Wonkbook: When it comes to cash, India just made a big mistake -- by Summers and Sarin

By Lawrence H. Summers and Natasha Sarin Like everyone else, we were surprised by the dramatic action taken by Indian Prime Minister Narendra Modi to demonetize the existing 500 and 1,000 rupee notes. This is by far the most sweeping change in currency policy that has occurred anywhere in the world in decades. First, it …   The latest economic and domestic policy from Wonkblog   India's Prime Minister Narendra Modi announced on Nov. 8 that 500 and 1,000 rupee ($7.50, $15) bills — 85 percent of the cash in circulation — would cease to be legal tender in a crackdown on fraud and tax evasion. (Agence France-Presse via Getty Images) By Lawrence H. Summers and Natasha Sarin Like everyone else, we were surprised by the dramatic action taken by Indian Prime Minister Narendra Modi to demonetize the existing 500 and 1,000 rupee notes. This is by far the most sweeping change in currency policy that has occurred anywhere in the world in decades. First, it affects notes that are in widespread use, being valued at $7.34 and $14.68, respectively. While it might be argued that because India is much poorer than the United States, $15 in India is equivalent to $100 in the United States, the reality is that most Americans in the top 1 percent of the income distribution do not handle $100 bills on even a weekly basis, whereas 500 rupee notes are very widely used in India. Second, and more fundamental, actions like those taken by the ECB or those proposed for the United States end the creation of new high-denomination notes. They do not contemplate declaring what has been legal tender to no longer be legal tender essentially overnight. It is the imminent prospect of notes currently held becoming worthless that has created such alarm and disruption in India. Small and medium-size merchants have seen their shops (which transact mostly in cash) deserted, and ordinary Indian citizens have spent the past week in line outside banks hoping to be able to exchange their cash holdings for legal tender. We recognize that many of those who hold large quantities of cash in India have come by their wealth in corrupt or illegal ways. So, the temptation to expropriate is understandable. After all, as the argument goes, anyone who came by their wealth legally has nothing to fear from coming forward and exchanging old notes for new ones. 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. ADVERTISEMENT   Read the rest on Wonkblog. Number of the day 64 percent. That's the share of overall U.S. economic activity produced by counties that Hillary Clinton won. Jim Tankersley has more. Top Trump tweets If you'd like to follow the live tweeting of the NYT Trump meeting, you can do it here:https://t.co/IJoblA4nMr — digby (@digby56) November 22, 2016 Trump on his businesses/conflict q's: "The law's totally on my side, the president can't have a conflict of interest." — Maggie Haberman (@maggieNYT) November 22, 2016 Does Trump think human activity is linked to climate change? "I think there is some connectivity. Some, something. It depends on how much." — Mike Grynbaum (@grynbaum) November 22, 2016 Most Recent Posts from Wonkblog India just made a big mistake with its currency ban This is by far the most sweeping change in currency policy that has occurred anywhere in the world in decades. By Lawrence H. Summers and Natasha Sarin  •  Read more »   Wells Fargo must now get permission before handing executives ‘golden parachutes’ A key bank regulator reverses course and imposes new restrictions. By Renae Merle  •  Read more »   Trump just announced he’d abandon the TPP on day one. This is what happens next. We're about to see who wins when the U.S. gives up on global trade agreements. By Ana Swanson  •  Read more »   Donald Trump lost most of the American economy in this election The split appears to be unprecedented in modern America. By Jim Tankersley  •  Read more »   Worrying about getting older might be worse than actually getting older There's a good reason young women should stop worrying about getting old. By Danielle Paquette  •  Read more »   ADVERTISEMENT   Recommended for you   Federal Insider Federal news and policy update, in your inbox daily. Sign Up »         Share Wonkbook:       Twitter      Facebook Trouble reading? Click here to view in your browser. You received this email because you signed up for a Wonkblog newsletter. For additional free newsletters or to manage your newsletters, click here. We respect your privacy. If you believe that this email has been sent to you in error or you no longer wish to receive email from The Washington Post, click here. Contact us for help. ©2016 The Washington Post, 1301 K St NW, Washington DC 20071