Stabilization of The Greek Economy and the 1953 Devaluation of the Drachma

THE NATURAL RESOURCES of Greece are still largely unexploited. The cultivable land is only one third of the total area, and the land actually cultivated is even less. Moreover, the soil is poor. Income per capita has been very low by European standards (equivalent to some US$80 per annum before the war); this factor and the relatively rapid population growth have been responsible both for widespread unemployment, open and concealed, and for emigration.


THE NATURAL RESOURCES of Greece are still largely unexploited. The cultivable land is only one third of the total area, and the land actually cultivated is even less. Moreover, the soil is poor. Income per capita has been very low by European standards (equivalent to some US$80 per annum before the war); this factor and the relatively rapid population growth have been responsible both for widespread unemployment, open and concealed, and for emigration.

THE NATURAL RESOURCES of Greece are still largely unexploited. The cultivable land is only one third of the total area, and the land actually cultivated is even less. Moreover, the soil is poor. Income per capita has been very low by European standards (equivalent to some US$80 per annum before the war); this factor and the relatively rapid population growth have been responsible both for widespread unemployment, open and concealed, and for emigration.

The economy, despite a considerable industrial expansion during the interwar years, is still predominantly agricultural. More than 35 per cent of the national income is derived from farming—in the broad sense of the word—and more than 50 per cent of the population earns its livelihood from agriculture. Industry—accounting for approximately 20 per cent of the national income—consists of light industries depending on foreign sources for a large part of their raw materials and fuel.

The dependence on foreign sources for many essentials, in conjunction with the fact that exports have consisted largely (to the extent of some 65 per cent) of two or three semi-luxury commodities—e.g., tobacco and fruits—has given Greece a vulnerable external accounts position. A large passive trade balance has been a traditional feature of the Greek economy. During the late thirties, when external accounts had been brought into balance, exports paid for some 70 per cent of imports, the rest being financed by net invisible earnings which are subject to wide fluctuations. Despite these weaknesses, Greece had succeeded, during the last prewar decade, in maintaining conditions of both internal and external equilibrium by her own means and without foreign borrowing.

Events since 1940, when the country was forced to enter World War II, have upset this equilibrium. During the war, the economy suffered extensive damage, particularly in transportation, livestock population, and agricultural equipment. Financial disintegration, brought about primarily by the occupation hyperinflation and other developments, has, however, weighed more heavily upon the Greek economy than the physical destruction. The economy is still suffering from the effects of this disintegration, and further sustained efforts will be required before the financial system is able to function again efficiently. Superimposed upon this war legacy there has been during the postwar period a combination of factors—political and economic, as well as internal and external—that has seriously impeded the return to economic stability and has prevented economic progress.

In order to analyze the main economic problems that have confronted Greece since the end of the war, it is convenient to divide the postwar period into two parts. The first runs from the liberation of the country (October 1944) until roughly the end of 1951. This period was marked initially by rapid price increases and highly unstable economic conditions, and subsequently—particularly after 1948—by economic rehabilitation and some degree of economic stability.

The second part of the postwar period may be regarded as having begun early in 1952 when the Government embarked upon systematic anti-inflationary and stabilization policies, which culminated in the devaluation of the drachma on April 9, 1953.

Period from 1944 to 1951

At the beginning of the first period, 1944-51, economic and monetary conditions were very similar to those that had prevailed during the enemy occupation. The liberation found the economy in complete chaos. Production and national income were some 30 per cent of what they had been before the war. Monetary savings and bank deposits had been practically wiped out. Confidence in the paper money had been reduced to almost zero.

The drastic monetary reform of November 1944, through which the previous currency was canceled and replaced by a new drachma (at the ratio of 1 new to 50 billion old drachmas), failed to stabilize the economy. The reform was not carried out under propitious conditions, and subsequent events also were highly unfavorable. From the first day of its liberation, Greece was confronted with serious internal political disturbances that soon exploded in the first Communist attempt in December 1944 to overthrow the Government by force. The excessive creation of money to finance both the public and the private sectors of the economy, coupled with acute commodity shortages, was constantly feeding inflation. Under these conditions, confidence was not restored, and the tendency to convert cash balances into gold sovereigns—a practice to which the business community and the public at large had become well accustomed from the war years—continued undiminished.

The market price of the sovereign had come to be regarded almost as a financial barometer, and movements in it were still widely regarded as the best indicators of price movements in general. The factors which at any given time determined the sovereign rate, namely the surplus cash of businessmen derived from current profits, and the expectation of further price rises, were constantly operating to raise it, since both profits and prices were rising steadily. The increase in the sovereign rate was followed in turn by additional price rises and inevitably a further expansion of money supply. Therefore, a price-wage inflationary spiral was in full operation.

With the year 1946, a new phase started. Attempts were made to stabilize and reconstruct the economy, first by the use of gold and exchange reserves,1 and subsequently by the utilization of U.S. aid, which was extended to Greece under various programs on a relatively large scale.

In the face of the enormous difficulties that the task of stabilization presented in the immediate postwar period, the Government decided, in February 1946, to make the drachma convertible into gold sovereigns at a fixed price, and also to permit a much larger flow of imports. Both these measures were designed to absorb some of the surplus purchasing power in the hands of the population and thus to counteract inflationary pressures. Moreover, larger imports, in addition to those effected by UNRRA, were expected to help to diminish or eliminate commodity shortages. Lastly, the stability of the sovereign price that was to be obtained by the operations of the Bank of Greece was expected to exert a stabilizing influence on prices.

The application of these stopgap measures, however costly and uneconomic they may have been from certain points of view, appeared to have achieved their intended short-run purpose. Despite the almost continuous increase in the volume of banknotes generated by further government overdrafts on the central bank and by credit expansion, monetary conditions became more stable and some basis for economic calculations was established. This situation, in turn, helped to increase production, particularly in agriculture, and also to improve somewhat the public finances.

By early 1947, however, the Greek exchange and gold reserves were almost entirely exhausted, and at the same time the UNRRA program involving total shipments of about $400 million was rapidly coming to an end. Thus the Government was deprived of the main tools for continuing the policy initiated in the beginning of 1946. A new economic collapse was avoided only by the relatively large-scale economic assistance that Greece started to receive after 1946 from the U.S. Government. The so-called “post-UNRRA relief” was followed in 1947 by the “Truman Doctrine” aid. A year later, in 1948, a new aid program of even broader scope and magnitude, the European Recovery Program, was initiated, in which Greece was one of the participants. Under these programs Greece had received, by the end of the fiscal year ended June 1953, economic aid (excluding direct military assistance) amounting to approximately $1,300 million,2 or about 20 per cent of the current national income.

Sustained by relatively large foreign assistance, new efforts were started in 1947 to rehabilitate, stabilize, and develop the economy. These efforts were seriously hindered, however, by new political internal and external upheavals. During the period from 1946 to 1949, Greece faced a new armed Communist revolt and, therefore, again had to divert a very large part of her resources and energy to military purposes. A large part of Greek territory, indeed, became a battlefield. It was only in September 1949 that public safety and order could finally be restored. However, soon after the Government’s military victory and before the beneficial results in the economic field were consolidated, the outbreak of the Korean war in June 1950 again worsened the economic situation and made for increased defense expenditures.

Quite apart from these developments, economic difficulties were created by other factors. The terms of trade deteriorated. Mainly as a result of the memories of past inflations, the economy was extremely sensitive even to small and transitory changes, and this gave a speculative character to much of its activity. And last, but not least, the economic policies that were applied were ineffective.

By 1950-51 war damage had been repaired, and in certain respects the physical apparatus of the economy was in even better shape than before the war. Production and national income reached the prewar level,3 and some degree of economic stability was attained. Despite these achievements, the forces mentioned above made it impossible to establish economic equilibrium. Inflationary pressures, at times very strong, still beset the economy. Although these pressures had, since 1949, ceased to manifest themselves in excessive price increases, this was to be ascribed primarily to such devices as the use of foreign aid counterpart funds for offsetting new money issues, official sales of gold to the public, and relatively large imports of nonessential goods.

In fact, inflation continued to exert its detrimental effects upon the whole economic and social life of Greece. The extensive price distortions incident to inflation, in turn, led to a very uneven distribution of national income and an uneconomic allocation of the agents of production. Because of the distrust in paper money, there was a tendency for consumption by certain groups to be relatively too high. Further, private savings, except where profits were ploughed back into productive enterprise, still tended either to be converted into assets such as gold hoards or stocks of nonperishable goods, or to be invested in luxury building construction.

The measures to which the Government resorted to meet the immediate social and economic effects of this economic imbalance were mostly of the nature of expedients and dealt with the symptoms rather than the roots of the malady. Administratively set minimum (“security”) prices for the main agricultural products—including the export staples—involved the payment of subsidies which, in turn, not being offset by adequate taxation of profits accruing to other sectors of the economy, gave rise to deficit spending. Repeated devaluations of the drachma during the postwar period failed to bring domestic prices into line with world prices. Domestic prices and costs increased at such a rate that each successive devaluation soon ceased to be effective. To counteract the effects of devaluation, multiple currency practices and other exchange measures were used extensively, which resulted in a very complex exchange system. Indeed, the corrective action to which the Government resorted during this period not only failed, in many instances, to achieve even its short-term objectives, but actually constituted in itself an additional element of economic instability.

Public finances

The state of public finances was one of the main disequilibrating forces in the Greek economy, particularly during the early postwar years. Not only did large budgetary deficits—open or hidden—contribute to inflation; the structure of both government expenditures and government revenues also adversely affected general economic conditions.

Mainly as a result of high defense expenditures, public outlays, calculated at constant prices, have, in many postwar years, been greater than before the war. Ever since the liberation in 1944, Greece has been compelled by both internal and world political events to maintain a military establishment far exceeding her economic capacity, and substantially larger than before the war or than would have been maintained under conditions that were less abnormal. Notwithstanding the fact that war materiel proper has, throughout the postwar period, been granted to Greece as direct military aid, over-all defense outlays (including internal security expenses and war pensions) have accounted for about 50 per cent of total budgetary current expenditures, and they are estimated to have absorbed in recent years some 9 per cent of the national income.

Civil expenses, measured in real terms, are also estimated to be greater than before the war, though to a lesser extent, although the servicing of the prewar public debt has been suspended; and public investment since the war has, on the whole, been financed separately, for the most part by foreign aid counterpart funds. High civil expenses are attributable to the excessive number of appointments made to the civil service both during the occupation and since the end of the war, which have brought into the government service a number of unqualified persons. Certain branches of the administration appear to be overstaffed. On the other hand, other branches, chiefly in the provinces, seem to be understaffed. Moreover, Greek civil servants are underpaid. Apparently the problem is connected with a long overdue and badly needed reorganization of the administrative machinery. Legislation already passed provides for the dismissal of redundant personnel, but the assurance of more adequate remuneration requires serious attention if a competent civil service—a prerequisite for economic and social stability and progress—is to be established.

On the revenue side, the yield of taxation, primarily of direct taxation, has been inadequate since the war. Of course, in a predominantly agricultural and low-income country, receipts from direct taxes will not normally be the largest source of government revenue. But in Greece, though income distribution after the war became much more uneven, in favor of the industrial and commercial groups—i.e., the groups that are subject to direct taxes—the relative importance of direct taxes as a source of public revenue at the same time diminished. Therefore, the burden of taxation during the postwar period did not fall primarily upon those most able to bear it. This state of affairs has to be attributed to insufficient assessment and collection of direct taxes, rather than to any nonprogressive characteristics of the taxation system; on the contrary, it is believed that existing tax rates on large incomes are too high, and that they probably induce taxpayers to conceal their incomes. Such concealment is often easy for the speculative enterprises that have been thriving under postwar conditions.

Starting in 1947, persistent efforts were made to improve the tax system in certain respects, and above all to improve the procedures of tax assessment and collection. Primarily as a result of these efforts, public finances have shown a noticeable improvement since 1949. Despite the crushing burden of defense expenses, budgetary deficits have been reduced gradually to more or less manageable proportions, with the result that the Government’s financial transactions have ceased to be the main inflation-generating force in the economy. Also, the structure of revenue has improved, the ratio of direct taxes to total revenue from taxes being higher in the fiscal year 1951-52 and subsequently than it had been before the war.

These developments cannot, however, be interpreted as meaning that there is no room for further improvement of public finances. On the expenditure side, many items cannot easily be reduced. The high defense outlay presents a special problem, depending primarily upon the world political situation and the part of Greece’s military burden that her allies are able and willing to undertake themselves. On the revenue side there is still room for considerable improvement in the procedures for tax assessment and collection.4 This would not only increase public revenue, but also would improve its structure, thereby making income distribution more equitable and affecting favorably the whole economic situation from several angles. Higher indirect taxation does not seem to be economically or socially advisable in view of the low standards of living of the poorer classes. On the contrary, a reduction in indirect taxes on essentials would serve a useful purpose as soon as conditions warrant such a step. Indeed, fiscal policy can become an effective tool for monetary and social purposes, and also for stimulating development along the lines best fitted for the general interests of the economy.

