It's worth noting that withdrawing certain banknotes is a classic move. Here's North Korea doing it in 2009:

https://en.wikipedia.org/wiki/North_Korean_won#2009_revaluat...

And the US did it in 1969:

https://en.wikipedia.org/wiki/Large_denominations_of_United_...

In both cases it appears that the main goal was tax revenue. In NK, against private traders, and in the US, against organized crime.

The US is kind of funny, we've (as far as i know) never withdrawn backing for a bill. If you have a silver certificate, you can spend it on a pack of gum. If you have a $1000 bill, you can deposit it in the bank.

You might have some hassle getting the bank to believe you, of course, those bills are probably in pretty poor shape. But you should be able to exchange them for new currency. Although, it might be worth more to sell to a collector. there aren't that many around.

I think a private enterprises in the U.S. can refuse money, so your bank can refuse that 1000$ bill at their discretion (and pissing you off as a customer in the process).

However, the government probably is required to take that money to pay nay taxes, although I do not know how you can pay any taxes to the federal U.S. by cash. Maybe a customs duty at a border crossing?

And India doing it in 1978 (http://www.thehindubusinessline.com/money-and-banking/highva...)

The difference is in the sheer volume of currency being taken out of / replaced from circulation almost 80% of the value.

https://twitter.com/d_jaishankar/status/796012168873320448

>replaced from circulation almost 80% of the value.

Not only replacing 80% of the value, but also added 220 Million bank accounts in a span of 15 months. 2/3 of the US population.

https://www.reddit.com/r/worldnews/comments/5btovy/indian_ru...

Isn't this a trick that will only work once? Wont the people who are taking advantage of black money start using a different store of value that isn't controlled by the Indian government like foreign currency or high value commodities?

Technically, yes. You can even just start using 100 rupee bills instead.

But what this does is adds cost to doing business secretly in cash. Also it increases the threat of government taking another bold move in the future to flush out more stores of black money. Basically, it increases the risk of operating outside official accounting, making that option more scary and less appealing.

Watch for real estate crash in New Delhi. On paper there wont be a crash but sharp growth, because the declared transaction value is about 40% of the real transactions, the remaining being in cash. With this move, declared values will move up, while actual values will move down.

A currency is useful only if you can buy products and services with it. In India, you buy things in Rupees. Tou can't buy Rupees with dollars without an ID at which point the government knows anyway it's probably just simpler to pay your taxes

There is Bitcoin though

Boils back to the same point - can you buy necessities of life in India today with Bitcoin in the short to medium term? No. So if you're accumulating black money (say you are a property developer) it will be difficult for people who buy houses to pay you.

Also remember that Bitcoin isn't really anonymous and it's fully traceable. So the police merely has to do some rubber hose type de-anonymization of which Bitcoin address was the payment made to you in and from there on, all your transactions can be back-traced.

I remember reading about the Indian government passing regulations for the tight control of Bitcoin<->₹ transactions in the country.

But there can still be Bitcoin <=> Bitcoin transactions as an alternative to Paytm et al. It's very unlikely to pick up though I guess.

Most people are only interested in Bitcoin insofar as it's convertible to a local currency. So if it's difficult to do that, it's difficult to use Bitcoin for most transactions.

Those things are more cumbersome to use than local currency. At some point it becomes cheaper to just pay your taxes.

Indeed, they can, but it's difficult to get foreign currency without valid ID. But gold is an option, even though govt have even made it mandatory to flash your ID for gold purchases.

Note that starting tomorrow, people will become progressively reluctant to accept those notes in retail transactions. It will become difficult for anyone with a hoard to exchange these notes for any other commodity.

EDIT: fixed typo "tomorrows"

It was done once before also, IIRC. Around the late 1970s. Seems to have worked. I guess it'll work given a long enough time interval, since human memory is short.

Depends on if you can find someone who's willing to take your new store of value. Part of the reason those people were able to get away with it was that those notes were regular legal tender, so I didn't have to worry about accepting them.

I agree, this is a good first move to get black money that is stored as cash out and taxed. Some forms that still remain are:

* Gold

* Money funneled into "agricultural income" (which is tax free)

* Large properties in metros that are bought and left empty (which raises rates sky-high for ordinary middle class people trying to buy a house there)

However, this move is brilliant in that it removes cash as an intermediary for these transactions, i.e. if a builder is demanding Rs. 50,00,000 for a house "above the table" + Rs. 30,00,000 cash (which he won't declare), then that extra 30,00,000 becomes useless as of 31 Dec.

If one is buying gold then they need to pay tax for that amount. Because shopkeeper can't hide that money without tax. Shopkeepers knows this money is gonna be useless soon.

For large, low volume transactions foreign currency works just as well if it's a pretty common thing.

