The post war reconstruction of greece a history of economic stabilization and development, 1944 1952

PALGRAVE STUDIES
IN DEMOCRACY,
INNOVATION, AND
ENTREPRENEURSHIP
FOR GROWTH

THE POST-WAR
RECONSTRUCTION
OF GREECE
A History of
Economic Stabilization
and Development,
1944–1952
George Politakis


Palgrave Studies in Democracy, Innovation,
and Entrepreneurship for Growth
Series Editor
Elias G. Carayannis
The George Washington University
Washington, District of Columbia, USA


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George Politakis

The Post-War
Reconstruction
of Greece
A History of Economic Stabilization
and Development, 1944–1952


George Politakis
Athens, Greece

Palgrave Studies in Democracy, Innovation, and Entrepreneurship for Growth
ISBN 978-1-137-57569-2    ISBN 978-1-137-57734-4 (eBook)
/>Library of Congress Control Number: 2017949884
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I dedicate this book to the memory of my grandparents
Georgios and Ismini Georgaras
They gave me the keys to walk the distance
taught me courage in the discovery
and so gave me life


Acknowledgments

During the time of the research and writing of this book, several people
have given me support and advice. My first debt is to my supervisor,
Professor L. Tsoukalis, who guided me throughout the original dissertation
at the University of Oxford. My second debt is to Professor Elias Carayannis,
who encouraged me to publish it and has been actively engaged in this
process. My third debt is to the editorial staff of Palgrave Macmillan for
their work in shaping my manuscript into the present book.
I would like to thank the (late) Greek politicians and economists and
journalists who shared with me their unique insights of the period. In
particular, Dr. I. Zighdis; Professors A. Angelopoulos and X. Zolotas; and
Messrs. S. Markezinis and A. Frangias.
I am also indebted to the staff of Bodleian Library, Oxford; the National

Archives, College Park, MD; the Library of the Hellenic Parliament,
Athens; the Greek Historical and Literary Archive, Athens; and the Library
and the Historical Archive of the Bank of Greece, Athens. I am also personally grateful to Messrs. N. Pandelakis and K. Papachrysanthou, who
entrusted me with the private papers of A. Diomidis and K. Varvaressos in
their possession, now part of the respective archives.
I am especially thankful to my family for their continuous support and
for accepting my, sometimes, exclusive interest in this project, and also for
their active interest in it.

vii


Contents

1 Introduction  1
2 Greece’s Pre-war Economic Development
and External Economic Relations 11
3 Wartime and Liberation Economic Policy 31
4 The Varvaressos Experiment 67
5 Greek External Economic Relations Until 
 the End of 1946 93
6 From Liberalization of Foreign Trade to 
the Exhaustion of Reserves121
7 The First Year of American Aid: The Porter Mission,
the Amag, and Initial Setbacks149
8 Greece’s Association with the Recovery and 
Reconstruction of Europe: The Lessons from 1948175
9 Defining and Implementing Economic and Political
Priorities in Post–Civil War Greece221
ix

x  

10

Contents

Conclusion257

Bibliography269
Index279


List of Figures

Fig. 2.1
Fig. 2.2
Fig. 2.3
Fig. 3.1
Fig. 3.2
Fig. 3.3
Fig. 4.1
Fig. 6.1
Fig. 6.2
Fig. 6.3
Fig. 6.4
Fig. 6.5
Fig. 6.6
Fig. 7.1

Fig. 8.1
Fig. 8.2
Fig. 9.1

Service of public debt as a percentage of public
expenditure in 1930
Trade of countries of Southeastern Europe with free
exchange countries
Per capita imports of Balkan countries in gold dollars
The volume of Foreign Trade 1941–1944
Percentage increase in money supply, 1939–1944
Indices money supply, consumer prices, and price of gold
sovereign in Athens
Remittances, March to December 1945
Monthly evolution of industrial output in 1946
Remittances, March 1945 to September 1946
Sales of gold and foreign exchange, March to December 1946
Evolution of domestic prices in 1946
Government income and outlay
Evolution of Monetary Indicators
Organogram of Amag
Sales of gold sovereigns in millions of US dollars
Sovereign, 1948 market price in drachmas
Greece’s balance of payments, 1938, 1945–1952 
in millions of current US dollars

