The Cycle of Over-indebtedness

From the Loans of Independence to

the Memoranda of Borrowed Prosperity
George J. Georganas#
Thucydides, writing about his History, sets himself this task : ... he that desires to look
into the truth of things done, and which (according to the condition of humanity) may be
done again, or at least their like, shall find enough herein to make him think it
profitable .... That is, that Thucidides will be satisfied if his work were to be judged
useful by the people who wish to ascertain the events of the past with accuracy and, also,
those events that will occur in the future, since these, too, will be the result of the deeds of
men. Also, Paparrigopoulos, in the preamble to his History of the Greek Nation (first
published between 1860 and 1874), sets forth the apothegm of the French statesman and
historian Guizot that a people studying their own history judge better, both about their
present conditions and about their future fortune. Karl Marx starts The 18th Brumaire
of Louis Bonaparte with the famous aphorism : Hegel remarks somewhere that all great
world-historic facts and personages appear, so to speak, twice. He forgot to add: the first
time as tragedy, the second time as farce. Hegel, of course, wrote neither the former nor
the latter. He did, however, write that what experience and history teach is this, - that
peoples and governments never have learned anything from history, or acted on principles
deduced from it. Heraclitus, in a similar vein, argued that one cannot swim twice in the
same river - . Christian philosophy, too, in its
worldly reading, unknown to the many, yet having brought great influence to bear on
philosophy overall, together with modern science, do most emphatically state : the world
has started at a certain point and is on the way to another. 1 I t d o e s n o t r e p e a t
i t s e l f . Time itself is temporal, a creation of God. Ioannis Metaxas, as much a man of
action as of reflection, wrote in his Diary (in the Notebook of Thoughts) that going back
into the past, examining the past, has no other value than the one assigned to it by the
needs of the present. Cicero attributes to Cato the Censor, who predated him, the view
that there is no opinion, however absurd, but has been proposed by some philosopher.
After such a deluge of incompatible views, one would lean to agreeing with Cato. And
yet, there are circumstances in History when the knowledge, the memory of what
happened in the past, for example when we had our fingers burnt in a fire, does protect us
from suffering the same fate in the future. Besides, let us consider what each one of us
would have been but for our memory, both of our skills and of our knowledge and our
experiences. Without our memory, we would be nothing.
#
1

The present text was first read, in preliminary form, in the lecture hall of the Piraeus Lighthouse on
Tuesday, 20th May 2014.
Basil N. Tatakis makes the point very eloquently in his Studies in Christian Philosophy.

Our point of departure for this lecture is the book by Andras M. Andrads National
Loans and Greek Public Finance of 1926. Andrads, a professor of Public Finance at the
University of Athens, was the first Greek economist of international renown. In that, he
does not seem to have been equaled to date. He did lend many times his prestige and his
knowledge to the governments of the country at various instances. He took part in many
diplomatic and quasi-diplomatic missions and wrote opinion editorials to enlighten world
opinion on several of our national causes. In his time, he was one of the world class
authorities in the field of the rules of law that apply to sovereign borrowing, together with
his fellow professor and fellow native of Corfu, Nicholaos Politis, who served many terms
of duty as Minister of Foreign Affairs. The unhappiest instance of their work together was
the signing of the Politis-Kalfoff Pact that recognised, without any compelling reason, a
Slav minority with extended rights in Macedonia. Theodore Pangalos, dictator in 19251926 and grandfather of the present-day eponymous politician, had offered the Pact to the
Serbs, so that he could have his hands free to take revenge on the Turks for 1922.
Fortunately, Pangalos was removed from power and Parliament rejected ratifying the Pact
by loud stamping of the members' feet. It is, of course, rare that men of the pen should be
consistently successful in the merciless field of diplomacy.
Andrads, a rather eccentric man, is a delight to read thanks to his language, a language
fully worthy of his maternal uncle and eccentric extraordinary, Emmanuel Rodes, of
whom he was the biographer and literary executor and, thus, the editor of Rodes'
Complete Works. The biography of Rodes' mother, Cornelia Rodou, is a true story of
adventure. Of course, Andrads writes in katharevousa Greek, a language much honoured
by his uncle, in reality an Anglo-Franco-German dialect, with Greek words ! Andrads,
though, is not so intimately familiar with German culture as Rodes. Andrads was
proclaimed a doctor of philosophy of the University of Paris in 1899 on the strength of his
thesis On consecutive or parallel punishments. Two years later, the study of criminal
law lost him and public finance (and later theatre critique) won him over. In 1901, he
published his most erudite History of The Bank of England a work that nobody has
surpassed since, not even an Anglo-Saxon !
The book of Andrads on the national loans of Greece ends on the eve of the First World
War. Yet, the world economy in our days is similar in many respects to the economy of the
era that Andrads analyses. The great, almost complete, freedom of commerce and
commercial transactions, the almost fully free circulation of money and men, the
worldwide appeal of certain ideas, were all features of the world that was shaken by the
historic earthquakes of 1914. No doubt, though, that for each similarity, there exist many
differences.

The French Christian-Socialist economist Charles Gide, with whose work our most beloved physician of
Piraeus, Polycarpos Papaspeliopoulos, is familiar, was an uncle of Andr Gide, the writer who was
awarded the Nobel Prize for Literature in 1947. Perhaps the rule by nephews, nepotism, has not always
been as unsuccessful as we got to know it in our country of late. Harilaos Tricoupis, for instance, was, on
the side of his mother, a nephew of Alexander Mavrocordatos.

All the authorities in historiography do agree on one thing, which is that historical
research is laborious and that its findings are not terribly entertaining for most people.
This is why the great works of historiography are also monuments of world literature.
Perhaps, one would legitimately state that historiography is a branch of literature.
Economic history is even less entertaining.
Worse, it lends itself to multiple
interpretations, if not to misinterpretations. Andrads, for instance, plays into the hands
of many crass commentators when he appears to protest the fact that the proceeds of a
national loan2 prove to be inferior in size to the amount that the country must disburse to
pay it off. Nevertheless, this is the quintessence of borrowing : unless the borrower
defaults or declares bankruptcy, he does not just pay back to the lender the principal of the
loan, but, also, interest. This is neither corruption nor mismanagement nor treason.
The Loans of Independence the first default
The first two National Loans, later to be named the Loans of Independence, were
contracted in the London money market by the 2 nd National Assembly sitting in Astros of
Cynouria - of the insurgent Greek nation in 1824 and 1825. After the victories of 1821 and
1822, there were no Turks (Muslims to be exact) any more in Old Greece except, perhaps,
in the south of the island of Euboea. Renascent Greece was able to get those loans
because :
First, the London capital market was in a state of speculative euphoria. The British
government had just managed, thanks to fortunate coincident historical circumstances, to
bring its economy back into a largely gold-based monetary regime, that is, to stabilise its
currency for the first time after the end of the Napoleonic Wars. It was the very beginning
of the English economic and political hegemony that was strongly contested but managed
to endure nonetheless, up to the beginning of the First World War. It was the golden age
of liberalism, free competition,
free trade, minimal state interventionism and
parliamentary government. Of course, there were dark spots in the history of that period,
such as the continual antagonism of the Great Powers of that time, the harsh colonialism
and the political battles for universal suffrage, a right that, of all the states of the world,
small Greece was the first to institute for its citizens, even if the people who instituted it
were driven by ulterior motives.
A second factor that allowed the contracting of the loans of Independence was
philhellenism, the preference of public opinion, at that time quite romantic, in the rest of
Europe, for a nation that had arisen from the dead and the repugnance towards Ottoman
obscurantism. The license to contract those large loans in the London market was
considered, by friend and foe alike of the fighting Greeks, a diplomatic victory equal in
importance to the recognition by George Canning, the Foreign Secretary of England, of the
belligerent status of the Greek government. Up to that point, the insurgent Greeks were,

