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In 1827, when the modern Greek State was created, money transactions were carried
out mainly in Turkish coins, as well as in foreign currencies such as the Spanish Distilo. There was no Greek currency until 1828.
A national monetary system, based on silver, was established for the first time in 1828. This silver standard prevailed until 1832. In 1831, the currency's convertibility into silver was suspended, and paper money was created to finance the budget deficits.
In May 1832, Otto's monarchy succeeded democracy. Nine months later, in February 1833, bimetallism was introduced as the new monetary standard, and Otto's Drachma was launched as the new legal tender. This was a silver currency. It weighed 4.029 grams of pure silver and was put into circulation in denominations of 0.5, 1 and 5 drachmas. In order to facilitate transactions, given the limited amount of drachmas in circulation,foreign currencies were allowed by law to circulate freely in the domestic money market.
However, the majority of these were tarnished, with a face value much higher than their
market value. As a result, Greek silver and gold coins quickly out-flowed since holders of foreign debased coins exchanged them for drachmas, which they then melted to obtain the precious metal. Thus, the drachma soon became an "ideal currency" that was used as "an accounting unit for foreign currencies and things of value".
Growth in Greece was slow during those times due to lack of private investment capital. The first and second Independence loans contracted in Great Britain were greeted as a successful instigation of economic alliances with Western Europe, hence, an international recognition of the Struggle for Independence and of the fledgling Greek State.
However, these loans were not used for the purpose for which they had been intended, i.e. the furtherance and expansion of the Struggle for Independence. The first loan (472,000 pounds sterling) financed the civil wars of the years 1824-25, whereas the second loan (1.1 million pounds sterling) was squandered almost in its entirety abroad, either in England and America for the purchase of canons and the building of battleships - which never arrived in Greece.
Greece's inability to repay the Independence loans destroyed the country's reputation
as a borrower and deprived her of the European capital markets for a long period of time. The lack of money resources for the organization of the fledgling State's domestic administration, the restoration of public safety, and the development of agriculture and commerce, created an urgent need for a new foreign loan.
However, this loan was also wasted in unproductive expenditures, such as the expenses of the Regency and the maintenance of a costly and unnecessary Bavarian army.

Overspending and over-borrowing precipitated a national bankruptcy in 1893. An English financial specialist, Edward Law, helped to save the drachma from huge depreciation and his labours kept the currency intact for 50 years. It was not until the late 1940s, after almost a decade of war and civil war, that the drachma again inflated with a vengeance. Inflation during World War II was dramatic in the extreme. In January 1941, 1 british pound was worth 1,200 drachma. By October 1944 that had spiralled to 1,219 billion drachmas. As in other countries, it required basketfuls of flimsy notes with a lot of zeros on them to buy basic provisions. A currency reform introduced a new drachma which was worth 50 billion of the old variety but nevertheless inflation continued.

Greece joined the Bretton Woods system in 1953. In 1954 the drachma was revalued for a second time at a rate of 1000 to 1 and the Finance Minister, Spyros Markezinis, dealt with the problem Alexander-fashion by chopping off three zeros. The new currency was pegged at 30 drachmae = 1 US dollar

In 1973, the Bretton Woods System was abolished and over the next 25 years the official exchange rate gradually declined due to growing urbanization and EU-fueled prosperity. Renewed inflation resulted in the exchange rate reaching 400 GRD = 1 USD and the situation was brought under control only in 1997, thanks to determined supply-side policies by the Government.

This brings us to today when most of you are probably familiar with what happened during the 2000's and the establishment of the Maastricht Treaty the Euro.

The current demise of the Greek economy is surprisingly repetitive in a historical context, or as Twain once said-"History doesn't repeat itself, but it sure does rhyme".

Sources / Further reading:
Bank of Greece
Bloomberg Echoes

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Comments (4)

  • AQM's picture

    Nice write up man, it's crazy to see how many ups and downs Greece has had in its time. The quote by Mark Twain was a nice touch in the end. It's just crazy how long Greece's current economic trail crises has been going. It's so bad it's screwing up western europe which is screwing us up.

  • Macro Arbitrage's picture
  • lasampdoria's picture

    Great stuff prashantkhorana. Love the finance/history mix. Thanks for the post.

    "Those who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."- Benjamin Franklin

  • G.M.Trevelyan's picture

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