14
16
22
33

35
36
82
123
127
132
138
142
143
156
178
213
248

xi


List of Tables

Table 2.1
Table 2.2
Table 2.3
Table 2.4
Table 2.5
Table 2.6
Table 2.7
Table 2.8
Table 3.1
Table 3.2
Table 3.3

Table 3.4
Table 3.5
Table 4.1
Table 6.1
Table 6.2
Table 6.3
Table 7.1
Table 7.2

Import substitution in the 1930s
The origin of the raw materials of Greek Industry 1928, 1938
Agricultural exports as a percentage of total exports
Evolution of foreign trade
Financing imports, 1934–38
Percentage composition of Greek Foreign Trade,
1934–38 average
Land reform in Greece and other countries of Europe.
Land distributed as a % of total cultivated land
Production of charcoal before and after the First World War
Greece, imports of foodstuffs as a percentage
of total consumption, 1935–1937
Public expenditure in Greece, 1939–1944
Comparison of accounts on imports required
Varvaressos’ request of relief imports
Money, public spending, and gold in Athens,
14/10 to 10/11/1944
Government income and outlay (in millions of drachma)
Agricultural production, 1945, 1946
Foreign exchange sales in 1946
The drachma note issue, 1946

Porter’s estimated balance of payments for 1947
Performance of Greek Foreign Trade in 1947

19
19
21
22
23
23
25
25
32
37
43
44
60
70
123
131
141
151
169

xiii


CHAPTER 1

Introduction

Modern Greece emerged out of poverty status in the 1960s. That it is faced
with the challenge of a declining wealth status within a short period is no
small feat. In the latest (2017) IMF review of the Greek economy, it is
shown that while the depth of the decline in output is only matched by the
USA during the 1929 crisis, Greece has remained at the bottom of the
barrel for eight years, compared to four for the USA.1
Yet, Greece’s current economic crisis that started in 2009 is misleading
in one respect: it hides the unprecedented success story, that of Greece’s
post-war economic miracle. From 1953 to 1977 the Greek economy grew
at an annual growth rate of 6%, exceeded only by Japan among OECD
members. Greek per capita income grew to fivefold its pre-1953 (or sixfold
its pre-1938 level) in real terms, while domestic price stability set another
OECD record, and the balance of payments remained in control. Greece’s
position within the international economy changed: whereas in 1938, 80%
of Greek exports were made up of farm products, by 1975 over 50% could
be classified as industrial products, and employment in manufacturing grew
from 18% to 29% of total. As a result, in the late 1970s, Greece was considered as one of the most dynamic New Industrialized Countries (NICs).2
In order to get better integrated with Western Europe, Greece became
in 1961 the first country ever to be associated with the newly formed
Common Market of Six original members, with the ultimate goal of
achieving full membership. Between 1961 and 1977 per capital income
© The Author(s) 2018
G. Politakis, The Post-War Reconstruction of Greece, Palgrave Studies
in Democracy, Innovation, and Entrepreneurship for Growth,
/>
1


2  

1 INTRODUCTION

increased from one-third of the EC average to two-third. The progress
made was acknowledged in the successful conclusion of the negotiations
for accession to the European Community (EC) in 1978 and officially
membership the EC as of 1981, ahead of the two Iberian candidates.3
These major advances, however, were questioned by many Greeks.
What many commentators, and a large segment of the Greek public,
resented was an economic development that was seen as having too many
political, social, and economic drawbacks. Perceived political drawbacks
primarily related to foreign intervention in Greece’s domestic affairs.
Greece’s relationship with the USA, starting in 1947 at the height of the
Greek Civil War and the time of the Truman Doctrine, was perceived as a
status of dependence. Within this perspective, large concessions to foreign
investors were seen not as the price to pay for attracting foreign capital to
a poor and underdeveloped economy, but rather as the outward economic
manifestation of political dependence.
The social and economic criticism was based on two grounds: firstly,
that large-scale emigration had been encouraged as part of the process of
economic development and that this was an unacceptably high price to
have been paid for industrialization; secondly, that the distribution of
wealth produced had been unequal. These criticisms were fueled by the
limits of the political reconciliation in the post–Civil War era and ultimately the seven-year repression of individual liberties in Greece from
1967 to 1974. While prominent economists have disputed that the
1967–1974 economic policy is a continuity of pre-junta policy, the military rule has been commonly interpreted as the culmination of earlier
social and political conditions, not least of the very model of economic
development. Even the proper economic achievements in terms of economic growth were, as is usual in such a political context, much disputed
and their relevance for the country’s future contested.
While much of the criticism of the political regime and in particular
the limitations of democracy in the post–Civil War environment were