There is in Greece one important special issue closely associated with both the state of public finances and production and distribution costs. The law provides for a considerable number of taxes that are imposed for the benefit not of the general budget but of private or semipublic groups or organizations. The yield of these taxes, usually referred to as “third party” taxes, many of which date back to before the war, is substantial. The taxes are levied either directly or indirectly through price increases of goods or services that are affected. The disposal of the proceeds is made, as a rule, by the beneficiary bodies themselves, without any control by the Ministry of Finance. “Third party” taxes run counter to the basic aims of fiscal policy and impede in various ways the attainment of economic stability.

Though this problem has been under consideration during the past few years, it has not yet been tackled effectively. There seems little doubt that taxes of this kind that are found to be uneconomic should be abolished, the remainder being absorbed in the central budget. At the same time, the benefits to beneficiary bodies would have to be discontinued unless there was a real justification for them, in which event the burden should be borne by the central budget.

Money market and bank credit

Conditions in the Greek money market have been very abnormal during the postwar period. The occupation hyperinflation deprived the economy of any sort of capital readily available for lending purposes. Savings have been low as a result of low national income and of a low propensity to save. The growth of bank deposits has been very slow, especially in the years immediately after the war. During these years, bank deposits were equivalent to only a small fraction of the note circulation, whereas prior to the war they were three or four times the note circulation. In addition, the structure of bank deposits deteriorated greatly; the compulsory deposits of public institutions accounted for more than 50 per cent of total deposits (against 15 per cent in 1938), while savings deposits dropped to the quite negligible amount of less than 5 per cent of the total (in 1938 savings deposits represented more than 40 per cent of total bank deposits).

The result has been that, since the end of the war, commercial banks’ own resources have been far from commensurate with the credit requirements of the private sector of the economy. On the other hand, the same elements, inflation and the expectation of further inflation, that have been responsible for the inadequate supply of loan funds have increased the demand for loans and raised interest rates to exorbitant levels.

In this situation it became incumbent on the Bank of Greece itself to provide credit facilities to agriculture, industry, and trade, in order to revive production and economic life in general. This has been done directly through loans and advances to business, but for the most part indirectly through lending to the Agricultural Bank and the commercial banks. During the postwar period, Bank of Greece funds have provided an average of about two thirds of the total credit available to the private sector.

The classical tool of monetary policy, the manipulation of the discount rate, could not have been used effectively under postwar conditions, which to a great extent made business insensitive to the cost of credit. The Bank of Greece and the Currency Committee5 resorted, therefore, to quantitative credit restrictions and also tried to apply selective criteria. The monetary authorities encountered great difficulties in the performance of this task. As long as there was a strong pressure for expansion of credit, it was difficult to distinguish between demands based on genuine economic needs and demands for speculation or for economic operations that, from an over-all point of view, were undesirable. A highly qualified banking inspectorate would have been helpful, but this could not be organized in a short time.

As economic activity increased and conditions were somewhat normalized, commercial bank deposits gradually expanded. This otherwise healthy development made possible for the commercial banks greater independence from the Bank of Greece and, under the prevailing conditions, caused their lending policies to tend to be based, in many instances, on a short-run concept of high profits rather than on the concept of the general interest of the economy. This had an unfavorable impact on general economic conditions. The possibility of high profits was also a constant temptation for commercial banks to offer unduly high rates of interest to depositors, which again were liable further to increase the cost of money.

In the face of the practical difficulties that hindered any effective supervision of the commercial banks’ activities, the Currency Committee resorted to the imposition of minimum reserves to be deposited by the commercial banks with the Bank of Greece. In August 1948 these were fixed for the National Bank of Greece (whose deposits accounted then for approximately 70 per cent of total commercial bank deposits) at 15 per cent of its demand deposits, and for other commercial banks at 5 per cent; subsequently they were raised, effective February 15, 1949, for all commercial banks to 22 per cent of the deposits of public institutions and to 10 per cent of other demand deposits, and, effective February 1, 1950, to 25 per cent and 12 per cent, respectively. Reserve requirements for deposits of public institutions, made after November 1, 1951, were raised to 35 per cent.

Furthermore, the privilege of the National Bank of Greece, the largest commercial bank in the country, to hold the larger part (in effect, 65 per cent) of the deposits of public institutions was allowed to expire at the end of 1950. These deposits were in fact compulsory; since the war they had amounted to about 50 per cent of all commercial bank deposits. New legislation was adopted, under which the deposits of public institutions were to be placed under the direct control of the Bank of Greece and the Currency Committee. Pursuant to this law, all such deposits held by commercial banks or other government institutions at the end of 1950 were transferred to the Bank of Greece; and beginning with January 1951, all new deposits of these bodies have been placed in the Bank of Greece. The latter has assumed exclusive responsibility for these deposits to the respective depositing institutions, which are entitled to receive an interest rate on their deposits that is fixed by the Currency Committee. The funds thus made available to the Bank of Greece are allocated to commercial banks or other financial institutions in the form of interest-bearing deposits to be utilized by them for credits to the private sector on terms specified by the Currency Committee.

The credit expansion that actually occurred indicates that the credit control measures as a whole were not vigorously enforced until 1951. Credit to the private sector, financed largely by the Bank of Greece, was allowed to expand in certain periods at a pace exceeding the rate of increase of available real resources. This, in conjunction with the still prevalent abnormal savings habits and a relatively high velocity of circulation, was bound to produce inflationary pressures and to hamper the attainment of economic stability.

A sound and effective credit policy is, no doubt, one of the main prerequisites for economic stability. But it is difficult to define, in advance, the details of such a policy for each set of circumstances. For the Greek economy it appears that—after sufficient stimulus had been given to the revival of production—the policy required was the avoidance of any new net credit expansion with central bank funds and reliance on the commercial banks’ own resources to finance the legitimate credit requirements of the private sector.

Interest rates

Even before the war, interest rates in Greece were high relative to other European countries, as a result of the inadequacy of capital and also, though to a lesser extent, of the high cost of bank services. Events since 1940 have made for even higher rates of interest.

The effective bank interest rate on loans and advances was fixed in 1949 at 16 per cent per annum (12 per cent plus 4 per cent commission) with a rather wide range of preferential rates on credits to farmers, exporters, etc. The rates on long-term loans to entrepreneurs, financed for the most part from foreign aid, have, however, been fixed considerably below the short-term rates, and this has created an abnormal interest rate structure.

Since demand for credit is substantially in excess of the supply at the legal rates of interest, an illegal or free money market has developed. Loans contracted in this market, usually with a gold clause, sometimes carried interest at the rate of 30 or even 40 per cent per annum. There were also clear indications that commercial banks were charging their customers, in many instances, an effective rate of interest well above the legal maximum. At the same time, these banks were competing for deposits by offering high interest rates and other inducements to depositors.

During the early postwar years, high interest rates could be explained by the pace of price inflation. Beginning with 1949, however, price inflation slowed down considerably; therefore, the continuation of borrowing at exorbitant rates of interest could be explained only in terms of the excessive profits that borrowers were still able to realize. In such circumstances, it was unlikely that a reduction in the bank interest rate would result in lower prices and costs. For, as conditions of demand, both private and public, were still favorable to excessive profits, lower interest charges would simply ensure differential profits to those having access to loans from the banking system.

Money supply

The use of bank checks in payments has never assumed any large proportions in Greece, and even prior to World War II deposit money was not as important in the Greek economy as in other economies that were more advanced financially. During the postwar period, the relative importance of deposit money in Greece declined still further, as a consequence of the lack of confidence and the public’s unwillingness to deposit its money with the banks. A growth of deposit money should, therefore, in principle, be regarded as a desirable development, for it would indicate a return to more normal financial practices and conditions.

Commercial bank deposits were quite negligible in the immediate postwar years, but subsequently they tended to increase in response to the improvement of general economic conditions. However, throughout the period note circulation has been the more important component of the total money supply, and therefore the best indicator of the monetary position. After the war, changes in the volume of the note circulation reflected primarily central bank credits and advances to both the public and the private sectors, on the one hand, and the counteracting effect of currency withdrawals through “sterilization” of foreign aid counterpart funds and official sales of gold sovereigns to the public, on the other.

As mentioned above, government overdrafts on the Bank of Greece were the main inflation-generating force in the immediate postwar years. Later—especially beginning with 1949—as public finances improved, credit expansion financed by Bank of Greece funds became the primary source of monetary expansion. The interplay of inflationary and deflationary factors is illustrated by the movements of the note circulation. In the three-and-a-half-year period ended June 30, 1951, new money issues for public and private credit requirements, including provisional advances to the Government for purchases of supplies, totaled some 6,600 billion drachmas. However, the note circulation rose during the same period by only 816 billion. The difference is explained chiefly by the blocking of approximately 4,200 billion drachmas of foreign aid (under the ECA and MSA programs) counterpart funds,6 and by official gold sales to the public of about 900 billion drachmas.

In assessing the disinflationary effect of official gold sales to the public, account has to be taken of the fact that a portion of the private gold holdings should be regarded as an addition to the money supply. Gold sovereigns have sometimes been used as a means of payment in current transactions; to this extent, the disinflationary effect of the gold sales policy was dissipated. The use of gold sovereigns as currency cannot, of course, be measured precisely, but it has been estimated at roughly 15 per cent of existing gold hoards, though the percentage has no doubt varied from time to time in response to changes in general conditions. If this estimate is correct, and on the basis of estimated private hoards of 12,550,000 sovereigns at the end of 1951,7 the addition to the effective money supply attributable to gold hoards would be approximately 400 billion drachmas (at the then current price of the sovereign), which is equal to about 20 per cent of the note circulation (2,198 billion), or 8 per cent of the total money supply (4,928 billion) at the end of 1951.

The existence of relatively large private gold hoards in Greece must be borne in mind in formulating and enforcing monetary policy. These hoards are beyond the control of the authorities; and they can, in effect, through a more extensive monetization of the sovereign, increase both the money supply and total effective demand. The money supply would also be expanded if the desire to hoard gold were to weaken and sovereigns were turned over to the monetary authorities, who would probably be ready to purchase them if they were offered at the official parity. In that event, however, the monetary expansion would not present the same dangers as those resulting from increased monetization of sovereigns. It would mean increased reserves, and therefore would increase the possibilities for effective offsetting measures; and it would clearly indicate increased confidence in paper money and therefore a lower velocity of circulation.

Obviously, the task of the Greek monetary authorities has been much more difficult since the war than it was in the thirties. The occupation hyperinflation and subsequent events brought about a financial disintegration that bore heavily upon the whole economy. As a result of lack of confidence in paper money, the public’s savings habits have become abnormal. Even a seasonal or transient increase in the money supply has tended to manifest itself in higher effective demand for gold or commodities. Under these conditions, not only the actual level of economic activity, but also such important factors as savings habits and the velocity of circulation have to be used as criteria for the formulation of monetary policy. The money supply has to be so controlled as to prevent inflationary pressures and, at the same time, not unduly retard progress in production and economic development.

Foreign exchange system

Economic developments in Greece after the war made it practically impossible to maintain any orderly foreign exchange system. As a result of the rapid internal depreciation of the currency, the successive devaluations of the drachma were not able, except for short periods, to bring domestic prices into line with world prices. The resulting overvaluation of the currency forced the Government, under the pressure of immediate problems, to resort to quantitative import restrictions and to multiple currency and other exchange practices, which made the foreign exchange system very complex. Under these conditions, the official exchange rate was deprived of a large part of its function as a link between Greek and world prices.

After the drastic monetary reform of November 1944, when an exchange rate of 150 drachmas per U.S. dollar was established, the drachma was again devalued in June 1945 to 500 drachmas per U.S. dollar, and in January 1946 to 5,000 drachmas per U.S. dollar. In October 1947, instead of another outright devaluation, an “exchange certificate system” was introduced; while the official rate remained unchanged (i.e., 5,000 drachmas per U.S. dollar), a considerably higher effective rate emerged. Exporters and other exchange sellers were granted, in addition to their exchange proceeds converted at the official rate, an “exchange certificate” expressed in terms of the exchange sold to the Bank of Greece. These certificates were negotiable on the free market, the demand for them coming from those who intended to apply to the Bank of Greece for foreign exchange, and who were required by law to present to the Bank of Greece, in addition to the usually required licenses, an exchange certificate of an equal amount.

