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The shock waves from the European financial debacle of 1931 reverberated through the Balkans. The collapse of existing international monetary institutions on the heels of the British sterling devaluation that autumn dealt the decisive blow to Liberal confidence. It led to a serious financial crisis in Greece that eventually pushed her off the gold standard. By staking so much on the outcome of his self-proclaimed ‘battle for the drachma’, Venizelos ensured that his failure to prevent devaluation would precipitate a serious political crisis as well. His ebullient rhetoric would come to sound increasingly hollow, and public opinion would swing towards the view expressed some time later by Dimitrios Maximos, a leading anti-Venizelist, that ‘his incorrigible optimism had led him and the country into a dreadful impasse’. This chapter charts the course of this stage of the crisis. It begins by sketching the background to existing monetary arrangements in Greece. For relations between the new central bank — the Bank of Greece — and the commercial banks left much to be desired. And as a result, the gold standard operated in Greece in a way which was not to be found in any textbook on banking theory, and which would have rather unexpected effects on the impact of the financial crisis there.

This chapter focuses on Greek monetary policy during the financial crisis. Abandoning gold fundamentally changed the relationship between Greece and the international economy. Almost overnight, as it became obvious that Greece had run out of foreign exchange, the balance of power tilted from creditor to debtor. The Greek authorities confronted a poorly organized assortment of private companies, individual bondholders, and foreign governments, and the drawn-out bargaining began. Leaving the gold standard also had another consequence: it made monetary policy a matter of the discretionary judgement of the authorities at the Bank of Greece. In other words, the very institution which was so closely connected in the minds of many Greeks with Geneva found that the collapse of Venizelos's economic strategy actually opened up the possibility of its playing a new, more active part in domestic affairs.

This chapter discusses the government's trade policy in response to the financial crisis. As Greece began to feel the effects of the crisis, it became obvious that more direct state intervention in trade, whether to promote exports or restrict imports, was required. Intervention could take many forms, ranging from the complete state monopolization of trade in certain commodities at one extreme to support for the private merchant at the other. Neither Liberals nor Populists were politically or ideologically prepared to abandon free trade in principle; as a result, the evolution of commercial policy showed rather clearly the equivocal way in which the economic crisis altered the balance of power between the state and private enterprise.