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Hyperinflation in Greece

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Hyperinflation in Greece occurred between 1941 and 1946 during World War II and the Axis occupation. In the most comprehensive study, Michael R. Palairet of Central European University described it as an

extraordinary long fifty months hyperinflation[1]

Palairet attributes its length to the fact that Greece’s governments in this era made no effort to tax and were consistently able to print as much money as they needed for finance.

Background

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The roots of the Greek hyperinflation date back to October 1940 when the army of Fascist Italy invaded the country.[2] April 1941 when the government of dictator Ioannis Metaxas, in power since 1936, moved alongside the Bank of Greece to London.[3] The country would be occupied by a coalition of Germany, Italy and Bulgaria, who would divide the country into three regions between which no movement of goods or people was permitted.

Once Greece was fully occupied, the Axis plundered all stocks of olive oil, olives, figs, and raisins, and handed over mines for chromium, bauxite, manganese, molybdenum and nickel. The value of the drachma was initially set as low as possible so that the Axis obtained Greek exports as cheaply as possible, whilst at the same time Italian and German occupation money were also placed into circulation.[4] Ultimately the “occupation currencies” were scrapped and the occupiers levied a monthly payment in drachma from the exiled central bank.

The effects of occupation produced a shift of activity to the black market[5] which further restricted government finance to printing money.

Beginnings

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Given that there was no way to cover the costs of the Axis governments by taxation — which Greeks had a tradition of resistance to[6] — printing money became the only possible means.[7] Monthly inflation would exceed 50% as early as May 1941,[2] and it would remain high though erratic until the end of 1942, by when shops had long been emptied and clothing, shoes and medicine unobtainable.[8]

In late 1942, the German occupiers attempted to curb the high inflation via a program launched by Hermann Neubacher, a longtime Nazi Party member and former mayor of Vienna.[9] Neuberger would take the following steps:

  • suspend all payments to Greek contractors working on Wehrmacht and Greek government contracts
  • instruct all banks to restrict credit allocations
  • ban all foodstuff exports
  • increase non-fiscal taxation
  • create DEGRIGES, a German–Greek trade corporation that monpolised trade between the two nations[10]

Since the early period of Axis occupation, the drachma had changed from undervalued to overvalued due to increased seignorage and government controls designed to make imports for the Axis occupiers cheap.[10] Neuberger’s moves would initially be quite successful: between November 1942 and February 1943 prices actually fell by five-eighths.[2] However, it was always apparent that continuing printing of money would threaten to reverse this fall in prices,[10] which was also linked to the expectation of the country being liberated from the Nazis.

Establishment of hyperinflation

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From the spring of 1943, prices began increasing again, as efforts were made to use Greek workers to provide for the German Reich rather than for the Greek population.[11] As workers were diverted from producing goods, inflation returned and increased above 50% per month in October 1943 after the withdrawal of Italy from the country,[12] although the rate of increase in the money supply remained stable for several months either side.[13] Unlike the better-known hyperinflations in Germany and Hungary, studies have shown that in this period of the Greek hyperinflation feedback — contrary to conventional models of hyperinflation — was from inflation to money creation, so that increasing velocity of money was predating increases in seignorage.[14]

Nevertheless, by the end of 1943, the quantity of drachma notes had increased 72-fold, while prices in terms of gold sovereigns 155-fold.[12] As Greeks turned gradually towards gold instead of drachma notes for exchanges,[15] and seignorage remained very high, the German occupation forced bought more and more gold for drachmas and inflation became worse and worse. It reached 534 percent per month in August 1944,[16] and by October it was as high as 7,459 percent per month, or prices doubling every 4.23 days. This was at the time the second-highest inflation rate for a month on record[a] and even today it is the fourth-worst on record.[b]

Hyperinflation was disastrous for Greece’s workers and peasants: real wages fell by over fifty percent between the invasion by Mussolini’s Italy and the peak of inflation.[12] The depletion of gold as stocks of goods fell with the departure of the Nazis further exacerbated shortages and forced businesses back to barter.[18] Overall, the Nazis and other occupiers are believed to have collected 12,600,000,000 1940 drachmas.[19]

Waley’s stabilization plan

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At the height of the hyperinflation, Greece was placed under control of the British and Sir David Waley was asked to develop a plan to stabilise the drachma. In November, Waley would develop a plan based upon the redenomination of the hyper inflated drachma at a ratio of 50,000,000,000 old drachmai to 1 new drachma,[20] with the new drachma convertible to pounds sterling at a rate of 600 to one.[21] This plan would be carried out on 11 November.