well founded, one should, however, make a distinction with the conclusions that were drawn and their implications. Annual growth rates and
economic development after the seven-year military rule were only
acceptable if they were to follow a pattern of increased income redistribution. Gradually, dividing the pie became a concern before growing it.
As a result, the pattern of development itself became a matter of ­political
­controversy, and Greece’s present condition should not fail to be seen
in this light.


1 INTRODUCTION  

3

There is no doubt that Greece’s post-war development pattern was a
particular case, compared to the post-war Western European model. The
differences existed not only in the devastating Axis Occupation and the
destructive Civil war, but arose mainly from the pre-war economic development. The Western European post-war pattern has been one of increasing wealth of national economies proud of their independence,4 under full
employment, development of the welfare state, and increased sharing of
wealth through progressive taxation—the model A. Shonfield exalted in
his Modern Capitalism.5 Had Greece followed a development along similar lines, the above-mentioned criticism might have been unfounded.
However, Greece’s path was different from Western Europe’s. This particular path of development created within Greek society vulnerabilities of
its own and provided the grounds for criticism of economic development.
How did all this start?
In order to understand the origins of post-1953 development, we have
to be in a position to understand how and to what extent Greece’s starting point differed from the rest of Europe. It would be wise to see how it
came about that the Marshall Plan, the common departure point of the
Greek post-war economy together with that of other Western European
participants, ultimately led Greece to a different path of economic development from the rest of Western Europe that participated in the Marshall
Plan. The year 1953 has been widely accepted as the starting point for the
post-war economic development of Greece, after the sharp and successful
devaluation in April of that year put an end to the earlier post-war period

of price instability and currency inconvertibility. If so, where can one find
the origin of these Greek particularities? Should one cite the very low
departure level, as demonstrated by Greek per capita income of $150
per annum? Had it to do with the Greek Civil war, and if so in what way?
Hadn’t Greece after all been a member of the European Recovery
Program (ERP), the Marshall Plan, and, if so, why after a grant of US$2
billion, did the Government in 1953 opt to offer exceptionally advantageous terms in order to attract foreign investors, which put it on a par
with underdeveloped countries that did not benefit from such largesse?
This is the subject of this book.
In order to provide a satisfactory answer to these important questions, we should survey the state of the pre-war Greek economy, considering in particular the level of economic development, external
­economic relations, the balance of payments, foreign trade, and the role
of debt. We look into this in Chap. 2, in connection with the course of


4  

1 INTRODUCTION

pre-war economic policy, paying attention in particular to some new
thinking that started to emerge in the inter-war period after 1922 and
the experience from the autarkic policies of the 1930s.
Chapter 3 opens with a discussion on the effects of war and Occupation
upon the Greek economy, both real and monetary. The priorities and
planning for the aftermath of Liberation are presented. It is followed by
the attempts of the National Unity Government to arrest hyper-inflation
and to create the monetary and material conditions for domestic recovery
at the time of Liberation. X. Zolotas, who directed this effort as co-governor
of the Bank of Greece, tried to do away with as much state regulation and
controls as was feasible at the time, by insisting mainly on creating the
right psychology in the markets. These efforts were severely disrupted by