This system was intended to ensure an automatic realignment of internal prices to foreign prices. Frequent changes of the effective exchange rate would, however, have introduced a new element of uncertainty and speculation into an already oversensitive and speculative atmosphere; therefore, the prices of certificates were not left to be formed freely, but were, from the beginning, effectively determined by direct intervention on the market by the Bank of Greece, which had been duly vested with this authority by law. During the first seven or eight months of the application of the system, the prices of certificates were adjusted several times, with the result that by June 1948 the effective exchange rate of the drachma had risen to 10,000 drachmas per U.S. dollar, compared with the official rate of 5,000 drachmas. This effective rate was then maintained unchanged until September 1949.

Because the adjustment of the prices of exchange certificates as a rule lagged behind increases in internal costs, the certificate system soon outlived its intended usefulness, and the drachma remained overvalued in relation to other currencies. A new attempt to eliminate overvaluation was made in September 1949, at the time of the devaluation of sterling and many other currencies. On September 22, 1949, the drachma was devalued in terms of U.S. dollars by 33.3 per cent and in terms of sterling by 24.8 per cent. This devaluation resulted in effective rates of 15,000 drachmas per U.S. dollar and 42,000 drachmas per pound sterling, and in the elimination of disorderly cross rates that had been in effect ever since the exchange certificate system was adopted in October 1947.

Although genuine economic stability had not yet been attained by September 1949, and the conditions necessary for the successful operation of a major devaluation were not present, a substantial economic improvement was already apparent by that time. The second Communist revolt had been suppressed and, perhaps for the first time since the end of the war, stabilizing forces were beginning to assert themselves and to result in increased economic activity and more stable prices. Moreover, it appeared that the effects of the devaluation of 1949 on internal prices were likely to be mitigated substantially by the simultaneous devaluation of sterling and other currencies in which the larger part of Greece’s exchange operations were transacted. Lastly, but of great importance, the adjustment of the exchange rate at that time was not likely to drive up the price of the gold sovereign;8 this was very significant in view of the link existing between commodity prices and the sovereign rate.

The combined effect of all these factors was to make the devaluation of September 1949 a relative success. The internal price level did not rise, and by February 1950 most of the temporary exchange measures adopted at the time of the exchange adjustment as safeguards against unjustified price increases had been removed. By that time the foreign exchange system had become more or less unified, and was much simpler than it had been before or immediately after the devaluation of September 1949. Official exchange receipts from both visible and invisible sources showed a noticeable increase, and the balance of payments situation was much better than before the devaluation.

The improvement was short-lived, however. By the spring of 1950 serious export marketing difficulties reappeared. These difficulties were to be ascribed mainly to the credit policies pursued at that time and to the methods of price formation for the principal export goods. For instance, the prices realized by producers of such goods as tobacco, currants, and sultanas were not formed by the free operation of market forces, but were administratively set on the basis of the “subsistence” needs of the producers. If Greek products at these prices were not competitive on world markets, the Government felt obliged to grant export subsidies in one form or another.

The subsidy system in effect for tobacco was especially complicated and uneconomic. The minimum (“security”) prices payable to tobacco producers were determined on the basis of prewar prices in the various tobacco-producing areas, increased by a uniform coefficient. Considerations connected with the quality of the product and the changes since the war for various grades of tobacco in world markets were ignored. In addition, the cost of processing tobacco was further burdened because of purely social considerations. Specifically, the law required that tobacco should be subjected to a second processing (the first is carried out by the producers themselves in the field) in the storehouses by tobacco workers organized in “closed shops.” These workers were employed for only a few months a year, but at wages that would secure for them a living for the whole year.

The re-emergence of export difficulties in the first part of 1950 seemed to have been caused primarily by an increase after the devaluation of 20 per cent in the minimum prices guaranteed to producers of the chief export goods. This increase more than dissipated the relatively small competitive advantages that the exchange adjustment of September 1949 had secured to exporters.

Developments after the outbreak of the Korean war made for further substantial deterioration. Internal inflationary pressures were intensified, while the prices of Greek export staples did not benefit from the world-wide price increases. By the summer of 1950, the drachma had again become grossly overvalued in relation to the leading currencies. To combat the effects of this overvaluation, the Government resorted to a variety of exchange measures, which once more made the exchange system very complex.

The exchange system, as it had developed by the end of 1951, may be described as follows. More than 90 per cent of exports came under one or another of the subsidy schemes. Some export subsidies—e.g., those paid to tobacco producers and merchants under the internal support system and those paid at the export level to exporters of tobacco and grapes—were borne directly by the general budget. Other subsidies were paid to producers of currants and sultanas through a special fund derived from the profits from imported molasses used for alcohol manufacture. Finally, a third form of subsidy was involved in the system of so-called “compensation import rights,” which was applied to the largest part of the remaining exports. Under this system, which embraced some 10 to 15 per cent of total exports, exporters surrendered their entire export proceeds; for part (20 to 90 per cent) they received payment at the official exchange rate, and for the remaining part (80 to 10 per cent) they were granted the right to import certain specific luxuries or nonessential goods. These import rights were freely negotiable in the market at fluctuating prices, varying according to the commodity permitted to be imported and according to the country of origin. The effective exchange rates that resulted from this system reached high levels. Against an official rate of 15,000 drachmas per U.S. dollar and 42,000 drachmas per pound sterling, the effective rate for the U.S. dollar was reported in some instances at more than 40,000 drachmas and for sterling at more than 95,000 drachmas.

Late in 1951 the Government made an attempt to tax away part of the importers’ excessive profits, by subjecting certain nonessential imports not effected under the compensation system to special taxes. The scope of this measure was limited, however, for it covered no more than 5 per cent of total imports of consumers’ goods.

An evaluation of the exchange system as it had developed by the end of 1951 shows that, while it contributed to economic imbalance, it also left much to be desired, even from the point of view of the achievement of its own narrowly defined objectives. The over-all burden from export subsidies was estimated at more than 400 billion drachmas per annum; this accounted for a large part of the budgetary deficit and for some 30 per cent of total proceeds from exports. Despite this burden, exports were not sufficiently stimulated. On the other hand, importers’ excessive profits remained largely untaxed, which affected the whole economic situation adversely in more ways than one. Moreover, the functioning of the system depended upon the discretionary power of the authorities which, of necessity, was largely arbitrary. This added greatly to the uncertainties of trade, and also induced favoritism. The administration of compensation import rights illustrated more clearly than anything else the defects and weaknesses of the whole exchange system.

Undoubtedly, the foreign exchange system of this period merely reflected the general economic situation. Not only the complete unification of the exchange structure, but also the success even of steps toward its simplification, was dependent upon the containment of inflation and improvement of general economic conditions.

External accounts

As a consequence of the commodity composition of both imports and exports and of the great importance of invisibles in Greek exchange earnings, the Greek balance of payments position has always been vulnerable. Invisibles are not, in general, a stable source of exchange, and this qualification seems to be particularly true for Greece. Greek invisibles consist of exchange remitted home by emigrants, of expenses of foreign tourists in Greece, and of shipping earnings. However, emigration as a source of exchange has been diminishing in importance during the last three decades, when serious curbs have been imposed by the main immigration countries of the world, particularly the United States. An increase in exchange receipts from tourists that would be commensurate with existing potentialities (climate, archaeological interest, etc.) would certainly require more and better facilities for tourists; this necessitates investment and is a rather longer-term objective. Finally, exchange receipts from shipping are much less than the size of the Greek-owned fleet9 would suggest. At least a part of shipowners’ capital and profits is, as a rule, kept abroad, but the main reason for the small amounts of foreign exchange that accrue to the Greek economy from shipping is the fact that the major part of operating expenses is paid outside the country in foreign currency. Most of the ships never enter Greek ports, and the Greek authorities are therefore not in a position to exert any effective control over Greek-owned ships and their earnings.

The effects of the war and its aftermath have perhaps been felt more strongly in the sphere of external accounts than anywhere else. Because of the depletion of prewar stocks, reconstruction needs, low production, and persistent inflation, the demand for imports has been strong. For most of the postwar years until 1951, the import volume was estimated to have exceeded noticeably the prewar volume. Official sales of gold to the public were a new item on the expenditures side of the balance of payments; for the period November 1944 to February 1952, they caused a drain on reserves equivalent to about $70 million (8,450,000 sovereigns). In addition, the overvaluation of the currency and the feeling of insecurity were strong inducements for excessive private exchange expenses abroad and for capital flight effected in a variety of ways.

On the receipts side, the setback of visible receipts has been more serious than the postwar decline of invisible earnings. Since the war, both internal and external factors have created great marketing difficulties for Greek exports. The nature of the domestic demand for the primary export goods is such that changes in internal economic conditions and the resultant overvaluation of the drachma could not increase the consumption of commodities that otherwise would have been exported. Instead, they have led to low production of export goods and to a small volume of exports. Furthermore, the comparatively low prices at which Greek export staples had to be sold in world markets have meant that the value of exports has declined more sharply than their volume. It is estimated that by 1952 the prices of Greek export staples were only 41 per cent above prewar prices. Another factor, which has reinforced the effects of the other elements, has been the fact that Greek tobacco—the main export, accounting for 40 to 45 per cent of total exports—lost ground after the war in certain important export outlets.

Although the loss of outlets for tobacco could be ascribed, to some extent, to the relatively high Greek prices, the substantial drop in tobacco exports to Germany seems to have been caused chiefly by other factors. Until 1949-50 the national income of the Federal Republic of Germany was low, and tobacco consumption was much less than before the war. The German market was also penetrated by U.S. tobacco, the importation of which was financed by U.S. aid. In recent years, and particularly since 1950, these impediments have become less important or have disappeared. Greater economic activity and higher consumption in the Federal Republic of Germany have led to a larger over-all volume of tobacco imports. Relatively high prices and the reduction in U.S. aid have affected adversely imports of U.S. tobacco. Finally, and perhaps of greater importance, broader economic considerations have pointed to the need for restoring the German prewar pattern of trade with the Balkan and Near East region, which could absorb German industrial goods in exchange for foodstuffs, raw materials, and tobacco. It may have been on the basis of such considerations that effective June 1953 the Federal Republic of Germany reduced taxation on cigarettes, a measure that has reportedly contributed to a further increase in tobacco consumption. As a consequence of these developments, exports of Greek tobacco to Germany expanded steadily after 1950.

Until 1951, the improvement of the Greek balance of payments position was, on the whole, very slow, and net exchange receipts from both visible and invisible sources were scarcely sufficient to finance some 30 per cent of imports. The external deficit on current account was still of the order of $300 million a year, financed primarily by the various programs for relief or economic recovery.

A lasting and organic improvement of the Greek external accounts position appears to depend upon an appropriate change in the relations of the Greek economy with the rest of the world. This would mean a sufficient diversification of exports, and also reduced dependence on foreign sources for essential supplies. The diversification of exports should not, however, mean the substitution of other products for tobacco. Despite low postwar prices, tobacco is still a high-yield product and best fitted to the country’s demographic and climatic conditions. Diversification should be sought rather through the addition of new products, agricultural as well as industrial, to the current export list. The attainment of this goal, and the reduction of Greek reliance on foreign sources for essential goods, require new investment and must, therefore, be regarded as long-term objectives.

Monetary Instability and Need for Anti-Inflationary and Stabilization Policies

The preceding analysis of developments in Greece has shown that monetary instability was a predominant feature of the economic situation. In the immediate postwar years, this instability found expression in a rapid price inflation and a high velocity of circulation. Efforts during that period to stabilize the economy through direct price control measures and rationing failed, as a rule, to bring about any appreciable or lasting effects. Greece did not have the highly efficient administrative apparatus that is an essential condition for the success of such measures. Moreover, severe commodity shortages persisted and the economy remained highly sensitive and speculative.

The period from 1946 to 1951 was characterized by some degree of economic stability, particularly after public order had been restored, and production rose markedly. Post-Korean price increases were the results chiefly of world developments; Greek prices did not rise, on the whole, more than prices in other European countries.

The economic stability of this period was not genuine, however. It was mainly the result of the Government’s use of two powerful disinflationary instruments. The first was the open market operations of the Bank of Greece in the domestic gold market, and the second the “sterilization” of a substantial part of foreign aid counterpart funds. The maintenance of a stable price for the sovereign by official sales of gold to the public exerted a favorable psychological effect and served also, particularly in certain periods when confidence was at a low ebb, as an important disinflationary element, by absorbing substantial amounts of drachmas from the note circulation. From the latter point of view, however, the foreign aid counterpart funds were, on the whole, an even more important disinflationary factor.