calculated to a precision of a hundredth of a drachma

formally speaking, rebels that were disturbing the fragile European balance of power that
the European Concert of the Great Powers was aiming to preserve.
The proceeds of the loans arrived in Greece at a moment when the resources of the
insurgent Greeks were coming to an end. The regular sources of income, those former
Ottoman taxes that had not been abolished for their slavery-related features, were no
longer providing much revenue in a time of war. The war booty that had been taken from
the Turks had run out as well as the wealth of the more prominent citizens, especially of
those of the seafaring islands.
Besides, the legal status of the Greek government was uncertain, since that government
was far from having reached a definite and uncontested form, even inside Greece, much
less was it recognised abroad. This uncertainty and the great danger of the Revolution
failing meant that the terms that the loans would carry would be onerous. Even so,
despite the high real interest rate, despite the fact that a great proportion of the proceeds
remained in England to service the first payments of interest and principal, the money to
be applied to the fight of Greece was sufficient for the country to field a regular army and
a steam-driven navy. If Greece were able to use those forces to gain victory, it would have
revenues and the accumulated wealth from the properties of the departed Turks to pay
those loans off.
So, the loan contracts were drawn up and the large amounts specified in them were
collected from an investing public of savers, capitalists and speculators, as well as of many
idealist philhellenes. The use of the money, however, was and remains a point of dispute.
The loan proceeds enabled the civilian leaders to prevail over the military. The politicians
were led by Alexandros Mavrocordatos, who managed to gain the attention and the trust
of the English philhellenes and skillfully directed the representatives of Greece, Louriotis
and Orlandos, during the negotiations in London. Thus, we can claim that Greece escaped
the fate of, say, Serbia, where, for decades, rival dynasties of warlords were fighting for the
throne, resorting to murders, the last of which took place in 1903 (and we have seen very
recently how the tradition of political violence has remained alive in that country). Our
blessings, however, stop at that point. Not one of the millions of golden sovereigns of the
loans was used for the fight against the Turks, except for a small amount that was used to
equip the fleet of admiral Miaoulis for the eight naval engagements of the summer of 1824.
The money that remained in England was put to even worse use. A large part of it was
used to buy back bonds of the loan that had been bought by philhellenes, the influential at that time - and ambitious politicians Hume and Bowring among them, at prices much
higher than the ones obtaining at the time in the money market, in a vain attempt to
maintain their philhellenic zeal ! Greece ordered six steam warships from an English
shipbuilder, the son of whom was serving as an officer in the navy of Mohammed Ali, the
ruler of Egypt and vassal of the Ottoman Sultan. As was to be expected, only one, the
Karteria (Perseverance) was belatedly delivered to Greece and got to fight somewhat
effectively, thanks mainly to the technical and naval ingenuity and the self-denial of its
commander, Hastings, who, also, fell in the service of Greece. Greece got terrible value
4

from the two wind-powered warships that it tried to get built in America, while ships of
equal fighting strength were on offer, ready-to-be-delivered in Europe. Only one ever
reached Greece and only after the government of the United States of America was
pressured by pro-Greek public opinion into tacitly breaking its policy of neutrality and
into buying one of the two ships, so as to finance the completion of the other. The ship
sailed to Greece only after besieged Messolonghi had fallen.
Thus, in the words of the Genevan banker and philhellene Eynard, the loans that could
have saved Greece resulted in a small immediate benefit and multiple losses. This
happened because, neither as a nation nor as individuals, had we had any instruction or
experience in managing so much money. The temporary over-abundance of money
reduced our patriotic and self-denying zeal and deepened the ever-lurking schisms
among the Greeks. We also erred, chiefly because of our inexperience, in hiring our
foreign advisors, both financial and military. We were offered, as volunteers, some of the
very best, such as the future marshal of England Charles James Napier 3, the sole, so far,
conqueror of British India (that included, at that time, Pakistan and the still
unsubordinated, to this day, Afghanistan)4, but we failed to hire them.
The 3rd National Assembly that gathered in Troizen in 1827 acknowledged that the nation
had no money to honour the upcoming service payments of the two Loans of
Independence. Besides, such money as could be scraped together had to be channeled,
first, to the army so as to keep free as many areas as it could and to control internal strife,
second, to rebuilding a minimum of public buildings to replace the ones that had been
destroyed in the Revolutionary war and, third, to succouring the needy and the refugees.
Nevertheless, the National Assembly did not entirely disown the loans. Given the
vanishingly small benefit that the country had obtained from them, the country could have
branded them odious debt, as some would have us call them today. It could have tried
to reduce the amount owed by arguing that the loans had been contracted by a previous
National Assembly in which had sat delegates from provinces that remained, in the end,
unliberated. On the contrary, the National Assembly did acknowledge not only that
Greece was liable to those who entrusted it with their money in difficult times but, also,
that ruining its public credit through bankruptcy would bring it immense difficulties in
the future. Thus, it sought to come to a settlement with its creditors. The definitive
settlement was achieved only after 51 years had passed. In the place of the old
philhellenes, it was a number of Jewish speculators from Amsterdam that collected most
3

Hero of the Napoleonic Wars, Governor of the island of Cephalonia in the early years of the English
Protectorate over the Ionian islands, he supervised the building of a dense road network on the island
that, in gratitude, displays his bust in one of its squares to the present day. His statue, also, stands in
Trafalgar Square in London.
His contribution to the practice of multi-culturalism remains relevant to this day. Since he had
promised to the natives in India that the life together of several different nationalities under English rule
would respect the customs of each one of them, he was asked to sanction the continued practice of the
sati, the cruel custom that called for the burning of the widow on the funeral pyre of her dead husband.
He replied that he, too, in keeping with his promise of multi-culturalism, would have to practice the
English customs that required him to condemn to death by hanging those who would dare to commit
such inhuman acts.

of the proceeds of the settlement. They had bought their bonds around the year 1830 at
5% and 10% of face value.
Their grandchildren, thus, got a return of
between 2,9% and 4,3% in gold on the investment of their grandfathers. Not a bad rate of
return, but only for the few that can afford to wait that long.
The triennium of the Governor The Quest for a Loan
The three years of rule by Governor Capodistrias showed that, despite the bitter
experience of the Loans of Independence, Greece had a dire need of new foreign loans.
Capodistrias showed how much the country could achieve w i t h o u t foreign loans.
Those achievements were many and great but, ultimately, not enough. One can get an
idea of the meticulous frugality of the Governor by noting that there were 7 ministers
and 185 chief secretaries in the government when he took it over. He got them replaced by
one secretary-general and 11 clerks. One can understand how much poison against the
Governor flowed from the pens of the fired most-learned men. Capodistrias did not
introduce new taxes. He only took care to enforce the taxes already legislated. There were
three principles buttressing his economic policy : First, tax equality ; everybody was
called to pay up. Second, the merciless pursuit of corrupt officials. Third, public order
and security, through the lightning-fast suppression of piracy and banditry. Moreover, he
adhered to the ancient Roman fiscal doctrine : economy is the greatest of all taxes, thus
limiting public spending to those expenditures that were absolutely necessary. Looking
upon those matters from our present-day point of view, we would expect those policies to
have depleted the Governor's political capital. Yet, the great masses of the people stayed
faithful to him to the very end.
Capodistrias, as a skilled diplomatist, was able to take full advantage of the (petty)
jealousies of the Protector Powers, England, France and Russia, so as to extract significant
amount of aid from France and Russia, at the necessary price of allowing the political
parties in Greece that were allied to each of those foreign powers to grow, somewhat, in
influence. All the same, neither the donation of his entire family fortune to the state nor
the great donations of his close billionaire-friend Eynard could meet the enormous need of
funds to finance the building of a new state. Since we were unable to contract for a loan in
the free market, given our disorderly default on the Loans of Independence, the
Governor conceived the idea of contracting a loan endowed with a guarantee of the
Protector Powers. That would be a loan by the official sector, as we would call it today.
The Powers did not rule out that option but were marking time, while the needs were
accumulating. Thus, Capodistrias was forced to borrow the money that had been set aside
by investors as capital for a bank to be founded in Greece. This act of desperation stifled
in its cradle the prospect of a large national financial institution. It would take ten years
for the project to be revived. Worse, the delays in contracting the loan forced Prince
Leopold of the House of Saxe-Coburg, who had been voted King of Greece and was a
relative of the royal houses of England and France, a mature man, well versed in matters
administrative, diplomatic and military, to decline the throne of Greece. The size of the
6

