Address by Nicholas C. Garganas Governor of the Bank of Greece at the celebrations marking the 75th anniversary of the Bank of Greece
03/11/2003 - Speeches
Excellency the President of the
Allow me to
thank you for having accepted our invitation to join us in today's event. Let me
also extend a warm welcome to Jean-Claude Trichet, who became President of the
European Central Bank on November 1. This occasion marks Jean-Claude's first
official function outside of
in his new position. Thank you for being with us today, Jean-Claude.
We wish you every success in your new position.
I also would
like to extend a very warm welcome and a special thanks to my central bank
colleagues from the European System of Central Banks as well as those from other
parts of the world who have honored us with their presence for this celebration.
This year we
celebrate an important anniversary -- the 75th year since the establishment of
the Bank of Greece. During this period, the conventional wisdom about a central
bank's institutional role and about what a central bank can and should do has
undergone enormous change. There has, however, been one constant underlying the
responsibilities of a central bank -- the importance of discharging these
responsibilities to the health of the national economy.
Why is the
role of the central bank important? Because, an economy’s central bank is
entrusted with safeguarding the value of the economy’s currency and with
ensuring the soundness of its financial system. Safeguarding the value of the
currency is not always an easy task. The correct answer to this challenge forms
the basis of an efficiently running economy and of social cohesion. As John
Maynard Keynes observed, “there is no subtler, no surer means of overturning
the existing basis of society than to debauch the currency”.
It would be comforting to find in the history of central banking a record
of steady progress and orderly development from earliest antecedents to present
knowledge. The facts, however, are different. The past 75 years have included
remarkable achievements and some setbacks both globally and in the Greek economy.
The role of the central bank in an economy’s fortunes --
and misfortunes -- is aptly demonstrated by the history of the Bank of
Greece. During this sometimes turbulent period, the Bank of Greece demonstrated
an ability to adapt to changing circumstances, often playing a leading role in
providing solutions to the main economic problems of the day. Let me use the
occasion of the Bank’s 75th anniversary to elaborate briefly.
period of monetary instability, in March 1927, the Greek government sought the
assistance of the
League of Nations
to improve the health of the economy, to secure monetary
stability and to help the Greek banking system function better. Negotiations
with the League followed and a stabilisation plan was hammered out.
Among the terms of the so-called Geneva Protocol, signed in September
1927, was the establishment of a central bank, exclusively responsible for
issuing banknotes. Until that time, the National Bank of
, a private institution, had the privilege of issuing
banknotes, which it waived in favour of the newly established central bank. The
Bank of Greece commenced its operations in May 1928. The two main tasks assigned
to the Bank, as specified in its Statute, were to ensure a stable currency and
to regulate currency circulation. To this end, the Statute provided for the Bank
to have reserve assets; it also set a strict limit on the financing of budgetary
deficits by the central bank.
The Bank of
Greece could not have begun operating at a more difficult time. This was a time
when the international monetary system was operating primarily under the gold-exchange
standard. Effectively, the gold standard aimed at securing the stability of a
currency by tying money supply to the gold reserves of the central bank, thus
leaving little room for conducting an independent monetary policy. The gold
standard has been described as nailing the domestic economy to a “cross of
historians blame the gold standard for helping precipitate the Great Depression
that began in 1929. Regardless, the global stock market crash of 1929 and the
ensuing global financial crisis of September 1931 saw many countries driven off
the gold standard.
international environment was hardly a favorable one for a fledging central bank.
Concerned about the instability that might follow in the absence of the gold
standard -- and with the recent period of monetary instability entrenched in
their memories – the Greek authorities attempted to maintain the link to gold.
The drachma, however, came under heavy selling pressures, and, in April 1932,
had to leave the gold standard.
gold standard made monetary policy a matter of the discretionary judgement of
the authorities at the Bank of Greece. The new monetary regime opened up the
possibility of the Bank playing a more active role in domestic economic affairs.
The Bank was no longer bound by the discipline imposed by the gold standard.
However, in common with most other central banks at the time, it pursued
monetary and credit policies geared toward safeguarding price stability and
ensuring a sustainable balance of payments; after all, this was in accordance
with its Statute. In addition, the Bank sought to remedy the inefficiencies of
under-developed money and capital markets by instituting measures to attract
savings to the banking system and to improve credit allocation.