the Civil War of December 1944.
Chapter 4 deals with the gradual deterioration of the economic outlook in Greece in the early months of 1945, at a time when, thanks to
the implementation of relief programs, underlying material conditions
were gradually improving. We consider why, while proposals for adjusting economic policy were submitted by the governor of the Central
Bank K. Varvaressos early in February 1945, action was postponed by
reluctant politicians until June, and then suddenly introduced after
British pressure. While his stabilization had the opposite philosophy of
Zolotas’, his efforts failed three months later for similar reasons: political
developments, domestic opposition to his plans, and the absence of firm
political backing obliged him to resign.
Chapter 5 presents how the evolution of Greece’s economic situation
was perceived in the West, and how this influenced Greece’s perception by
the United Nations Relief and Rehabilitation Administration (UNRRA),
the UK, and UNRRA’s major backer, the USA.
Chapter 6 describes the course of the economy between Varvaressos’
departure in September 1945 and the end of 1946. Attention is paid to
the course of economic policy after the third post-war stabilization of
January 1946 and in particular how after the elections of March 1946
Greece’s reserves were depleted following an untimely liberalization of the
trade policy, without matching foreign exchange earnings or credits.
Finally, we show how the very institutions that were supposed to supervise
Greece’s monetary policy failed to react on time.
A review of Kyriakos Varvaressos’ private papers shows that the
Americans were being advised by the former governor of the Central Bank
himself and that the latter exerted strong influence on the Undersecretary


1 INTRODUCTION  

5

of State Dean Acheson and the State Department and weighted heavily on
the unusually strict terms included in the policy of assistance to Greece.
Chapter 7 deals with this new context of the expanding Civil Conflict
and the announcement of the Truman Doctrine. The bilateral agreement
of June 1947 has been seen as the basis of US interference in Greek
affairs. Here, these heavy terms are analyzed in the light of the record of
Greek post-war economic policy as perceived by the US administration
looking through Varvaressos’ eyes. Then the initial difficulties and Greek
Government’s opposition the Americans faced in 1947 when they first
tried to dictate Greek economic policy are discussed.
Chapter 8 introduces the key issues of Greek reconstruction policy, in
connection with the launch of the ERP in 1948. It shows how Greek-­
enlightened proposals to use this opportunity to Greece’s best benefit,
especially to bring about a change in the structure of the economy. That
these proposals attracted the attention and got the support of key US policymakers, only to be defeated by strong and well-connected domestic
interests. Here, thanks to the archives of the Greek Highest Reconstruction
Council we can establish that, contrary to what has been often proclaimed
in the past, it was opposition from powerful interest groups within Greece
that wrecked those ambitious plans, rather than the security threat of the
Civil War or American opposition to Greece’s economic development.
And how in turn the Americans, who exercised enormous influence in
Greek affairs under the bilateral agreements of 1947, failed in this key test.
Chapter 9 surveys the poor record of the realization of the Marshall
Plan in Greece during the Civil War, carried over in the first post–Civil
War year. It discusses various attempts, under American pressure, to return
the Greek economy to a peacetime operation and parallel efforts to normalize political conditions. It is followed by a discussion of the impact of
the Korean conflict on the future of Greek reconstruction. It is demonstrated that the removal of the unconditional US backing for the moderate Plastiras Government set loose those Greek elements who were
opposed to the normalization of the political situation through a gradual
re-­integration of their (defeated) opponents in the political system and

paid lip service to the success of the ERP. In tandem, we consider how the
Americans were successful through successive aid reductions to get
through most of the reforms they had tried unsuccessfully to introduce in
the past—even though the offer of large-scale aid had by then disappeared
and the future of the Greek economy remained in suspense.