loss to Greece can be gauged in comparison with Belgium, where Leopold reigned as the
founder of its royal dynasty.
The Allies' Loan the second default
When Capodistrias was assassinated, the state coffers contained very little money. The
anarchy that followed his death finally convinced the Protector Powers to do what the
philhellenes in their countries were calling for insistently and what logic dictated : To
commit significant financial resources to make of liberated Greece a functioning state.
Thus was the great Allies' Loan of 1832 contracted under the several guarantee, by each
one of the Protector Powers, of one-third of the loan. The loan contract of the Powers with
the Kingdom of Bavaria (the home country of the new king Otto of Greece and not with
Greece) recognised explicitly the right of the diplomatic representatives of the Powers in
Greece to see to it that : fiscal revenues, in priority over any other expense, be
committed to the payment of interest and to the repayment of the principal of the loan. As
we can see, the idea of the troka, of international financial surveillance of Greek state
finances, is not at all modern. That particular clause in the contract was repeatedly and
abusively used by the three erstwhile Protector Powers as the legal basis for interventions
in Greece during the Crimean War (1855-1856), the revolutions of Crete (1841, 1866-1869,
1878, 1897-1898, 1904 and 1908), the Eastern Crisis (1875-1886), down to the initial period
of the National Schism, in the years 1915, 1916 and 19175.
King Otto, when he ascended the throne of Greece was but a boy. Thus, the power to
manage the resources of the loan was initially vested in the Regency, a council of highly
qualified civil servants from Bavaria. About one-fifth of the Allies' Loan was paid to
Ottoman Turkey as compensation for the confiscated private property of the displaced
Turks of Euboea, Attica and Phthiotis. Turkey paid half of that amount right away to
Russia in reparations for the Russo-Turkish War of 1828-1829. Much has been written
about the mismanagement of the proceeds of the Allies' Loan by the Regents of king Otto.
It is certain that they were worthy and well-intentioned men but were hardly prepared to
rule over Greeks.6 Their critics charge them with wasteful administration. However, if
one were to evaluate their policy objectively, one should not set them against the ideal
trustees of morality-improving books but against those that Greece could have put in their
stead. In such a comparison, the Bavarians come out as wasteful, but less wasteful than
5

Their attempt to mediate between the two quarreling political parties in Greece , while the great coup-d'tat of the venizelists of the 1st March 1935 was in progress, brought the angry riposte by antivenizelist
Metaxas : Better that (Eleftherios, of course,) Venizelos prevail, than foreigners' intervening.
The famous pronouncement of Charles James Napier, incidentally (?) a true philhellene, is apposite : so
perverse is mankind that every nationality prefers to be misgoverned by its own people than to be well
ruled by another. Maybe because, despite their, sometimes, good intentions, foreigners end up
governing badly. The verdict of revolutionary general and hero Theodore Kolokotronis is, also,
germane : Were (Athur Wellesley, the 1st Duke of) Wellington to give me 40,000 troops, I would be able
to command them, but if he were given 500 Greeks, he would not be able to command them for longer
that one hour. Every single Greek had his whims, his own God, and, in order for one to manage with
them, one had to browbeat some and to cajole others, depending on the character of each one.

their Greek predecessors and successors. The Regency, aiming to restore public order, as
Capodistrias had done in a very short time, spent the greater part of the loan on soldiers
and officers of dubious quality from Bavaria. As a result, the Allies' Loan did not help to
meet the dire need of money for economic development of the country. Nevertheless, at
great cost, the country obtained a mechanism to collect regular taxes. However
insufficient that mechanism may have been, it assured the continued operation of the state.
It is even quite probable that it collected higher taxes than the rudimentary Greek
economy of the time could yield. Thus, when, in 1843, the Powers sent a committee that
recommended, instead of further aid, a programme of economies, the spectre of public
spending cuts gave rise to a wave of discontent against the king. It resulted in a very
inopportune change in the constitution of the country on the 3 rd September 1843. That
change included the granting of universal (male) suffrage. It was inopportune, because a
people to which it had not been possible to distribute the public estates nor any farm
equipment to start farming them could not but sell their newly-acquired votes to the
highest bidder. If sufficient resources, even borrowed, had been committed to distributing
to peasants part of the public estates, as Capodistrias had planned to do, the land-use
condition and policy of our country would have been different and our whole economic
and political history would have been different, too.
After the first two defaults
This is a good point to remind ourselves that the Loans of Independence and the Allies'
Loan were carrying as collateral the national estates. Therefore, there existed, right from
the time of the founding of the modern Greek state, the truest quarrel, though least in
speech to prevent the national estates from being distributed or sold in a transparent
manner, but to remain in public ownership, ostensibly to secure the loans, but, in reality,
so as to be appropriated at any one time by those with the most gall.
The Allies' Loan, along with the Loans of Independence was subjected to a definitive
settlement in 1879. The Powers had since 1859 already imposed on Greece an interim
settlement, whereby it was paying 900,000 gold francs per year, and had not even bothered
to specify whether that money was to be paid against interest only or whether it, included
also repayment of principal, so that the debt would be paid out one distant day.
The sad truth is that modern Greece managed not to service the first large loans that it got,
except partially. We did not pay up ! Yet, the cost of this failure in terms of
untrustworthiness was much heavier. Private bondholders tended to conveniently forget
that most of the blame for the mismanagement of the Loans of Independence lay mostly
with those outside Greece who managed them. Gradually, they managed to carry public
opinion in their countries to their view. The guarantor-states, the Powers, were pulling out
of their drawers the question of the Allies loan, whenever they wished to be mean to
Greece. Worse yet, in the course of the fifty years of uncreditworthiness, Hellenism got
associated in the minds of world opinion with default and, thus, lost its former precious,

centuries-old, spiritual primacy among the Orthodox Christians of the Balkans.

appeared that liberty was a sour grape in its teeth.

It

The deliberately vague interim settlement of the Allies' Loan in 1859, imposed by England
and France, the victors of Russia in the Crimean war, was meant to be a punishment for
Otto's lukewarm pro-Russian stance. It appears that the settlement weakened the position
of the king in the political scene of Greece and contributed to his ouster in 1862.
Indeed, it took 17 more years before Greece was able to borrow again from abroad. In that
time period, just like in most years of Otto's reign, the country had to make do with what
little it could produce. The small loans that the state was able to contract in the local
money market or, even, from wealthy individuals, were very expensive. Public works and
improvements, in an appropriately large scale, could not be financed. The scarcity of
money resources was, though, calamitous in the field of foreign policy. Crete rose in
revolution in 1866 and, despite the first victories of the Ottomans in Vafe and Arcadi,
remained in a state of guerrilla war up to 1869, causing enormous financial strain to the
Ottoman Empire. Greece, of course, had no army or navy to help militarily the insurgent
Cretans. It limited itself to sending reinforcements and supplies to help with asymmetric
war operations. When the great Cretan Revolution was in its last throes, Turkey sent its
navy, led by Hobart Pasha, an English apostate, to blockade the raider ships, formerly
mail-carrying steamships, inside their Greek ports. Those ships were the Panhellenion,
the Arcadi, the Crete, and the Enossis (Union, of Crete with Greece, of course)
and had been carrying supplies and volunteers to Crete. Parliament, in a state of patriotic
and war paroxysm, voted to authorise the Voulgaris 7 ministry to borrow an amount equal
to the quadruple of the regular annual budget receipts, that is, in practice, to issue
inflationary currency. However, as Ioannis Valaoritis (son of the poet and patriot Aristotle
Valaoritis and, as we will see an even more outstanding patriot than his father) wrote : if
armies cannot be conjured from one moment to another through a simple legislative
resolution, yet harder is it to produce resources and to issue currency. The Great Powers,
in conference in Paris (where countless words had been written by prolific intellectuals in
favour of Crete) addressed a note to Greece that, in essence, vindicated Turkey.
Fortunately, writes Andrads we had the prudence to bend to the unavoidable.
Voulgaris resigned and the fifth ministry since the start of the Cretan Revolution, that of
the prudent, as Thrassyboulos Zamis was subsequently called, , salvaged the wrecks.
Without a doubt, the patriotsof that time branded it as slavish to foreigners, treasonous
and such like, just as we have seen recent governments called in our days.
Support for the Cretan Revolution, as was to be expected, was a heavy burden for the
finances of the state. Money was needed to support the revolutionaries, to feed and to
house the numerous refugees, mainly women and children from the great Turk-battling
Crete. At least, though, the country enjoyed five years of relative calm before the outbreak
of the great Eastern Crisis of the years 1875-1886. Many commentators considered that
short period to have been a time of good housekeeping. In reality, this was a case of
forced good housekeeping, since nobody would lend to us in tolerable terms. On top of
7

he was an authoritarian, without love of order, and a rebel, without love of liberty

