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That just happened in India. The government just make the old 1000 Ruby notes illegal and people have to exchange to new ones.
Yeah, but they can do it, right? They can exchange the old Rupees without any restrictions so it means the money still have their value. The much worse scenario would be if they can't do that which happenned many times in many countries throughout the history.
Only in theory. There was a short deadline for exchanging old notes for smaller denominations. There were long lines and a lot of paperwork to fill out to do the cash-to-cash exchange. Banks often ran out of notes. The only painless thing to do was to deposit the old notes into your bank account, and hope ATMs still have smaller notes when you need cash.
My theory of why India did this, at the last minute, on US election day (which, if you think about it, was a very strange way to do this kind of thing) are:
- To suppress the price of gold (only for the short term). Since the result was a shortage of cash (big or small denominations,) there would be less cash to buy gold.
- To put money into banks since depositing your large denomination notes was really the only easy way to handle the event. This was also successfully achieved. Only elite insiders know how fragile the banking system really is.