Will the Drachma repeat history and rise from the ashes?
Despite the four month extension to the Greek’s bailout package which was agreed in February, the possibility that Greece might yet leave the Euro still lingers. If negotiations between Germany’s Chancellor Merkel and Greece’s Prime Minister Alexis Tsipras fail to reach a compromise, many observers, including German Finance Minister Wolfgang Schaeuble, believe that at least a temporary return to the Drachma might be the way forward for the country’s struggling economy. Were this to happen, it would be far from the first time that the Drachma has risen from the dead.
The Ancient Drachma
The Drachma is a currency with a very long history. It is thought to have been in use as early as 1100 BC. The earliest incarnation of the currency was as ‘bullion’ – value determined by weight – and, not uncommonly for ancient units of exchange, it did not take the form of coinage at all, but rather consisted of metal rods fashioned from bronze, copper, iron or silver. It is believed that the name Drachma is derived from the verb meaning “to grasp”, and that the original Drachma was a fistful of these metal rods. Each Drachma consisted of six such rods, with each stick named an obol. Subsequently the names obol and Drachma were used to refer to coins of equivalent values ie. 1 obol = 1/6 Drachma.
Thanks to Alexander the Great’s conquests the Drachma gave its name to a number of other currencies in the Hellenistic / Macedonian Empire including the dirham as is still used in Morocco and the UAE today. It was the decline of Greek civilisation, and the simultaneous rise of the Roman Empire which lead to the currency being supplanted by the Denarius, the currency of the Roman Empire.
Phoenix rises from the ashes
For the next two thousand years or so Greece was ruled by foreign empires – the Romans, the Byzantines and the Ottomans – and used the currency of the ruling empire. Greece eventually became independent once more in 1829, following 400 years under Ottoman rule. It is perhaps not surprising that, after so long without national sovereignty, one of the first acts of the new government was to strike a brand new currency, named the Phoenix. Like its mythical namesake the new currency symbolised rebirth: a new currency for a nation reborn from the ashes of the Greek War of Independence.
The Phoenix was a short-lived currency. A very small number of the silver coins were ever minted, and the state had no further silver with which to mint more. Most Greeks continued to use foreign currency for everyday transactions. The government printed a lot more Phoenixes, but knowing that there was nothing to back the notes, they were roundly rejected by the public.
The first modern Drachma
In 1832, with the arrival of King Otto (himself a Bavarian) the ailing Phoenix was replaced by the resurrected Drachma. Things went a little more smoothly for more than 100 years, until, that is, the Nazi occupation of Greece began in 1941. This brought with it looting and hyperinflation, resulting in the issuing of some staggering denominations, including the 100,000,000,000-Drachma note.
The second modern Drachma
Once Greece was liberated in 1944 the second modern Drachma was launched, at an exchange rate of 50,000,000,000 old Drachma to one new. Once again the inflation Hydra reared one of its heads. In 1954, in an attempt to curb inflation Greece joined the Bretton Woods system – the first fully negotiated monetary order - with the exchange rate fixed at one US Dollar to 30 Drachma.
The third modern Drachma
When the Bretton Woods system was abolished in 1973, inflation once more became a problem, and by the time that Greece joined the Euro in 2002 the rate was closer to 400 Drachma to 1 US Dollar.
Now, as polls suggest that the majority of Greeks are keen to avoid leaving the Euro, but are also equally keen to avoid too much fiscal frugality, there are those who consider a Greek exit almost inevitable. If Greece and its debtors fail to reach an agreement in the next few days, then it may happen sooner rather than later. However, it seems likely (or at least possible) that such an exit would be a temporary arrangement to allow Greece to rebuild its economy. If this should be the case, we may yet see a Greek return to the Euro (Gre-re-entry?). Like the Phoenix of legend, the Drachma may have incarnations yet to come.
If you would like to learn more about the history of money, a good place to start is our blog from last year about the history of the banknote.