the uncreditworthiness carried forward from the previous two defaults, of 1827 and 1843,
there was now added the political instability naturally accompanying unbridled
parliamentary rule, as well as the military and diplomatic weakness of the country. This
was, thus, a period of true stagnation.
Fortunately (or, maybe, unfortunately), in our part of the world such periods of calm do
not persist for long. In 1875 the Ottoman Empire defaulted and the strong shock it
sustained as a result was followed by the Serbo-Turkish and the Russo-Turkish wars.
Making a virtue out of necessity and trusting the word of the English, we stayed on the
sidelines. We all know that the Greek position in the Balkans ran the ultimate danger with
the Treaty of San-Stefano. The national humiliations added up to a critical mass, so,
finally, in 1879, we conceded at last to come to terms with our foreign lenders. 8
Return to the markets the third default
The Treaty of Berlin of 1878 awarded Thessaly and a large part of Epirus to Greece without
war. However, in order to make sure to occupy the territories awarded, we had to wait for
three years and call out the armed forces to mobilise twice, march into Thessaly and make
war preparations. The country covered those expenses from the proceeds of the first two
large loans that it contracted, after its return to the world financial markets. Since the
needs of the country were pressing, the terms of the loans were pricey. Still, the first
territorial expansion of the Kingdom of Greece since the years of the 1821 Revolution, and
the realisation that, with the money of the new loans, much of what was wrong in the
country could be put right, had created an air of optimism. This optimism reached it
apogee, after the elections of 1882 brought to power, with an unprecedented majority,
Harilaos Trikoupis, a well-educated man with much talent and prestige, both inside and
outside Greece.9 During his first long premiership, until the outbreak of the crisis of 1885
that included the Bulgarian takeover of the autonomous Ottoman province of Eastern
Rumelia, Trikoupis endeavoured to correct the distortions that the long isolation from the
world economy had entrenched into the Greek economy. The trouble was that, as usual,
reforms are slow to bear fruit.10 The tax reductions of Trikoupis reduced the state taxreceipts right away, while his new, much more rational customs tariff and his new taxes
yielded revenues only after long years, at the time of his successors. Thus, instead of the
small surplus that was written into the budgets of Trikoupis, the state ran large deficits
every year. Already in the first year of Trikoupis premiership, his Treasury minister, the
The charg d' affaires of Greece in London, Ioannis Gennadios, negotiated relatively advantageous terms
for the definitive settlement. He was the second-born son of George Gennadios, revolutionary hero,
public intellectual and docent of the nation. The library of the two of them, that Ioannis donated to the
Americal School of Classical Studies of Athens in 1922, was the kernel of the current-day Gennadios
Library.
9 There were cooler observers, such as the Thessalian bey who summed up his impressions from a meeting
with Trikoupis with the Turkish dictum : At var, meydan yok. That is, that here was, indeed, a horse,
but not a field in which the horse would be able to show its abilities.
10 According the Holy Gospel of this past Sunday of the Samaritan Woman, one sows and another reaps.
8

10

jurist and historian Paul Calligas, who had refused to budget for new expenditures against
revenues not yet proven, resigned. Trikoupis, though, was not a man who would give
up. His task was, indeed, very hard. On the one hand, he was expecting a new external
crisis that, in fact, broke out in 1885 and resulted in Bulgaria proclaiming itself as the rising
power in the Balkans boiling with burning ambition 11. We needed, therefore, an army
and a navy. On the other hand, there was a dire need for reforms that had already been
postponed for decades, but which could no longer be put off because a state that wished to
enter as a worthy competitor for mastery of the Balkan arena just had to appear, in the
eyes of world opinion, to have cast oriental backwardness behind it. Trikoupis met the
shortfall in state revenues by issuing inflationary currency. Even though the sum of the
expenditures of Trikoupis was exorbitant, and, therefore, worthy of blame, those
expenditures, if examined one by one, were truly necessary. Even so, they were not
properly sequenced. Instead of giving priority to building the Piraeus - Borders (Larissa)
railroad, to buying the battleships Hydra, Spetses and Psara (named after the
islands that provided most of the ships and men to the Revolutionary navy) and to
equipping the army, during the first long premiership of Trikoupis, we chose to build
roads for horse-drawn carts and coaches, under the guidance of a rather expensive staff of
French and Swiss engineers. Thus, the Bulgarian takeover of Eastern Rumelia forced us to
spend this money in a haste and after the fact. Thus, we ended up not with the benefits of
those military expenditures but only with their costs. The responsibility for the failure
does not rest solely on the shoulders of Trikoupis but, also, on the shoulders of the
parliamentary opposition to Trikoupis and of the people, too, who resisted ferociously any
attempts by Trikoupis to rein in the deficits.
Trikoupis, in the course of his first three-year premiership, had been authorised by
Parliament to contract a large external loan, that he only managed to arrange partially. It
was then that he spoke the famous words there is success yet in failure ! Presumably, he
meant that partial success was better than total failure. And yet, the phrase would sound
cruelly ironic after only six years. Trikoupis lost the elections of April 1885. Theodore
Diligiannis came to power pledging to reverse the taxes and also to reduce the spending of
Trikoupis. He had convinced the people that Trikoupis had overextended. He was to
realise soon that, as Gladstone (a great fiscalist) had stated : it is easier for one to increase
spending by one pound than reduce it by a shilling. In September 1885, Bulgaria
annexed Eastern Rumelia in a coup d' tat. Greece had had its rights in that province
recognised by the Treaty of Berlin of 1878. The Powers, however, accepted the fait
accompli and, moreover, subjected Greece to a naval blockade to maintain peace. We
chose armed beggary, mobilised threatening war, but not daring to declare it. The
11 An ambition, moreover, hardly in accordance with its true strength. By the Treaty of San-Stefano (it was
never implemented, as it was entirely lopsided in favour of Russia and Bulgaria, but kept reinforcing
Bulgarian national aspirations and the consequent national disasters for decades) Bulgaria was to
become the most populous Balkan state, even though the Bulgarian nation was inferior in numbers to the
Greek, Serbian and Romanian nations. The reason is that this mastery was obtained (fortunately on
paper only) by a grant from Russia, while the Serbs and the Greeks, labouring for decades separately
from one another, alone and without allies, had only achieved very modest results.

11

finances of the country had gotten to an absolute impasse. Thus, Trikoupis returned to
power in May 1886. In a masterpiece of a speech in Parliament he set forth his programme
of expenditure cuts and new taxes. In January 1887, in spite of his self-avowedly
contractionary fiscal policy, voters gave him a majority that would enable him to govern
for four full years, such as no Greek prime minister had ever won up to that time (and
precious few since).
It is even more amazing that Trikoupis had not only managed to convince the voters but
had, somehow, cast a similar spell on foreign investors ! In the four years between 1886
and 1990, the country contracted loans of a total amount that was more than double the
amount of the loans it had contracted in the previous 75 years. The credit of Greece
appeared to be excellent in itself and continually improving. That miracle was
performed by the instruments that we have come to know through our recent economic
history. First, Trikoupis used accounting stratagems, creative accounting, as we
would call it today, consisting of budgeting for small surpluses and realising large deficits.
For him, it was natural indeed to seek to gather money by any means, since he was
foreseeing that Bulgaria was not going to stop in Eastern Rumelia. What about the foreign
bankers, though ? Certainly, the strong will of Trikoupis must have appealed to them. In
addition, however, he had to concede to them a large part of the most secure customs and
tax revenues of the state. Here was a material concession of national sovereignty, much
graver than the privatisations that the troka keeps proposing to us, in vain, during the last
six years. In order to avoid hurting the sense of national pride of the Greeks, those
revenues would be collected by the Monopolies Corporation, a company founded and
operating under Greek law. It appears that the commissions and other collateral benefits
of the loans, some of them not quite blameless, quasi-corrupt as we would call them
today, were fairly important to the foreign investors, as must have been the low rates of
return of investments safer than the Greek debt.
Starting already in 1890, the money markets, after four, unhoped-for, good years, closed
for Greece. Given the debt burden that the country had taken, it was only possible to defer
default, not avoid it. Diligiannis, after getting elected prime minister at the end of 1890,
only managed to pay one installment of the loans without having recourse to new
borrowing. What ought to have been everyday practice had ended up being a remarkable
achievement for the country. The drachma, though, was under pressure. Confidence in
the Greek economy collapsed. The king, following the (basically unfounded) outcry of
public opinion, fired Diligiannis and his party got routed in the elections of May 1892.
Trikoupis, elected prime minister for the fifth time, managed to muddle through for one
year, by drawing on the support of wealthy Greeks of Alexandria (in Egypt). In April 1893
he offered to concede to the lenders substantial additional customs and tax resources. The
king asked that the concession be ratified by Parliament, just as someone, in recent times,
asked that the memorandum outlining the the terms of the financial rescue package for
Greece be ratified by a referendum. Economic historians debate, to this very day, whether
the parties to that negotiation, especially the king, went into it in good faith. It mattered
little to the result. A further attempt by the caretaker extra-parliamentary government of
12