6  

1 INTRODUCTION

Dealing with the roots of Greek post-war development, one always has
to keep in mind the explosive Greek political situation throughout the
1940s, when Greece after Liberation became entangled in civil strife. To
search for the roots of the post-war economic development of Greece in a
period of civil conflict was and still remains a huge challenge. Because of
the intensity of political strife, one might be tempted to abandon the analysis of the economic policy during this period, for well-understood reasons.
First of all there is the mere gravity of domestic political developments
around the Greek Civil War. An intense political situation is less than a
solid ground for economic history. The history of this period is still a
politically and emotionally charged issue in Greece, and this has clouded
the judgment of economic historians of the period.
Secondly, the task of economic analysis is made difficult by the fact that
events in Greece then had an acute international dimension. The Truman
Doctrine was the first ever implementation of containment, preceding the
Marshall Plan by a year. Thus the international factor, in the form of
foreign intervention in Greek domestic affairs, has influenced Greek
­
understanding. The “foreign factor” has in the past occupied center stage
in the interpretation of Greek affairs in the 1940s, excluding domestic

forces from any role of a real political, economic, or social significance.
And the importance given to the foreign factor has reduced our understanding of Greek post-war developments, in particular when dealing with
the adoption of the Greek post-war pattern of economic development.
These problems are reflected in the voluminous historiography of
Greece in the 1940s. The attractions to the historian, first of the Civil War
itself, then of the foreign intervention surrounding it, have always exercised a heavy influence on our understanding of Greek history of that
period. This concentration of interest on political affairs has done an injustice to the political economy of the period. This injustice takes us beyond
the “mutual neglect”, as S. Strange coined in 1970,6 since here lack of interest has sometimes been camouflaged in parenthetical references to economic developments, which tends to ignore the internal dynamics of the
economy.
So the present study has a dual task: firstly, to disentangle the issues of
Greek economic development of this period from the politics of foreign
intervention; secondly, to reconnect economic development with domestic politics. This approach will permit us to establish the respective contribution of politics and economics to the internal dynamics of Greece,
by avoiding the undue influence exerted on previous analyses by the


1 INTRODUCTION  

7

l­arge-­
scale foreign interventions in Greece’s domestic affairs. The
purpose here will be to cut “the foreign factor” down to its real size, and
to examine the influence the USA was able to exert in connection with
economic policy. In fact, whatever the objections and personal animosities
raised by US interference, it should not escape our attention that in the
end the important question was how Greek politicians and various groups
in the Greek society reacted to the very important questions raised by
post-war economic recovery and reconstruction. The strategy which led
the Greek economy from stabilization to economic development in the
ensuing period was first and foremost the product of an analysis by Greeks

themselves, who maintained ownership throughout the program and led
it finally to success after these initial setbacks.
It is true that such a focus on national development strategies during
the Marshall Plan years is more common these days than when this study
was originally conceived. However, no other European participant became
entangled in a prolonged civil war and no such neglect is more pronounced
elsewhere than in the case of Greece. And nowhere else in Western Europe
has the Marshall Plan been more effectively used as a tool of economic
modernization than in Greece.
The more comprehensive methodological foundations for this research
can be found in the survey “Greek History, 1940–1950, The Main
Problems” by N. Svoronos (1980), wherein he said,
In their treatment of [the 1940’s] historians have focused mainly upon two
factors; first, internal politics, that is (a) the stand taken by Greek political
and social groups during the war and (b) the resistance organizations and
their relationships both with the various political parties and among themselves; and second, the foreign factor, that is the intervention of Great
Powers in Greek affairs. Emphasis on this second point has been such that
foreign intervention came to be considered the most important factor in the
development of recent Greek history.
… It would be a serious methodological error to ascribe to these epiphenomena, with the pretension of offering interpretative keys, the character of
principal and autonomous historical factors -even though one may connect
them, somewhat parenthetically, with social and economic developments.
This error occurs with many of the studies of the period we are concerned
with. In fact such studies often conclude with a series of value judgments
that try to either justify or to condemn the policy of one of the rival powers
toward Greece or the policy of one of the Greek political parties. Such studies, furthermore, give the impression -so widespread in Greek ­historiography


8  

1 INTRODUCTION

and politics- that Greece is merely a stage for puppets whose strings are
moved by alien hands. Such a conception is naive for a historian, a mortal
disease for history itself, and an unacceptable alibi for politicians.7

