Britain and the Greek Economic Crisis, 1944- 1947: from Liberation to the Truman Doctrine Athanasios Lykogiannis Thesis submitted for the Degree of Doctor of Philosophy London School of Economics and Political Science University of London March 1999 UMI Number: U122824 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U122824 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 Tneses . r ai&dk- for my parents 2 Abstract In 1944, the government of newly liberated Greece faced a crisis of staggering proportions, with a devastated economy and a currency undermined by rampant hyperinflation. Anxious to preserve Greece as a friendly 'outpost in South-Eastern Europe', the British provided advisors to help overcome the crisis. Whatever the political motives of the British, their economic advice was largely orthodox and sound, enshrining the only measures likely to provide a long-term solution to the problem of inflation. Nevertheless, successive governments in Athens managed to avoid acting on the advice in the hope that massive amounts of Allied aid would eliminate the need for painful policies, and preferring to adopt palliative measures which allowed wealthy Greeks to protect their assets while the underlying problems remained unaddressed. Exasperated by their lack of success, the British withdrew in early 1947, to be replaced by the Americans. The mixed success of the American advisors over the subsequent year merely confirmed the extensive problems which had earlier thwarted the British efforts. The thesis demonstrates how the inertia of successive Greek governments led to the prolongation of the economic crisis. It also shows how the attitudes of the Greek political establishment during 1944-47 - with endless squabbling, an obsessive anti-Communism, a relentlessly laissez faire approach to the economy, a cavalier lack of concern towards chronic balance of payments and budget deficits, a reliance on foreign capital coupled with a resentment of any conditions foreign aid might entail - were all firmly established within Greek political culture prior to World War II. 3 Acknowledgements In preparing this thesis, I received support from a number of individuals and institutions. I would like to thank the Scholarships Office of the LSE, the Royal Historical Society, the Hellenic Foundation and Crafoordska Stiftelsen for the financial backing that enabled me to undertake part of the necessary research. I would also like to acknowledge the assistance of the staffs of the Bank of England Archive, the Public Record Office, the Imperial War Museum, the British Library of Political and Economic Science, the National Museum of Labour History (Manchester), the Bank of Greece Library (Athens), and the National Archives and Records Administration (Washington DC). They made available to me a mass of unpublished documents and published materials, and their helpfulness made working there a pleasure. I am particularly indebted to Dr Rena Zafiriou for hours of stimulating discussion and helpful suggestions, and whose generosity made possible part of my stay in Washington DC. I am deeply grateful to her, as I am to Mr Kostas Papachrysanthou, and also to Mr David Kessler for their advice. A special word of thanks is due to professor Alan Milward, who was kind enough to read parts of the text and whose critical insight showed me new ways of looking at the subject. My thanks go as well to professor Forrest Capie, professor Nicos Mouzelis, Dr Max-Stephan Schulze, Dr Michalis Psalidopoulos and Dr George Petrochilos who, being extraordinarily generous with their time, read part of the manuscript. Above all, I would like to express my gratitude to my supervisor, Dr Robert Boyce, on whose wider experience and incisive criticism I drew constantly. Lastly I must thank my parents without whose encouragement, understanding, patience and financial support this work would never have seen the light of day. 4 Abbreviations ACO Autonomous Currant Organisation AGIS Anglo-Greek Information Service AFHQ Allied Forces Headquarters AMAG American Mission for Aid to Greece ML Military Liaison BEM British Economic Mission DRF Drachma Reconstruction Fund EAC Economic Advisory Committee EAM National liberation Front EDES National Democratic Hellenic League ELAS National People's Liberation Army ERP European Recovery Programme ESC Economic and Supply Committee Exlm Export-Import Bank FAO Food and Agriculture Organization FEA Foreign Economic Administration FTA Foreign T rade Administration FRBNY Federal Reserve Bank of New York GRCC Greek Reconstruction Claims Committee IBRD International Bank of Reconstruction and Development IFC International Financial Commission IMF International