Sotiropoulos12 to issue a capitalisation loan failed. It would have been a default in thin
disguise, since, in the place of cash interest, we would have converted interest to capital
(hence capitalisation) and only given lenders new bonds 13. In September 1893,
Trikoupis, prime minister for the sixth and last time, acknowledged, albeit not in public as
popular legend would have it, that unfortunately, we have gone into default.
Declaring default, however, is never the end of the matter. As tycoon Andreas Syngros
told Trikoupis : Mr. President, default requires a special skill of its own. On this
occasion it became evident that we did not have that particular skill and this is, perhaps,
an honour. Trikoupis unilaterally reduced cash interest on the loans to 30% of what was
contractually owed and suspended entirely the repayment of principal. Further, he stated
that those arrangements were provisional and that a final settlement would need a
compromise and the agreement of the creditors. He hoped, in this way, to show his good
faith, since further taxation could not be made to yield more that 35%. However, he only
ensured that settlement would be difficult and belated. He ought, either to have
suspended cash payments entirely, so as to pressure bondholders into agreeing to a
settlement as soon as possible, or to not even call for further negotiation with the creditors.
A second blunder he committed was exempting drachma loans contracted in the domestic
market from that particular round of cuts. This was fair, since their holders had suffered
as much or worse in previous rounds of cuts and as a result of the depreciation of the
(paper) drachma, the currency in which domestic bondholders had been forced to collect
their interest. That perceived difference in the treatment of foreign versus the domestic
creditors, entirely justified in itself, did attach to Greece the unjust stigma of bankruptcy
fraud.
The consequences of default were dire : Charitable houses and other national foundations,
especially in Turkey, lost immense amounts of money. The default appeared to have been
a punishment for patriotism. The exchange rate of the drachma fell so much that paying
the reduced interest on the pared-down loan coupons ended up costing, in paper
drachmas, as much as it had cost before. Imports, including cereals, because at that time
we were not self-sufficient in cereals (as, indeed sadly, we are not, again, today) soared in
price. Worse, nearly all the domestic banks collapsed. And yet, there was to be even
worse : In the foreign affairs of the country there awaited dishonour, war and the
International Financial Control.
One would not exaggerate in asserting that one of the causes that encouraged Turkey to
provoke us to the War of 1897 was the long delay in arriving at a settlement with our
creditors. The narration of Stephanos Streit, successor to Calligas in the Governor's post at
the National Bank, is worthy of Thucydides for its drama. The telegram detailing the
agreed terms of the settlement had made its way through the telegraph cables to Melite
(Malta as mentioned in the Acts of the Apostles), when prime minister Diligiannis asked
12 He was called the patriarch of economists because, according to Trikoupis, his ideas were outdated.
13 The newspaper Scrip was founded at that time by Kousoulakos and got its title from the provisional
titles (scrip) of the proposed capitalisation loan that were to be offered to bondholders. It started out
as a satirical paper, was successful and very soon extended its coverage over all current affairs.

13

for its transmission to be suspended. In the evening of that same day the Greek
government got delivery of the diplomatic note of the Great Powers stipulating that the
Greek government not recognise nor aid the revolutionaries of Crete. All this, while a
substantial contingent of Greek Army soldiers had already arrived in Crete, whose
presence, however, had not induced Turkey into declaring war against Greece. Germany,
though, encouraged Turkey to take that step, not because, as subsequent events proved, its
stance was particularly anti-Greek, but because the delay in reaching agreement with the
German bondholders had driven it to exasperation.14
The International Financial Control the Economic loan
Having been roundly defeated in the war, Greece provided the Great Powers with a blank
cheque to negotiate with Turkey on its behalf. They found it expedient to introduce into
the peace treaty between two, supposedly, sovereign states provisions to serve the
interests of private persons, that is, of the holders of Greek debt. Greece was to be
subjected to full International Financial Control, through which substantial state
revenues were to be collected and delivered, in absolute priority, to the service of the
foreign debt of the country.
Alexandros Zamis, prime minister, and Stephanos Streit, Finance minister, negotiating in
sincerity and good faith managed to elicit a similarly sincere and fair-minded response
from the excellent men whom the Powers appointed to institute the Control. Thus,
while the terms were onerous 15, they were much lighter than those that loomed, were the
Treaty of Constantinople to have been applied to the letter. In part, there was an intention
on the part of the Powers to check, at no loss to them of course, the noble national
obsessions of Greece for its own good. But, also, because philhellenism had surged
again, in opposition to the perceived strict treatment of Greece in the hands of the Powers.
The Powers deigned to guarantee, jointly and severally, a large loan, later named the
Economic loan, so that Greece could finance large reparations to Turkey and take back, in
return, Thessaly, that was being held hostage. Out of the proceeds of the loan the country
would be able to resume the newly reformed servicing of its old debts, to cover, in part,
the expenses of war, to provide assistance to the victims of the war and, for the first time,
to revamp its entire economy16, so as to be able to service its debts with some leeway. Here
was a very detailed memorandum, as we could call it today, that put under tutelage our
tax, customs, foreign exchange and, even, our monetary policies. Law 2519, of February
1898, the law of the Control or of the Settlement, voted by Parliament willy nilly 17, was to
be the economic constitution of the country for the next 15 years.
14 By coincidence, the chief spokesman of the German bondholders was called Roesler, and he bore the same name as
the former Vice-Chancellor of Germany (of Vietnamese origin and adopted by German parents) during the Greek
debt crisis of 2008, who heaped much reproach on the Greek people and their government, much of it perfectly
well-deserved.
15 bearable according to Syngros
16 whence that loan got to be called Economic
17 All the speeches, without exception, dwelt on the futility of arguing.

14

In compensation, the new loan, armed with the security of the International Financial
Control and with the joint and several guarantee of the Powers, was issued at par and bore
interest (in gold) of only 2,5%, making it the safest investment paper in Europe at that
time.
Even so, the years following the default were hard going. Most of the time during that
period the country was governed by George Theotokis, one of the lieutenants of Trikoupis,
the maternal grandfather of prime minister (1980-1981) George Rallis. He based his
foreign policy of irreproachable stance with the Powers to such prestige as the Greek
Royal Family carried in the royal courts of the rest of Europe. The effort to restore to
health the state finances evolved around the interpretation and the implementation of the
rules of the International Financial Control. Both the Greeks and the foreigners realised
that a faster economic recovery of Greece would, also, serve the narrower interests of the
lenders. Thus, they arrived at the idea of using the same institutional mechanism that was
built to secure the interests of the past lenders in order to secure the interests of any new
lenders of the country. The increasing surplus of the pledged revenues could be used by
the country to contract fresh loans. By degrees, and with fits and starts, frugal prudence
started having beneficial results.
Yet, as we have noted above, normality in our part of the world does not last long.
Already since 1904 Greece was in a low-intensity war with Bulgaria over Macedonia. The
putsch of the Young Turks in 1908 brought about a temporary calm in Macedonia but
shook otherwise our country. Crete, at the time an autonomous Ottoman province under a
Christian governor, declared for the umpteenth time its Union with Greece. The Theotokis
administration had its attention fixed on economic reconstruction and did not consider it
prudent to intervene in the crisis at all actively. Of course, in agreement with the
rebellious Cretans, it recalled the Administrator of the Powers, Alexandros Zamis.
Theotokis inclined towards accepting the dictates of the Powers and refusing, once more,
the Union, the more so since he needed to contain somehow spending on the armed
forces. The 1909 draft budget included provisions for funding, in the medium term, of the
National Defense and the National Fleet Funds (whose budgets appeared annexed to the
ordinary budget) with an amount equal to one half of a year's budget. The government
was forced to cancel this funding, since it could find no resources to finance it. Theotokis,
having resigned before the impasse, was succeeded, without an election, by Dimitrios
Rallis, leader of the second largest party and, also ( ! ), paternal grandfather of prime
minister (1980-1981) George Rallis. Despite his fame of a fiendish temperament (he was
called the crazy little Rallis by his supporters) Rallis failed to quell the people or to
maintain discipline in the armed forces, who clamoured to have the cancelled funding
restored. A dynamic minority among armed forces officers staged a bloodless coup at the
army base of Goudi near Athens on the 15th August 1909. Those officers were asking for
resources for the armed forces, invoking the interests of the country, of course, but, also, in
their narrowly parochial, professional interest. Mavromichalis, leader of the third and
smallest of the parties in Parliament, the party of local notables, was appointed prime
minister for three months. He promised the military that he would accede to their
15