The present author has greatly benefited in his investigation from the fact
that during the research period three economists that played a major role,
namely Angelos Angelopoulos,8 Xenophon Zolotas,9 and Ioannis
Zighdis,10 were already in retirement but keen to talk about this period
and major archives, in particular those of former Central Bank governors
Kyriakos Varvaressos11 and Alexandros Diomidis,12 had just become
available.
It is our intention to prove that the actions of the Greeks themselves in
response to various circumstances—or their failure to act—were much
more important in shaping Greece’s economic future than foreign intervention, however forceful or inappropriate the latter might have appeared
at times. Furthermore the reason why the Greeks failed to use to their
advantage the opportunity of the Marshall Plan had less to do with the
Civil War and rather more with the opposition to the policy of economic
modernization. The focus of this research is to discover how the path to
development emerged from the difficult choices faced during the process
of Greek post-war recovery and reconstruction, from 1944 to 1952.

Notes
1. IMF Country Report No. 17/40, February 2017, 2016 ARTICLE IV
CONSULTATION.
2. O.E.C.D. The Impact of the Newly Industrialized Countries, Paris 1978.
3. That economic growth came to a halt with EC membership in 1981 was, as
in the previous period, again the result of Greek domestic developments.
4. Spain, another country of Southern Europe, which presented similarities

to Greece in terms of concessions to foreign investors, did not participate
in the Marshall Plan.
5. A.  Shonfield Modern Capitalism, The Changing Balance of Public and
Private Power, O.U.P., London 1965.
6. S. Strange “International Economics and International Relations, A Case
of Mutual Neglect” in International Affairs, April 1970.
7. J. O. Iatrides (ed.) Greece in the 1940s A Nation in Crisis University Press
of New England, Hanover and London, 1981, pp. 2–3.
8. Angelos Angelopoulos (1904–1995) studied economics at the Athens
University of Economics and Business (AUEB), Leipzig and Paris. Elected


 NOTES  

9

professor in 1939, fired from his post in 1946 for political reasons, and left
Greece. Returned to Greece 1959, re-elected professor in 1961, where he
remained until 1967 when he resigned protesting against the coup d’état.
Member of the Academy of Athens In 1976. Director of the Supreme
Economic Council (1931–1945), Secretary of State for Economics in the
Mountain Government in 1944, and Deputy Finance Minister in the
Government of George Papandreou. Governor of the National Bank of
Greece (1974–1979).
9. Xenophon Zolotas (1904–2004). Professor of Economics in 1928, a post
he held until 1967, when he resigned in protest at the military regime.
Governor of the Bank of Greece in 1944–1945, then in 1955–1967 (when
he resigned in protest at the regime), and in 1974–1981. In November
1989 he was chosen to head a Coalition supported by the conservative,
socialist and communist parties, with the task of saving the Greek economy

from bankruptcy. He was close with Angelos Angelopoulos and Ioannis
Zighdis.
10. Ioannis Zighdis (1913–1997), educated in Lausanne Geneva and London,
did his Phd in London School of Economics 1937. In wartime he worked
in London under Varvaressos to prepare for the solution of Greece’s financial problems after the end of the war. From June 1944 until the end of
1947 he served in UNRRA international staff, in London and Athens.
From the last position, a series of projects were published including “The
Mineral Wealth of Greece”. To avoid political prosecution for his views on
economic development and industrialization he went on a long trip to
Africa to study the economic situation in Ethiopia and Kenya where there
were large Greek communities. Elected MP in 1950 of the Dodecanese.
Minister for Industry under the Centrist Coalition Governments of
N. Plastiras (1952) and G. Papandreou (1964–1965).
11. Kyriakos Varvaressos (1884–1957) Chief section, Ministry of National
Economy, Greece, 1911–1913, director statistics, 1913–1920. Assistant
professor economics, University of Athens, 1918–1923, Professor 1923.
Economic adviser Greek National Bank, 1924–1933. Minister of finance,
1932. Deputy governor Bank of Greece, 1933–1939, Governor,
1939–1945. Minister of finance, 1941–1943 (London). Ambassador at
large for economic affairs representing Greece at UNRRA Conference,
Atlantic City, New Jersey, 1943, Bretton Woods, 1944, San Francisco,
1945, 1943–1945. Deputy prime minister, also minister of coordination
and Minister of Supply, 1945. Executive director then Advisor, International Bank for Reconstruction and Development (IBRD, commonly
the World Bank), 1946–1957.


