What is Demonetization?

Demonetization is the process of ceasing to produce and circulate particular forms of currency. This is often the case when it is determined that the currency is not longer in regular use within the country of origin. While the currency is no longer minted or printed, any of the discontinued currency that is presented is still accepted as legal tender.

Going through the process of demonetization may be helpful for a couple of reasons. The most common is the replacement of one form of currency with another. For example, some countries have chosen to replace their smaller banknotes with coins of the same value. Even though the banknotes are no longer printed, merchants can still accept them as legal currency and deposit the worth of the banknote into a bank account. Over time, the banknotes are exchanged for the newer coins and the demonetization process is considered complete.

Another reason for withdrawing currency is to completely revamp the value and type of currencies used within the country. This is often due to matters involving the rate of exchange of currency with other countries. At other times, this wholesale change has been due to a desire to streamline the currency in order to make the use of the money easier for all concerned. In both scenarios, the older coins and notes usually are declared to no longer be legal tender after a certain date. However, the older money can be redeemed for an equivalent amount of the newer forms of currency.

Deciding to engage the process of demonetization is something that is not done lightly. There is usually a solid reason behind the change in currency, and countries normally go through a learning curve as the citizens begin to get used to the phasing out of one form of currency and the concurrent introduction of a new form of currency.

Rarely does demonetization take place without some amount of public outcry. However, in most cases, the indignation of the general public is short lived and soon everyone begins to accept the changes and gradually discontinue use of the older currency. This is particularly true when the government only allows a specific window of time to redeem the discontinued currency for other types of legal tender.