Michalis Psalidopoulos HISTORY OF THE BANK OF GREECE 1928-2008 From government’s banker to guardian of financial stability Research collaborators: Spyros Α. Vretos, Konstantinos Ι. Loizos, Adamantios D. Syrmaloglou This book contains the translation of the Greek book on the history of the Bank of Greece, which was published in 2014. Overall coordination of the publication: Centre for Culture, Research and Documentation Digital layout, printing and bookbinding: Bank of Greece Printing Works Department, Commercial and Value Document Printing Section Translation: Publications and Translation Section of the Bank of Greece Printed in October 2019 BANK OF GREECE Centre for Culture, Research and Documentation 21, El. Venizelos Ave., 102 50 Athens Tel. 210 320 3562 ISBN: 978-960-7032-92-8 ISBN e-book: 978-960-7032-93-5 © 2019 - BANK OF GREECE To the staff of the Bank of Greece GOVERNOR’S FOREWORD This year marks the 86th anniversary of the Bank of Greece. The similarities and differences between the distant 1928, when the Bank began operations, and today are not only interesting but also highly instructive. The same is true of the various policies by which the Bank responded to routine problems or, at times, major cri- ses and imminent disasters during the 80 years (up to 2008) covered by this history. One of the conclusions of this book could be – it is up to readers to decide – that these policies may have differed, but they were all governed by one constant: a com- mitment to serve the public interest by ensuring and safeguarding monetary and fi- nancial stability as essential conditions for fostering economic development. The Bank of Greece has repeatedly engaged in the study of its own past and the economic history of the country. The latest comprehensive retrospect of the Bank’s history, a collective work by the Economic Research Department entitled The First Fifty Years of the Bank of Greece, dates back to its 50th anniversary in 1978. Since then, a number of individual contributions followed: in 2003, the 75th anniversary provided an occasion to look back at the Bank’s history (Bank of Greece, 75th Anni- versary, Commemorative Ceremony – 3 November 2003); in 2005, in an homage to the late governor Xenophon Zolotas, some of his former associates shared important testimonies and perspectives (Xenophon Zolotas, In memoriam – 25 February 2005); in 2009, the Bank published a volume titled The 1929 Crisis, Greek economy and the annual Reports of the Bank of Greece for the years 1928-1940 (edited by the Economic Research Department); a study by Michalis Psalidopoulos (who is also the author of the present book) titled Monetary Management and Economic Crisis – The policy of the Bank of Greece 1929-1941 followed in 2011; the biography Emmanuel Ι. Tsouderos 1882-1956: central banker and politician, by Margarita Dritsas, was published in 2012; and the Bank has already commissioned a biography of Kyriakos Varvaressos. Moreover, together with the present book, the Bank is also launching The Chronicle of the Great Crisis: the Bank of Greece 2008- 2013, authored by its staff. viii | THE HISTORY OF THE BANK OF GREECE 1928 TO 2008 The history of the Bank of Greece we are now introducing to the public is not in- tended as the last word on the subject. Its aim is quite different – and this is exactly where its value lies: using the hitherto unexploited archival material available to the Bank of Greece (General Council decisions and the Currency Committee archive, archives of former Governors), Annual Reports and interviews with former Gover- nors or other of its executives, it seeks to provide an as far as possible comprehen- sive account of the events and put them in the context of the changing international environment and the perceptions on economic policy and central banking. This hi- story falls into the category of the history of the Greek economy and could serve as a solid basis for future monographs that will delve into more specific issues. Yet, this history is also interesting, even captivating, in its own right. Wouldn’t it be fascinating to learn about a central bank that started operations in 1928 – follo- wing insistent exhortations by the Financial Committee of the League of Nations (a body strongly reminiscent of the International Monetary Fund and the Economic and Financial Committee of the European Union) – and just one year later faced the challenge of a global economic crisis and lived to tell the tale? Soon afterwards and while its necessity as a separate institution was still deba- ted in Greece, the fledgling central bank was admitted as an equal member to the newly-founded Bank for International Settlements (BIS) and, in 1931, participated in the financial support offered to the distressed central banks of Austria and Hun- gary! In 1932, under the governorship