demands. The Finance minister, Athanassios Eutaxias 18, introduced a draft budget
providing for a reduction in ordinary spending of 7% and for a nearly equal amount in tax
increases. Parliament, with the officers in uniform watching from the spectators' galleries,
voted, willy nilly once again after 1898, the Eutaxias budget. That was, in all probability,
the sole genuinely revolutionary act of the Goudi putsch. With one drastic stroke of
messianic character it restored long-term stability to the public finances that had been
shaky ever since the latest default. Neither the voters, nor his fellow politicians ever really
forgave Eutaxias his salutary budget. The country, though, would be able again to borrow
on its own strength. Before making way for the successor government of Stephanos
Dragoumis, the Mavromichalis administration ordered the battle cruiser Averoff, that
was to play a crucial role in the future Balkan Wars.
The slaves of the foreigners and the corrupt get vindication Balkan Wars
While the ever-yielding Greece of the irreproachable stance was subservient to the
International Financial Control, the proud and defiant patriots of rival countries in the
Balkans were throwing unilaterally away their own international controls. They wanted to
be free to spend without limits, to create strong armies. With a smaller population of
military age, Bulgaria and Serbia had larger armies. We had no money to clothe and arm
our young men who were eligible for military service. Building on the bases laid by the
preparations of Theotokis, the economies of Eutaxias allowed us to train, in a very short
time, many more soldiers than were provided for in the budgeted 60.000 strong ceiling
of the army. Even so, money was so scarce that the ammunition for the Averoff only
arrived in Greece after the outbreak of the 1st Balkan War.
All the General Staffs were expecting the war to last a few days. It lingered on, however,
for eight months. The patriotic Bulgarians, mobilised to a man, were starving. In the
Bulgarian capital, Sophia, Metaxas, on a mission to negotiate a military pact, could not
find a bakery open to buy bread. And they could not borrow, since they had hastened to
throw away the control over their economy. The patriotic Young Turks had achieved
as much. On the other hand, the subservient and corrupt Greeks sent Ioannis
Valaoritis abroad to borrow, in the space of six months, an amount equal to four annual
budgets ! While all this was happening, the Greek securities were appreciating and the
exchange rate of the drachma was rising, too. Quite unprecedented events ! Here is proof
18 A priest's son from Dadi, a smal town of Phocis. He studied at the Rizareios Ecclesiastical High School,
together with his brothers, Charalambis and Ioannis. All three secured scholarships to study in
universities in Germany. Athanassios and Charalambis got elected to parliament with the party of
Mavromichalis, while Ioannis became a university professor and married the daughter of Stamatios
Dekozis-Vouros, a very wealthy man. Lambros Eutaxias (notorious in the opinion of some, but a great
facilitator in politics with some notable achievements and patron of the arts, of nonprofits and of
charity) was their son. Ioannis Eutaxias succeeded Ioannis Valaoritis at the head of the National Bank.
In Novemeber 1914, he clashed with prime minister Eleftherios Venizelos over his refusal to help the
government with loans against the issue of inflationary currency and was forced to resign. That
precedent of government interference into the management of the bank was to do much harm both to the
state and to the National Bank

16

that borrowing is not always a curse nor are surpluses always a blessing, as the Germans
appear to believe19. Alas, those sterling fiscal practices were not to outlive the
victories.20
Without the drastic, constitutionally illegitimate, fiscal reform of Eutaxias and the prudent
husbanding of the resulting surpluses by Lambros Coromilas, the Finance minister of
Eleftherios Venizelos, it is very doubtful that the boldness and the diplomatic genius of
Venizelos alone would have brought the borders of Greece to the river Nestos. On the
other hand, without Venizelos, the prudence and the methodical work of Theotokis would
have taken us to Katerini, at the most. It was the combination of prudence and boldness, a
felicitous coincidence, that brought about such admirable results.
The bisection of the paper currency The fourth (virtual) default
The First World War remains in the conscience of men as a pointless shedding of blood
that deprived Europe of its world primacy, not only in the political, but, also in the
spiritual and moral sphere. It was, in reality, a civil war between peoples who had become
one people, but, like the ancient Greek city-states or the city-states of Renaissance Italy or
the states of pre-Bismarck Germany, would not conceive of ever setting rules to their
mutual antagonisms. In Greece, the war took the additional mode of internal dissension,
of the National Schism. The venizelist party, a significant minority of the mass of the
people, was forced to rely on the Allies of the Entente for economic support, while their
royalist opponents secured loans from Germany. The Finance ministries of the Allies
attributed many abuses to the Greeks, although they were themselves guilty of waste in an
altogether grander scale. What is certain is that, by the end of the war, the victorious
European Allies had brought themselves to the same dire financial position as the
vanquished. The vanquished, moreover, had a better case for renouncing their debts.
Except that, for Greece, the war did not end in 1918. In May 1919, the Greek army landed
in Smyrna. Its legal position there, however, was settled only after 15 months, with the
Treaty of Svres. In the meantime, Greece had to meet the immense expense of the
expedition and the occupation alone. Exactly on the first anniversary of the landing in
Smyrna, the victorious Allies gave the Venizelos government permission to issue
inflationary paper currency, contravening the provisions of the law of Control (law 2519).
They tolerated breaching the law to allow the Greek government to meet the financial
needs of the expedition and the occupation. That hasty remedy, although damaging from
an economic point of view,21 had the counterfeit advantage that it freed the Allies from
having to lend to Greece even one pound of real money, although Greece was in Asia
19 The do not truly believe this, however, as has been proven by their copious borrowing aimed at
integrating the economy of the former East Germany into the advanced economy of the former West
Germany. The ensuing rise in world interest rates led to increases in the borrowing costs of all countries,
who, thus, contributed mightily, if indirectly, to the cost of German unification.
20 Shortly after the signing of the Treaty of Bucharest, that doubled the land area of Greece, Ioannis
Valaoritis, who had a great share in the triumph and had added great glory to his already very illustrious
family name, got drowned in a sea accident in the port of Piraeus. An ill omen ?

17

Minor as their mandatory. They were as much in default as Greece was. One cannot take
something from one who has nothing.
Two months after the signing of the Treaty of Svres, on the 1 st November 1920, the hatedby-the-people, slave-of-foreigners, dictator Eleftherios Venizelos was gleefully voted
out of office. His successors, although they had opposed his Asia Minor policy, did,
however, espouse, as did all Greeks, the vision of the Great Idea, of the Greek Asia Minor.
The only one who could see the impasse and was bold enough to say so was a majorgeneral of the Engineers Corps, Ioannis Metaxas, who had just then been pushed into
retirement.22 His diary preserves for us the content of two long discussions he had had
with the post-November-1920 rulers in March 1921. The financial impasse of isolated
Greece is evident in this document, as is the powerlessness of the nominal victors of the
war, the English. The desperate (and failed) attempt of the army to force quickly a
decisive battle and a victory, by pursuing the Turks to the ends of Asia Minor in July and
August of 1921 is due to the lack of money. Greece had no money, so as to fortify the areas
it had occupied and to await, even partially mobilised, the Turks to attack, as Metaxas and
Venizelos, bitter opponents in everything but this, were unanimously counselling at that
moment.23
In March 1921 we had money allowing us to stay in Asia Minor for three more months.
We stayed for 17. Greek inventiveness devised a quick fix. By law, introduced by Finance
minister Petros Protopapadakis and voted by Parliament on the 25 th March 1922 ( the day
of the national holiday, a tragic coincidence) all banknotes in circulation were cut in half,
physically bisected. The left halves, the Stavroi, that bore the figure of the first governor
of the National Bank, George Stavros, were kept in circulation for a value equal to half the
previous face value of the entire banknote, while the right halves were converted into
bonds of a forced loan to meet the needs of the state and of the expedition in Asia Minor.
This was a highly unconventional move 24, a policy of despair and, yet, most experts
consider it ingenious and successful. I wonder, though, whether that stratagem led the
government into hoping, while, without that temporary fix, it would have considered
retiring the army from Asia Minor in some order and not in total disarray. Because the six
21 In the three years following the breaching of law 2519, until March 1923, the drachma lost 95% of its
value.
22 He had made himself unpopular with his friends who were royalist politicians and had won the
elections. He was unable to find a newspaper that would print his unpopular and inconvenient truths
until the very eve of the Asia Minor Disaster, a sign of the extent to which the vision of Ionia had
inebriated the Greek people.
23 In view of those facts one cannot but wonder at the decision of the government, profusely applauded by
the opposition, to reject the compromise proposals put forth by the Allies and to entrust everything to
the Greek bayonet. They probably feared that public opinion would accuse them of treason, selling the
country short and the like. They did, however, take advantage of war censorship so as to hide from that
very same public opinion the impasse and the compromise proposals of the Allies. The end result was
that they did not escape from the very fate they were trying to avoid.
24 My paternal grandfather, whenever he detected a spike in inflation, rushed to convert as many paper
banknotes as he could lay his hands on into coins, because her remembered that, although all paper
banknotes had been bisected, metallic coins had been spared.