In April 1941, the Axis Powers occupied
. For several years,
became the seat of both the exiled Greek government and the
Bank of Greece, with the Bank’s gold secretly transferred to
. Within occupied
, the economic situation became increasingly grim and
hundreds of thousands of Greeks died of hunger. The Axis powers forced the
country to pay not only for the upkeep of the occupying troops, but also for
their military operations in
. The puppet regime established by the occupiers forced the
Bank of Greece to resort to the printing press. As a result, the country was
beset with hyperinflation; between April 1941 and October 1944, the cost of
living rose 2.3 billion times. In these difficult circumstances, the country’s
economic system collapsed. To give another example of the magnitude of inflation
during the occupation, let me mention that in November 1944, immediately after
liberation, a so-called “new” drachma was introduced; it was set equal to 50
billion “old” drachmas!
In March 1946, a stabilisation plan, which was part of the London
Agreements, set up the Currency Committee, which was to become responsible for
monetary, credit and exchange rate policies for several decades. This Committee
consisted of five members, including the Minister of Coordination, the Minister
of Finance, and the Governor of the Bank of Greece. The Committee was given
control over the issuance of money, and the authority to allocate credit among
sectors and activities as well as to determine lending terms.
suffering through World War II and the civil war, the economy was in ruins. The
hyperinflation produced long-lasting effects on attitudes, and savers were
unwilling to deposit their funds in the banking system. To help attract funds
back to the banking system, the central bank sought to re-establish price
stability. At the same time, the Bank of Greece was also called upon to support
economic reconstruction and to help lay the foundations for growth. However,
circumstances were difficult, since certain factors, including substantial
expenditures on defense, social policy, and support of the agricultural sector,
caused strong growth of the money supply. The Bank’s task was made even more
difficult in view of the country’s underdeveloped financial markets. Yet, the
Bank was successful in conducting a tight monetary
policy. This, together with the decline in fiscal deficits, resulted in
inflation falling dramatically, from over 40 per cent in 1948 to 5 per
cent in 1952. This created suitable conditions for a reform in exchange rate
In April 1953 the drachma was devalued by 50 per cent against the US
dollar and then joined the Bretton Woods system of pegged exchange rates.
In the following year, another “new”
drachma was introduced and set equal to 1,000 “old” drachmas. Coupled with
the nominal anchor provided by the Bretton-Woods system and tightened fiscal
policy, the "new drachma" played a key role in reducing inflation
next fifteen years real GDP growth averaged 7 per cent, one of the highest in
the world. At the same time, average inflation in
was less than 2.5 per cent, confirming that strong long-term
growth is not feasible without price stability. The Bank of Greece not only
helped restore and maintain monetary stability, but its interest-rate policy was
decisive in channeling private saving to the banking system.
The nominal anchor of the Bretton Woods system proved unsustainable in
the long term.
ures to finance the Vietnam war led to an expansionary
monetary policy in the
and inflationary pressures
spilled over to the rest of the world. This, along with the inherent
weaknesses of the arrangement, proved the undoing of the Bretton Woods system,
which broke down in March 1973. Once again, the lesson that there is a need to
separate monetary policy from political influences had to be re-learned. The
drachma's link to the US dollar was maintained up to the spring of 1975.
The decades of the 1970s and the 1980s were difficult ones for policy
makers worldwide. Among other things, they had to deal with two oil price shocks
in 1973-74 and in 1978-79, an international debt crisis in the early 1980s in
and a global stock market crash in 1987. Particularly during
the 1970s, Keynesian ideas, which, to some extent, downplayed the connection
between monetary policy and inflation, were at their peak. In
, during the second half of the 1970s and the 1980s, the
central bank conducted monetary policy under difficult circumstances, as the
policy mix was often inappropriate. Compounding the difficulty of the Bank’s
task was the fact that the financial system operated under a complex framework
of rules and provisions, which proved not only ineffective, but also distorted
credit allocation and limited the scope for conducting an effective monetary
policy. The abolition of the Currency Committee in 1982 and the transfer to the
Bank of Greece of its functions in the fields of monetary, credit and exchange-rate
policies as well as banking supervision marked the beginning of a new era in the
With broader responsibilities, beginning in the mid-1980s and until the
mid-1990s, the Bank of Greece undertook the leading role in the deregulation of
the financial system. Financial liberalisation was a gradual process, however,
so that the lifting of controls could take place in tandem with the
restructuring of the economy and thus avoid the potentially destabilising
effects of abrupt and sharp reversals of international capital flows. This
strategy proved wise; in the 1990s many Asian economies, which had not given
sufficient consideration to sequencing, were exposed to severe financial crises.
financial liberalisation in
had been completed in the mid-1990s and up to entry into EMU
and the adoption of the single monetary policy in January 2001, the Bank of
Greece had at its disposal more effective and flexible market-oriented means of
monetary control and was able to react quickly and effectively to changes in
supervisory functions of the Bank have also changed considerably, shifting from
the task of ensuring commercial banks’ compliance with credit and exchange
controls and regulations, to the monitoring and the evaluation of bank asset
quality, and the solvency and capital adequacy of these financial institutions.
