finem respice

Great Moments in Professional Monetary Policy

Submitted by ep on Tue, 07/12/2011 - 08:42
watch out for the printing, lads

On December 1st, 1944 Lieutenant General Ronald MacKenzie Scobie (soon to be "Sir Ronald," KBE, CB, MC), Chief of the General Staff for General Headquarters (Middle East), issued a final ultimatum ordering the disarmament within ten days of all remaining Greek guerrilla forces– excepting, of course, the "Sacred Squadron" and the 3rd Mountain Brigade, who had pledged support for the Greek government that was, at least at that particular moment, presently enjoying the fickle favor of the Allies.

Scobie had, mostly effortlessly, commanded Britain's III Corps– which, as it happened, had for some time following its ignominious withdrawal from Dunkirk in 1940 been used primarily for deception purposes– this time on a real, armed mission to politely escort from the country those Germans still possessed of the temerity (not to mention the outrageously poor taste) to find themselves still within the sovereign borders of Greece in 1943.

In what would quickly become a recurring, historical theme, Scobie was faced with the unenviable task of issuing ultimatums to the Greeks. It is important to use this term "Greeks" loosely in this period, lest one suggest a degree of cohesion and purpose not abundantly in evidence in the surviving historical record.

Few pretenders to the moldy mantle of Greek administration had much claim to legitimacy at all. Most were formed from the broken remnants of the Hellenic Army and had spent a greater share of those difficult years since 1941-1942 shooting each other than they had killing Germans (or even Italians). But, then, illegitimacy is something of a Greek tradition. After all, King George II had– for some reason that necessarily escapes the boundaries of modern understanding– fled to that universally recognized, global capital of governments in exile (of course we refer to Cairo, Egypt) one dreary day in 1941– but not, you understand, before making what was surely a richly-deserved and very restful stop on the island of Crete, a diversion that was interrupted, quite rudely if we might say so, by the unannounced arrival of rather a lot of Fallschirmjäger from a number of Ju 52's of the German 7th Flieger Division.

Of course, it is difficult to glamorize a heroic Hellenic evacuation to Crete when by then the sounds of German 88's could be finally and unambiguously recognized even from within the thick walls of Kolonaki's palatial residences– not to mention the fact that this "Other King George" had himself come to power in Greece through a coup d'état in the middle of 1936.

Still, his Majesty was wise enough to bring with him some essential personnel, including Colonel Dimitrios Levidis, the King's former Master of the Household and then current Grand Master of Ceremonies, and Kyriakos Varvaressos, Governor of the Bank of Greece. His Majesty is later quoted as saying "...the most important tool for a King of Greece is a suitcase."1

And even while His Majesty the King of The Hellenes assembled– with a large and steaming helping of British complicity– a cabinet in exile that would, perhaps with more rationale than might otherwise seem apparent, come to be known as the "Cairo Government," the Germans busily went about installing their collaborationist puppet show under General Georgios Tsolakoglou, a local affair they had been cobbling together from whatever stragglers they could lay hands on while advancing through the Greek countryside on their way to Athens. Certainly, the undue (today one might go so far as to say "unexpected") speed with which the German war machine traversed the Greek landscape contributed to the dearth of Vichy-like administrators available to the SS.

Tsolakoglou, for example, had come to be in German employ only by virtue of the unmatched (outside of France at least) and innate speed of his surrender reflex.

On April 20, 1941, not two weeks after the initial German invasion (made to bail out the Italians who were determined to be defeated by the Greeks as quickly as possible), then Lieutenant General Tsolakoglou relieved General Ioannis Pitsikas,2 Commander of the Army of Epirus and signed, completely without authorization it would seem, with General Josef Sepp Dietrich (who had climbed the Nazi ranks primarily by virtue of his affinity for the murderous during the "Night of the Long Knives") the first documents providing for the unconditional surrender of the Greek Army to the Germans.

Historians would later comment that Tsolakoglou's primary motivation was to avoid being defeated by the Italians. Indeed, on hearing the news Mussolini ordered attacks on any Greek forces his armies could find– comically, these were handily repulsed by the "unconditionally surrendered" Greeks. The formal instruments of surrender were executed on April 21rd but, in a last fit of temper, Mussolini forced the surrender ceremony to be repeated with whatever Italian officers could be persuaded to travel far enough South to be present– apparently this took two days to arrange.

