An Explainer: Demonetisation

The bank notes you keep are legal tenders issued by a government which promises to give you the value marked on the notes. As it is a legal tender, the sovereignty of the currency is binding on the taker. However, when authorities decide to withdraw the value of the said notes, this process is called demonetisation, a term which could be loosely translated as an end of an agreement.

When a government decides to demonetise certain currency notes it means the latter would no longer remain a legal tender of that country and promise you no value any longer.

This is often done by the government to circulate new currency notes into the system.

Earlier, nations of the European Union also used demonetisation to adopt the Euro as a common currency. At the time when the EU introduced the Euro, old currencies were in a certain time limit exchanged for the new currency. In a more recent move, India's Central government earlier this month demonetised existing currency notes of Rs 500 and Rs 1,000 — a move aimed at curbing the use of unaccounted money into the system. People have been given a 50-day window to exchange their old currency noted with the new one.