George Alogoskoufis and Sophia Lazaretou

Athens, Livanis Publishers (in Greek)

2002 Prize of the Academy of Athens

This book deals with the history of the Greek monetary system since the emergence of the modern Greek state. Between 1833 and 2001, the currency of Greece has been the drachma, which was named after a coin of ancient Athens. Through the pages of this book, we examine the turbulent monetary history of Greece. The book is not only addressed to economists, but to every Greek interested in the history and prospects of the economy.

Extracts from the Foreword

For a poor newly established state, like Greece after liberation from the Ottoman Empire, access to international capital markets was a vital necessity. The inadequacy of domestic savings and the other national funds meant that there were no other means of financing the costs of creating the new Greek state.

From the beginning, the drachma was linked to silver and gold, in the context of bimetalism, which at the time was the basis of the global monetary system. However, her story, like the history of modern Greece, has been turbulent. For long periods, the monetary regime became a victim of the general political instability and the military adventures in which the country embarked. For other periods, the drachma has been able to participate in the international monetary system, and, whenever the latter operated well, borrowed its credibility.

In more recent years a program was launched in the European Union to replace national currencies with a single European currency, the euro. After Greece  joined, in 2001, the drachma was delegated to the past. What consequences will euro participation have for  Greece? We believe that the reader of this book will be able to see most of the dimensions of this question.

For the first of us, George Alogoskoufis, the interest in the history of the drachma and the analysis of the factors that have determined monetary developments in Greece date back to when he began to study economics. For this reason, much of his research activity dealt with Greek monetary problems. In 1990, he urged Sophia Lazaretou to choose for her doctorate the issue of monetary and exchange rate policy in Greece in the 19th and early 20th centuries. After finishing her dissertation, we decided to proceed with writing this book, partly based on the research that led to Sophiia Lazaretou’s dissertation, and partly on George Alogoskoufis’s past and ongoing research efforts.

The story of the drachma evolves according to a common thread. Its relation to the international monetary regime and the effects of domestic economic and financial disturbances. In the 19th and 20th centuries, whenever the monetary system was destabilized, it was either due to international monetary disturbances or because of fiscal disruptions, by events such as the need for rearmament and the occurrence of wars. The only exception was the 1980s, when the fiscal disruption occurred as the result of an ineffective effort to proceed to the massive redistribution of income and wealth.

Extracts from Chapter 1

In modern nation states, the currency, together perhaps with the flag and national anthem, is one of the most important national symbols. However, unlike the other national symbols, the currency, apart from its symbolic character, is also one of the most important social and economic institutions. It strengthens economic exchange and activity, savings and investment, and thus contributes to greater economic and social well-being.

The value of the currency as a symbol is also augmented by the fact that a strong and stable currency usually goes hand in hand with a strong and stable economy. The relationship between monetary and economic strength and stability is of course two-way. A strong and stable economy facilitates the maintenance of monetary stability, but monetary stability in turn contributes to the smooth operation of markets and transactions and promotes savings, investment and economic growth.

The Drachma and the History of Modern Greece

The history of the drachma and the monetary system of modern Greece is a typical example of the above conclusions. At times when the economy was operating smoothly and effectively, the monetary system was not a problem. However, when there were major economic shocks and upheavals, mainly of a fiscal nature, the monetary system suffered the consequences, resulting in monetary destabilization, which in turn created more economic volatility and instability.

The evolution of the Greek monetary system was influenced by both global monetary developments and the financial disturbances caused by the frequent war conflicts, a major feature of the history of modern Greece.

In 1828, when the first coin of modern Greece was created, the Phoenix of Kapodistrias,  bimetallism was the prevalent international monetary system in Europe and the rest of the world. Some countries were on a gold-standard and others on the silver-standard. The monetary system of modern Greece was set at the basis of silver, although most circulating coins were made of copper and were of low value. The phoenix was not able to prevail, and the Greek coins circulated in parallel with a number of other foreign coins. The fiscal difficulties faced by the newly established Greek state caused the first cessation of currency convertibility in mid-1831 and the issue of paper bills. The murder of Kapodistrias then resulted in the end of the phoenix.

In 1833, after the establishment of a monarchy and King Otto, the drachma, named after a coin of ancient Athens, was introduced as Greece’s new currency. The new Greek monetary system was bimetallic in conception, but in practice only a few gold coins circulated. The drachma began to be widely used in domestic transactions, as it was explicitly forbidden for the government to accept Turkish currencies. The monetary system gradually expanded, and in 1841, after many years of efforts, the National Bank of Greece was established as Greece’s first central bank. Convertibility to silver, and to a lesser extent gold, continued for a long time, although there were also short periods of cessation of convertibility, such as the global currency crisis of 1848 and the revolution of Crete in 1868.

