Payment Methods

Venezuela, India: A Tale Of Inflation

What happens when money — at least in coins and bills — no longer stands, in its physical form, as the preferred method of exchange? Two recent examples, far flung across the globe, stand out.

Recent developments in India and Venezuela show government initiatives at work, clumsily in some cases, to bring some undesirable activities to heel. In the case of the former, India took a leap into withdrawing, physically, roughly 86 percent of its circulating bills — the 500-rupee and 1,000-rupee notes — while simultaneously replacing those bills … with new bills. The aim was, and is, to stop tax evasion and underreporting of cash on hand. The effort hasn’t worked well, from a mechanical point of view, as the new ATMs were not able to accept the new denominations and new bill sizes those denominations carried. Getting the new notes to rural areas proved difficult. Bartering took root.

Now, Bloomberg reports, black market activity has emerged, with money laundering looking to get around government efforts to track down large deposits and tax their holders. In some cases, planeloads of banned cash notes are being brought into remote areas of the country, shifting the money into accounts held by rural-based citizens and effectively leading a wild goose chase to find the cash before it literally disappears. In other cases, people are tying up their money in tangible stores of value like real estate.

Elsewhere, in Venezuela, backpacks are being employed to shuttle around notes, and those packs are getting heavier for daily transactions, as the money supply in that country has grown by more than 100 percent in just one year. The ripple effects of boosting the money supply also has brought bills with higher denominations to bow this month, and the largest of them, the 20,000-bolivar note, for now, anyway, will be worth $5. But just issuing bigger bills may just come in tandem with bigger prices for goods and services. The less faith people have in a currency, the more they charge in order to get … well, more, today, right now. In a hyper inflationary environment, bills become the ultimate display of the “greater fool” game, where you pass on a losing proposition in exchange for something else, right away (the theory is at work in the stock market, too).

If the bills do not hold trust, what might? There’s the rub, in a gradual process that might seek alternative routes (India has a goal of a cashless society, starting with … less cash) — some would say digital currencies, some would say relationships that operate outside of the conventions of central banking. And for the backpack crowd toting the burden of bills that grow in number but shrink in power, there’s the attraction of cashless payments, certainly as, via mobile or card, less weightier options.

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