Note Ban Is ‘Fisher Equation’ in Practice – With Tragic Results

Note Ban put economist Irving Fisher’s famous ‘quantity theory of money’ in practice, writes Abheek Barman. 

5 min read
People stand in a queue to deposit and exchange discontinued currency notes outside a bank on the outskirts of New Delhi. Image used for representational purposes. 

In 1930, the world’s first ‘celebrity economist’ Irving Fisher wrote a book titled ‘The Theory of Interest: As Determined by Impatience to Spend Income and Opportunity to Invest It’. The upshot of this was an equation that split the profession of economics and policymaking down the middle.

Fisher’s idea was simple: anywhere that currency was used, the amount of money in the system and the frequency with which it changed hands, was the best indicator of prices and the health of the economy.

American economist Irving Fisher revamped the 17th century concept of ‘quantity theory of money’ and lent his name to the equation: MV=PT
American economist Irving Fisher revamped the 17th century concept of ‘quantity theory of money’ and lent his name to the equation: MV=PT
(Photo: Wikimedia Commons)
It was summarised in a simple equation: MV = PT

‘M’ is the total stock of money in the economy. ‘V’ is the rate at which it changes hands, the romantically titled ‘Velocity’, ‘P’ is the level of overall prices, ‘T’ is the number of ‘transactions’ or, as we understand today, the overall income of the entire economy.

In his worst nightmares, Fisher would not have imagined an economy where the doughty ‘M’ – the amount of money in the economy – would evaporate overnight. But that is exactly what Prime Minister Narendra Modi announced on television, at 8 pm on 8 November 2016.

Modi declared that from 8 November midnight, currency notes of Rs 500 and Rs 1,000 would cease to be legal tender.

Thus, India’s Prime Minister, no great or original thinker by any scale, ensured that he would rise from the footnotes of the encyclopaedia of botched-up policy to occupy several chapters, if not the entire volume.

The ‘Collateral Damage’ of Note Ban

Modi’s goals were to apparently wipe out ‘terrorism’ funding, ‘corruption’ (or kala dhan, as he called it), punish wealthy cash-holders and – in some miraculous, but unstated way – clear up the overall health of the economy and the morale of the people who work like ants to keep the system going.


Overnight, 86 percent of India’s currency by value was vaporised. If, as Modi said, the idea of eliminating Rs 500 and Rs 1,000 notes was to achieve great populist goals, it also led to the death of more than 100 people who stood in queues for days at ATMs.

These ATMs had to be physically rejigged to carry the new Rs 500 and Rs 2,000 currency notes, which were around 17 percent smaller than existing notes.

Like the Queen of what remains of the British empire, Modi might not need to carry cash – not even to settle bills. The rest of India had to pay the price.

The worst hit were those on the margins of the economic ladder; around 92 percent of India’s workforce is classified as ‘unorganised’. These are folks who work at construction sites, as household help, hawkers, taxi drivers, tailors, farm workers and so on.

Topsy-Turvy Thinking Led to an Economy Gone Topsy-Turvy

Their lives and livelihoods were turned upside down by Modi’s unthinking and unimaginable policy coup. Overnight India slid from being the world’s fastest-growing large economy to a laggard.

Corporate earnings fell in tandem with people’s purchasing power. In West Bengal, which happens to be a large exporter of labour for harvests, construction and other labour-intensive activity, Chief Minister Mamata Banerjee announced a Rs 350-crore dole to migrant workers ‘returning’ empty-handed from other states.

Millions of words, including much platitude from Modi’s government, have been written about the effects of overnight ‘notebandi’. However, the Harvard Business Review, deviating from its tradition, published two critical essays on the effects of ‘notebandi’.

Despite Modi’s claims, stories across India – from the leather hub of Kanpur in Uttar Pradesh to the construction hubs around Delhi and the winter harvests across most states - testified to the trauma of cash starvation.

Modi’s ‘Theory in Practice’ – With Disastrous Effects

In an economy where 92 percent of all transactions are in currency notes, where formal banking is yet to reach the vast hinterland, wiping out 86 percent of cash overnight was bound to be catastrophic.

To see why, it will be useful to revisit Fisher’s near-century-old equation: MV = PT

For a minute, assume that sucking out 86 percent of the total money in a system is almost equivalent to removing all currency in circulation. In that case, the value of ‘M’, (ie: the total currency in circulation) becomes zero, or close to it.

If ‘M’ is zero, the right hand side of the equation (MV = PT), which summarises prices and GDP, also crashes to nothing. This is just theory.

Thanks to Modi, the world now has a real-life demonstration of theory in application – with devastating effects.

Despite the best efforts of a government-controlled data system, India’s growth rate has slumped by two percentage points. Inflation is history – farmers choose to dump produce or feed cattle, because the main mandis or produce markets have no cash to pay them.

A Poor Report Card & Raghuram Rajan’s Take on Note Ban

As for the mythical benefits of ‘curbing terrorism’ or ‘untaxed income’, the government has got an ‘F’. In other words, it has failed. The Reserve Bank of India (RBI) recently reported that it had received over 99 percent of ‘demonetised’ currency back from people.

This debunks Modi’s claim that ‘notebandi’ would lead to cash-hoarders dumping their stash in the Ganga.

About terrorist funding, the less said, the better. On 22 November 2016, a fortnight after demonetisation, the media reported that alleged terrorists shot down in Jammu & Kashmir’s Bandipora district were carrying new Rs 2,000 currency notes.

Economist Raghuram Rajan, who quit as the RBI’s governor two months before Modi declared demonetisation, wrote in a recently published anthology, “At no point during my term was the RBI asked to make a decision on demonetisation.”

A Huge Loss – for Ambanis, Adanis, You & Me

Rajan, a mild-mannered person, took an out-of-character position, to take a shot at reckoning the high cost of demonetisation. “Between Rs 2,00,000 and Rs 2,50,000 crore” was lost, according to him.

This is an interesting number.

The World Bank (and other sources) reckon that each Indian made $1,709 in 2016. Multiply that by roughly Rs 65 to a dollar, and it is apparent that as average folks, each one of us makes about Rs 1.1 lakh a year. For a family of five (assuming that children work instead of going to school) that’s Rs 5.5 lakh per year.

Now, if this is correct, Modi’s inexplicable decision has cost every household a loss of Rs 50 lakh in one year. Of course, this number is 10 times the average household income, but remember, it’s the actual loss for the entire economy – from the Ambanis and Adanis, to factories and farms – and your pocket.

There is nothing to celebrate on 8 November. How can you stand up and cheer, when a political figure with little knowledge of history, economics or anything else under the sun, has wiped out the incomes of daily-wage workers, Banaras boatmen, Kanpur cobblers, Bengali farm workers, Tamil rice farmers – and picked your pocket as well?

Shed a tear.

Let Modi and his sarkari cabal cheer at your cost today.

(The writer is a Delhi-based senior journalist. He can be reached @AbheekBarman.)

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