History Offers an Ugly Precedent for a Greek Euro Exit

Looking over the precipice of national default and an untimely exit from the international monetary system, the Greek leader issued a somber warning to Europe’s economic leaders: “Bear in mind that if you leave the small states without assistance, a black future awaits Europe.”
Delivered by Prime Minister Eleftherios Venizelos on April 15, 1932, less than two weeks before his nation would suspend loan repayments and exit the gold standard, the prescient remark and the trials that followed offer urgent lessons for the current Greek crisis.
Before the euro bound the continent’s disparate economies into one monetary system, European governments relied on the gold standard to direct international monetary flows. This promised stability, but also required the vigorous coordination of each country’s central-bank policy. The turmoil of World War I disrupted the international order, pushing Greece and the rest of Europe off the standard, a blow from which the monetary system would never fully recover.

Modern State

Nevertheless, in the absence of alternatives, gold remained the standard for much of the rest of the developed world, and Greece made the drachma convertible to gold in 1928 under the leadership of Venizelos’s Liberal Party. A centerpiece of the government’s reform agenda, the return to gold, combined with vigorous economic development and large-scale public works, promised to turn Greece into a “synchronon kratos,” or modern state. Further, re-gilding the drachma offered pride to a Greek nation that had recently suffered prolonged inflation and political turmoil.

Read more: http://www.bloomberg.com/news/2012-06-01/history-offers-ugly-precedent-for-greek-euro-exit.html