The term demonetisation refers to the act of stripping a currency unit of its status as legal tender. In simple terms, you can say that when demonetisation of a currency occurs, the currency loses its face value and is no longer of the status to be used as legal money for any kind of transactions. This usually happens when there is change of any national currency, which involves withdrawal of the existing form or forms of money that is currently being circulated and replacement of those forms with new notes or coins. Rarely, it may happen that a country will entirely replace its old currency with new currency.

Demonetisation is often considered as a drastic intervention in the country’s economy as it involves removing the legal tender status of the currency and can affect the day to day business activities in the economy. If demonetisation goes wrong, it can cause a chaos or serious downturn in an economy. The chances of this happening are even more when demonetisation is announced suddenly, without any prior warning. The process that is opposite to demonetisation is called remonetisation which refers to the act of restoring a payment form as a legal tender.

Demonetisation is often believed to bring stability to a country’s currency and used as a tool to fight inflation, facilitate trade and give the economy a better access to the markets which will allow it to push informal economic activities into becoming more transparent and get them away from black and grey markets.

As we have already discussed above, demonetisation is used by economies for various reasons that they find valid for the progress and development of their nation. Although demonetisation can be harmful if gone wrong, it has also proved beneficial many times when used across the globe by different countries and their economies.

The Coinage Act, 1873 in the USA, demonetised silver as its legal tender and fully adopted gold standard. This was done to fight disruptive inflation which was as significant as the new silver deposits discovered in the Western America. The act suspended the circulation of various coins, including two-cent piece, three cent piece and half dime. This act that removed silver from being circulated in the economy led to contraction of money supply which in turn contributed to the downturn of the economy throughout the country. This is the reason why silver was remonetised as a legal tender through the Bland-Allison act in the year 1878. This remonissation was done in an effort to put an end to recession and political stress that was going around among farmers and silver miners.