18

months gained by the Greek government through that strange default were also gained
by the Turkish leader Kemal.
The Refugee loan the Stabilisation loan
The Asia Minor Disaster brought a large part of the nation into the utmost penury. The
refugees had to get fed, get medical attention, get lodgings, if only for a time. The
resources of the indigenous people had been exhausted after ten years of wars. It took one
more year for peace to be agreed in Lausanne. And it was fortunate that Eleftherios
Venizelos conceived the idea of a sophism that he proposed to the Turks : Greece would
state that it owed them war reparations but that it was unable to pay. Thus, he convinced
them to accept only moral compensation, otherwise we might have had to go to war again.
Political instability in Greece (there were five administrations in the year 1924 alone, due to
infighting between venizelist factions) would not let the country negotiate for a loan the
need of which was undeniable. There were infants and old people dying every day in the
refugee camps. Once again, Greek inventiveness thought up a solution : The loan would
not be contracted by the Greek government but by an International Commission for the
Resettlement of Refugees. Its chairman, Henry Morgenthau Senior 25, an American,
Israelite in religion, was an experienced banker. Even so, there occurred one of those
strange historical coincidences that Thucydides loved to point out. Morgenthau,
according to his memoir of the matter, secured the Refugee Loan, carrying the guarantee
of the League of Nations, in September 1924, in return for his discretion, after recognising
on the walkway along the coast of Lake Geneva the eccentric, agoraphobic Governor of the
Bank of England, Montagu Norman, who was visiting that city incognito ! Such was the
coincidence that saved the life of many a refugee child in the winter of 1924-1925 26
The political turmoil of the years 1923-1926 came to an end with the elections of November
1926. Proportional representation and the multiple misfortunes that the country had
suffered dictated a political compromise. The Ecumenical (all-party) administration of
Alexandros Zamis kept at its core the moderate venizelist parties of Kaphantaris and
Michalakopoulos and the Free Opinion party of Metaxas, in essence the party of the
moderate royalists. In the field of the economy, it managed to balance the budget. It
founded a central bank, the Bank of Greece, in which alone it vested the power to issue
currency. In the one-and-a-half year of its life the coalition government contracted the
Stabilisation loan, meant to stabilise the international value of the drachma. That loan, too,
required the guarantee of the League of Nations.

25 His son, Henry Morgenthau Junior (III), holds, to the present day, the record of the longest-serving
Treasury Secretary of the USA, during the Presidency of Franklin D. Roosvelt. The Morgenthau Plan, a
proposal to turn Germany after the 2nd World War into a pastoral country, so that it would no longer
be a threat, was prepared under his auspices.
26 Had the chance encounter not taken place, the loan, in all probability, would have gotten delayed until at
least March 1925, when the following session of the League of Nations was to be convened.

19

The Quadrennium of Venizelos the fifth default

Eleftherios Venizelos overthrew the coalition government in 1927. In the elections of 1928,
he got such an overwhelming majority that he was able to write his wife that the people
appointed him parliamentary dictator. He was sincere in his wish to bridge the schism
and to offer the nation peace and prosperity. He was not, however, able to earn the trust of
neither his opponents nor of his supporters. One complication was that the international
economic environment had by then moved far away from the liberalism that Venizelos
understood. There had come the time of commercial and exchange controls, of
protectionism, of bilateral commercial agreements and of dictatorial political regimes. The
stabilisation programme that Venizelos continued to implement had started bearing fruit
but the rest of the world was getting submerged in the great economic crisis of the
interwar years. The mortal blow was dealt to Greece by the drastic devaluation of the
British pound against the dollar in 1931 which followed the unilateral suspension by
England of the convertibility of sterling into gold. The Greek government and the Bank of
Greece had not foreseen the devaluation 27 and lost a lot of money they had earmarked in
order to service the loans of the country. Just like Trikoupis, Venizelos had no notion of
the technique of default. At the height of the crisis, in September 1931, he disagreed with
his Finance minister, Georgios Maris, (over the purely political matter of the date of the
forthcoming elections and of the electoral fallout of the needed policy of spending
reductions) and fired him, as, indeed, he fired the Governor of the Bank of Greece,
Alexandros Diomedes (for a non-existent foreign exchange infraction). He spent the last
foreign exchange reserves paying interest and principal on foreign loans in an attempt to
support the creditworthiness of the country. Venizelos went on a desperate tour of the rest
of Europe seeking loans, but his prestige in the rest of Europe was no longer as high as it
had been before, because the leaders with whom he had worked together in earlier times
had now left the stage. In May 1932, Greece went again into default.
Kyriakos Varvaressos, a German-trained economist of some international standing,
devised and implemented a system of currency and foreign exchange controls that was
destined to isolate and protect, as much as that was possible, the Greek economy from the
storms (but also to deny the opportunities) of the world economy over the long time span
of 60 years.
Under the dictatorial regime of the 4 th August (1936-1941), the Greek economy appeared to
be adjusting adequately to the more restrictive world economic environment. Metaxas, its
leader, sought a compromise with the creditors of Greece but his utmost priority was to
prepare the country for a war that he considered imminent. He used to answer the
insistent queries of the creditors, most of whom came to Greece from London, thus : We
27 It was, nevertheless, clear to all that England would not be able to maintain the exchange rate of the
pound against the US dollar and gold at the prewar levels. Churchill, an amateur in charge of His
Majesty's Treasury, wanted, with his usual strong will, to repeat the historic achievement of England
after the Napoleonic Wars. England paid that insistence with unprecedented, in both size and duration
(in excess of a decade), unemployment and consequent misery. All the same, knowing that the pound
would get devalued at some time does not mean that one could forecast with any accuracy when that
would happen.

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are spending this money to arm ourselves for their good, so it should be enough for them
that we are their friends. He went to the Permanent Court of Arbitration in the Hague 28
and got it to issue a decision whereby, in the case of a settlement of a default, any special
privileges of certain lenders are brought to exactly the level set by the settlement for the
remaining lenders. This decision has since been recognised as precedent and an essential
provision of the international law governing the defaults of sovereign states. It has been in
force to the present day. However, in an era of geopolitical earthquakes succeeding one
another, Metaxas was unable to come to a definitive settlement, so that the pending matter
of the non-serviced loans that had been guaranteed by the League of Nations was to
trouble Greece for long years, as late as the decade of 1960.29
The Government of Liberation the sixth (virtual) default
The government of the Liberation of 1944 arrived in Greece in a haste to preclude the
takeover of the capital by the communists. Its financial plans had not matured. The
Occupation had drained the last of the little resources that the Greek economy could
produce through the issuing of inflationary currency. The occupation authorities got it
into circulation and acceptance by force of arms. The economics management staff of the
government of the Liberation, professors Alexandros Svolos, Angelos Angelopoulos and
Xenophon Zolotas were, it seems, carried away by the spirit of euphoria and the
expectations of immediate relief. Varvaressos was disliked by the politicians because he
had allegedly collaborated with the 4th August regime and because he had been absent
from Greece, together with the government in exile, during the Occupation. 30 They were
hoping to terminate rapidly the policies of currency and exchange restrictions that
Varvaressos had devised and implemented. In practice, though, since the reserves, in gold
and pounds sterling, that the government had brought along were finite, they thought it
prudent to hoard them, instead of releasing them in some ample quantity into the market.
Of course, their chosen policy made that money much more desirable. This was the exact
opposite of the policy recommended by those very same professors in their voluminous
textbooks. Faced with generalised distrust, they were forced to print inflationary currency
in quantities that exceeded many times over such printing as had been undertaken by the
collaborationist governments of the Occupation. From that point on, matters went out of
28 Greece was represented in the Court proceedings by Kyriakos (Kokos) Tenekides, maternal uncle of the
Nobel-winning poet George Seferis, a scion of the historic family of the island of Naxos (the town of
Philoti) and Smyrna, father of Panteios Graduate School of Political Science professor, Georgios
Tenekides. Metaxas, unlike many dictators of the interwar period, did not foud a political party of
movement and, therefore, was not obliged to appoint any people recommended by the party to posts
in which he would rather appoint others, even if he knew they were his political opponents.
29 at which time it was obliged to came to terms with the United Nations Organisation, that had inherited
the assets (down to the premises in Geneva, as well as such of the staff that had survived the 2nd World
War) of the League of Nations .
30 The extent to which the three professors had felt the ills of the Occupation is an open question, given that
two of them were scions of extremely wealthy families, while the third, because of his extremely simple
and frugal, indeed ascetic, way of living before the Occupation, is unlikely to have noticed any
additional privation due to the Occupation.