Both these policy instruments were, however, mechanical devices that served to counteract a too rapid expansion of the money supply originating chiefly from an unduly large credit expansion. The relative stability that could be attained by using them could not mean that inflationary pressures had been eliminated. It merely meant that these pressures were finding expression, not primarily in commodity price increases, but partly in a high domestic demand for gold and partly in balance of payments deficits. It also meant that sizable resources, which otherwise could have been used for productive investment, were being spent on consumption.

Postwar inflation, in conjunction with the semimonopolistic conditions in certain sectors of the economy, produced wide discrepancies between Greek prices at the official rate of exchange and world prices, and also within the internal price structure. For instance, prices of industrial or imported goods rose substantially above prices of agricultural exportable commodities, which had suffered more severely from postwar developments. Also, average retail prices rose more than average wholesale prices, a discrepancy that could be explained in part by the excessive profits realized after the war at the retail level, and in part by various uneconomic charges imposed on the circulation and distribution of commodities. These price discrepancies were indicative of the intensification of the maldistribution of income after the war and of the misallocation of the agents of production among their various possible uses. They were also indicative of the direction in which the commodity structure of imports should have been changing.

To counteract the immediate economic and social illnesses of a situation that was basically unsound, the Government had recourse to various “stopgap” measures. For example, to relieve the position of the most seriously inflation-penalized sector of the economy, agriculture, the Government intervened in the formation of prices of the main farm products; this involved the payment of subsidies, which were paid for largely by inflationary means and which, therefore, ultimately created a need for additional subsidies. Multiple currency practices and other exchange measures—described in some detail in a preceding section—gave rise to a complex foreign exchange system, which was, however, unable to solve satisfactorily the problems connected with the external accounts and which, in addition, produced new difficulties. It appeared that, while the corrective action, mainly in the form of expedients, to which the Government resorted during this period could not fulfill even all of its short-term objectives, it constituted in itself an additional element of economic instability.

Although certain extraneous elements have, no doubt, influenced adversely the Greek economic situation since the war, the excessive injection of purchasing power into the economy has consistently been an important factor underlying and intensifying all the other causes of imbalance. Monetary policy was much influenced until nearly the end of 1951 by the belief, which was widely held in Greece at that time, that the best way to restore stability was by restoring productive capacity and increasing production, and that to achieve this objective, monetary policy should be rather liberal. The failure of the policies adopted during this period to attain their objective was the clearest evidence of their inability to establish genuine economic stability, even though production and national income had advanced so that, by 1950-51, they were about the same as in prewar years,10 and resources were further supplemented by sizable foreign aid. It became apparent that the attainment of economic equilibrium required the persistent enforcement of anti-inflationary policies and the application of a well-concerted stabilization program that would attack the causes of economic imbalance at their roots.

Anti-Inflationary and Stabilization Policies in 1952-53

By late 1951 it had already become apparent that Greek monetary policy was undergoing a drastic reversal. During the early months of 1952, influenced in part by the reduction of foreign aid, monetary policy was made still more restrictive, in order to achieve ultimately a balance between effective demand and supply at current prices and thus to curb inflation. It was also hoped that this would change the expectations of the public and encourage the growth of more normal savings habits.

As the demand for credit had become insensitive to the cost, it was not likely to be affected significantly by manipulation of the discount rate. The Bank of Greece and the Currency Committee therefore resorted to a strict rationing of credit to each branch of economic activity. While credit rationing of this kind is, up to a point, itself a selective measure, other measures were also taken to improve the quality of credit.11 At the same time, the fields of activity of the Bank of Greece on the one hand, and of the commercial banks on the other, were more clearly defined, and steps were taken to enforce the national credit policy on private banks.

The new restrictive policy was not limited exclusively to the credit field; it also embraced all public financial operations, including those in government-traded supplies and investment financed by foreign aid counterpart funds. In order to regulate effectively the purchasing power that was being released through various channels into the economy, the Currency Committee introduced the practice of fixing in advance every month the volume of such purchasing power for each sector of the economy. Thus the Committee could obtain a clear picture of all the inflationary and deflationary forces that were operating. On the basis of this plan, the Committee established monthly ceilings, both over-all and for each sector of the economy, for the extension of credit to the private sector, and also, after consultation with the competent government agencies, for the Treasury’s overdrafts on the Bank of Greece and for investment financed by counterpart funds.

The enforcement of such an over-all restrictive policy necessitated measures in several fields. Beginning with 1952, measures in addition to those introduced earlier were taken to improve the procedures for tax assessment and collection. Also, public investment was slowed down substantially; although fully aware of the need for productive investment, the Government felt that economic stability is, to a large degree, a prerequisite to economic growth.

As monetary policy began to exert its beneficial effects on general economic conditions, the Government gradually took further steps to restore the role of the free market mechanism, both internally and externally. Consumers’ subsidies (notably the bread subsidy) were abolished, and the scope of the policy of government-guaranteed prices for agricultural goods was reduced. Legislation was passed to terminate the tobacco workers’ “closed shop” and to settle the problems connected with that issue. Subsidies granted to tobacco producers regardless of quality or grade were replaced by a subsidy calculated as a percentage of the free selling price; in contrast to the previous method, the new system gave an inducement for quality improvement and for increased cultivation of the grades for which there was a better demand.

The reshuffling of the exchange system in October 1952, which to some extent simplified its structure, was of considerable significance. The list of imports subject to special taxes was broadened considerably, to include all commodities whose importation had previously depended on compensation import rights and also other more essential (primarily processed) goods. As a result of these additions, the proportion of imports subject to tax increased to approximately 35 per cent of the total, and to some 40 per cent of current import requirements. The tax rates were fixed at from 25 to 200 per cent of the exchange value of imports, depending on the essentiality of the commodities. At the same time, the system of compensation import rights was abolished, and the export subsidies involved in it were replaced by direct subsidies to exporters granted as a percentage—ranging from 15 to 50 per cent—of the exchange value.

By these changes, the more objectionable features of the exchange system, those associated with the compensation import rights, were removed. Even from a strictly monetary point of view, the new exchange system also furthered the aims of the new restrictive policy, for the yield of the new import taxes was estimated to exceed the amount required to pay the new direct export subsidies. Finally, the more restrictive effective rate on taxed imports permitted the Government to relax substantially its quantitative import restrictions.

Interplay of inflationary and deflationary forces

The changes in the money supply, which from the beginning of 1952 followed the enforcement of more restrictive monetary policies, cannot by themselves reveal the changes that were taking place in the interplay of inflationary and deflationary forces. In fact, the note circulation continued to expand at the same rate, or even more rapidly than previously.12 The increase was 8.6 per cent during the fiscal year 1951-52 and 24.1 per cent during the first nine months of 1952-53 (July 1952 to March 1953), compared with 8.3 per cent in the fiscal year 1950-51 and 6.2 per cent in the period July 1951-March 1952. The significant fact, however, was the maintenance of practically the same rate of currency expansion even after the complete or partial abandonment of the disinflationary instruments which had been used before. The interplay of the more important inflationary and deflationary forces in the periods before and after the adoption of restrictive policies is illustrated in Table 1.

Table 1.

Main Inflationary (+) and Deflationary (—) Forces in the Greek Economy, July 1950-March 1953

(In billions of drachmas)

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Including counterpart funds of common use goods for the Armed Forces, financed by U.S. aid, but excluding transfers to the U.S. account as provided by the agreement between Greece and the United States.

Until February 1952, after which official sales of sovereigns became unnecessary.

Owing mainly to government purchases, from domestic or foreign sources, of olive oil (which involved an outlay of more than 300 billion drachmas), wheat, sugar, rice, pulses, codfish, seed-oil, and coal.

Source: Compiled from data in the Bulletins of the Bank of Greece and analytical statistics on government overdrafts provided by the General Accounting Office of the Greek Ministry of Finance (Departments I and III).

These figures show that, after 1950-51, there was a decline in currency withdrawals from the note circulation through sales of sovereigns to the public and on account of imports financed by foreign aid. These movements were compensated by substantially reduced government overdrafts for current budget operations and public investment, but mainly by the drastic reversal of credit policy, which stabilized or even somewhat reduced the volume of Bank of Greece funds available to the private sector of the economy. While central bank lending to the private sector expanded by 1,310 billion drachmas (or 54.7 per cent) in 1950-51, it contracted by 153 billion (or 4.1 per cent) in 1951-52, and remained practically unchanged during the first nine months of 1952-53.

It was, indeed, in the sphere of credit that the policy change was felt most keenly. Not only was credit financed by the central bank restricted, but the lending operations of commercial banks financed by their own resources also became more restrictive and selective. The allocation of credit among its various uses was also changed in harmony with the ultimate aims of national economic policy. In fact, there were some complaints about the difficulty of getting adequate cash resources for working capital.

The statistics of over-all bank credit (Table 2) suggest that the outstanding characteristic of the change in policy was not any drastic reduction13 in the over-all volume of credit but rather its redistribution among the various branches of the economy. Farm credit continued to expand in 1952, and so did industrial credit after a fall in the first half of the year. On the other hand, credit to trade, particularly import and inland trade, was sharply decreased. This complete reversal of earlier practice was no doubt largely responsible for the liquidation of inventories.

Table 2.

Total Bank Credit Outstanding to Agriculture and Business in Greece, June 30, 1950-March 31, 19541

(In billions of drachmas)

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The statistics do not include long-term loans to entrepreneurs, with a dollar clause, financed by foreign aid counterpart funds. The dollar equivalent of these loans amounted to $64.3 million at the end of 1951, $73.2 million at the end of 1952, $75.3 million at the end of 1953, and $72.5 million on March 31, 1954.

Includes some credit for collection of agricultural products. Most of the cost of collection, however, has been financed, since mid-1951, through the Government’s Supplies Account with the Bank of Greece.

Source: Bulletins of the Bank of Greece.

Effects of the new policies

The new restrictive and stabilization policies affected the economic situation favorably in several ways. Between 1951 and 1952, the balance of payments deficit on current account was reduced from $303 million to $118 million, or by more than 60 per cent, while utilized foreign aid similarly declined from $262 million in 1951 to $101 million in 1952.14

Though there was some increase in exchange earnings, the reduction of the external deficit has to be explained primarily in terms of lower imports. Imports (c.i.f. values), excluding reparation deliveries, declined from $401 million in 1951 to $255 million in 1952, or by more than 35 per cent. Some of the factors that made for lower imports in 1952 seemed to be permanent. Others, however, were transient, and to that extent an increase in subsequent years from the abnormally low level of 1952 was to be expected.

Domestic prices remained stable in 1952, or even showed a slight downward tendency. Price stability—which also led to wage stability—could be attained, despite a volume of imports considerably below that of previous years, because of the lower total effective demand resulting from the restrictive policies, the increased production of certain agricultural products, and the liquidation of private inventories prompted by the restrictive credit policy and by falling world prices. Changes in the expectations of the business community and the public at large were also influential. Perhaps for the first time since the war, the public no longer expected further inflation and, although confidence in the currency was not fully restored, public willingness to hold currency increased somewhat.

The new policies also improved conditions in the internal gold market. The use of the gold sovereign as a means of payment declined considerably. Beginning with the third week of February 1952, the private supply of gold either equaled or exceeded the demand at the official ceiling price of 226,500 drachmas per sovereign, and this eliminated the need for intervention by the Bank of Greece as a seller on the market. By March 1953 the sovereign price fell to about 180,000 drachmas, or by 20 per cent. The public’s attitude toward gold was affected, at the same time, by two external factors. Gold prices on the world free markets had dropped markedly, and substantial quantities of Italian manufactured sovereigns had been imported which, though selling at a discount of approximately 10 per cent, could not easily be distinguished from genuine sovereigns. But past experience had clearly demonstrated that the gold market in Greece is affected, above all, by internal developments.

The question naturally arises whether the restrictive policy inflicted any damage on the economy by keeping available resources idle. The tapering off of foreign aid would, in any event, have affected the utilization of resources, but the restrictive policies themselves reflected to some extent the substantial curtailment of foreign aid in 1951-52 and the prospects for subsequent further drastic reduction. On the whole, there is no clear evidence that the restrictive effects of the new policy at any time assumed the proportions of an economic “crisis.” Both the gross national product and the national income in real terms in 1952 have been estimated at only slightly less (some 2 per cent) than in 1951,15 and this was chiefly a consequence of lower output of olive oil and of tobacco, for neither of which can the stabilization policies be held responsible. The year 1952 was one of cyclically low production of olive oil,16 and the small production of tobacco was rather a temporary result of the change in the subsidy system which, under the then existing marketing conditions, was likely to prompt tobacco farmers to abandon cultivation of lower grades. On the other hand, particularly from the second half of 1952, there was some evidence that the industrial sector was being affected adversely, in terms not so much of declining over-all production as of the termination of the previous upward trend. Textile production declined significantly, and this also affected the employment situation, although the global index of industrial production in 1952 (compiled by the Federation of Greek Industrialists) was no more than 1 per cent less than in 1951. Gross investment in 1952 is estimated as approximately 27 per cent less than in 1951, the larger part of the decline being accounted for by stockpiling. Consumption in 1952 is estimated as about 1 per cent less than in 1951.

