868.515/5–2445
The Ambassador in Greece (MacVeagh) to the Secretary of State
[Received June 7.]
Sir: As of possible interest to the Department in connection with my many recent messages dealing with the financial situation in Greece, and also with those setting forth the great and growing difficulties created thereby for the personnel of this Embassy, I have the honor to submit below certain observations concerning the present drachma and its relation to the dollar.
It would be natural for anyone unfamiliar with the financial situation in this country to take it for granted that drachma currency partakes of the same nature as dollar or sterling currency, although it would be understood to be “weaker”. But the real difference goes much deeper.
The fantastic inflation which reached its culmination in Greece during 1944 is well-known. One of the most obvious steps to meet such a situation was that taken last November, when an entirely new paper currency was issued in place of the old.33 It was decided to call the new unit a “drachma”, as before, and to fix its exchange rate in relation to the dollar and the pound at substantially the same levels as obtained [Page 220] during the year prior to the German occupation. At the same time it was decided virtually to wipe out the old drachma currency in circulation when Greece was liberated by making it redeemable at the rate of 50 billion old for one new drachma, thereby reducing the nominal exchange value of all the paper currency then circulating in Greece to approximately $1,000,000 as against a corresponding figure for August 1939 of over $80,000,000. The first of these decisions seemed logical enough; the second was perhaps questionable. But giving the old currency only a negligible value made the selection of a dollar exchange rate purely arbitrary.
Whatever the psychological advantages of reintroducing the prewar exchange rate, from an economic standpoint the price of the dollar could just as logically have been fixed at 1,000 drachmas as at the arbitrarily selected figure of 150. In any event, no official provision was made for converting the new drachma into foreign currencies with which to purchase goods for import or to make remittances abroad. Today’s official exchange rate constitutes strictly a non-commercial one-way affair, used chiefly in connection with official expenditures of the United States Government and for cashing support remittances. The official rate is in no way affected by price levels or by other normal factors of supply and demand. On the other hand, several steps have been taken which, in contrast to the fixing of an arbitrary exchange rate, have had an immediate effect upon commodity prices. The most important of these steps involved a series of measures establishing wage rates for a variety of occupations, both among private workmen and employees and for those employed by the Greek Government and the British military authorities. Other actions influencing price levels were the establishment of prices for rationed foodstuffs issued from relief supplies, and the short-lived experiment of the Bank of Greece in selling a limited amount of gold coins to the public. As applied in Greece, these three economic controls had one basic feature in common: they provided for wages and prices approximately three times prewar levels in terms of drachmas.
For reasons too obvious to need recital here, liberated Greece must for some years endure a living standard appreciably below that of 1939. This must be reflected in real wages lower than prewar. Greece has never had a comprehensive system of rationing and price control, and present plans for introducing one appear unlikely to produce effective results on a broad scale in the foreseeable future. Lower real wages, therefore, probably will continue to be reflected more in high commodity prices than in strict rationing. And since an excess of demand over supply tends to increase prices in geometrical proportion, it is not suprising that increases over prewar have not been limited to the three-fold rise apparently justified by the factors mentioned [Page 221] in the preceding paragraph. In actual fact commodity prices in May 1945 average about ten times 1939 levels.
Contributing to this impressive rise in commodity prices is the fact that the new drachma is not a full-fledged currency. Practically no one deposits it in the bank or otherwise retains possession or title to this currency any longer than absolutely necessary. It has no value abroad and even in the case of domestic transactions its use is limited principally to day-to-day purchases of necessities. A sale involving the equivalent of $25 or more is almost invariably calculated in gold. It would not be quite fair to liken the present drachma notes to cigar-store coupons or premium stamps, but it would be reasonably accurate to compare them to a token good for purchases at a company store charging high prices. When the United States Government discharges obligations in Greece today (May 24), it pays good dollars. But the beneficiary receives for one of these dollars simply 150 tokens with a total purchasing power of about 10 prewar cents. In terms of present (1945) price levels in the United States the dollar converted in Greece may be worth as much as 15 cents, but it must be spent at once since no one considers the tokens received as safe to hold.
Some day Greece may be expected to have a full-fledged currency again, but in the meantime the standard of value, as indicated above, is not the token drachma but the gold sovereign, which was supplied liberally by the Allies to self-styled resistance movements during the German occupation. Commodity prices in terms of gold sovereigns have been comparatively stable and reasonable. Today the sovereign sells for 25,000 drachmas in Athens as against $8.40 in New York; the cross-rate is, therefore, nearly 3,000 drachmas per dollar in contrast to the official rate of 150. A large part of the premium on gold is, of course, due to its value for hoarding, but the dollar is worth perhaps 1,000 drachmas today in terms of current commodity prices in Greece, and it is only in such terms that the drachma has any value whatever.
Respectfully yours,
- See note 4111, November 14, 1944, from the Greek Ambassador, Foreign Relations, 1944, vol. v, p. 227.↩