10  

1 INTRODUCTION

12. Alexandros Diomidis (1875–1950). Studied law and economics in
Weimar and Paris, doctorate from the University of Berlin. Professor in
Athens in 1905. Member of the Athens Academy. First elected in 1909 to
the Hellenic Parliament under the banner of the Liberal Party. From 1912
to 1915 and again in 1922 he served as the Minister for Finance. Governor
of the National Bank of Greece in 1923 and first governor of the Bank of
Greece in 1928. Diomidis became prime minister upon the death of
Sofoulis. It was during his brief term in office (28 June 1949–6 January
1950) that the Greek Civil War ended.


CHAPTER 2

Greece’s Pre-war Economic Development
and External Economic Relations

2.1   Introduction: Major Factors of Pre-war
Economic Development
The Greeks became independent from Ottoman rule in 1832, ahead of
their Balkan neighbors.1 The small size of the initial Greek state, its level
of economic development, and the time it took to establish frontiers
acceptable to the Greeks as definitive cast serious doubts on its viability as
an independent entity. For a long time to come, the number of Greeks
living within Greek frontiers was to remain smaller than those under
Ottoman rule. So in the era of nationalism, the issue of the unredeemed
(the liberation of ethnic Greeks living under Ottoman rule) became a key
reference of the new country’s foreign policy.
These developments were of considerable importance for Greece’s relationship with the international economy. Territorial expansion required a
relatively large army and high public expenditure on defense, which was
usually provided by borrowing internally or, more significantly, externally.2

For over a century, Greece had to finance the cost of its expansion, which
was the first reason for reliance on foreign finance.3 Second, whereas the
independent state covered initially 48,000 square km and had a population
of fewer than 1,000,000, territorial expansion by 1922 had increased it to
127,000 square km and a population of over 6,000,000.4 The implications

© The Author(s) 2018
G. Politakis, The Post-War Reconstruction of Greece, Palgrave Studies
in Democracy, Innovation, and Entrepreneurship for Growth,
/>
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from such a formidable expansion of the internal market are obvious.
Qualitative changes, which took place during the same period, broadened
their impact.

2.2   Post-1922 Course of Greek Economy
The economy was positively impacted by a decade of territorial expansion
from 1912 to 1922, that started with the Balkan Wars and ended with a
defeat in Asia Minor in the aftermath of the Great War. At first, high
demand and profits generated by the Balkan Wars of 1912/3 provided a
powerful stimulus to Greek industry; military supplies and the annexation
of new territories in particular gave a strong impetus to Greek industrial
production. Also, Greece acquired for the first time a shared border with
the rest of Europe. A rail link, which Ottoman obstruction had not allowed

before, was quickly established.5 Greek industry was at last set for
expansion.
The outbreak of the First World War6 initially shelved all plans for
expansion since machinery could not be imported from overseas due to
the high transportation risks involved in maritime communications.
Nevertheless, there was a need to supply the increased demand of a growing domestic market, which had been confined to local industry during
the 1916/17 blockade,7 and the demands for supplying an Entente army,
which was stationed in Northern Greece.
In the meantime, the disruption which international trade had faced during the First World War had contributed to spreading the idea of economic
development for underdeveloped regions.8 This spread the new concept of
economic self-reliance, which resonated following Greek experiences of
import trade difficulties during the Balkan Wars, the First World War, and,
in particular, the Anglo-French blockade of Athens in 1917. As a consequence, there was a switch from imports to local production and a utilization of Greek lignite9; from those experiences one can sense on the part of
the Government a nascent positive perception of the role of industry.
The last major stage of Greek territorial expansion (1917–22) was to be
of the utmost benefit for Greek industry; not only did markets expand at
hitherto inconceivable rates, but in addition, following the traumatic
defeat in the war against Turkey in 1920/1922 and the subsequent withdrawal of the Greek population from Asia Minor after 1922, would supply
not only abundant and cheap labor, but also entrepreneurial skills. This
brought significant changes to the perception of the optimum structure of