It may be concluded, therefore, that there was a moderate “stabilization” or “cash crisis” in Greece in 1952-53, which was a result of the new stabilization policies. This was, however, inevitable, and indeed proof that the stabilization policy was really bearing fruit. The disturbances which may have been caused, and which in any case were not major disturbances, to economic and social life have to be weighed against the beneficial and permanent effects upon the economy as a whole.

Devaluation of the Drachma, April 9, 1953

Need for devaluation

As a result of the restrictive and stabilization policies that were persistently applied during the preceding fifteen months, economic conditions in Greece appeared sufficiently stable by the spring of 1953 to permit a further step forward. A balance between inflationary and deflationary forces had been attained, and inflationary pressures were thus effectively checked. The external deficit also had been reduced sharply.

However, permanent conditions for genuine economic stability had not been established. Price and income discrepancies still persisted between the various sectors of the economy to almost the same extent as before. The prices of many industrial and import goods were more than 500 times the prewar prices, while the prices received by agricultural producers were lagging behind, at some 300 to 350 times the prewar prices. There also remained a wide discrepancy between internal prices at the official rate of exchange and world prices, which compelled the Government to maintain many of the exchange practices that made the exchange rate structure complex.

For economic, social, and political reasons, the elimination of these discrepancies by a vigorous deflationary policy was practically impossible. The only way to eliminate them was through an outright devaluation of the currency, which had again become grossly overvalued in relation to other currencies. Devaluation undertaken before 1952 might have become ineffective quickly, and indeed might have revived the forces of inflation. By the spring of 1953, however, the ground had been well prepared, and devaluation could be undertaken without great risks. Moreover, the risks were significantly mitigated at that time by a considerable abatement of international political tension and by stable or falling world prices. Last, but of great importance, Greece attained a remarkable political stability after November 1952, which made it possible to press measures of reform with much greater vigor than before. This was indeed an important prerequisite for the successful operation of devaluation.

The need for exchange adjustment in Greece should be viewed in the light of both external and internal economic necessities and potentialities. Obviously, the overvaluation of the drachma had been an important contributory factor in the large postwar balance of payments deficit. Commodities that were produced or could be produced within the country under conditions comparable to those of other countries were imported simply because foreign prices were lower. Exports could not move sufficiently, and this kept down production of both traditional and potential new export goods. It is true that the volume of exports rose substantially after 1950, mainly on account of higher tobacco exports to the Federal Republic of Germany. Since the end of the war, however, world tobacco consumption had greatly increased, but Greece had failed to expand her exports correspondingly. Satisfactory experience had been gained in the production of cotton, rice, and certain light industrial goods, mainly textiles, and their production had increased to the point where internal consumption requirements were covered and even some limited exports became possible. The technical conditions for further expansion of production were present, but with such a gross overvaluation of the currency and the practical impossibility of enlarging the scope of export subsidies, exports which could have effectively diversified the pattern of Greek trade were not profitable and the expansion of production lost much of its momentum.

In view of all these considerations, and with account taken of the elasticity of demand for and supply of both traditional and potential new exports, as well as the elasticity of demand for imports, it seemed likely that a well-chosen degree of devaluation would improve the foreign trade position of Greece and thus strengthen her economic relations with the rest of the world. Equally satisfactory results could be expected in relation to invisibles, which have very great importance for Greece. The unused productive capacities of Greece and the resultant potentialities for higher production made it reasonable to expect that after devaluation the Greek economy would be able to decrease its foreign deficit and at the same time to maintain, or even eventually to increase, domestic consumption and investment, even though the terms of trade might be expected to deteriorate further as a consequence of devaluation.

Devaluation, moreover, was a measure needed for the attainment of internal economic equilibrium. The realignment of domestic prices to world prices through exchange adjustment was to be regarded as the crowning step in disinflationary policy. This realignment would do much to eliminate price and income distortions, thereby removing the need for government subsidies and interference in the formation of prices and providing an incentive for a more economic distribution of the agents of production. Such a development would, in turn, set in motion throughout the economy automatic mechanisms, which would contribute to economic and financial equilibrium and hence to further economic growth.

Extent of overvaluation

Measured in terms of relative changes in purchasing power and on the assumption of an equilibrium position in 1938, the drachma was overvalued in relation to the U.S. dollar by some 33 per cent in March 1953. This suggested that the official exchange rate should be adjusted from 15,000 to 22,500 drachmas per U.S. dollar. But by their very nature such calculations cannot be reliable, particularly when the price statistics available are inadequate. In particular, for the postwar drachma, the wide divergence between the movements of the prices of Greek exports and of other prices makes it necessary to use the utmost caution in interpreting the results of such calculations. The dollar prices of the three main Greek export staples, which account for about 60 per cent of total exports, were estimated in 1952 to be only approximately 40 per cent higher than before the war, while the dollar prices of other goods had increased, on the average, by more than 125 per cent. This does not, of course, mean that the world prices of Greek exports were to be taken as a basis for determining the extent to which the drachma ought to be devalued. It was a factor, however, to be given serious consideration when making the decision. Since no mathematically accurate estimate was possible, it was probably safer to err, if at all, on the side of caution, by choosing a rather high percentage for exchange adjustment in preference to a rather low percentage.

Some further indication of the extent of the overvaluation of the drachma was given by the effective exchange rates at which foreign trade transactions were being carried on. By the extensive use of multiple currency practices, the economy had already been adjusted to an effective exchange rate considerably higher than the official rate of 15,000 drachmas per U.S. dollar. After the introduction of exchange import taxes in October 1952, the average effective dollar rate for all imports was estimated at 17,600 drachmas, while the effective rate for taxed imports was 20,900 drachmas. The effective rate for certain luxury or semi-luxury imports—which accounted, however, for only a very small part of total imports—was as high as 45,000 drachmas per U.S. dollar. The average effective export rate was estimated, immediately prior to the devaluation of April 1953, at 20,600 drachmas per U.S. dollar. The effective export rate for tobacco (representing about 45 per cent of total exports) was estimated at more than 21,000 drachmas per U.S. dollar, while for other exports it ranged from 17,250 drachmas (currants) to 22,500 drachmas (minerals, sponges, carpets). But these effective rates were not to be regarded as sufficiently high for either exports or imports. Even after the imposition of exchange taxes on imports in the fall of 1952, importers’ profits were probably still excessive. And the effective export rates failed to make either traditional or potential new export goods move in the desired volume. Finally, the black market exchange rate of the drachma (which immediately before the devaluation was virtually the same as the official rate) could not serve as an indicator of the extent of overvaluation. In fact, arbitrage operations in gold and hard currencies between the Greek and other free markets make the black market quotations for these currencies in Greece a function of the price of the sovereign.

More generally, the fact that had to be borne in mind was that any major devaluation of the drachma, unless accompanied by new multiple currency practices, would be bound to raise internal prices and costs. Also, given the nature of Greek export staples, some further deterioration of their relative position in world markets could not be ruled out as impossible; such a deterioration might well be the result either of general trading influences or of exchange measures taken by countries competing with Greece in third markets. And finally, account had to be taken of the existing large price discrepancies, whose limitation or elimination was practically dependent upon an upward price adjustment.

In view of all these considerations, it might have been concluded that the extent to which the drachma should be devalued ought to be greater than was indicated either by current de facto exchange rates or by calculations based on the concept of purchasing power parity. Indeed, with allowances for prospective internal price rises resulting from devaluation itself, as well as for the necessity of stimulating exports, it would follow that the new devalued exchange rate would exceed 25,000 drachmas per U.S. dollar.

Devaluation and post devaluation measures

It was apparently on the basis of such considerations that the Greek Government decided to devalue the drachma by 50 per cent in relation to the U.S. dollar. Effective April 9, 1953, the official exchange rate was adjusted, with the concurrence of the International Monetary Fund, from 15,000 to 30,000 drachmas per U.S. dollar.17 At the same time, all multiple currency practices that were in effect on April 9 were abolished and the exchange rate structure was thus unified.

Devaluation in itself was an inflationary factor. It increased the cost of imports and thus exerted an upward pressure on prices and wages. A similar pressure was to be expected from the increased drachma price of exportable goods and the higher incomes of exporters and recipients of invisibles. Also, the so-called secondary effect of devaluation on prices, viz., the impact of the adjustment of money wages and salaries, was to be expected. In addition to these usual devaluation-induced inflationary factors, it was also necessary in Greece to anticipate the effects of the increase in the drachma value of private gold hoards that would inevitably follow an exchange adjustment. The dollar price of the sovereign prevailing at that time made it likely that this increase would be no less than 70 per cent. This would mean that the value of gold hoards, estimated at more than 13 million sovereigns and which could be regarded as liquid assets, would increase by approximately 1,700 billion drachmas. The significance of this factor may be gauged from the fact that immediately before the devaluation the note circulation was 2,400 billion drachmas, and the total money supply 5,200 billion.

These considerations suggested that, despite the marked improvement of both internal and balance of payments conditions by the spring of 1953, the new rate and a unified exchange system could be maintained and the broader objectives of devaluation attained only if anti-inflationary policies were firmly continued.

Transitional post devaluation measures

In addition to its anti-inflationary policies, the Government resorted immediately after the devaluation to certain transitional measures intended to protect the cost of living from the immediate impact of the exchange adjustment, and thus to smooth the adjustment of the economy to the new rate of exchange. First, it liquidated a large part of its stocks of essentials at prices lower than those corresponding to the new rate of exchange. In addition, import subsidies were granted for some ten essential foodstuffs and raw materials that weigh heavily on the cost of living. The subsidy ranged from 7,000 to 15,000 drachmas per U.S. dollar and therefore produced effective exchange rates of from 15,000 to 23,000 drachmas per U.S. dollar. By the end of July 1953, all these subsidies and the liquidation of public inventories at low prices had been discontinued.18

Export taxes were also temporarily imposed on such commodities as cotton, rice, and olive oil; while these products are important for domestic consumption, markets for them can easily be found abroad. The taxes were originally fixed at between 1,500 and 9,000 drachmas per U.S. dollar, but subsequently, as general conditions appeared to warrant a change, they were reduced to between 1,500 and 5,000 drachmas per U.S. dollar, thus producing effective exchange rates ranging from 25,000 to 28,500 drachmas per U.S. dollar. The goods affected by these taxes account for a small part of the total exports of Greece, and they had been exported before the devaluation at effective exchange rates which did not deviate far from the previous official rate. In the absence of special measures, their domestic prices would have risen substantially after April 9, 1953 and, in view of their essential character, this might have caused a sudden steep rise in the cost of living. A further upward pressure on prices might also have been exerted by the higher incomes associated with the new exchange rate if it had been applied to such exports, and the adaptations in the economy required by the devaluation might thereby have been made more difficult.

Monetary and fiscal policies

Monetary and fiscal policies continued to be quite restrictive during the first three months (April-June 1953) after the devaluation. Total bank credit was maintained at approximately the predevaluation level. The extraordinary nonrecurrent taxes that had been imposed shortly before the devaluation to balance the 1952-53 budget, combined with the taxation of exported windfall profits consequent upon the devaluation,19 produced a small cash surplus in the current budget operations. The Government realized another cash surplus from the sale of public inventories. On the other hand, the substantial increase in official exchange reserves was the most important inflationary factor. The net result of the interplay of deflationary and inflationary factors during the first three months after the devaluation was a 4 per cent decrease in the note circulation (Table 3).

Table 3.

Main Inflationary (+) and Deflationary (—) Forces in the Greek Economy, April-December 1953

(In billions of drachmas)

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Including counterpart funds of common use goods for the Armed Forces, financed by U.S. aid, but excluding transfers to the U.S. account as provided by the agreement between Greece and the United States.

Owing mainly to government purchases of domestic wheat of the 1953 crop.

Source: Compiled from data in the Bulletins of the Bank of Greece and analytical statistics on government overdrafts provided by the General Accounting Office of the Greek Ministry of Finance (Departments I and III).

The need for restrictive policies continued after June. Quite apart from other reasons, this was necessary since, in the months ahead, a substantial monetary expansion was to be expected as a consequence of the seasonal inflationary forces that usually operate in the Greek economy during the fall and winter months. In view of the increases in prices and in economic activity, the credit expansion to agriculture and business during the latter part of 1953 cannot be regarded as excessive. Between July and December 1953 the total volume of bank credit increased by 767 billion drachmas, or 15 per cent, chiefly on account of credit extended to farmers, industrialists, and exporters. This credit expansion involved central bank funds to the extent of 197 billion drachmas, and commercial banks’ own resources to the extent of 570 billion, and increased the ratio of credits financed by commercial banks’ deposits to total bank credits from 31 per cent on June 30 to 37 per cent on December 31.

