Foreign Relations of the United States: Diplomatic Papers, 1942, Europe, Volume II

868.51/1662

Report by the Greek Minister of Finance (Varvaressos)⁷³

I. Statement of the Financial Resources at the Disposal of the Greek Government From 23 April 1941 Until 31 August 1942

At the moment when the Greek Government was compelled to leave Greece it had at its disposal abroad the following funds to meet the expenditure which it was undertaking for the purpose of continuing the struggle:

a) £,417,000.— balance of a credit of £10,000,000 granted by the British Government to the Greek Government at the beginning of the Greco-Italian war to meet war expenditure incurred outside Greece, and, in particular, for the payment of war material purchased within the Sterling area. The difference, amounting to £5,583,000 between the total credit of £10,000,000, and the aforementioned balance had been expended by the Greek Government before the enemy invasion of Greece.

b) $4,975,000.— (i.e. £1,235,000.—) which the British Government likewise made available to the Greek Government for payment of the value of war material purchased outside the Sterling area.

Thus, at the time of its departure from Greece the Greek Government had at its disposal the sum of £5,652,000 from the above mentioned credits granted by the British Government.

After the seat of Government had been established outside Greece, and more particularly after it had been established in London, the Greek Government created the following sources of revenue:

a) it imposed taxation on Greek merchant ships with retrospective application from April 1941. Up to the 31st August 1942 this had yielded £415,000.—. Unfortunately, this will of necessity be a progressively declining source of revenue, by reason of the continuing heavy losses sustained by the Greek Mercantile Marine; these losses now amount to 60% of its pre-war strength.

b) by means of a legislative measure it enacted that any difference between the freight paid by the British Government, on the basis of the time-charter agreement, and any other higher freight actually realised by a Greek ship from any cause whatsoever, shall constitute public revenue and, as such, be assigned to the needs of the State.

This arrangement also had retrospective application from April 1941. The sums, however, collected from this source up to the end of November 1941 were by law set aside in fulfillment of the obligations undertaken by the Greek State in connection with the insurance scheme which it had established. Losses were sustained on account of the fact that very many of the Greek ships insured under the scheme were lost in the course of the occupation of the country by the enemy.

At the present moment there is only a very small number of ships in respect of which the above-mentioned item of revenue (from difference in freight) can accrue. Certain arrangements have, however, been made ensuring that, under certain conditions, this item of revenue will be retained in Public Funds as long as the ships in this category (which in the past were trading on the free market) survive. The revenue collected from this source for Public Funds (after deduction of the sums required in fulfilment of obligations under the insurance scheme, as mentioned above) is reckoned at £1,000,000 up to the 31st August 1942.

To the above sums must be added one of $2,000,000.— (approximately £500,000.—), being the unutilized balance of a remittance from the Greek Government to the Greek Legation at Washington, made prior to the enemy invasion and intended for the purchase of supplies.

Thus, the total of the funds both capital and revenue, which the Greek Government had at its disposal from the date of its departure from Greece until the 31st August 1942 amounted to £7,567,000.—Out of these available funds, however, a sum of £1,610,000 was expended in payment of the value of supplies which though ordered by the Greek Government before the enemy occupation of the Country, fell due for payment after the Government’s departure from Greece.

Consequently, the actual amount of funds available to the Greek Government in the period up to 31st August 1942, for meeting public expenditure was £5,957,000.—

II. Greek Government Expenditure From 23 April 1941 to 31 August 1942

Against the aforementioned assets expenditure incurred by the Greek Government from the date of its departure from Greece up to 31 August 1942 amounted to a total of £3,582,000.—

It should be noted that this figure does not include expenditure of the Ministry of Marine for the period April–August 1942, nor that of the Air Ministry for the month of August, as the relative accounts have not as yet been made up.

The apportionment of the above total is as follows:

Ministry	of	War	£1,355,100
“	“	Marine (up to March 1942)	727,200
“	“	Air (up to July 1942)	202,400
“	“	Foreign Affairs (Embassies, Legations and Consulates)	362,000
“	“	Mercantile Marine (including expenditure for ships chartered to the Greek Government.)	298,300
Revictualling and Relief of Refugees			442,000
Fixed charges:—
Royal Household, Pensions etc.			104,000
Other Administrative expenses			91,000
		Total	£3,582,000.

After deduction of the above figure of total expenditure from the afore-mentioned total of assets, amounting to £5,957,000 there remained a balance at the disposal of the Greek Government on the 31st August 1942 of £2,375,000. This sum will, however, be reduced by at least £500,000 when the deferred payments for account of the Ministries of Marine and Air have been effected up to the 31st August.

