Demonetisation And Legal Tender : Basics Ought To Be Known

The Prime Minister of India, Narendra Modi on 8 November 2016, in a live televised address to the nation declared circulation of all Rs. 500 and Rs.1000 bank notes as invalid from 9 November 2016. Through this process of demonetisation, the said currencies ceased to be legal tender. 

What is legal tender? What is demonetization?

The citizens of a country use different modes of exchange in their daily lives to carry out various transactions. In ancient times barter system, a system of exchange where one kind of good or service is directly exchanged for another good or service, was in force. Gradually, currency evolved as a common medium of exchange. 

Legal tender is the money or currency recognized by the law of land as a valid medium of exchange. In India, Reserve Bank of India (RBI) is the sole authority for issuance of currency notes. Reserve Bank is the central bank of India. RBI got its the power through The RBI Act, 1934. The act stipulates that every bank note shall be legal tender at any place in India in payment for the amount expressed therein. The process of abolishing the legal tender status is termed demonetization. 

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What is meant by the limited and unlimited characteristics of legal tender?

In India,  coins and currency notes are in circulation and both are legal tenders. However, coins function as limited legal tender and currency notes as unlimited legal tender. This implies that 50 paise coins can be used as legal tender for any payment upto Rs.10 and other smaller coins up to Rs.1. Currency notes being unlimited legal tender can be used for payments of any size. The receiver of a due cannot deny payment made in currency notes and sue the other person to recover a debt. 

What is the impact of currency ceasing to be legal tender?

All currencies contain a guarantee by the government by which it derives the value mentioned in the currency. In the absence of the recognition of the value by government, the currency note becomes a printed paper. So any currency note becomes a legal tender through a fiat, with the RBI or the government promising to pay  an equivalent sum mentioned in the currency note. Ceasing to be a legal tender means that currency is no longer worth the amount printed in it. In short, all of a sudden, your personal wealth disappaers if you have been keeping your wealth in the said currencies. 

Has demonetization happened earlier?

This is not the first instance of demonetization.  India demonetized Rs 1,000 and higher denomination notes first in January 1946 and again in 1978. The member countries of European Union demonetized their individual currencies in 2002 to adopt the Euro as common legal tender. 1990s saw Australia replacing paper currency notes with polymer notes. 

What led to present demonetization?

The stated objectives of the demonetization are 

1) Tackle the menace of black money in the economy.
2) To fight corruption in the country by lowering the cash circulation. 
3) Eliminate fake currency and dubious funds being used by terror groups to fund terrorism in India.

By bringing restrictions on circulation of cash supply, government intends to make people rely more on bank accounts and migrate to digital modes of transactions. This will widen the tax net, reduce corruption and pave way for a stronger economy. 

TheCS

Why don’t currency notes disintegrate when it gets washed?

How are tears produced? 

Summary
Article Name
Demonetisation And Legal Tender : Basics Ought To Be Known
Description
Legal tender is the money or currency recognized by the law of land as a valid medium of exchange. The RBI Act, 1934 stipulates that every bank note shall be legal tender at any place in India. The process of abolishing the legal tender status is termed demonetization. 
Author
attemptNwin.com

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