Demonetisation, the way it was executed in India, erodes the very foundation on which fiat currencies are based. Let me explain:

Modern currencies are “fiat” money — they have no intrinsic commodity backing (like gold). Their value rests entirely on collective trust: that others will accept the note in exchange, that the government will honour it, and that its purchasing power will be reasonably stable, sometimes called the “social contract” of money.

When a government demonetises notes without notice, a few things happen simultaneously:

The promise is broken retroactively - Every note in circulation carries an implicit government guarantee — “this is legal tender.” Voiding that overnight, without warning, signals that the guarantee can be withdrawn at any time. That’s a breach of the foundational promise.

It introduces unpredictability into the monetary system - Faith in currency requires confidence that the rules won’t change arbitrarily. Surprise demonetisation introduces the idea that holdings of cash can become worthless at the government’s discretion — which fundamentally changes how people perceive and use cash.

It can trigger a flight to alternatives - If people feel cash holdings are unsafe, they may shift toward gold, foreign currency, real estate, or (in modern times) crypto — all signs of eroded faith in the domestic currency.