Britain and the Greek Economic Crisis, 1944-1947: From Liberation to the Truman Doctrine
Published by EH.NET (June 2003)
Anthanasios Lykogiannis, Britain and the Greek Economic Crisis, 1944-1947: From Liberation to the Truman Doctrine. Columbia, MO: University of Missouri Press, 2002. xvii + 287 pp. $39.95 (hardcover), ISBN: 0-8262-1422-3.
Reviewed for EH.NET by Gail Makinen.
This meticulously researched and beautifully written book is the author’s Ph.D. dissertation in political history at the London School of Economics. He currently serves as special adviser on historical issues and archives at the Bank of Greece.
Lykogiannis concentrates on the twin problems facing the National Liberation Government when it returned to Athens in October 1944: hyperinflation and massive structural damage inflicted on the economy by the Germans during 1941-1944. The book contains three parts. Chapters 1 and 2 discuss characteristics of Greek history, the economy, and political and social conditions and institutions that he believes are important in explaining the inability of the Greek governments during 1944-1948 to deal with the twin problems. Chapters 3, 4, and 5 deal with the hyperinflation and the British aid and assistance program designed to stabilize the economy. Chapter 6 concerns a similar American program during 1947-48.
There is little new information in this book, a fact acknowledged by Lykogiannis. He believes that his major contribution is to link the deficiencies identified in part 1 with the Greek failure to deal with the twin problems discussed extensively in parts 2 and 3. This book, almost entirely descriptive, formally tests no hypotheses. Lykogiannis has made use of British and American archives and draws heavily on the unpublished Ph.D. dissertation (Harvard 1948) of the late Gardner Patterson, who was closely involved with the stabilization effort during 1944-1948.1
The deficiencies identified by Lykogiannis to explain the failure to deal with the twin problems are: poor education, a confused legal system, excessive reliance on agriculture, encouragement of monopolies, a political system based not so much on parties as on factions led by prominent individuals, and a fiscal system unsuited to the needs of a modern state (e.g., a tax system with little reliance on direct taxes and an inept civil service to administer it).
When the National Liberation Government returned to Athens on October 18, 1944, it immediately had to confront the hyperinflation. A plan of attack was cobbled together and implemented on November 11 consisting of a currency conversion, a limit on the government’s overdraft at the Bank of Greece, and the convertibility of the new drachma into British Military Authority Pounds. Few fiscal reforms were undertaken to increase taxes or reduce expenditures. Heavy reliance was placed on British aid. A number of British advisers arrived. The Greeks accepted the aid and, Lykogiannis tells us, disregarded the advice. The various governments preferred, instead, to cover the substantial budget shortfall by selling state assets (its gold and foreign exchange reserves). This stock response to a flow disequilibrium was obviously not viable and Lykogiannis rightly condemns it as did the British advisers. In fact, this study is a damning indictment, somewhat shrill in tone, of the fiscal ineptitude of the Greek governments during 1944-48.
Nevertheless, Lykogiannis has a hero: the governor of the Bank of Greece, Kyriakos Varvaressos, the man with a stabilization plan.2 However, it might be argued that no plan is better than his which called for wage and price controls to halt inflation, cutting the price of aid goods (an essential revenue source) to reduce measured inflation, and relying on a tax that antagonized powerful interests in Greece, not to speak of a civil service that could not administer the necessary controls. In fact, Lykogiannis seems convinced that controls should have played a major part in solving the twin problems. It is also worth noting that the aid program, while it undoubtedly served an humanitarian purpose, provided little budget support, one of its objectives, for it cost more to distribute the goods than the revenue raised from their sale.
Early in 1946, the British undertook a major effort at stabilization. Among other measures, the Currency Committee was created whose unanimous approval was required before the Bank of Greece could issue additional notes (two of its five members were foreigners, one of whom was Patterson). Despite a new set of British advisers and some success, Lykogiannis argues that the twin problems remained and gold sales continued to be an important source of budget support. Early in 1947, the British decided to call it quits. While the Greeks had pressured the United States for aid since 1944, only limited sums were forthcoming. Prior to opening the purse, the U.S. dispatched Paul Porter on a fact-finding mission. His report, delivered in April 1947, became the basis for U.S. involvement in Greece, although President Truman announced a large aid package before the report was completed.
The U.S. involvement in Greece built on British experience. It involved more aid, a larger number of advisers with a good deal more power to force change, and other institutional controls to end the budgetary disequilibrium (including control over the receipts from the aid program). Lykogiannis concludes that, despite all this, the major difficulties with the Greek government faced by the British remained, while conceding that the advent of civil war complicated this picture greatly.
Thus, Lykogiannis’s overall assessment is that despite massive aid and a good deal of sound advice, the Greek governments did little to solve the twin problems. While some sectors of the economy improved, he concludes “the pace and extent of recovery was far from encouraging.” Yet, there is much evidence to suggest that this assessment is too pessimistic. First, price stability was achieved during the period and this made possible the remonetization of the economy and, with it, a related gain in efficiency. Second, while the author mentions the sectors of the economy that revived, no data are presented. In fact, data on industrial production and national income are available, but not used. The former index increased from 38.3 in January 1946 to 59.7 in March 1947. Real national income rose 5.1%, 62.1% and 33.9% for the years 1945, 1946 and 1947. The increase in output and the remonetization explain why the economy was able to absorb a large increase in the money supply without much of a rise in the price level. However, the budget still received some support from the sale of gold.
Finally, I would like to offer an alternative explanation for the Greek’s apparent failure to solve the twin problems. Far from being inept, the successive governments were really quite clever. They recognized early on the strategic importance of Greece to the geopolitical ambitions of the British and the Americans and decided to exploit it to the maximum. The data on foreign aid record their success. While some disagreements with Lykogiannis remain, this is a fine book, a pleasure to read, and it will undoubtedly remain a standard reference on this subject for years to come.
Notes: 1. Curiously, when I interviewed Patterson (July 13, 1983) for my own work on the Greek hyperinflation, I found him totally disinterested in this early part of his professional life. 2. My interview notes suggest that he was also the hero of Patterson.
Gail Makinen retired from the Congressional Research Service on December 31, 2002. His most recent publication, “An Independent Central Bank and an Independent Monetary Policy: The Role of the Government Budget: The Case of Poland, 1924-1926,” Public Budgeting and Finance (Spring 2001) was the recipient of the 2001 Burkhead Award for the best paper of the year.