Current budget operations in the latter half of 1953 did not add significantly to inflationary forces. From July to December 1953, the Government’s overdrafts on the Bank of Greece seemed to be less than that part of defense expenditures which was to be financed by foreign aid. Thus, it could be expected that the budget results for the fiscal year 1953-54 would not deviate substantially from the estimates.20 In addition, public investment during this period lagged behind the actual accruals from foreign aid counterpart funds, which therefore operated as a deflationary influence.

The comparatively large monetary expansion in the latter half of 1953 (Table 4) is to be explained entirely in terms of two other factors. First, there was an increase in official exchange reserves, owing primarily to a greatly increased influx of exchange from invisibles; this element alone is estimated to have involved new money issues of more than 900 billion drachmas. The second factor, of about the same significance, was the official purchase of wheat at a fixed price; this operation involved government drafts on the Bank of Greece of some 1,000 billion drachmas, and increased the Treasury’s debt to the Bank of Greece on “supplies account” by approximately 700 billion drachmas. By the end of 1953, the note circulation was greater by 1,175 billion drachmas, or 50 per cent, than at the end of June, and the money supply by 2,220 billion drachmas, or 40 per cent.

Table 4.

Money Supply in Greece, December 1951-March 1954

(In billions of drachmas)

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Source: International Monetary Fund, International Financial Statistics.

The nature of the factors that caused the note circulation to increase in the latter half of 1953 indicates that the monetary expansion was temporary and likely to be self-correcting. The expansion, however, which surpassed the increases in production and prices, may have been excessive, particularly in view of the fact that the effects of the devaluation had not been worked out fully at that time. Thus, it might have seriously impaired the ultimate effectiveness of the exchange adjustment. To some extent it did have an adverse effect on the domestic gold market. The increased purchasing power, combined with the tendency (which now, however, is less widespread than in the past) to convert savings into gold sovereigns, raised the drachma price of the sovereign from approximately 300,000 drachmas at the end of October 1953 to about 335,000 in the closing days of February 1954. At the same time, gold quotations in other free world markets were either fairly stable or were falling a little. These divergent movements resulted in the sovereign price in Greece being higher than elsewhere by more than one U.S. dollar per sovereign. It may be assumed that, as a consequence of this discrepancy, the demand in Greece for foreign exchange increased, with the result that black market premiums on hard currencies of some 6 to 7 per cent re-emerged.

The increase in the price of the sovereign and the re-emergence of black market exchange premiums did not seem to affect commodity prices. Yet these developments tended to affect adversely the inflow through official channels of invisible earnings and also to create an atmosphere of speculation and nervousness. It was against this background that, late in February 1954, in contrast to official statements made after the devaluation of the drachma in April 1953, the authorities announced that the Bank of Greece would intervene in the domestic gold market for the purpose of reducing the sovereign price so that it would correspond to its “real exchange value.” When this announcement was made the price dropped to about 310,000 drachmas, and the black market exchange premiums disappeared almost completely. But the Bank of Greece did not actually intervene in the gold market, and the lower sovereign price merely reflected the impact of the announced change in gold policy on expectations as to the future course of sovereign quotations. Conditions in the gold market apparently were influenced also by the withdrawal of more than 300 billion drachmas (9 per cent) from the note circulation during the first two months of 1954. Thus, by the end of February, the note circulation was back to that of November 1953.

It would be regrettable if the Government should have recourse again to the policy of intervention in the internal gold market, a policy that, after mid-February 1952, appeared to have lost its justification and usefulness. In spite of any short-run stabilizing effects that might follow stabilization of the price of the sovereign through Bank of Greece intervention, such a policy might defer the establishment of genuine confidence in the paper money. That the policy change was announced cannot, however, mean that need for actual intervention in the gold market will arise. It must, indeed, be borne in mind that in such a situation it is the general economic policies enforced by the Government that are of overriding importance. If these policies are effective—as they appeared to be early in 1954—there would probably be no need for actual intervention in the gold market, just as adherence to anti-inflationary measures after February 1952 permitted the Bank of Greece to abstain from any gold operations and caused the sovereign price to fall substantially below the official ceiling rate.

Effects of the Devaluation

By the early months of 1954, when this study was prepared, sufficient time had not elapsed to permit a definitive judgment of the effects of the devaluation of the drachma in April 1953. The experience of this period was sufficient, however, to justify something more than a tentative assessment of the effects. For the most part, the analysis that follows covers the period ended February 1954.

Effects on prices

Tentative calculations made prior to the devaluation21 had indicated that the effect on the cost of living of a devaluation of the magnitude that was later approved would be an increase of from 17 to 21 per cent, depending on the pattern of consumption. These calculations did not include either the effect of the prospective increase in the internal prices of exportable goods or the secondary effect of the devaluation, i.e., the one that would result from the income adjustment. Other calculations indicated that the primary effect would be an increase of some 20 to 25 per cent, and the secondary effect an increase of about 5 per cent, so that the total effect of the exchange adjustment on internal prices was estimated at 25 to 30 per cent.

All these calculations assumed that devaluation would have no adverse psychological effects. The expectation that the price increases would be moderate was based on the following considerations. Account had first to be taken of the extensive use, before the devaluation, of multiple currency practices, as a result of which the economy had already adjusted itself to an exchange rate considerably above the official rate. Approximately 60 per cent of total foreign trade transactions had been carried out at effective rates exceeding the previous official rate and, in certain instances, even above the new rate of the drachma, and importers’ profits were still excessive. Moreover, despite the fact that a large part of imports are of primary importance, either as consumers’ goods or as industrial raw materials, imports account for only about 20 per cent of all the goods consumed in the country. Finally, customs duties and other internal charges account for a large part of the resale prices of certain essential imports (particularly sugar) and, since these charges would certainly not be adjusted in exact proportion to the devaluation, the resale prices would not be affected to the same extent as the exchange value of the drachma.

Actual price developments in 1953 and early 1954 were roughly in accord with expectations. The anti-inflationary policies, combined with well-timed transitional measures, ensured a smooth and orderly adjustment of the economy to the new exchange rate. Of primary significance in this respect were, of course, the far-reaching measures of import liberalization. Their effects were further reinforced by the prevalence of a buyers’ market and falling prices in world markets. In these circumstances the rise of the sovereign price, consequent upon devaluation, from about 180,000 drachmas to more than 300,000 drachmas, had no effect whatever on commodity prices.

By February 1954, retail prices and the cost of living were some 25 per cent higher than in March 1953; and wholesale prices had risen approximately 30 per cent (Table 5). Indeed, by September 1953 (when retail prices had increased by some 15 per cent and wholesale prices by 30 per cent) the primary effects of the devaluation had already appeared, for the most part, to have been realized. Price increases in subsequent months seem mostly to have reflected the impact of the seasonal factors usually operating at that time of the year. That wholesale prices increased more than retail prices is explained by the structural differences between the two price indices; the wholesale price index is more sensitive, since it includes mainly raw materials which are imported duty free or charged with low customs duties. Another, or additional, explanation is that the unequal increases in the two indices reflect the elimination of excessive retail profits and charges.

Table 5.

Price Developments in Greece, December 1951-April 1954

(1938 = 1)

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These price movements appear to have fully reflected an average 10 per cent cost of living allowance granted to salary and wage earners on July 1, 1953. After January 1954, however, as salaries and wages were being raised by an average of 20 to 25 per cent above the predevaluation level,22 the cost of living allowance was being abolished.

Provided that sound policies could be maintained, the effects of the new wage adjustment on prices were expected to be moderate. Several factors seemed to justify this expectation. As a result of increased production and imports, supply conditions improved considerably after the exchange adjustment. Moreover, exchange reserves also increased and the consumer industries still appeared to have some unused capacity. Therefore, goods either were available or could become available to match the higher demand that was to result from the adjustment of wages and salaries. Also, it could be expected that the effect of this adjustment on internal costs would not assume large proportions, in view of both the extent of the adjustment and the relation of labor cost to total cost. Provision for salary increases for public servants to be financed out of revenue had already been made in the budget, so that this adjustment would not by itself cause deficit financing. Finally, the period immediately ahead was one when seasonal deflationary forces might be expected to operate, which would mitigate substantially the immediate effect of the wage adjustment on internal prices and costs.

Effects on price and income distortions

The exchange adjustment of April 9, 1953 rendered possible a substantial reduction in the scope of price supports for agricultural products, which had been severely hit by the previous overvaluation of the currency, and permitted to a large degree the restoration in this field of the free market price mechanism. Simultaneously with the devaluation, the administratively set system under which tobacco prices had been formed since the end of the war was abolished; and thereafter the Government limited practically to wheat alone the policy of supporting farm prices by purchases at a fixed price. Although the price of wheat in 1953 was fixed some 15 per cent above the price in the previous year, it was—when converted at the new exchange rate—at, or only slightly above, the world market price.23 In view of the importance of wheat for domestic consumption, strong economic and balance of payments considerations could be adduced in justification of the support policy. (In any case, the protection given to wheat prices in 1953 was substantially less than had been customary in the past, particularly in the interwar period.) Since the devaluation, the policies being pursued for the support of prices received by producers of other farm products apparently do not deviate substantially from normal bank financing. They are carried out by the Agricultural Bank and other quasi-government agencies, and appear not to involve subsidization or the accumulation of stocks of farm products financed by inflationary means.

In the absence of appropriate price statistics, no detailed or precise analysis can be made of the effects of the devaluation in eliminating pre-devaluation price discrepancies. There can be little doubt, however, that the unification of the exchange system, combined as it has been with the removal of import restrictions and the restoration to a great extent of the free market mechanism, has helped to bring internal prices into line with world prices. In terms of calculations based on the concept of purchasing power parity, the drachma—which, in relation to the U.S. dollar, was overvalued before the devaluation by 33 per cent—was undervalued by some 5 per cent at the end of February 1954, a discrepancy that would almost disappear if domestic prices should increase to the extent anticipated.

Within the internal price structure, there is some statistical and other evidence that the devaluation reduced the excessive profits per unit in certain lines of business. This appears to have been true in general for retail trade and in particular for import trade. When prewar prices are taken as a standard of reference, the upward movement of retail prices was some 12 per cent greater than the upward movement of wholesale prices. Differences between the movements of the two indices since April 1953 had reduced this discrepancy to about 7 per cent by February 1954; and to the extent that the higher level of retail prices was due to excessive profits, this trend means that excessive profits were being eliminated. An indication of the curtailment of excessive profits in import trade is the fact that from April 8, 1953 to February 1954 the price index for imported goods (compiled by To Vima) rose by 25.3 per cent, although this index supposedly includes essentials which, before the devaluation, were imported at exchange rates that did not deviate far from the official rate.

There is also some evidence that the prices of agricultural products increased more than other prices after the devaluation. The more pronounced increases were in the prices of such domestically produced and potentially exportable farm goods as rice, cotton, and olive oil. The drachma prices received by farmers for the traditional export staples also rose noticeably. Some statistical evidence of the greater increase in farm prices relative to other prices is offered by the movement of the To Vima indices of retail prices. Between March 1953 and February 1954 the index of prices of agricultural and dairy products rose by 29.3 per cent, against a 20.4 per cent increase in the index of prices of industrial articles and a 25.7 per cent rise in the global index. These movements do not, however, necessarily indicate that the discrepancy between the prices paid by farmers and those received by farmers—a discrepancy that, ever since the war, has been against the farmers—has narrowed. Indeed, the nature and structure of the indices are quite inappropriate for any such measurement. Specifically, the index of agricultural products does not reflect the prices actually received by farmers, and the index of industrial goods does not include all the articles usually bought by farmers—especially imported fertilizers (an important cost element in Greek agricultural production), which before the devaluation were imported at the official rate. Therefore, it would not be surprising if the farmers’ “terms of trade” actually have deteriorated still further since April 1953. However, because of the higher volume of production, the total income of farmers in 1953 was high in comparison with both the previous year and the prewar period.24 The farmers’ position may be expected to improve further as conditions permit the removal of export exchange taxes on agricultural products and as imported fertilizers can be replaced by domestic fertilizers.

Though by the early months of 1954 it is not possible to present any definite conclusion about the effects of devaluation on the predevaluation price distortions, it seems likely that, given continued economic stability, these distortions may be substantially reduced in the near future. By this means, a redistribution of currently generated income in favor of those sections and groups that had been penalized by the past inflation might be effected. Such a development would be of great economic and social significance.