During the late 1980s and the 1990s, a substantial shift occurred in
thinking about the role of the central bank in the economy. Experience of past
episodes of hyperinflation in various countries, as well as of moderate
inflation, exemplified in the breakdown of the Bretton Woods system, led to the
finding that monetary policy is not necessarily independent of the government of
the day. Sometimes central banks have to finance government spending and this
results in higher inflation and, ultimately, lower growth. Thus, the views that
the goal of monetary policy should be to provide price stability and that the
central bank should be made an independent institution in the pursuit of this
goal gained ground.
underpinned the monetary policy of the Bank of Greece in the 1990s as it sought
to support the effort to satisfy the Maastricht Treaty criteria and to join the
euro area on
1st January 2001
. The Bank’s ability to attain its goals was considerably
improved by the abolition of the monetary financing of the fiscal deficit,
mandated under the Maastricht Treaty, in 1994, and the law, enacted in 1997,
granting independence to the Bank of Greece with a mandate to achieve price
an effort to bring down inflation, in the mid-1990s the Bank adopted a
“hard-drachma policy”, under which the exchange rate was used as a nominal
anchor. Real interest rates were kept at high levels to help ensure the success
of this policy. The hard-drachma policy operated, at times, under difficult
conditions, yet it proved highly credible and immensely successful. Ironically,
the source of the difficulty was related partly to the success of the policy.
The policy’s credibility led to enormous inflows of foreign capital,
complicating the conduct of monetary policy. The Bank was able to neutralise
these inflows, absorbing excess liquidity and thus buying time for other
policies to adjust. Within three years of the policy, inflation was more than
halved, falling to under 5 per cent, while economic growth accelerated sharply.
The fiscal consolidation that took place beginning in the mid-1990s, and
moderation in wage increases, contributed importantly to an increasingly-sustainable
policy mix, enhancing the credibility of monetary policy.
With the outbreak of the Asian financial crisis in late 1997, and its
spread to other parts of the world, there were pressures on the drachma. The
Bank of Greece initially raised interest rates to stem these pressures. Then, in
March 1998, the drachma entered the Exchange Rate Mechanism of the European
Monetary System, so that it could satisfy a
criterion, and was devalued to help maintain international
competitiveness. Unlike the currency devaluations in many other countries around
this time, the drachma’s devaluation was not followed by the aftershock of a
banking and financial crisis. A well-supervised Greek banking sector, with
adequate prudential regulations in place, limited the exposure of commercial
banks to foreign currency risk and, therefore, safeguarded the financial system.
In the years following the drachma’s entry into the ERM, the Bank of
Greece maintained a tight monetary policy so that the inflation criterion of the
Maastricht Treaty could be satisfied. Fiscal policy continued to be tightened
and wage restraint was maintained. With
an ever-more-balanced policy mix, real economic growth accelerated. The rest, is
1 January 2001
became the 12th member of the euro area, where price
stability is entrusted to the independent European Central Bank and the
The Bank of Greece is now
part of a larger family, the Eurosystem, and continues to exercise extremely
important functions. It is an integral part of the Eurosystem, which comprises
the European Central Bank and the national central banks of the euro area. The
Governor of the Bank participates in the ECB’s Governing Council, which, among
other things, sets monetary policy for the euro area. The Bank is responsible
for implementing monetary policy in
and ensuring the smooth operation of the payments system,
which it runs and which is part of the EU’s Target System. The Bank also is in
charge of supervising the banking
system and maintaining
financial stability With the
opening of financial borders in the euro area, these functions will take on
added importance in the coming years.
In carrying out its responsibilities successfully the Bank has benefited
enormously, in the present and in the past, from an extremely well-trained and
highly dedicated staff. In my view, this has been the key to its success.
Such has been the journey of the Bank of Greece during the past 75 years.
As you can see, in common with the experiences of other central banks, the
journey has not been without bumps and turns along the way. Yet, the history of
the Bank demonstrates that the Bank has always fulfilled its obligations and, in
so doing, it has earned the trust of the Greek citizens.
In the early
part of the last century, the famous Swedish economist, Knut Wicksell, said that
“Monetary history reveals the fact that folly has frequently been paramount;
for it describes many fateful mistakes. On the other hand, it would be too much
to say that mankind has learned nothing from these mistakes”. I might add that
in recent years we have learned a great deal from the mistakes of the past. As
confirmed by the history of the Bank of Greece, the role of central banks, both
institutionally and in actual practice, has been upgraded in such a way that it
contributes to the improvement of living standards.
Ladies and Gentlemen, thank you for your attention.