868.00/11–2647: Telegram
Governor Dwight P. Griswold to the Secretary of State
Amag 542. ReGama 475.1 1. Inquiry by Bank of Greece of FRB NY regarding exchange of napoleons for sovereigns made without prior consultation Mission or approval of foreign members of Currency Committee.
2. While unable to prevent sales from present sovereign stocks of Bank of Greece, Mission has repeatedly informed Govt that US assistance in procuring additional sovereigns even through conversion of napoleons is most unlikely. In view of further intensification of inflationary pressure and increasingly grave political repercussions, however, Mission strongly urges authorization for conversion of napoleons be granted.
3. General price index October 1939 equals 100 has risen to 25018 on November 22 from 23047 on November 1, 21543 on October 1 and 20473 on August 31. Inflationary pressures outlined in Amag 337 and 4542 primarily responsible. In particular, coincidence of certificate plan, 150% increase in customs duties, 66% increase in turnover tax, and belated wage increases in transport and other public utilities have recently resulted in drastic increases in industrial and transport costs. For example, railway rates to be increased by 88% and price of industrial coal by 87%. Such abrupt elimination of former subsidies constitutes great shock to entire economy which has become severely intensified by speculation in gold and commodity markets. Although profit margins probably sufficiently high to absorb bulk of cost increases resulting from AMAG initiated reforms, there is widespread effort to pass on to consumer full amount of cost increases.
[Page 421]As result of rapid rise in commodity prices in recent weeks, renewed series of demands for wage increases appears imminent, again confronting Govt with dilemma of flat refusal at risk of general strike or wage concessions and accelerated inflation.
4. No reform measures in form of direct taxation, expenditure controls, price controls, rationing, etc., can be applied in time to escape necessity of choice between above alternatives. Mission believes only possible course is to try to check speculation on gold and commodity exchanges by intermittent gold sales while simultaneously limiting wage-rate concessions to the minima politically feasible. Mission agrees that commodity price level cannot, by manipulating gold price, be held below level dictated by available supplies and purchasing power. Mission has repeatedly made clear that its advocacy of gold sales is based only on temporary psychological effects of such sales which obviously are not fundamental correctives.
5. Gold sale policy pursued since November 6 directed to closely limited objective of checking panicky increases in gold rate by intermittent intervention. Requests of Govt for stabilization of rate at artificially low level of 150 thousand drachmas firmly rejected by foreign members of Currency Committee with Mission’s concurrence. Early attempt to hold rate at 165–175 thousand resulted in heavy sales totalling 41 thousand sovereigns from November 7 to 12. Subsequent withdrawal from market followed by rise in rate to 187 thousand on November 25.
Greece has been through two runaway inflations within eight years. As result psychology firmly fixed that investment in gold essential as hedge against new inflation. Gold psychology nation-wide with even peasants hoarding one or two sovereigns. Relative stability gold price would be most important factor in holding inflation during these critical months while confidence shaken by military situation and economy shaken by reform. It should also have effect of bringing goods into market now held off market in hope of further price rise.
6. Stock of sovereigns in Bank of Greece available for sale is a strong factor in market confidence. Greatly concerned lest approaching exhaustion of existing stocks induce even more panicky demands. Announcement of conversion of napoleons to sovereigns would unquestionably exert strong stabilizing effect on gold market.
7. Govt subject to heavy political pressure as result of rise in gold rate and general price level. Minister of National Economy Varvoutis, Liberal, and most able and effective Minister, threatens to resign if rate exceeds 200 thousand. Ministers united on essentiality of gold sales regardless of political affiliations. As evidence of desperation of Govt, Economic Policy Committee without informing Patterson and Gregory [Page 422] ordered Bank of Greece on November 21 to resume gold sales regardless contrary agreements. A reasoned letter by foreign members Currency Committee to Ministers primarily concerned pointing out dangers aroused heated resentment by Tsaldaris who asked Keeley and Griswold to home and discussed gold.
8. Gravely concerned lest support and prestige of present Govt be seriously weakened by continued speculative rise in gold market. Such weakening of present Cabinet prestige is itself adequate basis for this request for emergency exception to long-range US policy. Fall of present Cabinet would be little short of disastrous to American objectives. No new govt likely to be so able, cooperative or broadly based and there would be almost certain series of political crises which in itself would create lack of economic confidence and intensify present trends, and serious danger rightist govt would emerge recreating political liability for US in US and in international picture; and creating political dissension and strengthen Communist agitation within Greece. Frankly, we think it necessary to buy time until army begins to march and imports begin to reach market in greater quantity. Economic Ministers have manifested in recent months much more realistic and nonpartisan approach to problems of Greece. Believe they merit interim assistance in form of speedy conversion of napoleons and continuance of gold sales.
9. For examination basic economic aspects of gold policy I ask you to send to Athens for brief study some policy level representative of State and Treasury.
10. Entire subject fully discussed with Embassy which entirely concurs with views of Mission expressed above.
Pass copy to Clay.