ELI5: demonetization

What is demonetization?

Demonetization is when a government says that certain money bills are no longer worth anything and people can't use them anymore [1][2]. Imagine if the government suddenly said all your $100 bills were worthless and you had to trade them in for different money—that's what happened in India in November 2016 [1].

Why did India do this?

India's government wanted to stop people from hiding money and cheating on taxes, because many people had huge stacks of high-value bills (500 and 1,000 rupee notes) that they weren't telling the government about [5]. By making those bills worthless, the government forced people to either use banks or admit they had all that secret cash [3].

What happened to people's money?

People who had the old bills had to go to banks and exchange them for new money, but this was confusing and took a long time [2]. About 86% of all the cash in India disappeared overnight, which made it really hard for people to buy things [5].

Did it work?

The plan was supposed to stop corruption and tax cheating, but economists found it also made the economy slower because people couldn't use cash as easily [4]. It's like breaking everyone's wallets to catch the bad guys—it hurts everybody, not just the criminals.