Tsolakoglou's collaborationist career was short. He was made Prime Minister a week later, but then replaced in December 1942 by Konstantinos Logothetopoulos, whose qualifications for the job appear to have hinged on his working knowledge of German, the fact that the number of vowels in his name could not be counted on the fingers of both hands, and his former position as professor of gynecology at the University of Athens.3

Logothetopoulos was in turn replaced by Ioannis Rallis in April of 1943. Rallis managed to hang on until liberation in October 1944, whereupon he was arrested and sentenced to life in prison, a term which would last only until his death in 1946.4

But even as these overt political machinations met, copulated, cheated, schemed and divorced one another, a number of resistance groups sprouted up, much as one might expect weeds to, from the fertilizer that was the detritus of the Hellenic Army– just as cohesive, honorable and possessed of the virtue of self-sacrifice as during the Greek salad days of Lieutenant General Tsolakoglou.

Later, many would speculate that the partisan group the National Republican Greek League (EDES) had cut a deal with the Germans, giving them a cease fire and thereby earning the ire of the National People's Liberation Army (ELAS), the military wing of the Communist backed National Liberation Front (EAM) all of whom enjoyed the unending scorn of the Peoples' Front of Judea (PFJ) and its splinter group, The Judean People's Front (JPF)5.

By late 1943 the Italians had surrendered to the Allies and the Germans had been led to believe that the fictitious "Twelfth Army" threatened the area and poured soldiers into Greece. While the Germans occasionally made sport of hunting down and executing Italian soldiers in Greece,6 it was growing increasingly apparent that the German High Command might actually have to politely RSVP to the very tasteful, engraved invitation Lieutenant General Scobie had sent inviting them, should their busy autumn social schedule permit, to leave Greece.

Earlier, in May of 1943, the three main resistance groups had signed a treaty and agreed to operate under the command of then General Henry Maitland Wilson (GCB, GBE, DSO, and the 1st Baron Wilson) who had distinguished himself in prior action on or about April of 1941 by retreating his expeditionary force to Crete in the face of the Axis invasion. The agreement was a landmark accord for the Greek resistance, which meant that after its signing it took five whole weeks before the ELAS and the EDES were taking potshots at each other and the interminable span of three and a half more months before ELAS was conducting what may as well have been an all out civil war against EDES.

The British managed to stop the fighting in February of 1944, so that on Easter Monday ELAS could destroy the 5/42 Regiment of EKKA (the National and Social Liberation resistance group founded in 1942 and who were not actually worth mentioning before now) and capture, shoot, stab and then behead its founder, Colonel Dimitrios Psarros before leaving his body to rot for several days in the spring weather.

It was in this context that, in opening hours of December of 1944 Lieutenant General Ronald MacKenzie Scobie thought that perhaps it might be a good idea to take explosives, artillery, mortars, anti-tank equipment, small arms, sling-shots, as well as projectile weapons of any kind (not to mention sticks with unduly pointy ends) away from the Greeks. But whatever his explicit purpose, it seems difficult to imagine that Scobie could possibly realize that he was about to set in motion events that would lead to one of the most remarkable successes of global political-economy to take place in the closing years of the Second World War, or, indeed, in post-war history.

Incredibly, and despite a number of distinct periods between 1940 and 1945 that could only be characterized by severe or even violent and sudden changes in policy, government, political status, occupation, liberation, military or civilian administration and the presence or absence of outright civil war, Greek monetary and fiscal policy enjoyed a disarmingly consistent state of absolutely peerless incompetence.

In fact, the reform of Greece's financial administration was so hopeless a task that war with the Italians, the invasion of Greece by the German Army, the flight of the King, the occupation of Greece by the Germans, three puppet governments in quick succession, a German program introducing a new and independent currency (military script– this was abandoned in three months), an occupation levy, the establishment of special occupation accounts at the Bank of Greece, gold sales, foreign exchange sales, the rise of Greek resistance groups and partisans, German reprisals, the turning of the tide of World War II, the liberation of Greece by the Allies, Greek Civil war and the (mostly effective) pacification of Greece by the British were unable to restore even a trace of voluntary fiscal discipline to Greece.

So hopeless was the state of Greek finances that, even as they routinely hung with piano wire prominent citizens and officials on the thinnest of provocations, and even given three years to do it, the Nazi's were somehow unable to compel what amounted to a totally subservient collaborator government to put its fiscal house in order.