2.2  POST-1922 COURSE OF GREEK ECONOMY   

13

the Greek economy. Awareness was progressively growing that
­industrialization was henceforth necessary for the significantly expanded
Greek state, if employment were to increase, incomes to rise and social
unrest contained.10 Simultaneously, emigration from Southern Europe to

the USA was abruptly curtailed after 1921.11
Greek foreign policy was also reshaped as a consequence of the defeat
by Atatürk’s Turkey in 1922. In its aftermath, Greece moved progressively
toward regional cooperation, while traditional links with the Great Powers,
in particular with Britain, the leading naval power, were preserved. Greek
economic and foreign economic policy was to be considerably adjusted in
the same direction.
Among the economic issues which post-1922 Greece had to face,
were the effects of ten years of war in destabilizing its financial position.
Greece had been at war between 1911–1913 and 1916–1922. War
expenditure and the cost of resettling the refugees in its aftermath were
met by further borrowing. The sheer size of the financial emergencies
created by the problem of resettling 1.3 million refugees in a country of
fewer than 6 million, led to excessive paper-notes issue and precluded for
some time any long-term cure. It took at least up to the late 1920s
before some kind of balance was re-established in Greece’s finances,
while the most pressing needs of the refugee problem were barely met.
Foreign debt between 1914 and 1930 increased by 165%, measured at
constant 1914 prices.12 Between 1914 and 1930, internal and external
components of public debt increased on average by 143%.13 As a result,
during the same period, the servicing of the public debt increased from
19% to 36% of public spending in the financial year 1931/1932.14 Public
debt as of the end of 1936 was 75% external and 25% internal, the highest
ratio of non-resident ownership in Europe.15 Greek public debt service
was among the highest among European debtors in 1930. As Fig.  2.1
shows, Greece was third highest. Most significantly, there existed no
important offsetting payments, as war reparations were low.16
This ever-increasing resort to external finance had important consequences. It destroyed the confidence of foreign investors, and thus the
conditions of loans issued during the 1920s deteriorated. It has been calculated that loans extended in the 16-year period from financial year 1915 to
1931/1932 produced receipts of drachma 22.2 billion while the service of

public debt absorbed drachma 25.9 billion.17 Simultaneously, the State’s
resort to external finance on a large scale squeezed credit for industry.


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Fig. 2.1  Service of public debt as a percentage of public expenditure in 1930

Until then the National Bank of Greece (NBG), the leading commercial bank, had extended credits to the Government. In exchange for this
special relationship between the Bank and the State, the NBG had enjoyed
the exclusive right to issue paper notes. The non-existence of an independent Central Bank was at that time a rather common phenomenon among
Southeastern and Central European economies, and reform was almost
simultaneously introduced in most if not all of them in the 1920s.18 In
order to rebuild the confidence of foreign lenders in the Greek economy,
the League of Nations, acting as an advisor to the Greek Government,
proposed in connection with a stabilization loan to set up an autonomous
central bank in order to discipline the government’s borrowing demand.
This was implemented in 1928 with the creation of the Bank of Greece.
In this way a certain degree of stability was restored and this attracted
private savings to the banking system. The increased financial self-­discipline
that followed the setup of the Bank of Greece in 1929/1931 was beneficial to industry. Since the State’s appetite was being more controlled, savings were transformed into significantly larger and cheaper credit for the
industrial sector. Consequently, the lower levels of interest Greece was to
know from the late 1920s onwards and through the 1930s were a real
bonus to industry, and played an important role in the development of
Greek industry in the last inter-war decade.19
Commercial banks had been traditionally reserved toward financing
Greek industry.20 The high levels of interest prevailing before the war can
be attributed to the low savings, the policy of commercial banks themselves, but also to the Government’s appetite for credit, which was easily

satisfied by the special relationship that existed between the leading
­commercial bank (the NBG), and the State.