Old Money: Modi, money laundering and Hitler’s helicopter cash

At 8:15pm on November 8, Indian prime minister Narendra Modi stunned the country by announcing in an unscheduled television broadcast that at midnight Rs500 ($7.50) and Rs1,000 ($15) banknotes would be “demonetised”.

  • By Richard Roberts
  • 08 Feb 2017
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by Professor Richard Roberts, King’s College London

The notes, India’s highest in value, comprised 86% of circulating currency, in an economy in which 90% of transactions involve cash. Holders had 50 days to deposit them in banks before they became mere paper, but anyone depositing more than Rs250,000 would have to explain to the taxman how they came by their hoard. 

In the meantime, people scrambled to obtain smaller-denomination notes to make everyday payments, with long queues at ATMs and banks. Indeed, several people died queuing. Business was hit hard, with reports of small services firms shedding 35% of staff and estimates of a 1%-2% downturn in GDP growth.

Modi’s surprise surgical strike was aimed at India’s rampant black economy, tax evasion, criminals and corruption. A windfall boost to government finances was expected from the write-off of undeclared currency. However, this scarcely materialised since hoarders used family, friends and other mules to launder cash caches through their accounts.

Demonetisation also struck against the counterfeiting and extortion stashes of insurgents, triggering surrenders by hungry Maoists. But it prompted street protests, strikes, litigation, and criticism of the monumental mismanagement of the process. It was “like shooting at the tyres of a racing car”, commented an Indian economist. 

Modi’s chief economic adviser hailed it as “a very unique experiment in monetary history”.

But it was not. India has demonetised large notes twice since World War Two. In 1946, Rs500, Rs1,000 and Rs10,000 notes were barred to clobber war profiteers, black marketeers and tax evaders. And in 1978, Rs1,000 (reintroduced in 1954 and, later, in 1998), Rs5,000 and Rs10,000 notes were barred — again to hit black marketeers and tax evaders. The move was a surprise even to the central bank, while the public was given just three days to deposit their notes — the shock model for 2016.

India’s 1946 demonetisation followed The UK’s example. In 1943 the UK stopped issuance of new larger notes — £10, £20, £50, £100, £500 and £1,000. This was intended to hinder black marketeers and tax evaders who stashed their wealth in big banknotes. In 1945, as the war with Germany drew to a close, the authorities went to war with the spivs, and notes of £10 and over were demonetised in a similar (though less draconian) operation to Modi’s. Big bank notes were later reintroduced, reflecting inflation: £10 in 1964; £20 in 1970; and £50 in 1981.

A special factor in the UK’s big banknote demonetisation was Nazi production of counterfeit Bank of England notes on an industrial scale, the biggest-ever banknote forgery. Hitler keenly endorsed the programme, conducted by a 160-strong concentration camp unit. 

The idea came from British airdrops of fake food and clothing rationing coupons on Germany from 1939.

Over the course of the war, the unit produced £150m of counterfeit Bank of England notes — 15% of the £1bn of notes in circulation in 1944. The forgeries were so perfect that they were undetectable, only coming to light when an alert bank clerk spotted two notes with the same number.

The Nazi plan was to shower the UK with banknotes to destabilise sterling — Hitler’s helicopter money. But by the time the hoard was ready, the Luftwaffe had lost the capability. Instead Germany’s SS used the forgeries to fund overseas agents, purchase supplies in neutral countries, and to rescue Mussolini; by 1945, a substantial volume of fakes was in circulation.

There have been quite a few other big banknote demonetisations. Some were in conditions of monetary chaos — as in post-war France, Belgium and Holland, or the collapse of the Soviet Union. But mostly the aims were curbing the black market, crime and tax evasion. 

In 1976, James Henry of McKinsey argued that the only activities to make use of the US’s big bills were organised crime and tax evaders and proposed the abolition of dollar bills of $50 or above. 

The cause was taken up by Harvard’s Kenneth Rogoff in the 1990s and by others since. Rogoff does not advocate a cashless economy, rather a less-cash economy. He is supportive of Modi’s move, though concerned about short-term impacts, and expects long-term benefits, observing that Modi’s “broader goal is to change the mindset of India”.

Perhaps Modi’s “unique experiment in monetary history” will indeed prove to be a historic turning point.

  • By Richard Roberts
  • 08 Feb 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 13 Mar 2017
1 JPMorgan 94,925.33 384 8.39%
2 Citi 87,531.58 331 7.74%
3 Bank of America Merrill Lynch 84,341.49 288 7.46%
4 Barclays 75,288.19 241 6.66%
5 Goldman Sachs 68,504.71 208 6.06%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 14 Mar 2017
1 Bank of America Merrill Lynch 10,650.87 23 11.13%
2 Deutsche Bank 8,169.49 17 8.53%
3 HSBC 6,243.46 23 6.52%
4 Citi 4,355.35 13 4.55%
5 SG Corporate & Investment Banking 4,273.37 17 4.46%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Apr 2017
1 JPMorgan 6,719.07 26 8.43%
2 Deutsche Bank 5,994.13 30 7.52%
3 UBS 5,678.69 26 7.12%
4 Citi 4,920.31 35 6.17%
5 Goldman Sachs 4,802.16 24 6.02%