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Causes of Greece's Inflation

The main cause of Greece's hyperinflation was World War II, which loaded the country with debt, dissolved its trade and resulted in four years of Axis occupation.

At the outset of World War II, Greece saw a budget surplus for fiscal 1939 of 271 million drachma, but this slipped to a deficit of 790 million drachma in 1940, due mostly to trade, reduced industrial production as a result of scarce raw materials and unexpected military expenditures. The country's deficits would continue to be funded by monetary advances from the Bank of Greece, which had doubled the money supply in two years.

With tax revenues down and military expenditures up nearly 10-fold, Greece's finances were in a downward spiral. The country was occupied by Axis forces by May 1941, and Greece's military costs were replaced by expenditures from the support of 400,000 troops, which varied between one-third and three-fifths of the country's outlays during the occupation, which were all funded by the printing of money by the Bank of Greece. The Greek puppet government - established by the occupying forces - did not tax to cover its costs and revenues represented less than 6 percent of expenditures during the final year of occupation. This was combined with national income dropping from 67.4 billion drachma in 1939 to 20 billion in 1942, a level that was maintained until 1944.

Hyperinflation began in 1943, when expectations of future inflation caused Greeks to refuse to accept the currency and the government began paying in gold franc coins, which further encouraged the public to hold wealth in non-currency forms and decreased confidence in the drachma, reducing the elasticity of and the demand for domestic currency. When the government in exile returned to Athens, they had a limited ability to collect taxes outside of the capital and ran into substantial unemployment and refugee costs. By the time the new government's stabilization effort went into effect, revenues comprised 0.4 percent of expenditures, with the Bank of Greece covering the rest.

The stabilization effort occurred while the war was still going on, a civil war broke out and there was little hope of restoring Greece's export trade (traditionally with members of the Axis) or the import of raw materials, dipping the country back into high inflation once more before the currency finally stabilized.

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