Glimpses of Indian Economic Policy: an Insider’s View, Patel writes that when the then finance minister HM Patel told him about the step, he asserted that steps like these rarely have striking results.
He added that most people in possession of black money rarely keep their ill-gotten earnings in the form of currency for long. Thinking that black money is stashed away under mattresses or suitcases is naive, he said.
Dubashi in his article also wrote that demonetisation of currency is not entirely effective because one can’t really know how much black money there is in circulation, and more importantly “whether black money can really be defined in precise terms in all its shades.”
“Black money stashed as high-value currency is much less than black money as untaxed income, part of which might be splurged in conspicuous consumption or used for investment in real estate, commodities, stocks, benami lending or plain graft to secure political or administrative goodwill,” Dubashi wrote.