Both reforms undergone by the New Greek government were not successful as issuing new currency was not the most ideal solution at that time. The economic situation did not improve with merely replacing the old currency with a newer one.

It can be said that the country’s investment activities is highly affected by the country’s savings as it can determine the flow of the process. The country will be able to undertake new developments with the help of adequate savings. This will lead to an increase in economic activity and a rise in the GDP per capita of the country.

An unavoidable cause of hyperinflation were such as World War II and the Civil War. The economic rules were not abided which resulted in a plummet in the country’s economic status and a loss of many lives. Hence, after the Civil War in 1945-46, a plain was offered by the British in hopes of stabilizing the country. This included the increase of revenue through the selling of aid goods, adjustment of particular tax rates, better tax collection techniques and the installation of the Currency Committee.

In 1946, we can see that with the establishment of the monetary commission by Greece, rules and standards for credit statements were important as it is used to monitor the flow of funds. The country would be able to ensure that not too much of the funds are exported overseas while also saving funds for the development of their own country.

In 1973-74, the oil price shock changed everything. Sharp rises in the oil price stopped Greece’s economy dead in its tracks.

In 1974 the country suffered a sharp recession while inflation, which hadn’t been above 5% since the mid-1950s, suddenly leapt to over 25%. It remained above 10% for over two decades.

The stabilization policies of Constantine Karamanlis’ newly formed New Democracy government, which had won the country’s first democratic elections following the collapse of the ruling military junta, helped soften the blow of the oil price shock but failed to tame inflation.

Second oil price shock of 1979-1981 the current government lost power to the populist left-wing Pan-Hellenic Socialist Movement (PASOK) party in 1981. After PASOK took power, the country’s debt-to-GDP ratio began to balloon as the government borrowed heavily to finance its populist programme of state spending. PASOK lost out to New Democracy in the 1989 election. In 1992 because of the Maastricht Treaty in February, sharp increase in revenues combined with falling government borrowing costs helped stabilise the situation for the years leading up to the financial crisis. However, the Greek government took advantage of the fall in its interest payments to increase other spending, rather than reducing its debt and finally they fail to get the economy back on track.

After the World War II, Greece underwent an ‘economic miracle’. GDP growth averaged 7% per year between 1950 to 1973, second only to Japan. The period also saw low unemployment and moderate inflation.

Moreover, the living standards for Greek citizens also improved hugely. In the 1960s and 1970s, GDP per capita increased by 210%, or an average of 6.1% per year, as workers became much better off. Industrial production grew rapidly, as did Greece’s tourism and services industries on the back of financial support from the US under the Marshall Plan.

In part, the funds were designed to head off the threat of Communism. As The New Republic columnist Richard Stout wrote in 1947:

State Department strategists have now come around to the point a good many ‘visionaries’ have been urging all along, that one way of combating Communism is to give western Europe a full dinner pail.

Greece’s fiscal budget balance swung from a 271-million drachma surplus in 1939 to a 790-million drachma deficit in 1940 due to the onset of World War II when foreign trade fell dramatically. This set the stage for an already-deteriorating fiscal position by the time Greece was invaded by the Axis powers at the end of 1940.

The additional costs on Greece imposed by the “puppet government” of Axis powers that controlled the country during its occupation included supporting 400,000 Axis soldiers stationed there and a big indemnity owed to the occupiers.

Furthermore, national income in Greece was slashed from 67.4 billion drachma in 1938 to 20 billion drachma by 1942. As tax revenues plummeted, Greece resorted to monetisation at the central bank to pay the aforementioned expenditures and finance the rest of its deficit.

The Currency Committee was established in 1946 to provide a system that enables monetary, credit, and foreign exchange policies to be incorporated with the demand of the economy. This committee had full authority on issues concerning the listed policies while the Bank of Greece still had jurisdiction on the implementation of the monetary policy.

Therefore, Greek’s government was more dominant compared to the Currency Committee. Consequently, funds were provided for both the Greek economy and Greek government by the Bank of Greece throughout the years 1945 until 1948.

The public had held a strong gold preference during the hyperinflation period also known as the Occupation Period. This can be said because the market for gold sovereigns were much higher than the drachma. This led to a continuous rise in the prices of gold sovereign which were followed by the increase in general price levels.

Furthermore, the policy of gold sovereign sales had an important aspect to it which was that the Bank of Greece was able to occupy the amount of drachmae which corresponded to the rising demand of gold sovereigns. Hence, the quantity of money in circulation would decline.

The stabilization of the price of gold sovereign was the main objective of the policy rather than to reduce the money supply. Nonetheless, this policy ended up being not too successful.