Under the pressure of its foreign creditors, Greece signed the Latin Monetary Union agreement in 1867, accepting the gradual identification of the gold drachma with the gold French franc and other gold European currencies. The Revolution of Crete in 1868 and the Russo-Turkish War of 1877-78 prevented this development, as once again, Greece was forced in 1877 to cease its metallic convertibility.

The cessation of convertibility was maintained for over 30 years. Only in 1909 could Greece fully adhere to the gold-standard rules adopted by the Latin Monetary Union. The main reason for this weakness was the increase in public spending, both for defense and infrastructure purposes, which was largely funded by issuing paper currency. The liberation of Thessaly and Epirus from the Turkish occupation, which was achieved during the Russian-Turkish war of 1877-78, made it necessary to maintain high defense spending, as tensions with Turkey rose. It also created the need to increase public spending on the reconstruction of the two new provinces. The increased fiscal needs did not allow for a successful reintroduction of currency convertibility.

The widespread external borrowing by the state in the period that followed, exacerbated the fiscal problems. External borrowing became more and more difficult at a time when Greece had launched an extensive program of spending to upgrade its economic infrastructure.

In 1893 the Trikoupis government declared a default, refusing to service foreign loans. After the default and the humiliating defeat of Greece by Turkey in 1897, followed the establishment of the International Financial Control Committee. This committee, which represented the interests of the foreign borrowers of the country, imposed a long period of fiscal adjustment, which allowed the drachma exchange rate to appreciate, and the introduction of the gold-standard in 1910.

Despite the Balkan wars and the First World War, the drachma remained a gold based currency rule until 1919, with the help of the exchange restrictions that were generalized during the First World War.

The beginning of the 1920s finds politically divided Greece to have launched the campaign in Asia Minor and to be forced to finance expedition by issuing paper currency. Following the defeat of Venizelos in the 1920 elections, the Allies refused to provide Greece with financial assistance. A number of desperate measures, which amounted to default followed, such as the compulsory loan of 1922, through the division of banknotes into two parts.

After the Asia Minor disaster, a new political and monetary crisis followed.

The crisis continues until 1926, when a government of national unity was formed under Zaimis. As Greece needed new loans from abroad, it again had to succumb to the demands of its international creditors, who this time recommended the creation of an independent central bank, in charge of maintaining monetary stability. The Bank of Greece was founded in 1928, and the drachma was accepted into the interwar gold-exchange standard. Despite the great international recession of 1929 and the international economic and monetary disturbances of the 1930s, which undermined the gold exchange standard, and despite another default, Greece managed to maintain relative monetary stability until the declaration of the Second World War.

The period of Occupation, 1941-44, caused the greatest financial disaster in the history of modern Greece. Following the catastrophic course of the economy during the occupation, the monetary system completely collapsed. The value of the drachma was driven down to zero through hyperinflation, as monetary financing was used to cover the costs of the occupying forces, at a time when economic activity had also collapsed.

Efforts of economic reconstruction and monetary reform after liberation were delayed mainly due to the civil war which followed liberation. Only after 1952 did monetary stability begin to be restored, reinforced after the 1953 devaluation and the drachmas fixed exchange rate to the US dollar, through the Bretton Woods system. What followed was a period of unprecedented economic growth for Greece, combined with almost unprecedented monetary stability. For twenty years, from 1954 to 1973, Greece experienced annual GDP growth of 7%, coupled with inflation rates of less than 4%.

This period came to an end after the collapse of the Bretton Woods system and the adoption of floating exchange rates by the main industrial economies. Greece adopted a crawling per system of continuous depreciation of the exchange rate, to compensate for growing inflation differentials, in a period of general international as well as internal institutional turmoil. The fiscal, income and monetary instability that prevailed since the mid-1970s, and especially since the 1980s, led to stagflation, i.e high inflation rates and a significant slowdown in economic growth. The situation worsened after Greece’s entry into the European Economic Community, and the attempt to redistribute income through government deficits and public debt, which characterized the 1980s.

In the early 1990s, an attempt to reverse these unfavorable fiscal trends and to impose greater monetary discipline was undertaken, but fiscal adjustment slowed down after 1994. The aim was, once again, to integrate Greece into the international monetary system, through its participation in the euro area. This was achieved in 2001, although the Greek economy was still characterized by significant fiscal imbalances and low international competitiveness, as a result of the unbalanced and incomplete adjustment effort.

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