21

their control. The currency of Greece, for nearly the next ten years, would be the gold
sovereign. We would not have banks, in the real sense of the word, for, maybe, fifty more
years. By converting the occupation drachmas into new drachmas at the rate of one new
drachma against fifty billion old drachmas, all money liabilities vanished, to the benefit of
the debtors, whose debts in occupation drachmas were not converted new drachmas that
immediately lost most of their value. Law 18 of 1944 was drafted in such a hurry that
nobody took care to put in an exception for the Occupation Loan, about which we get to
hear a lot these days. The loan had been forced by the Germans on the Greek
collaborationist government. It is quite possible that it is, also, subject to the provisions of
law 18 of 1944 that erased all debts.
It is worth noting that only one of the perpetrators of the sixth default, Alexandros Svolos,
the one who was least responsible and only really put his name and signature under the
text of the law, suffered any consequences to his reputation. Zolotas 31, who bore the
heaviest responsibility, did have a great career as Governor, for nearly 20 years, of the
Bank of Greece, cabinet minister and even got to be prime minister. His readiness to set
aside the teachings of his academic field, those that he himself had professed in several
voluminous textbooks, in favour of what the political leadership of the day perceived to be
its interest, appears to have been acknowledged and rewarded.32
Post-dictatorship era ( 1974- date ) European Union the seventh default - bankruptcy
The adhesion of Greece to the European Communities, as the European Union was called
then, stemmed from a mainly political and not economic logic. There was an economic
rationale, though. The Greek economy and society had lived and grown since 1932 within
a narrow, limited, but, also, protected horizon. That experience was radically different
from the conditions in which the Greek economy had been operating since at least the era
of the New Greek Enlightenment in the late 18 th century. The consequences of looking
inwards, of the various restrictions on economic activity and of the ensuing distortions
were evident to us through the artificial and temporary well-being of the years 1967-1973
and the rough awakening of 1973-1974 brought about by the first oil crisis and by the
Turkish invasion of Cyprus in 1974. It was only logical that we sought to accede to an
environment in which the restrictions could be relaxed under somewhat controlled
conditions.
Anyone can easily ascertain that the material standard of living of the Greek people and,
even, their educational achievements have taken great strides since 1981. Even the period
of economic stagnation that started in the decade of 1980 brought to most of the Greeks
significant material benefits through a redistribution of income and wealth, even as a large
part of our productive base withered in the name of a supposed social sensitivity and
justice, that only vainly tried to mask the underlying covetousness of an overwhelming
majority of the citizens.
31 He, like Eutaxias, had studied at the Rizareios Ecclesiastical High School.
32 One wonders as to what this precedent implies for the incentives of public servants in Greece ...

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As we have seen in reviewing the entire history of the Greek economy, developments in
the world economy cannot be made to await, neither Greece, nor any other country. The
remaining countries in the European Union, however much they wanted to help Greece,
felt they had to proceed quickly with the economic and monetary integration of their
economies. The Greek economy cast away the last vestiges of protectionism in 1992.
However, instead of taking advantage of the low cost of capital to restructure the
productive base of our economy, we chose to invest in more jobs in the public sector,
many of them useful, but, really, beyond our economic means. We did invest in social
services, too, and reacted fiercely when reform of our social security system became
overdue. Those distortions created further distortions in the private sector of our
economy. There too, the ample financial resources were placed in the production of noninternationally-tradeable goods and services, to the detriment of the tradeables, that had
been exposed to world competition somewhat clumsily and prematurely.
The distortions became more rigid in the six years 2002-2008, during which the cost of
money, due to our membership of the Eurozone, was extremely low.
The world financial crisis of September 2007 was the quarter-hour of Rabelais for the
Greek economy, the time at which the check for the meal comes. Given the immense size
of our debt over-exposure, the only possible, and maybe tolerable, option was a controlled
crash. Our partners forgave us a debt of 100 billion euro, substituted for our private
lenders to the tune of 220 billion euro, refinanced our banks through the European Central
Bank with an amount exceeding 100 billion euro. This was the largest debt settlement and
financial rescue package in the history of the world.
The afterword of the entire operation to rescue the Greek economy cannot be written yet.
One mustnote, though, that, in comparison to Spain and Portugal, who went through a
crisis of a similar nature, the rise and fall of the standard of living in Greece in the years
2002-2014 were much greater. Even so, Greece is in a better position, as regards its average
standard of living, in comparison with the two countries above, than it was in 2002.
Taking into account the fact that Greece, under pressure from the troka, has implemented
many more economic reforms than those two countries, it is probable that it will be able to
recover, in the three years to 2016, one-half of the well-being that it lost in the collapse of
the five years 2008 2013. Then, we might be able to say that we managed to fool the dimwitted Franks once more.
The Cycle of Over-indebtedness
The Finance minister of Louis XV of France, Joseph Marie Terray, a defrocked monk,
notorious for debauchery and obscene language, but, also, a man of exceptional abilities
and decisiveness, had pontificated that a frequency of defaults inferior to three in every
century is a sign of fiscal timidity. This is the information relayed by Andrads, for, on
the internet, one reads that Terray recommended a default only once in every hundred
years. In any case, the modern Greek state, having defaulted seven times in 193 years,

23

cannot be accused of any fiscal lethargy. Are, though, those defaults unavoidable ? Must
every generation get a taste of them ?
If we get to look at matters more carefully, we will notice that, in six out of the seven
defaults, our state can point to very serious extenuating circumstances. It was to its
advantage that it chose to sacrifice its crediworthiness in order to save the greater goods at
stake, in most cases its very existence. However, this latest default, the one that we are
living through today is different. It might even be a bankruptcy. The defaulter does not
pay because he cannot, while the bankrupt chooses not to pay, even if he could.
The sad truth is that our economic policy in the years 2002-2010 was the exact opposite of
the one we needed. There were voices warning us but we chose not to heed them. Even
today, we shut our eyes and ears so as to shut out the bad news. This is our true
bankruptcy today, the one of the spirit and the mind. Any comparison with the noble
national obsessions of previous generations is not at all flattering for us. 33
Over one hundred years have passed and we still resemble The Beggar of Andras
Karkavitsas, who acknowledges that he could work and be of service, but that people,
with a minimal bother on his part, are prepared to offer him charity that it would not be
rational to refuse. Is the conduct worthy of a nation that has kept its language and faith,
after going through trials much harder than default ? Of a nation that has shone the light
of its values for long centuries and instructed the peoples of the whole world ? I found
one answer in a memory of my spouse, Sophia Mourouti-Georgana, recalling Motherland
Day in the Christian summer camp for teenage girls of Vravron, a few years ago. However
hard the two of us searched, we were unable to find a precise citation. Maybe a member of
the audience could help us. The oration of the young girls of the camp ended with the
dilemma at the end of this text, a dilemma that, I believe, we ought to set and keep setting
to ourselves : To be a torchbearer or, rather, a beggar to the ends of the earth ?

33 Andrads attributes to Thucydides the assertion that rarely have the Greeks, having been fortunate,
shown themselves prudent. I have not been able to locate the passage and I hope it is not in
Thucydides. And if it ever held true, at least that it not hold in the future.
Alas, the quotation is correct. It is in Book VIII, chapter 24 of Thucydides, who qualifies it slightly. I still
hope we shall be able to prove him wrong one day.

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