The return of the Greek government in-exile to Athens was to address hyperinflation and confront wartime destruction in October 18, 1944. A monetary reform was attempted on November 11, 1944 with the basic provision of a new drachma. Both the inflated occupation drachma and the new drachma were related by a ratio of 1 to 50 billion of the old drachmae. Furthermore, there was a linkage of the new drachmae to the pound sterling with a ratio of 1 pound sterling to 600 drachmae.

Nevertheless, a new reform was handled by Kyriakos Varvaressos, Deputy Prime Minister, in June 1945 as the previous reform failed.

Based on the Varvaressos reform, the control of prices and rationing of commodity, an increase in taxes, restrictions on imports and an increase in economic aid was included. However, the inflationary past and currency stability were not liquidated and established, hence the reform ended failing.

During World War II the Great Famine occurred. The allied powers blockaded Greece and many local citizens starved. This along with only ⅓ of Greece’s land being abled to be cultivated greatly hurt the Greek economy. The effects include the emergence of the Black Market, inflation in food prices, undernourishment in ⅔ of children and the death of around 60% of large farm animals.

The banking system collapsed in 1946. The war had taken a toll on them along with other factors such as the British naval blockade, hyperinflation, no consumer revenue. Furthermore, all of these were caused by several aspects such as citizens selling their homes and farms to feed themselves, no jobs available and famine due to unavailability of money and food.

During the Second World War, Greece experienced a decrease a hyperinflation which lead to an increase in prices. This was due to the repossession of power towards Athens by the exiled Greek government during the October of 1944.

Everyone was well concerned with the future of Greece during the salvation of Greece in October, 1944 and the fact that the newly formed Greek government would not allow the monetary inflation and effects to continue for long. A monetary reform was attempted on November 11, 1944 with the basic provision of a new drachma.

Both the inflated occupation drachma and the new drachma were related by a ratio of 1 to 50 billion of the old drachmae. Furthermore, there was a linkage of the new drachmae to the pound sterling with a ratio of 1 pound sterling to 600 drachmae. Nevertheless, a new reform was handled by Kyriakos Varvaressos, Deputy Prime Minister, in June 1945 as the previous reform failed.

Based on the Varvaressos reform, the control of prices and rationing of commodity, an increase in taxes, restrictions on imports and an increase in economic aid was included. However, the inflationary past and currency stability were not liquidated and established, hence the reform ended failing.

Greece’s economy suffered a great deal during the occupation by Axis countries in World War Two. It had already felt the impact of several attacks in late 1940 before being overwhelmed in the spring of 1941.

The occupiers took raw materials, livestock and food, and the puppet government was forced to shoulder the costs of occupation.

A drop in agricultural production led to severe shortages of food in the main cities and a period known as the Great Famine. Dwindling tax collection contributed to rising inflation, which reached a peak of 13,800% a month in November 1944.

Although price hikes weren’t as intense as in post-war Hungary or Germany, Greece’s stabilization efforts went on for longer. After liberation came in October 1944, the government made three attempts over eighteen months before reaching some stability through fiscal reform. loans and a new currency.

Source: Getty Images

The main cause of Greece’s hyperinflation was World War II, which loaded the country with debt, dissolved its trade and resulted in four years of Axis occupation. 

At the outset of World War II, Greece saw a budget surplus for fiscal 1939 of 271 million drachma, but this slipped to a deficit of 790 million drachma in 1940, due mostly to trade, reduced industrial production as a result of scarce raw materials and unexpected military expenditures. The country’s deficits would continue to be funded by monetary advances from the Bank of Greece, which had doubled the money supply in two years. 

“With tax revenues down and military expenditures up nearly 10-fold, Greece’s finances were in a downward spiral.”

The country was occupied by Axis forces by May 1941, and Greece’s military costs were replaced by expenditures from the support of 400,000 troops, which varied between one-third and three-fifths of the country’s outlays during the occupation, which were all funded by the printing of money by the Bank of Greece. The Greek puppet government did not tax to cover its costs and revenues represented less than 6 percent of expenditures during the final year of occupation.

Hyperinflation began in 1943, when expectations of future inflation caused Greeks to refuse to accept the currency and the government began paying in gold franc coins, which further encouraged the public to hold wealth in non-currency forms and decreased confidence in the drachma, reducing the elasticity of and the demand for domestic currency.

When the government in exile returned to Athens, they had a limited ability to collect taxes outside of the capital and ran into substantial unemployment and refugee costs. By the time the new government’s stabilization effort went into effect, revenues comprised 0.4 percent of expenditures, with the Bank of Greece covering the rest.