Category Archives: Economics

21 JULY, 1916: Money Talks… And Can Be Dumb

A century ago today, Britain and France confirmed a loan of about £800,000 to the Greek government, backing up a loan of £1,600,000 made the previous November.  In itself, this was nothing too special.  Loaning large sums (and the economic effect of a million pounds in 1916 was equivalent to more than £500 million today) to minor powers either at war or likely to join the War was standard practice for the major belligerents.  On the other hand, the position of Greece in July 1916 was quite special, though not in a good way, and this is a good time to catch up with that country’s unfolding chaos.

As previously discussed (6 March, 1915: Side Effects?), the end of the Balkan Wars in 1913 had left an expanded Greece with a lot of new territory, a multi-ethnic population, some major administrative challenges and a bunch of jealous neighbours – including Austria-Hungary, Serbia, Turkey and Bulgaria – bent on (literally) cutting it down to size. Given that most of those regional rivals were committed to the War from quite an early stage, Greek participation was almost inevitable at some point, if only because neutrality was unlikely to protect its new frontiers from whichever side won.

King Constantine, in charge since the assassination of his father in 1913, nevertheless clung to neutrality for all he was worth during the first two years of the War. Though he was married to Kaiser Wilhelm’s sister – and many of his ministers and senior military officers (especially in the navy) were explicitly pro-German – Constantine was not exactly an enemy of the Allies, more a friend unwilling to do anything that might upset his other friends. On the other hand the dominant Greek political figure of the day, serial prime minister and unapologetic expansionist Eleftherios Venizelos, was all for making a deal with the Allies as soon as possible, partly because he regarded British and French democracies as the way forward for a developing Greek society, but largely because their support represented the best chance of maintaining the country’s bloated status in a post-War world.

Venizelos overlooks the Greater Greece of his dreams... as briefly realised in 1919.
Venizelos overlooks the Greater Greece of his dreams… as briefly realised in 1919.

An uneasy truce between the two sides had held together until the autumn of 1915, when Venizelos, having been frustrated in his attempts to aid the Anglo-French effort at Gallipoli, had invited the Allies to land troops in Salonika.  He was promptly removed from power, leaving a major Allied force high and dry in an armed camp, hemmed in by potentially hostile Greek government forces and susceptible to connivance with the ‘Venizelist’ opposition.

Since then, the Central Powers and their newest ally, Bulgaria, had conquered Serbia and moved troops close to the northern frontier of Macedonia – a region occupied by Greece since 1913 but popular with planners in both Vienna and Sofia – and to complete the picture of circling sharks, the French Navy had taken control of two Greek islands during the first half of 1916: Corfu to provide a home for Serbian refugees, and Kefalonia to provide a useful base against Austrian or Turkish naval adventures.

In May 1916, after Constantine’s troops allowed Bulgarian and German forces to occupy Fort Roupel, on the northern Macedonian border, without a shot being fired, the royal regime’s shaky grip on power began to melt away.  Seen by the King as genuinely neutral, the gesture was portrayed by Venizelists as a pro-German betrayal of the national interest, a position that struck a chord with a population and army weaned on aggressive nationalism.  During the early summer, Venizelos and his supporters established dominance over the north of the country, close to the Allied camp at Salonika, and began plotting with local Allied authorities to engineer regime change and a Greek declaration of war against the Central Powers. By July, Greece was effectively, though not officially, two states, and some kind of Venizelist move against the royal regime in Athens appeared imminent – but though Venizelos was much admired by the Allies, and particularly by the French, the British weren’t quite ready to abandon Constantine.

The reasons for this were largely social, in that the King was personally well known to a number of senior British figures (including the late war minister, Kitchener) and regarded as a good chap with his heart in the right place.  Ridiculous though that sounds today, it was a genuine reflection of the way European diplomacy had worked before the War and still worked in 1916.  The continent’s elite classes, largely though not entirely aristocratic, still had more in common with each other than with the rest of the people they represented, and were inclined to reach diplomatic decisions on the basis of personal relationships at the highest level. So it was that British diplomats remained in touch with Constantine, listened to his muddled (though probably honest) plan to join the Allies one day, when all attempts at neutrality had failed, and approved the £800,000 bribe confirmed on 21 July.

King Constantine. A good chap, but inclined to muddled thinking.
King Constantine. A good chap, but inclined to muddled thinking.

So Greece remained teetering on the brink of both civil war and world war, a mess of rocks and hard places, just one of the many European societies being wrecked in passing by the warring Great Powers. Within a few weeks an invasion of Macedonia by the Central Powers would push the country over the edge, and I’ll wander back for another look then. In the meantime, there is another aspect of the Allied loan that opens up a can of worms so big and smelly all I can possibly do here is point at it from a distance. Given the undeniable fact that the War was in the process of draining all the wealth accumulated by Britain and France during a century of imperial looting, what were they doing handing out money to a longshot like King Constantine?

It’s a big question, especially when you consider that Britain alone shelled out more than £20 million in gifts, loans and credit to Greece during the War, and if you want an answer you’ll need to read a bunch of academic tracts on wartime economics and then see which guess you like the most. What can be said is that, then as now, a big economy (and Britain’s economy was still the biggest in the world in 1914) could expect to reap rewards in the aftermath of any crisis that required reconstruction, and that dominance of emerging markets was part of British and French financial thinking as they imagined the post-War world. One day, in theory quite soon, everybody everywhere would be rebuilding, big economies would control the process, loans would start to look like investments and the vast wartime accumulation of global debt would pay off in their favour. This is simplistic stuff, and economic historians wouldn’t say anything so black, white or all embracing, but I’ll risk their wrath to point out two things.

First, the big European economies never did get their mojos back. Russia fell apart in 1917, Austria-Hungary in 1918, and the German economy screamed to self-destruction as it tried to fight the cancer of blockade with a super-heated internal production binge. France and above all Britain ended up owing a lot more money than they’d bargained for, and losing much of their grip over imperial infrastructure to the upstart United States, which ran a pretty much perfect economic war, growing its economy for three years before joining the winning side and profiting from the reconstruction boom from a position of unparalleled financial strength.

Secondly, capital forces from rich countries all over the world are currently doing roughly the same thing – pouring money they haven’t got into global crises they hope will turn into paydays.  They are of course operating on the basis of informed guesses about the timescales and final results of various crises, so maybe they should all take a look at what went wrong for their predecessors a century ago.