The extra becomes useless starting tonight.

No, that's a legal fiction. It becomes useless as soon as there's no way to extract value from a briefcase of Rs.500 and Rs.1000 notes. Tomorrow, someone can trade it in to the Bank of India in exchange for new notes, it's just that this someone needs a plausible reason for holding the money - they have to have paid taxes on enough income that they could theoretically have legal reasons to possess the money. This does not have to be the current owner turning the money in, it can be anyone the current owner pays a premium to in exchange for clean bills.

So tomorrow, the money will need to be laundered in order to help the owner. But a few months down the line, the Bank of India stops taking deposits, and the money becomes actually useless.

He can still pay tax and get away.

If he (and by extension thousands more) pay tax, then there's no "get away" involved – the transaction has been done fairly and the Govt. got the requisite amount of tax.

The point is, if he has been doing this for 10 years and has a massive stack of cash which he tries to deposit now, that is going to bring him to the attention of the Income Tax authorities.

Changing $100 notes to $200 notes will open a new black market for converting 2 x $100 notes to $200. I think just removing the $100 note is safer.

I think since India only has notes in {5,10,50,100,500,1000} denominations there might not be enough legal tender with just {5,10,50,100} to convert all {500,1000} notes, thus by introducing a new notes (bills) which look completely different than older 500 Rs, and 2000 Rs which are completely new, they can ensure that enough notes/bills are available.

there is 20

Wouldn't it be 4x $100 notes? Why would you take the two $100 notes if you knew they were being devalued?

2K notes are not just piece of paper, it does have NGC (Nano GPS Chip) by which income tax department can track the location and exact amount have stashed nearby that location. So sending that amount to some other country or keeping that money underground will be the most foolish thing one can do.

Surprised to see this garbage rumour parroted in Hacker News of all places. Haven't people heard of Faraday cages?

GPS receivers don't transmit.

Not possible and also useless. Govt has not made any statement about it either.

Is this Nano GPS Chip for real? How does it work and how much does it cost to make such currency?

That NGC seems to be a rumour.

Do not believe in WhatsApp forwards.

Could it really be GPS? Or does it function more like an RFID chip that can be read at an extended range or distance?

Not sure how true is that story. But it's circulating around various news channels and whatsapp groups too.

> the value has been significantly lowered by approximately ~10 to 20% consider when the money gets deposited, there would be an income tax due on it.

How do you figure it's 10%-20%? AFAIK it's a 300% penalty now after the voluntary disclosure scheme has ended (for income that was gained before Sep 30). People are better off burning the money if they can't launder it somehow.

> This is the boldest and probably most brilliant move by any Indian politician since liberalization of economy in 1990s.

This is not the first time this has happened. It happened in March 2014.

https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=...

This is slightly different. All 500 and 1000 rupee notes in circulation right now are being demonetized. In previous cases demonetization was done for older currency over a longer period of time.

Reading about it, looks like this has been done before in India in '54 and '78. Has black money decreased since then?

You can't compare '54 and '78 with 2016. Removing 500 and 1000 rupee notes as legal tender in 2016 accounts to more than 80% of total cash circulation. This is huge.

I think this is more about sending a message that they are serious about enforcement once the amnesty ends.

Call me up when our government stops doing idiotic things like sending billions in cash to Iran. Then I'll consider being concerned about income taxes.

which government? US? that was Iranian money frozen 39 years ago plus interest. India? that was owed oil money due to sanctions.

I don't understand how you are capitalist until the other side is Iran.

This is totally unrelated to capitalism as a structure and paradigm for an economy.

Let's momentarily set aside the issue of whether the US owed Iran 1.7B dollars. There are arguments on both sides but I want to point something out:

The cash payment was made at the same time as the release of four Americans by Iran's regime. The Obama administration has admitted that the cash was used as leverage in negotiating their release.

If it looks like a duck, walks like a duck, and quacks like a duck...

as you said it was used as a LEVERAGE not a ransom. US had to pay this money anyway, by timing it right they had more LEVERAGE in the negotiations and 4 innocent people got out of prison.

What is wrong with that? painting this payments as ransom is wrong.

Ransom IS leverage. The payer is manipulating the captor's desire for money, in order to get an immediate release of prisoners that would otherwise not happen.

Equally true, taking hostages is a way to gain leverage by manipulating the payer's desire to protect the captives. Why do you think bank robbers and hijackers do it? Iran was unable to get that money for almost forty years, but by dangling four Americans in front of the Obama administration, they were able to collect a ten-figure cash payment out of America's coffers.

And you think there's nothing wrong with that?

The Americans are guilty of caving on their principles and giving tons of (borrowed btw) cash to hostage takers, and the Iranians are guilt of taking hostages in the first place.