The Axis administration soon realised it would be a waste of effort to get the Greek government to balance its accounts. It therefore orientated its currency policy towards the maximisation of seigniorage. This was necessary both for the extraction of the occupation levy, and for the functioning of the Greek government. [German Ambassador Hermann] Neubacher's first initiative, the reform of November 1942, exploited (highly successfully) the turn round in public expectations on the future value of the drachma. It yielded an enhanced flow of seigniorage at more or less stable prices for five or six months. In the absence of a fiscal stabilisation, very high inflation resumed in the late summer of 1943. By October, the consequent contract in hand to hand balances threatened to destroy the base for inflation tax. So, in November 1943, policy switched to selling gold. This maintained enough confidence in the drachma for the printing press to yield a continued flow of seigniorage. By the late summer of 1944 the demand for hand to hand money shrank too much for seigniorage to provide adequate non-fiscal revenue. So the Germans considered the "Rentendrachma" plan, which would again furnish the authorities with seigniorage. Neubacher thought it bound to fail, but had no suggestions of his own to offer when refused a further supply of gold.7

The "Rentendrachma plan" was modeled on the experience of the Germans in halting hyperinflation in 1923 through the issue of "Rentenmarks." As there was no gold to speak of left in Germany to back the Deutsche Mark, the Rentenmark was created and backed with land and "industrial goods."

Fortunately for Germany, by the time the matter came to a head the Germans had RSVP'd to Scobie and Greece was Britain's problem. It wasn't just partisans the British would end up having to fight.

Greek officials refer to Axis economic policy, except in wholly negative terms. True, Neubacher and [Neubacher aide Paul] Hahn had conducted their operations secretively, without involving Greek officials, except finance minister Hector Tsironikas, whose discretion they trusted. Still, the market was aware of what they were doing. So too were the British authorities, from the reports that reached them from Greece. Unfortunately, they wrongly discounted this information as being "not too reliable," but [Undersecretary of the British Treasury Sir David] Waley was given a reasonably accurate resume of German financial policy during the occupation from Greek officials at an informal lunch. The immediacy with which the newly landed Greek finance ministry and Bank of Greece official demanded gold from London, not to buy goods directly, but to support the drachma, suggests that the Greeks still hankered after the previous scheme of financial management, under the more favourable conditions crated by the British military presence. Like their discredited predecessors, who were consigned to Greek gaols from which they did not emerge alive, the new managers needed this means of preserving their seigniorage.8

What followed could only be described as a comic progression of populist pandering, the spread to the national economy of a series of parasitic labor unions and cabals, and a confidence on the part of the Allies in their own fiscal administration abilities that was as enduring as it was inflated.

At first Waley sold gold to support the drachma, conditioning the sale on a series of fiscal and monetary reforms the Greeks adopted in principle and promised to implement– at some later date when it was somewhat more convenient. It was around this time Waley quipped:

...the Greek government are in effect paying doles to a large part of the population who spend all day parading in the streets in idleness with political demonstrations as their chief occupation.9

Liberation governments, fearing popular backlash were terrified of taxing the Greeks. Instead they continued to look for sources of wealth to redistribute, and were happy to resort to even the most gamey monetary policies to buy time. After raiding "punitively" the only entities with wealth of any kind (businesses) in 1945 in order to buy popular support with cheap food and wage increases, the Greeks were, again, running out of options. They sacked Varvaressos and his successors returned to the Neubacher method and began to run the presses in earnest again.

And so began a ongoing cycle that may strike the astute finem respice reader as somewhat familiar:

The Liberals, nominally representing the business interests in the various center-left leaning coalitions, knew that their own supporters would have to carry the entire burden of taxation. They were therefore the most enthusiastic in urging the need for a foreign loan with which to carry the expense of government during the transitional period. No such assistance was forthcoming. As Greek governments, despite the horde of under-employed civil servants on the pay-roll, lacked equitable and efficient mechanisms for taxing and regulating business, and as business was capable of defending its own interests, very little tax revenue could be raised.

Therefore post-restoration governments tried to survive on seigniorage, always pleading the indigence of all but the (unpatriotic) businessmen. The collaborationist politicians had differed from the legitimate in their foreign policy stance, but all were drawn from the same social-political stratum. Lacking the independence of landed wealth, they had colonized the state and the institutions.10

Even the thrill of liberation and the end of the fascist menace shrank in the face of domestic political concerns and ambitions.

Since governments needed both to protect the salariat, and to win the assent of organised labour, they were usually concerned to raise real wages, or to alter the distribution of income in labour's favour. Especially in late 1944 and again in the summer of 1945, wage raising policies destabilised efforts otherwise directed to the control of inflation. The government spending bill was made up overwhelmingly of wage payments. As civil service labour was perennially dissatisfied with its conditions of employment (including its pensions) and as it strenuously resisted redundancies, the need to pacify it destabilised budgets and stimulated excess demand.