Thus the balance available to the Greek Government at 1st September 1942 may be reckoned at approximately £1,875,000.

III. Estimates for the Immediate Future

a.—estimates of expenditure

The estimate made at the beginning of the current year regarding expenditure in the financial year 1942–43 (April 1942–March 1943) had to be radically revised on account of the heavy increase in expenditure on the Fighting services. This increase is attributable to the substantial growth in the numbers of our armed forces in the Middle East. There has been, and still is a steady flow of new recruits—both officers and other ranks—to the Army, Navy and Air Force. Hence the estimates for the current financial year 1942–43 are as follows:—

1 April 1942—31 March 1943.
Ministry	of	War	£1,480,000
“	“	Marine	1,100,000
“	“	Air	360,000
“	“	Foreign Affairs	280,000
Fixed Charges:
(Royal Household, Pensions etc.)			80,000
Ministry of Mercantile Marine (including expenditure for ships chartered to the Greek Government)			200,000
Other Administrative expenses			100,000
		Total	£3,600,000.

As is shown below, in the section dealing with the financial assistance afforded by the British Government, the above estimates of expenditure for account of the Armed Forces include only the cash disbursements for salaries and allowances, for which the Greek Government is liable. No expenditure for material of any kind is included therein, inasmuch as, by the Agreement referred to below, the British Government undertook to supply such material to our armed forces.

To this expenditure should be added the probable expenditure on the partial revictualling of Greece up to the limit allowed by the Great Allied Powers, as well as the necessary expenditure on relief for the refugees escaping from Greece.

The heavy financial burden of despatching foodstuffs to Greece is lightened for the Greek Government (a) by the Canadian Government’s generous gift of 15,000 tons of wheat monthly, which are allowed to be shipped to Greece, (b) by the splendid work of the Greek War Relief Association in U. S. A., a work which enjoys the moving and whole-hearted support of the American people, (c) by the liberality of the United States Government which has promised to supply on Lease-lend terms foodstuffs and other commodities the importation of which into Greece may be permitted, (d) by the support given by the British Government and British people, and (e) by the assistance forthcoming from various International Organizations, in particular the International Red Cross, Swiss Red Cross, Swedish Red Cross.

The Greek people cannot ever forget the warm-hearted support, moral and material, which it has received from these Governments and Organisations; and it will ever recall with gratitude the splendid spirit of solidarity which, at the moment of its suffering, all nations with a high standard of moral civilization showed towards it.

But, as in the past so too in the future, the Greek Government will of necessity share in the expenses of despatching foodstuffs to the Greek people. Likewise, it will bear the cost of relief for refugees escaping from Greece.

It is clearly impossible to make an exact estimate of such expenditure. Nevertheless, the experience of the past few months combined with an examination of certain obligations which have already been undertaken leads one to envisage an expenditure of not less than £1,000,000.

Thus, for the financial year 1942–43 the total of the outgoings which it is possible to foresee with any degree of certainty will probably amount to the sum of £4,600,000. Of this sum £1,880,000 have already been spent in the five months 1 April–31 August 1942 (the figure includes expenditure of the Ministries of Marine and Air entered at £500,000, the accounts of which as mentioned above, have not yet been made up). It follows, therefore, that a sum of £2,720,000 falls for expenditure in the remainder of the financial year i.e. the seven months 1 September 1942 to 31 March 1943.

b.—estimated receipts

The resources which may be anticipated to be available to the Greek Government during the same period from 1 September 1942 to 31 March 1943 are reckoned to be the following:—

a) The afore-mentioned balance of earlier funds, viz. £1,875,000.

b) The proportion of taxes imposed upon Greek ships, and of the difference of freight collected for account of Public Revenue, as detailed above.

The amounts accruing in a full year are reckoned at £300,000 from taxes, and £1,500,000 from difference of freight, i.e. a total yearly revenue from these sources of £1,800,000. Hence for the period to the end of the financial year (seven months, 1/9/42–31/3/43) the proportion of revenue from these sources amounts to £1,050,000.

Consequently the total of resources at the disposal of the Greek Government up to the end of the financial year may be estimated at £2,925,000 against expenditure, as estimated above, of £2,720,000.

At the same time, it should be borne in mind that the attainment of these figures of revenue as a whole is a matter depending on the extent of the losses sustained by our Mercantile Marine. As already pointed out, taxation and difference of freight depend on the number of vessels surviving. Heavy losses would inevitably entail a reduction in revenue from this source.