Effects on production

There are some grounds for believing that devaluation had an immediate favorable effect on production. This seems especially true for industrial production. The index of the Federation of Greek Industrialists25 indicates that, shortly after the exchange adjustment, industrial output started to increase substantially. Such output (including electric energy production) in December 1953 was 36.8 per cent higher than a year before and 67 per cent above the prewar average. Many of the industrial branches showed consistent gains above previous records. The increases in output by the chemical, woodworking, building materials, metal working, and metallurgical industries were particularly marked.

During the period immediately after devaluation, when the impact of the exchange adjustment on prices had been felt to only a limited extent, it should have appeared advantageous to industrialists to build up inventories at relatively lower costs. However, it would probably be an exaggeration to explain the increased industrial activity after the devaluation entirely in terms of expectations of higher prices. Output was maintained at a relatively high rate after a large part of the effects of devaluation on the prices of agents of production were believed to have been felt already. This suggests that increased production did not merely reflect the accumulation of stocks and speculative motivations, but that it was also a response to greater demand for industrial goods, which resulted from an expansion of economic activity and the general effects of the devaluation. Mineral production also was affected favorably. In December 1953, the index of mineral output (excluding lignite) was 85 (1939 = 100), compared with 60 a year earlier. The impact of the devaluation on the output of minerals would have been greater if world prices of minerals had not dropped in the meantime. Increased industrial and mineral production also caused employment to increase somewhat, although this has shown itself less in any appreciable increase in the number of employed workers than in an increase in working hours.

The commodity composition of agricultural production and the timing of the devaluation precluded any appreciable effects of devaluation on agricultural production in 1953. The impressive increase in agricultural output in that year has to be explained rather in terms of the productive investment of earlier years, which was then beginning to bear fruit. Another factor was that 1953 was cyclically a year in which a good olive oil crop was to be expected. However, devaluation could be expected to have favorable effects on agricultural production in 1954 and subsequent years, in both the traditional and potentially important export crops.

There can be little doubt that devaluation, through its effects on price and income distortions, will contribute substantially to the utilization of unused productive capacities along lines that are most appropriate from the standpoint of the general interest. It may also be expected to help the reallocation to more economic uses of agents of production already employed.

Effects on balance of payments

Mainly because most Greek exports consist, and will continue to consist in the near future, of agricultural products whose supply cannot be increased quickly, the full impact of the devaluation on exports may be expected to be felt in 1954-55 and thereafter.26 An improvement in the external accounts position was, however, already evident in 1953 and the early months of 1954. The devaluation, coupled with more favorable world market conditions for tobacco, contributed to the liquidation of most of the accumulated stocks of exportable goods (particularly tobacco) and also made possible a rapid movement of exports from current production. Despite lower selling prices in terms of foreign currencies, exchange proceeds from exports in the period April-December 1953 were 25 per cent higher than in the same period of 1952 ($98 million, compared with $78 million), which indicated a larger volume of exports in 1953. For 1953-54 (July 1953 to June 1954), exchange proceeds from exports are expected to reach the equivalent of about $140 million, compared with $116 million in 1952-53.

The new exchange rate is more restrictive on imports than the previous effective import rate, so that a smaller import volume could have been expected. However, the impact of devaluation on the over-all level of imports has been considerably mitigated by the far-reaching import liberalization measures introduced shortly after the devaluation. As of April 17, 1953, most of the complicated import regulations which had been in effect ever since the early thirties were abolished and a liberal import regime was established. Though importers were still required to comply with certain formalities, a restrictive import license was needed for only about ten luxury imports. Also abolished at that time were those regulations which had, to a large extent, restricted the right to import to importers already established. This was of particular importance in view of the semimonopolistic situation in some sectors of Greek import trade. For some goods, the liberalization of imports appeared indeed to outstrip the restrictiveness of the new exchange rate and thus created conditions unfavorable to certain branches of industrial production. This prompted the Government to take corrective action through adjustments of the customs tariffs. A general adjustment of tariffs is believed to be under consideration.

The net effect of these measures and countermeasures is likely to result in imports during the current year (1953-54) being higher than in the previous year. During the first postdevaluation months, exchange payments for imports were below those of the preceding year, but in the second half of the calendar year 1953 they rose above the corresponding period of 1952. Import liberalization, authorization to import on suppliers’ credit, and increased economic activity all combined to increase imports. Payments for imports for the whole fiscal year 1953-54 were set at the equivalent of some $250 million, compared with $230 million in 1952-53. In assessing the importance of the over-all increase in imports, account should be taken of a substantial change in their commodity composition compared with 1952-53 and earlier years. Imports of basic foods decreased, because of increased agricultural output, while capital goods imports by business increased substantially.27 Imports of certain luxury goods (primarily durable consumers’ goods) increased as the removal of quantitative restrictions permitted the satisfaction of accumulated demand for such goods. It should also be remembered that imports in 1952-53 may have been abnormally low, as a result of the restrictive policies then in effect. The maintenance of imports at an appropriate level, i.e., at a level compatible with the economy’s existing possibilities and needs, depends no doubt on the firm continuation of sound internal economic policies. Now that imports have, for the most part, been freed from direct control, the importance of these policies, from the standpoint of the external accounts, has been greatly increased.

The impact of the devaluation on invisibles was more immediate and pronounced, since the previous official exchange rate had been uniformly applied to these transactions. For the period April-December 1953, gross receipts from invisibles were the equivalent of $100 million, about 50 per cent more than in the corresponding period of 1952. Though part of this increase should probably be regarded as nonrecurrent, the Government has estimated that gross invisibles for 1953-54 will be the equivalent of about $120 million, 28 per cent more than in the preceding year, an expectation which seems to be justifiable. Invisible payments could have been expected to decrease substantially after the devaluation. In fact, there was no such decline; for the period April-December 1953 they were reported at approximately $24 million, the same as the year before. The substantial relaxation of exchange restrictions, which has also permitted more liberal exchange allocations for travel, no doubt explains the maintenance of invisible payments at a relatively high level.

In general, therefore, the devaluation had already affected the balance of payments in 1953 and early 1954. In contrast to the improvement in 1952-53, the improvement after the devaluation was the result not of reduced imports but of increased exchange earnings, chiefly on account of invisibles. Increased exchange earnings, U.S. economic aid, and the commercial short-term credits which importers obtained from foreign suppliers together resulted, for the first time since the war, in a substantial increase in official exchange reserves. This increase is reported to have been approximately 40 per cent from April 1953 to February 1954. When the equivalent of $35.7 million in the Monetary Reserve Account is excluded,28 the gold and exchange holdings of the Bank of Greece at the end of February 1954 were equivalent to approximately $120 million, an amount adequate to finance five to six months’ imports.

In the first half of the fiscal year July 1953-June 1954, the current account balance of payments, calculated on the basis of actual payments, showed a surplus of $12 million (Table 6), against a deficit of about $21 to show a surplus, as it did for the half year July-December 1953. Indeed, imports are tending to increase in the latter part of the fiscal year. Exports are seasonally low after February. Also, part of the invisible earnings received during the first half of the current fiscal year should probably be regarded as nonrecurrent. The payments deficit is expected to be considerably less than in 1952-53, with both receipts and payments at a higher level. Provided that the Government is successful in continuing its intended anti-inflationary policies, and the harvest is not substantially smaller in 1954 than in the previous year, further improvement can be expected after 1953-54. In the early months of 1954, the beneficial effects of the devaluation on the trade balance could be expected to continue to be felt in the future, but other developments were also encouraging. The West German market, which had been the most important prewar export outlet for Greek tobacco, was again offering possibilities equal to, or even greater than, those before the war. Moreover, trade agreements between Greece and Eastern European countries were giving hope that other traditional export outlets would be reopened.29

Table 6.

Summary of the Greek Balance of Payments, July 1951-December 19531

(In millions of U.S. dollars)

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Based on data for exchange receipts and payments, compiled by the FOA Mission in Greece (Finance and Program Division).

All these developments seem to indicate the approach to a solution of the short-term balance of payments problem by a return to a position similar to that of the thirties. They do not indicate, however, that the foreign exchange needed for investment can, in the near future, be provided from Greek earnings. And it is only through investment that the desired change in the interdependence of the Greek economy with the rest of the world can be brought about. This change should involve less dependence on foreign sources for essentials, and also an adequate diversification of exports.

Effects on the money market

Money market conditions improved somewhat after the devaluation. The public appeared to have become somewhat more willing to deposit cash surpluses with the banks in the form of demand deposits, and commercial bank deposits increased more rapidly than the currency circulation.

The demand for loans also declined, on the whole, as evidenced by the reported slight drop of free interest rates, a development that meant a smaller field of operations for the free money market. This was apparently the result of a reduction in the excessive profits of certain branches of business. An additional explanation was the authorization of imports on credit, which make it possible for importers to receive substantial short-term commercial credits from abroad. Finally, it should be remembered that, following the devaluation, the liquidity of business increased substantially and that probably more profits were being reinvested in enterprises.

To the extent that conditions on the money market really improved, a reduction in bank rates of interest would serve a useful purpose. It was likely to contribute to lower costs and prices, either directly or by preventing increases which, otherwise, would have followed the devaluation.

It was against this background that, as of January 1, 1954, effective interest rates on bank loans and advances were reduced from 16 per cent (12 per cent plus 4 per cent commission) to 12 per cent (10 per cent plus 2 per cent commission) per annum. Interest rates paid by farmers, which had been fixed substantially below those charged on loans to business, were reduced by 2-2.5 percentage points. Other preferential rates were not changed.

However justifiable, from a general economic point of view, the reduction of bank interest rates may be, it may produce some financial difficulties for the banks, whose administrative expenses have been increased in recent years by undue additions to their personnel. The expansion of the volume of banking business since the devaluation has, no doubt, improved their position, but it is not likely to have provided a solution for their basic difficulties. As long as foreign aid was forthcoming on a relatively large scale and internal policies were expansionist, the effect of high operational expenses on the financial positions of banks was concealed. But as far back as the closing months of 1951, there were indications of major financial difficulties confronting the main commercial bank, the National Bank of Greece, which at that time conducted more than half of the commercial banking business of Greece. These difficulties revealed the necessity for institutional reforms in the banking system. As a first step toward such reforms, the Government, early in 1953, initiated a merger between the two most important commercial banks, the National Bank of Greece and the Bank of Athens.30

If the merger is to fulfill its immediate purpose,31 it has to be implemented in such a way as to reduce the administrative expenses of the new bank well below the combined expenses of the two merged banks. This, together with other measures, some of which are of an organizational character affecting both the new bank and other banks, would render the banking system more efficient and reduce the cost of bank services.


Developments up to the early months of 1954 were, on the whole, encouraging and seemed to justify the expectation that the devaluation of April 9, 1953 would ultimately contribute to the establishment of conditions of economic equilibrium, both internal and external. The exchange adjustment may well prove to be a decisive, and the most important single, step toward economic stabilization and consolidation, which, in turn, are the preliminary conditions for economic growth and development.

These results are conditioned, however, upon the general policies that the Government is able to pursue in the future. The long experience of a disruptive inflation appears to have degraded the economy in respect of the proper functioning of its financial mechanism. After the war, savings habits became quite abnormal and any expansion of the means of payment beyond a certain point did not lead to higher savings, but rather tended to increase effective demand for goods and gold. Therefore, a strong monetary policy that would take as a criterion not only the actual level of economic activity but also the extent to which normal savings habits have been restored is, particularly for the Greek economy, an absolute necessity. Only by means of such a policy can the re-emergence of inflationary forces be avoided. In addition, other measures—many of them of an institutional character—would have to be enforced. Reforms in the fields of taxation and banking, including measures that would place the financing of agriculture on a sounder basis,32 as well as reorganization of the administrative machinery, are steps that will have to be taken. Indeed, some measures of this kind are already under way. Further progress in this direction would no doubt help to raise the national income, make its distribution more equitable, and complete and consolidate the task of economic stabilization.

Once economic stability is ensured, economic development, upon which the solution of the long-term economic problems of Greece is dependent, would be greatly facilitated. Despite the relatively large amount of foreign aid which Greece has received since the end of the war, little or nothing has been accomplished so far in the sphere of economic development, for reasons discussed in the earlier sections of this paper. Although several development programs have been prepared since 1948, they have, in large part, remained on paper. In the spring of 1953, the Government formulated a development program embracing both projects already under construction and new projects, in the confidence that the political stability then attained and the economic stability that seemed to be in sight would permit its execution. It is estimated officially that the cost of this three- to five-year program will be the equivalent of about $236 million (i.e., approximately one fifth of the gross national product in 1953); of this, $131 million represents capital goods imports and the rest local currency expenses.

