India just made a big mistake with its currency ban

One of us (Larry) has long advocated the abolition of the $100 note in the U.S. context and the 500 euro note (a.k.a. the bin Laden) in the European context. We assumed the next step after the European Central Bank’s announcement that the 500 euro note would be phased out would be discussion of the $100 bill and of the particularly pernicious 1,000 Swiss franc note.

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.

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