On the other hand, the corresponding expenditure up to the end of the financial year has been estimated at £2,720,000. This estimate, however, rests on the assumption that no events will occur calling for any considerable increase in expenditure, such as (to name the principal items) a growth in the numbers of our Armed Forces or in the Revictualling or Refugee Relief requirements. Yet such increases are extremely probable, and, if occurring would certainly wipe out the small margin of £200,000 between revenue and expenditure shown in the above estimates.

The conclusion to be drawn from the above is that, if the Greek Government has hitherto been able, and will, in all probability, be able, up to the end of the financial year (31.3.43) to meet expenditure, this is due to the fact that it had at its disposal the aforementioned funds from earlier credits; as appeared above, these sums totalled £4,542,000 (total of sums available up to 31 August 1942 £5,957,000 less taxes and difference of freight £1,415,000 leaving a balance of funds available, derived from earlier credits, of £4,542,000).

Unfortunately, however, by the 31 March 1943 these funds will have been wholly exhausted, as clearly emerges from the foregoing account.

Hence the estimates for the following financial year (April 1943–March 1944) will be:

Receipts: £1,800,000. (on the assumption that the losses of our merchant ships will not be such as seriously to reduce this amount)

Expenditure: certainly in excess of the figure of £4,600,000 estimated for the current financial year.

IV. Financial Assistance From the British Government

From the very beginning of the Greco-Italian War the British Government gave the fullest measure of financial assistance to Greece. This consisted in the granting:

1) of the credits referred to on the first page of the present Report under (a) and (b).

2) of further substantial credits which the British Government had granted to the Greek Government in monthly instalments, for the purpose of meeting war expenditure within Greece. The amount of these credits totalling £35,000,000, had been wholly utilized by the Greek Government in Greece in drachmae which it acquired by the sale of the aforesaid sterling amount to the Bank of Greece.

But the financial assistance afforded by the British Government did not cease with the occupation of Greece by the enemy.

By an agreement dated the 9th March 1942 between the British and Greek Governments, “concerning the organisation and the employment of the Greek Armed Forces”, His Britannic Majesty’s Government undertook to provide all material necessary for the arming, equipment and maintenance of the Greek Armed Forces, and to make no claim on the Greek Government for reimbursement of the cost so incurred. The Greek Government for its part undertook to return to the Government of the United Kingdom on the cessation of the hostilities in which the Greek Forces are participating such of the war material and other supplies in question as would be still under their control and as the Government of the United Kingdom may request them so to return.

As a consequence of this Agreement the Greek Government bears all expenditure for the General Administration of public affairs, and, in respect of the Fighting Services, all cash payments for salaries and allowances for the officers and other ranks of our armed forces, while the British Government bears the expenditure for all material and supplies required for the arming, equipment and maintenance of the Greek Armed Forces.

At the date of signature of this Agreement the Greek Government had envisaged neither the tremendous increase in Services expenditure arising from the growth in the numbers of our armed forces, nor the great cost of the revictualling programme.

The Greek Government hoped that the funds available at that time, together with the revenues provided by the mercantile marine, would suffice to meet the expenditure undertaken by it for a relatively long period of time, which it then estimated, somewhat optimistically, at about two years.

But expenditure, as estimated at that date, had almost doubled viz. it has increased by £2,000,000 through the growth of the armed forces and the revictualling requirements. In consequence the available funds will be exhausted during the current financial year, and the Greek Government’s assets for meeting the increased expenditure of the financial year 1st April 1943–31 March 1944, will be limited merely to the receipts from the Mercantile Marine, as detailed above.

V. Assets of the Bank of Greece

The Bank of Greece was established in the year 1928 as an independent issuing Bank, in the form of a Limited Liability Company, in fulfillment of the Geneva Protocol of 1927.⁷⁴ This protocol embodied among other things, the programme of monetary and banking reorganization which had been worked out by the Financial Committee of the League of Nations in conjunction with the Greek Government, and which was introduced in Greece immediately thereafter. The principal measure envisaged by this programme was the creation of an autonomous Central Bank, possessing the exclusive right to issue bank-notes. The Administration, Management and Functioning of the Bank are free from State intervention. The State has the right to inquire only into the legality of the Bank’s acts and decisions.

In the year 1932 the Bank of Greece acquired by law the exclusive right to buy and sell gold and foreign exchange.

This right could be granted to other reorganized Banks also on the recommendation of the Bank of Greece, but such Banks were obliged to hand over to the Bank of Greece any difference between purchases and sales of foreign exchange.

On the other hand, anyone exporting goods from Greece was obliged to hand over the resultant foreign exchange against the equivalent in drachmas to the Bank of Greece or to one of the above mentioned Banks, which were, in their turn, obliged to transfer it to the Bank of Greece after fulfilling their obligations.