While part of the cost of the program is likely to be met by U.S. aid—which is expected to continue on a relatively small scale during the next few years—the rest will have to be provided from other, noninflationary sources. The financing of development is thus predominantly dependent upon the achievement of conditions of economic equilibrium. This would help to develop a domestic capital market33 able to make a contribution to productive investment, and at the same time would encourage foreign capital to flow to Greece34 and supplement the internal resources which, particularly if defense expenses remain high, are likely to be quite inadequate in comparison with investment requirements.


Mr. Eliades, economist in the Central and Eastern European Division, is a graduate of the School of Economics and Commerce, Athens. He served for many years in the Research Department of the Bank of Greece, and was associated with the Association of Greek Banks.


Reserves at the time of the German occupation amounted to approximately $180 million, including the unutilized part of the credits of £46 million extended to Greece by Great Britain in 1940-41, the repayment of which was waived by the Financial Agreement of 1946. By 1945, reserves were more than $190 million, excluding assets derived from payments to British troops stationed in Greece at that time.


This amount was made available as follows: post-UNRRA, $38 million; other relief programs, $13 million; Truman Doctrine aid, $119 million; ERP, ECA, etc., $1,102 million. In addition, there were granted, during the same period, Export-Import Bank and surplus stock credits totaling another $68 million.


As a result of foreign aid, total available resources were greater than they had been before the war.


In the last few years the Government has had under study a basic reform of the taxation system. The present taxation system provides for “analytical” taxes, at flat rates on the various types of income, and a “synthetic’ tax, with very progressive rates imposed on that part of the over-all income from various sources which exceeds a certain limit. In view of the complexity of the system, a proposal has been advanced to substitute for it a simpler system consisting basically of a unified progressive income tax along the lines of the system in force in Anglo-Saxon countries. The transitional period from the old to the new system may, however, give rise to great difficulties and may even entail a decrease in revenue that the economy could not afford under present conditions. Before the introduction of a new tax system, the ground will have to be prepared through a series of measures carefully designed and enforced. Recent official statements indicate that the Government intends to act in this way.


The Currency Committee was established in 1946 pursuant to the Financial Agreement between Greece and Great Britain concluded in that year. The Committee is presided over by the Minister of Economic Coordination and consists of the economic ministers, the Governor of the Bank of Greece, one member of British nationality, another of U.S. nationality, and one Greek financial and economic expert. The field of the Committee’s authority covers the banknote issue management, credit and exchange policies, interest rates, etc.


Total U.S. aid counterpart fund accruals are estimated to have amounted during that period to 7,600 billion drachmas, of which 454 billion was transferred to the U.S. Government account and about 2,940 billion was used to finance public investment and development loans to entrepreneurs.


Total private hoards of sovereigns are estimated to have been accumulated as follows:

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That the exchange adjustment of September 1949 did not make necessary a corresponding rise in the sovereign rate is to be explained basically by the fact that the new official exchange rate had been established at about the level of the previous black market dollar rate. The Greek gold market is linked by speculative arbitrage with the free or black markets in European and Middle Eastern countries; such arbitrage tends to equalize the cross rates between the gold sovereign price and foreign exchange rates. Therefore the upward adjustment of the official exchange rate to the level of the black market rate, coupled with the maintenance, if necessary through official intervention, of the sovereign rate at the predevaluation level, did not produce any disturbance in the Greek free gold and exchange market, and it prevented the re-emergence of excessive black market exchange premiums.


A distinction should be made between the Greek merchant fleet under the Greek flag, the tonnage of which declined from about 1,800,000 gross tons before the war to about 1,200,000 gross tons at the end of 1953, and the Greek-owned fleet, under the Greek or other flags, the size of which was reported at the end of 1953 at more than 8,000,000 gross tons. The Greek-owned fleet is thus the third largest in the world, immediately after the U.S. and British fleets.


Because of the increase in population, which is estimated at more than 6 per cent between 1939 and 1951, per capita income in 1950-51 was probably still a little less than before the war.


For instance, bank lending operations on drafts and bills were subjected to the previous issuance of a wholesale invoice relating to the financed transaction.


The total money supply, including deposit money, expanded by only 3 per cent in 1951-52, compared with 28.8 per cent in 1950-51; this was the result of a considerably reduced rate of increase in bank deposits, a development which could not, however, be ascribed to contractional policies, at least in any direct way.


Part of the over-all reduction was the result of the partial repayment of frozen credits to industry and trade. In June 1952, the amount of frozen credits was estimated at 335 billion drachmas, of which some 95 billion was repaid by June 1953.


Based on International Monetary Fund, Balance of Payments Yearbook, Volume 5.


In view of the smaller import surplus, however, total available resources in 1952 were some 5 per cent lower than in 1951.


Usually, there is a relative failure of olive oil production every second year.


As of May 1, 1954, the Greek Government eliminated the last three zeros from the figures in which the values of banknotes were expressed. As a result, the U.S. dollar exchange rate was changed from 30,000 drachmas to 30 drachmas. All prices and claims expressed in terms of money were simultaneously adjusted in the same ratio.


A subsidy of 4,000 drachmas per U.S. dollar on imported cotton, which was granted early in 1954 on 2,000 tons of cotton, was later discontinued. Frozen meat imported on government account is still subsidized through sales to customers at prices below the purchasing price converted at the official rate; the cost of this subsidization is borne by the Government.


For exports effected prior to the exchange adjustment but for which the surrender of exchange was to take place after April 9, 1953, the difference between the exchange value converted at the previous effective rate (official rate plus the export premium) and the exchange value at the new official rate was entirely taxed away. For exports of agricultural products that had been purchased from producers before the devaluation, only 50 per cent of this difference was taxed away.


The 1953-54 budget appears to have taken into due account the exigencies of the economy. Instead of a deficit, a surplus of 300 billion drachmas ($10 million, or some 4 per cent of revenue) is estimated, which is planned to be used for productive investment. The budgeted tax revenue exceeds that realized during the previous fiscal year by approximately 20 per cent, a justifiable assumption in view of the higher level of prices and economic activity. The structure of tax revenue also shows an improvement. In the 1953-54 budget, direct taxes account for 20 per cent of the ordinary tax revenue, against 17 per cent in 1952-53, and indirect taxes, including excise duties, for 53 per cent, against 56 per cent in 1952-53. However, the structure of expenditures continues to be unsatisfactory. Defense outlays, including internal security expenses, as well as war pensions, account for more than half of all current expenditures, while the rest represents chiefly payroll payments, pensions, and other administrative expenses. However, part of the defense expenditures, particularly the cost of the so-called “Common Use Items” for the Armed Forces, is financed by U.S. aid. If this is excluded, defense outlays, as defined above, account for some 45 per cent of all current expenditures.


The calculations appeared in a memorandum prepared in the period from October 1951 to April 1952 by Miss M. Goudis of the Bank of Greece. The first part of the memorandum was submitted in November 1951 to the Greek Currency Committee by Professor X. Zolotas, a member of the Committee, and published after the devaluation (M. Goudis, The Readjustment of the Rate of Exchange, Athens, 1953).


Both the cost of living allowance authorized on July 1, 1953 and the increases reportedly granted after January 1954 were not applicable to that part of wages and salaries in excess of a specified limit, some 2,500,000 drachmas a month. Thus, the increase in the higher wages and salaries was proportionately smaller than that of the rest. Effective February 1954 the Government, in line with its policy of dispensing with direct economic controls, replaced government fixing of wages and salaries with the system of “collective labor agreements” (which had been in effect before the war), through which wages and salaries are agreed upon by employers and workers. Cases which cannot be solved by the interested parties are subject to government arbitration.


The minimum government-guaranteed price for wheat of the 1953 crop was fixed at 3,200 to 3,500 drachmas per oka (1 oka is equal to about 2.80 pounds), against 2,750 to 3,000 drachmas in the preceding year for wheat of the 1952 crop, depending on the size of the holding owned by the producer.


According to preliminary statistics on national income, net national income at factor cost (in constant prices) was 13 per cent greater in 1953 than in 1952. Income from farming rose by 26 per cent; from manufacturing by 6 per cent; from wholesale and retail trade by 5 per cent; from banking by 13 per cent. The share of farming in total national income increased from 35 per cent to 39 per cent, while the share of manufacturing declined from 20 per cent to 19 per cent.


The reliability of this index has been challenged from many quarters, but it is the only one available in this field, and is used by both government agencies and private economic analysts.


This assumption takes into account the fact that the manipulation of tobacco for export requires a period of one year.


Capital goods imported by private individuals or firms seemed to have increased in 1953-54 to such an extent as to outstrip substantially the decline in the import of capital goods financed primarily by U.S. aid and reparations, under the government development program.


The Monetary Reserve Account was instituted by the Greek-British Financial Agreement of 1946. Originally the Account had included a total of £25 million designed to serve as cover for the drachma, viz., a U.K. loan of £10 million to Greece repayable without interest in 10 equal annual installments beginning in 1951, and £15 million from Greek exchange reserves. The whole cover was to be held in a special account of the Bank of Greece at the Bank of England. By February 1954, £3 million had been repaid to the United Kingdom, and £9,250,000 from the Greek contribution had been utilized by Greece. Therefore, the balance of the Account at the end of February 1954 represented the equivalent of $19.6 million (£7 million), the unrepaid part of the U.K. loan, and the equivalent of $16.1 million (£5,750,000), the unutilized part of the Greek contribution.


Against the already materialized or prospective improvements of the external position, account should be taken of the fact that Greece will, perhaps in the not-too-distant future, be burdened with some servicing of her prewar external debt, estimated as equivalent to about $300 million, repayable mostly in sterling and U.S. dollars.


After appropriate modifications of the relevant legislation, the National Bank of Greece and the Bank of Athens were merged, by royal decree, into one institution under the name “National Bank of Greece and Athens” for a specified period of 50 years. The new bank’s capital, comprising all assets and liabilities of the two merged banks, was fixed at 223,190 million drachmas divided into 30,366 shares, each with a nomimal value of 7,350,000 drachmas. One share of the National Bank or 12.05 shares of the Bank of Athens were exchanged for one share of the new bank. Though the relative importance of the National Bank (which was both a bank of issue and a commercial bank until 1928, when the Bank of Greece was established as a separate bank of issue) had declined after the war, it was conducting about 54 per cent of all commercial bank transactions during the postwar period; the corresponding percentage for the Bank of Athens was 23 per cent. While the National Bank’s gross profits were about four times those of the Bank of Athens, the difference between the net profits of the two institutions was insignificant, not exceeding about 10 per cent in the postwar period.


The merger was criticized on the ground that the new institution would, in effect, enjoy a commercial banking monopoly, which would seriously hamper the enforcement of national credit policy. At present, given the relatively low level of commercial banks’ own resources, this danger may not be very great. But with the restoration of confidence and the consequent increased inflow of savings and cash surpluses into the banks, it is likely that the disadvantages of a monopolistic situation in such an important sector of economic life would make themselves felt. On the other hand, it should be noted that recently enacted legislation has, in more ways than one, placed the new bank under government control; but while this may help to prevent the bank from following a course contrary to the official monetary policy, it might at the same time make possible undue political interference in the bank’s affairs.


The Agricultural Bank of Greece is still heavily dependent on central bank funds. At the end of 1953, total outstanding loans and advances to the agricultural sector extended through the Agricultural Bank were 2,588 billion drachmas (excluding government purchases of wheat), of which 2,313 billion, or 89 per cent, was financed by the Bank of Greece. This amount represented 61 per cent of all the loans and advances to the private sector extended by the Bank of Greece.


Perhaps for the first time since the war, internal savings, voluntary and compulsory, were expected to be mobilized in 1954 for public productive investment. These savings were likely to be provided by the surplus of 300 billion drachmas in the Government’s budget and an internal voluntary loan of 300 billion drachmas. The loan is to be issued with a dollar clause (at the official rate) and to be open for subscription from June 9 to June 19, 1954. Public or semipublic institutions will be entitled to subscribe to the loan, but priority is to be given to private individuals. The loan is to carry interest at 5 per cent per annum, and additional amounts will be paid to bondholders in the form of lotteries. The bonds are to be exempt from certain taxes, and bondholders may borrow from banks up to 50 per cent of the nominal value of the bonds. Repayment of the loan is to be made within seven years beginning with July 1, 1955.


Certain steps have already been taken to ensure the financing of the foreign exchange expenses of the development program. A law has been passed, providing for special treatment for capital invested in Greece for purposes connected with the country’s economic development. In addition, the Government has concluded with the Federal Republic of Germany, France, and Italy preliminary agreements for the supply of capital goods valued at some $90 million on medium-term credit. Also, at the request of the Greek Government, a mission from the International Bank for Reconstruction and Development visited Greece in the fall of 1953.