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The Origins of Central Banking in Greece OLGA Christodoulaki

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The Origins of Central Banking in Greece OLGA Christodoulaki London School of Economics and Political Science The Origins of Central Banking in Greece by OLGA Christodoulaki A thesis submitted to the Department of Economic History of the London School of Economics for the degree of Doctor of Philosophy London September 2015 DECLARATION I certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work. The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. Copyright © OLGA Christodoulaki 2 ABSTRACT The establishment of a fully fledged central bank in Greece between May 1927 and May 1928 was a prerequisite for the country’s stabilisation programme prepared by the Financial Committee of the League of Nations. Prior to 1928, the National Bank of Greece had acted as a central bank whilst at the same time being by far the biggest and most powerful commercial bank in the country. Under pressure from the League, its governors faced the challenge of transforming it into a fully fledged central bank by shedding all business that was in the province of deposit and commercial banking. They chose instead for the Bank to retain its commercial activities and instead a new fully fledged central bank was established. This thesis explores both the central banking and commercial aspects of the National Bank from the enactment of the Law of Control in 1898 until de jure stabilisation in 1928. It addresses the following questions: why was the National Bank not in a position to transform itself into a fully fledged central bank on its own initiative following a path similar to that described by the natural evolution hypothesis? Why were the commercial activities of the National Bank so important that in the end it chose to retain that aspect of its business when prior to 1927 it had so fiercely guarded its central banking privileges? It is argued that it was the way in which the governors of the National Bank combined central banking responsibilities with commercial banking that safeguarded and preserved the financial strength and consequently the reputation of the Bank throughout its entire history as a bank of issue. The financial position of the dual-purpose Bank was also protected by the conservative and risk-averse way in which it pursued its commercial activities. The National Bank’s financial strength was based on its market power and its ability to select high quality assets and liabilities which resulted in its enduring profitability and solvency. The quality of its assets and liabilities was more important for its governors than maximisation of profits per se. The way that central banking reforms were implemented is also studied. The objectives and functions of the new central bank are evaluated as well as its financial position when it first opened its doors for business. It is maintained that the statutes of the Bank of Greece were at the heart of the central banking principles promoted by the Bank of England and were focused on the macro function of a central bank and on its role as the bank of the government. This thesis also sheds light on the complex relationship that arose between Greek governments and foreign supervisors between the enactment of the Law of Control in 1898 and stabilisation in 1928. Furthermore, it asks questions about the conditionality attached to bailout loans in the late nineteenth century and in the 1920s. The impact that international financial intervention had on monetary reforms is clearly demonstrated. It is argued that monetary developments in Greece between 1898 and 1928 reflect the political economy of the time as well as the historical circumstances. Monetary reforms were shaped by the objectives of the National Bank and the constraints under which it operated rather than foreign control. These findings provide valuable insights into why Greek governments have unsuccessfully struggled to implement widespread structural reforms demanded by their lenders since 2010 and as a consequence the country has experienced a deep and protracted economic recession. 3 Στην οικογένεια μου For my family 4 Η Ιθάκη σ’ έδωσε τ’ ωραίο ταξείδι. Χωρίς αυτήν δεν θάβγαινες στον δρόμο. Κι αν πτωχική την βρεις, η Ιθάκη δεν σε γέλασε. Έτσι σοφός που έγινες, με τόση πείρα, ήδη θα το κατάλαβες η Ιθάκες τι σημαίνουν. Κ. Π. Καβάφης Ithaca gave you the marvellous journey. Without her you would have not set out. And if you find her poor, Ithaca won’t have fooled you. Wise as you will have become, so full of experience, you’ll have understood by then what these Ithacas mean. C. P. Cavafy 5 Table of Contents Abstract ...................................................................................................................................... 3 Table of Contents ....................................................................................................................... 6 Extended Table of Contents ....................................................................................................... 7 List of Tables ............................................................................................................................ 10 List of Figures .......................................................................................................................... 13 List of Illustrations ................................................................................................................... 13 List of Abbreviations................................................................................................................. 14 Acknowledgements .................................................................................................................. 15 INTRODUCTION .................................................................................................................................17 PART I: PRELIMINARIES ........................................................................................................................ 20 Chapter 1: Central banking in historical perspective ..................................................................... 21 Chapter 2: Central banking in Greece: historiography, methodology, questions and sources ..... 38 PART II: THE PRECURSOR OF THE CENTRAL BANK IN GREECE: THE NATIONAL BANK OF GREECE .................................................................................................................................... 58 Chapter 3: The National Bank as commercial bank ....................................................................... 59 Chapter 4: The National Bank as central bank ............................................................................. 126 PART III: FROM MONETARY STABILITY VIA MONETARY UPHEAVAL TO DE JURE STABILISATION................................................................................................................................ 195 Chapter 5: Greek governments: options for finance ............................................................... 196 Chapter 6: The stabilisation of the drachma ................................................................................. 238 PART IV: THE ESTABLISHMENT OF THE BANK OF GREECE ............................................... 270 Chapter 7: A domestic variation on League of Nations’ norms .................................................. 271 CONCLUSION .......................................................................................................................................... 289 APPENDICES ............................................................................................................................................ 298 BIBLIOGRAPHY ...................................................................................................................................... 341 6 Extended Table of Contents Abstract ...................................................................................................................................... 3 Table of Contents ....................................................................................................................... 6 Extended Table of Contents ....................................................................................................... 7 List of Tables ............................................................................................................................ 10 List of Figures .......................................................................................................................... 13 List of Illustrations ................................................................................................................... 13 List of Abbreviations................................................................................................................. 14 Acknowledgements .................................................................................................................. 15 INTRODUCTION .................................................................................................................................17 PART I: PRELIMINARIES Chapter 1: Central banking in historical perspective .............................................................. 21 1.1. Some thoughts on the evolution of central banking .........................................................
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