Monetary Fund JCC Joint Coordinating Committee JPC Joint Policy Committee KKE Communist Party of Greece MESC Middle East Supply Centre NBG National Bank of Greece PEEA Political Committee of National Liberation UNRRA United Nations Relief and Rehabilitation Administration 5 List of Tables 1.1 Note Circulation, 1939-48 13 1.2 Summary of Stabilisation Measures 16 1.3 Wholesale Prices and Money Supply in the Middle East, 1941-44 22 2.1 Value of Exports as Percentage of Imports, 1861-1938 38 2.2 Expenditure as Percentage of Total Tax Revenues, 1833-1936 40 2.3 Direct Tax as Percentage of Total Tax Revenues, 1833-1936 41 2.4 The Sovereign Rate, Sep 1939-10 Nov 1944 49 2.5 Major Recipients of UNRRA Aid 60 2.6 Major Components of UNRRA Aid to Greece 60 3.1 Payments and Receipts, 14 Oct-11 Nov 1944 89 3.2 Estimated Revenue and Expenditure, 1944-45 92 3.3 Note Circulation, 10 Nov-1 Dec 1944 95 3.4 Estimated Revenue and Expenditure, 1945-46 102 4.1 Estimated Revenue and Expenditure, 1945-46 125 4.2 Payments and Receipts, 11 Nov 1944-Jan 1946 127 5.1 Estimated Revenue and Expenditure, 1945-46 145 5.2 Estimated Revenue and Expenditure, 1945-46 149 5.3 Greek Budget, 1945-46 163 5.4 Comparison between Budgeted and Actual Receipts, 1946-47 166 5.5 Estimated Expenditures, 194647 167 5.6 Comparison between Budgeted and Actual Expenditures, 194647 168 5.7 Wage, Salaries and the Cost of Living, Mar 1945Mar 1947 170 5.8 Greek Public Finances, 194647 174 5.9 The Drachma Note Issue, 11 Nov 1944-31 Mar 1947 176 5.10 Note Circulation, 31 Jan 1946-31 Mar 1947 177 5.11 Retail Price Index, 11 Nov 1944-Mar 1947 191 6.1 Comparative Economic Indicators, 1947-48 237 6.2 Greek Budgetary Developments, 194649 238 6 Table of Contents Abstract 3 Acknowledgements 4 Abbreviations 5 List of Tables 6 Table of Contents 7 Introduction 9 The Structure of the Thesis 10 A Note on Sources 11 1 Hyperinflation and Stabilisation 13 1.1 Inflation, Hyperinflation and Stabilisation 14 1.2 The British Experience at Home and Abroad 18 2 Political and Economic Background 24 2.1 Economic and Political Trends up to World War II 24 The Nature of Greek Politics 24 The Hydrochephalous State 27 Greek Economic Development, 1830-1940 29 The Laissez Faire State 34 The Insolvent State 37 The Price of Insolvency 41 2.2 The Legacy of the War 46 Occupation and Inflation 46 Political Developments, 1941-1947 53 The International Relief Effort 57 2.3 Aspects of British Involvement in Greece, 1940-1947 62 A Vital Imperial Problem 63 The 'Choice of Evils' 66 The 'Clear Conflict': Security vs. Finance 71 The 'Second Egypt' 75 The Decision to Withdraw Aid 79 3 'Delay and Indecision' 82 3.1 Pre-liberation Planning 82 3.2 The Stabilisation Plan of November 1944 87 3.3 The 'Easy Way Out' 97 3.4 Preaching the 'Gospel of Control' 104 3.5 Conclusions 107 4 'Clarity and Energy' 112 4.1 The Return of Varvaressos 112 4.2 The 'Varvaressos Experiment' 118 4.3 Conclusions 129 5 The London Agreement 141 5.1 The British Response to the New Policy Vacuum 141 5.2 The Broader Approach 153 The Grove Plan 154 The Treasury Plan 156 5.3 The London Agreement and Its Instruments 158 5.4 Inflationary Factors 162 Budgetary Developments 162 Wages 169 Loans to Agriculture 172 7 5.5 Anti-inflationary Policies 175 Gold Sales 175 Commercial Imports 184 5.6 Economic Trends up to 1946 195 5.7 Conclusions 199 6 The American Aftermath 6.1 The International Dimension 209 Sharing the 'Headache' 209 Contrasting Fears 213 6.2 The United States and Greece 216 The Pursuit for US Aid 217 American Misgivings 220 The Porter Mission 223 6.3 The US Aid Programme, 1947-1948 227 The American Mission for Aid to Greece 228 The Fresh Crisis 231 Countermeasures 235 6.4 The First Year of US Aid 238 6.5 Conclusions 247 Conclusions 252 Bibliography 257 8 INTRODUCTION In October 1944, the National Unity Government of newly liberated Greece faced an inflationary crisis of a magnitude sufficient to tax the competence of any government. Although it could count on a large degree of assistance and advice from its Allies, much depended on its own actions and its determination to restore economic normality as a prerequisite to recovery. Nevertheless, success was meagre, and by the time the British pulled out in the spring of 1947, economic stability remained elusive despite all the aid and advice. In the Greek case political factors played a crucial role in shaping the attempts to stabilise the drachma and create a basis for long-term recovery, offering an excellent example that although hyperinflation and stabilisation are essentially economic issues, political realities need to be appreciated in order to understand the particular course that both processes can take.