Notes

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  1. ^ After that of the Weimar Republic in 1923.[17]
  2. ^ After that of Hungary in 1945–46, Zimbabwe in 2007–08, Yugoslavia between 1992 and 1994, and the Weimar Republic in 1923.[17]

References

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  1. ^ Palairet, Michael R. (2000). The Four Ends of the Greek Hyperinflation of 1941-1946. University of Copenhagen: Museum Tusculanum Press. pp. 9, 15–17. ISBN 9788772895826.
  2. ^ a b c Makinen, Gail E. (September 1986). "The Greek Hyperinflation and Stabilization of 1943-1946". The Journal of Economic History. 46 (3): 795–805.
  3. ^ Szybisz, Leszek; Szybisz, Martin A. (25 February 2008). "Finite-time singularity in the evolution of hyperinflation episodes".
  4. ^ Brewer, David (2016). Greece, the Decade of War — Occupation, Resistance and Civil War. London: Bloomsbury Publishing. p. 53-54. ISBN 9780857727329.
  5. ^ Nikas, Christos (February 2008). Hidden Economy and Hyper-Inflation in Occupied Greece 1941-1944. Archives of Economic History. pp. 29–34.,
  6. ^ Brewer (2016). Greece, the Decade of War. p. 58.
  7. ^ Capie, F.H. (2007). "Inflation in the twentieth century". In Oliver, Michael A.; Aldcroft, Derek H. (eds.). Economic disasters of the twentieth century. Cheltenham: Edward Elga. p. 168. ISBN 9781840645897.
  8. ^ Bolles, Blair (June 26, 1942). "European Inflation". The Springfield Daily Republican. Springfield, Massachusetts.
  9. ^ Palairet (2000). The Four Ends of the Greek Hyperinflation of 1941-1946. p. 33.
  10. ^ a b c Palairet (2000). The Four Ends of the Greek Hyperinflation of 1941-1946. p. 34.
  11. ^ Skalidakis, Yannis (2015). "From Resistance to Counterstate: The Making of Revolutionary Power in the Liberated Zones of Occupied Greece, 1943-1944". Journal of Modern Greek Studies. 33: 155–184.
  12. ^ a b c He Liping (2017). Hyperinflation: A World History. Taylor and Francis. pp. 97–98. ISBN 9781351361880.
  13. ^ Alexiou, Constantinos; Tsaliki, Persefoni; Tsoulfidis, Lefteris (February 2008). The Greek Hyperinflation Revisited. Polytechnic School, Aristotle University Department of Economics.
  14. ^ Sargent, Thomas J.; Wallace, Neil (September 1972). Rational Expectations and the Dynamics of Hyperinflation. Discussion Paper No. 22. Minneapolis, Minnesota: Center for Economic Research, Department of Economics, University of Minnesota.
  15. ^ Palairet (2000). The Four Ends of the Greek Hyperinflation of 1941-1946. pp. 105–112.
  16. ^ Palairet (2000). The Four Ends of the Greek Hyperinflation of 1941-1946. p. 63.
  17. ^ a b Hanke, Steve H.; Krus, Nicholas (August 15, 2012). World Hyperinflations. Baltimore: Institute for Applied Economics, Global Health, and the Study of Business Enterprise, The Johns Hopkins University. pp. 12–14.
  18. ^ Palairet (2000). The Four Ends of the Greek Hyperinflation of 1941-1946. p. 48.
  19. ^ Palairet (2000). The Four Ends of the Greek Hyperinflation of 1941-1946. p. 27.
  20. ^ Palairet (2000). The Four Ends of the Greek Hyperinflation of 1941-1946. p. 209.
  21. ^ Makinen, Gail E. (December 1984). "The Greek Stabilization of 1944-46". The American Economic Review. 74 (5): 1067–1074.
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