During the earlier years of Axis control, government efforts had been limited to protecting the well-being of state officials, but after the real income collapse of late 1943 and early 1944, the partisan threat led them to seek broader support by conceding the allocation of wages in kind. Later, in the face of imminent political collapse, they bade for popularity by augmenting the wage in kind, by letting money wages rip, and by packing the official payrolls. This caused an extraordinary rise in real wages, which aggravated already extreme inflation. The liberation governments tried to sustain these high wage levels, directly by setting high official wage tariffs, and indirectly by misusing food aid. Renewed inflation diluted the effects of wage raising, but the policy reached its apotheosis in Varvaressos' reform. This again caused real wages to leap to unsustainable levels, wrecking his effort to re-balance the budget.11

As you may remember: On December 1st, 1944 Lieutenant-General Ronald MacKenzie Scobie (soon to be "Sir Ronald," KBE, CB, MC), Chief of the General Staff for General Headquarters (Middle East), issued a final ultimatum ordering the disarmament within ten days of all remaining Greek guerrilla forces– excepting, of course, the "Sacred Squadron" and the 3rd Mountain Brigade, who had pledged support for the Greek government that was, at least at that particular moment, presently enjoying the fickle favor of the Allies. Scobie also ordered the dissolution of the ELAS.

Six ministers of the EAM (which was at this point being controlled almost entirely by the Greek Communist Party (KKE))12 resigned instantly. On the 3rd of December 1944 between 1,000,000 and 3,000,000 people demonstrated. At some point shooting began in the vicinity of the General Police Headquarters. This touched off chaos. For almost 40 days full scale fighting between EAM, ELAS and the British Army, along side the Greek government raged in the streets of Athens.

The Greek Civil War had begun.

The British dropped in the 4th Indian Infantry Division (borrowed from Italy) to reinforce their positions. Fortunately, the open fighting was limited to Athens and ELAS forces outside of Athens left the British Army unmolested. With the additional reinforcements and political pressure on KKE from the Soviets not to disrupt the larger alliance, on January 15, 1945, Scobie agreed to a ceasefire on terms widely seen as a crushing loss for KKE, ELAS and EAM.

Thousands were dead. Athens, which had offered effectively no German resistance to the British, was pock-marked with the signs of battle. Greece would go on to exhibit symptoms of civil war for years to come. But, for that one magic month of December 1944, Lieutenant General Ronald MacKenzie Scobie managed to accomplish what years of Nazi occupation, invasion, resistance or British treasury officials could not. By shutting down Athens and deploying Paratroopers from the 5th (Scots) Parachute Battalion, 2nd Parachute Brigade, he blocked officials from the Bank of Greece from obtaining the critical, custom paper stock on which to print banknotes and, therefore, not a single drachma was printed in December of 1944.

Lieutenant General Ronald MacKenzie Scobie had broken the 56 month streak of Greek hyperinflation.

  1. 1. Beevor, Anthony, "Crete: The Battle and the Resistance", Govostis Publishers (2004).
  2. 2. Appropriately perhaps, Pitsikas would go on to become Mayor of Athens in 1946 before being appointed as the Greek Minister of Defense in 1952. One strains to imagine credentials for the top slot in the Greek Ministry of Defense more commanding than a history of stepping aside after less than two weeks in command to permit your Lieutenant General and subordinate to surrender fourteen full divisions to the invader-aggressors.
  3. 3. We are, of course, beneath employing witticisms comparing Logothetopoulos' sage and enlightened administration of Greek affairs during the five months of his tenure as Prime Minister with cheap slang or juvenile puns belittling his academic accomplishments as a professor. Nor do we think it of import that Logothetopoulos fled Greece for Germany with the Wehrmacht on their occasion of their retreat. Surely many in the German officer corps would later benefit from his expertise in the treatment of various venereal diseases.
  4. 4. By some twist of fate, his son George managed to climb to the by now storied position of Prime Minister of Greece in 1980.
  5. 5. Not to be confused with the Judean Popular People's Front
  6. 6. Likely with the connivence of some Greek resistance groups, because if Greek resistance groups hated one thing more than Germans it would be each other, but coming in second and seething with only slightly less animus would definitely be their disposition towards the Italians.
  7. 7. Palairet, Michael R., "The Four Ends of the Greek Hyperinflation of 1941-1946", Museum Tusculanum (April 2000).
  8. 8. Ibid.
  9. 9. Ibid.
  10. 10. Ibid.
  11. 11. Ibid.
  12. 12. Supported, interestingly enough, by Josip Broz Tito of Yugoslavia.
[Art Credit: Turner W R H (Sergeant) "Untilted," Photograph (December 6, 1944), Imperial War Museum. Members of the 5th Parachute Battalion ("The Scots" Paratroops), 2nd Parachute Brigade in Athens during the Greek Civil War. KKE (Greek Communist Party) graffiti is visible above.]

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