In general, anyone importing foreign exchange into the country and wishing to obtain drachmae was obliged to sell it to the Bank of Greece, according to the above procedure.

In like manner, if the State held foreign exchange abroad and wished to obtain an equivalent amount of drachmae in Greece, it ought to sell such exchange to the Bank of Greece.

Thus the Bank of Greece was the institution which concentrated in its hands all the foreign exchange assets of the Country which the holders imported (either in order to conform with a legal obligation, or voluntarily) in order to obtain an equivalent amount of National currency.

The foreign exchange so acquired was sold by the Bank of Greece, against its equivalent in drachmae, to persons having lawful payments to make in foreign countries.

Shortly before the enemy invasion the Bank of Greece had succeeded in safeguarding the whole of its gold reserve. It was transferred, first to Crete, later to Egypt and finally to South Africa.

By virtue of a Law issued in Crete the Bank of Greece accompanied the Greek Government on the latter’s departure from Greece and establishment abroad; the Bank’s headquarters were transferred to the country in which at any given time the Greek Government would have its seat, and the Bank, of course, took control of its gold and foreign exchange assets lying outside Greece.

These assets (which have undergone only very slight alteration since that date) consist of the following items:—

a) Gold.
In the United States of America	ozs. 191,602.
In the Union of South Africa	“ 608,350.
Total	ozs. 799,952.
b) Sterling.	£35,000,000.
c) U. S. Dollars.	$9,336,000.

The amount of the assets is higher than it would ordinarily have been in normal circumstances. It should, however, be stressed that this accumulation of foreign exchange does not result from the normal process of exchange of goods and services with foreign countries, but is due to wholly exceptional conditions. From the beginning of the present war in 1939, and more particularly, from the time of its extention to the Mediterranean the import of all kinds of goods required in Greece had been severely restricted. The control on the part of the belligerents of the production and supply of the principal commodities, the serious difficulties of sea transport, on which the provisioning of Greece depends, and the imposition of blockade by sea, which necessarily led to the control and restriction of imports even into the neutral countries of Europe, had as their result that, even while still neutral, Greece was unable to utilize her foreign assets for the purpose of satisfying the great needs of the population and the existing demand either in foodstuffs or other consumption goods or in raw materials, machinery or other production goods. Thus the Bank’s assets while increased through the Greek Government’s selling to it, in exchange for drachmae, a large part of the credits granted by the British Government, as mentioned above, could not be utilized for the purpose for which they were intended, and therefore accumulated at the Bank.

On the other hand, the quantities of national currency representing the equivalent of these assets remained in circulation and thus created even at that time inflationary conditions.

There is no need to point out that since the enemy occupation of the Country imports of consumption or production goods necessary to the population and to the Country’s economy have almost entirely ceased.

It is obvious that the protracted privations of the Greek people and the terrible destruction of the country’s wealth—machinery, tools, raw materials, buildings, and, generally, every stock and every productive asset—will, at the end of the war, create an enormous demand for goods from other countries, and that it will be impossible for even a small part of this demand to be met through the exporting capacity of a ruined economy.

Consequently, on the cessation of hostilities, the Bank of Greece will be faced with the following tasks:—

a) Together with the international action of assistance to the countries which have suffered from protracted enemy occupation, the Bank will have to satisfy, within limits, the purchasing power of the population by granting foreign exchange against drachmae for the purpose of providing from other countries the consumption and production goods for which there will be an enormous demand and of which the country will have been deprived.

b) By means of adequate reserves it will have to restore and safeguard the national monetary system, which together with the whole economy of the country will have been completely dislocated in the course of the country’s occupation by the enemy.

It is only in this way that the country’s economy can return to some form of normal functioning and thereby be enabled to confront the hard task of reconstruction.

Greece’s recent monetary history shows that even reserves regarded as adequate may soon be exhausted if abnormal conditions would occur. In December 1928 that is at the end of the year in which the country’s monetary and banking system was radically reorganized, the Bank of Greece’s net reserves in gold and gold exchange amounted to 66,000,000 gold dollars. This fact did not prevent these reserves from falling in April 1932 to 11,000,000 dollars, nor did it prevent the serious monetary crisis which caused the abandonment of the gold standard and a return to a paper currency.

London , 15 October 1942.

The Minister of Finance

K. Varvaressos

73. No indication on file copy as to when this report reached the Department. On December 10, the Chief of the Division of Near Eastern Affairs referred to this report “recently handed to me by the Greek Ambassador”. (868.51/1664)
74. Greek Loan Protocol, signed at Geneva, September 15, 1927, League of Nations Treaty Series, vol. lxx, p. 9.