of Emmanuel Tsouderos, the Bank resorted to imaginative (unorthodox but effective) methods for drawing foreign exchange from the free market, relying on experienced brokers. Equally intriguing is the story of the Bank’s international activities in the context of the pre-war clearing agree- ments with various countries, inevitably including Nazi Germany, Greece’s major trading partner at the time, only a few years before our country entered the war. Then came WWII, with the rescue of the country’s gold reserves via a route through Crete and South Africa to London, the operation of the Bank in exile with a staff of six in London, and the heart-breaking efforts of its staff back in occupied Greece to salvage whatever could be salvaged. From 1944 onwards, the Bank played a decisive role in the effort to reconstruct the ruined economy and monetary system (on 23 October 1944, new banknotes were issued in denominations of 10 billion and 100 billion inflationary drachmas!). The establishment of the Currency Committee in 1946 marked a close link between the government and the Bank, with the visible presence, during these first post-war years, of foreign advisers and supervisors, partly as a result of the Marshall Plan. GOVERNOR’S FOREWORD | ix The post-war period up to 1981, marked by instances of strong economic per- formance but also by serious structural problems emerging in the economy, is exa- mined on the basis of – among other sources – untapped material from the archive of Xenophon Zolotas, Governor during 1955-1967 and 1974-1981. In addition, this book sheds light on certain aspects of the economic policy pursued by the dictato- rial regime during 1967-1974. In 1982, the abolition of the Currency Committee represented a first step towards disentangling the respective roles of the Bank and the government, although the Bank’s independence would only formally be established in 1997- 1998, ahead of EMU accession. Meanwhile, between 1975 and 2008 the monetary policy regime underwent significant changes, which could become the subject of a separate monograph. Milestone years during this period were 1998, when the drachma entered the Exchange Rate Mechanism (ERM), and 2001, when Greece entered the euro area and the Bank of Greece became a member of the Eurosystem, thereby participating in the design and implementation of the single monetary policy of the euro area. Through the evolution of the Bank’s relationship with the government/state, this history highlights the importance of its independence. Although this independence was fully established only in the last decade of the 80-year period under review, effectively, the Bank enjoyed organisational autonomy right from the start. Its 1928- 2008 course clearly shows the independent critical stance typically held by the Bank, partly attributable to the strong personalities and the prestige of its successive governors, while the continuity of its analyses confirms the chronic nature of certain fundamental weaknesses of the Greek economy. Dealing with several of these weaknesses remains on the agenda in 2014. George Provopoulos Governor of the Bank of Greece TABLE OF CONTENTS PREFACE . 1 PART ONE METHODOLOGICAL, THEORETICAL AND HISTORICAL CONSIDERATIONS 5 1. Writing the history of a central bank: methodological remarks . 5 2. The international historical context. Major political and economic events, 1928- 2008 . 10 2.1 Post-World War I imbalances . 10 2.2 Dissolution of monetary unions . 11 2.3 The temporary reinstatement of the gold standard . 12 2.4 The impact of the 1929 crisis on economic policy . 12 2.5 Wartime economy and post-war planning . 13 2.6 The Bretton Woods conference. The post-war architecture of world economy, 1944-1971 . 13 2.7 The path towards European integration . 14 2.8 From the Smithsonian Agreement to floating exchange rates . 15 2.9 The oil shocks . 16 2.10 The quest for international understanding . 16 2.11 A paradigm shift in economic policy . 17 2.12 The growing importance of the financial sector . 18 2.13 From the Plaza Accord to the crisis of 1987 . 18 2.14 The emergence of the new globalisation. The new global architecture . 19 2.15 The rise of the US economy in the 1990s . 21 2.16 Monetary policy in the era of globalisation . 22 2.17 Shocks and crises . 23 2.18 The crisis of 2008 and the prospects for the future . 25 3. The Greek context. The major political and economic events, 1928-2008 . 26 3.1 The stabilisation of the drachma, 1928 . 26 3.2 The establishment and the first steps of the Bank of Greece (1928-1932) . 27 3.3 The implementation of productive projects . 27 3.4 Managing the evolving crisis . 28 3.5 Managing the default . 28 3.6 Protecting domestic production - the tariff list of 1935 . 29 xii | THE HISTORY OF THE BANK OF GREECE 1928 TO 2008 3.7 The establishment of ΙΚΑ .