Demonetization involves removing the face value of a banknote or coin. It is the end of the possibility of exchanging previously withdrawn currencies. Thus, once demonetized, they can no longer be used for their intended purpose, and are no longer redeemed by the issuing central bank.
The causes of demonetization
Demonetization operations are generally organized by public authorities. Very difficult and delicate to apply, it is often justified by the obsolescence of the security systems protecting banknotes from counterfeiting. However, demonetization can also be justified by a switch to another currency.
Demonetization to combat counterfeiting
Central banks must issue banknotes that are protected against counterfeiting. As time goes by, counterfeiters' techniques change and tools improve. To stay one step ahead, the responsible authorities call on professionals to improve banknote security systems.
As new-generation banknotes are issued, the authorities demonetize the old ones so that counterfeits based on them are no longer used.
Demonetize to switch to another currency
The second possible cause of demonetization is the switch to another currency. Taking Europe as an example, several currencies were replaced when the euro was introduced. All 19 member states had to replace their local currencies with the single currency. Each applied a different policy of repayment and exchange of their former currency until their final demonetization.
For example, franc banknotes have not been used for payments since February 17, 2002, and have not been exchanged by the Banque de France since February 17, 2012. They are now demonetized.
We can also cite countries affected by hyperinflation. In Yugoslavia, inflation reached 1,000,000% in 1994. The government launched a program of reforms and introduced a "super-dinar", demonetizing the old one. Venezuela has experienced this situation twice, launching the "strong bolivar" and more recently the "sovereign bolivar".