European Investment in Greece in the Nineteenth Century

A Behavioural Approach to Financial History

Korinna Schönhärl

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000191547
• Edition: 1
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Banking historiography often does not sufficiently take into account bankers' deliberations of their decision making, but rather limits investigation to considerations of profit maximisation. This book shows that the decision-making processes of nineteenth-century bankers contemplating high-risk financial markets like Greece are just as complex as present-day investment decisions.

The book, now published in English after a first German edition, offers in-depth studies of decision making in concrete historical situations, considering political and economic circumstances and also the individual background of the actors concerned, including a reflection on the influence of cultural movements such as Philhellenism. Employing methodological inspirations from the field of behavioural finance, the book analyses a broad range of published and unpublished English, French, Greek, German and Swiss sources on European investment in Greece between 1821 and the Balkan wars. Additionally, rich insights into Greek economic history, the economic integration of the country into Europe and long-lasting European stereotypes of Southern Europe and Greece are provided; this furthers understanding of the historical background of the Greek financial crisis after 2009.

In combining the perspectives of financial, economic, political and cultural history, this book is primarily significant for students of various fields of historiography. Due to its strong awareness of methodological questions, it is also of great interest to academic historians. In addition, the strong public interest in the Greek financial crisis after 2009 and its consequences for Europe will, thirdly, attract the interest of a broader public.

Part I

Introduction

Investments by European bankers in Greece in the nineteenth century

The burden and blessing of an ancient heritage in precarious financial situations

‘Swindlers in the Euro-Family. Is Greece cheating us of our Money?’ demanded the front page of the German news magazine Fokus on 22 February 2010.¹ This headline was illustrated with the famous statue of Aphrodite, the so-called Venus de Milo, an image of Greek antiquity that is firmly rooted in European visual memory and is today housed in the Louvre in Paris. Although the right hand is missing in the original, the Fokus added an arm with a raised middle finger. A dirty Greek flag was wrapped around the figure’s hips (Figure I.1). Greece took the magazine to court for this so-called Greece-bashing. The case was heard in Athens and ended with an acquittal, but the damage to German-Greek relations was undeniable.²

Figure I.1 Fokus, Cover, 22.2.2010.

Admittedly, it has long been common to illustrate headlines about Greece with images and symbols of antiquity, such as the Acropolis of Athens, even if usually without the obscene alienation effects. Greek politics and, in particular, the Greek financial crisis inevitably lead West European reporters to illustrate current events with images related to Greece’s great past. This contrasts to, for instance, the situation with Ireland and Iceland where nobody would think of drawing on historical references. Even in the case of Italy, comparable historical images are seldom used. With Greece, it seems that the Europeans think automatically of antiquity (Klemm 2015, 352). Reporting on the financial crisis in Greece seems almost impossible without recourse to ancient history, which forms a glossy backdrop that further accentuates the severity of the contemporary situation. Between 2010 and 2012, reports in German media about the ‘broke Greeks’ were correspondingly negative, at times even defamatory (Bickes et al. 2015). Six months of this negative reporting, particularly prevalent in the Fokus and the Bild, were enough to fully activate the negative images of Greece (ibid., 347).³ However, justifying a financial rescue policy for the crisis-stricken country seems similarly to require reference to its function as the cradle of Western civilisation and democracy, as seen in the poem by the famous German poet Günther Grass (Grass 2012).⁴ It is equally rare for France to produce an unprejudiced view of Greece sine ira et studio (Basch 1995, 500), and in Great Britain, Greece is also ‘an emotional word’ (Holland/Markides 2006, 1). Throughout Europe, it is apparently impossible to think about or comment on Greece’s finances without referring to antiquity. In contrast, Greece’s Byzantine history is never used for comparison, despite the fact that in its latter days, it offered manifold examples of nepotism, corruption and state decline. In West European imagination, however, this era is hardly ever linked to Greece. The Greeks themselves occasionally utilise images of antiquity to their advantage. Thus at his first visit to the French president in Paris, the Greek prime minister Alexis Tsipras, who has held the position since January 2015, announced his delight at being in a country that had taken on the baton of democracy from Greece, thus audaciously building a bridge between the Acropolis and the Storming of the Bastille, as the Süddeutsche Zeitung commented (Cáceres/Wernicke 2015). However, there are comparable examples of extensive laments about the ‘misfortune of being a Greek’ and constantly being confronted with exaggerated expectations from abroad (Dimou 2012).

While the use of such comparisons with antiquity may seem particularly original to certain contemporary journalists, they can be traced back to before the founding of the modern Greek state in 1830. In the 1820s, Greek freedom fighters were in London and Paris promoting their cause in the hope of gaining financial support for their struggle for independence from the Ottoman Empire. They too used ancient Greek heritage and the hope for its renaissance as important arguments to persuade Philhellenes to provide investment. This linking of the spheres of culture and finance was to continue, as will be seen, far beyond the phase of great European Philhellenism at the time of the Greek Revolution, and can be traced throughout the entire nineteenth century. Greek thus became an ‘imagined market’⁵ for many West Europeans, an assimilation that drew together and intermingled many different periods, modifying the receiving culture while constituting the reference culture.⁶

This renders Greece particularly attractive for a cultural-historical investigation of the perception of financial markets by bankers, the mental dispositions underlying their actions and their cultural roots. A further advantage is the starting point provided by the especially convenient ‘zero hour’ of the founding of the Greek state in 1830 (Loules 1986, 409).⁷ It is notable that despite three state bankruptcies (in 1827, 1843 and 1893⁸), Greece developed into an accepted investment market for European bankers in the course of the long nineteenth century, even if the country only accounted for 0.15% of world trade in 1913. It seems exaggerated to speak of Greece as an ‘El Dorado’; the term ‘emerging country’ seems more applicable (Bonin 2013, 12, 42, 70). Before the Balkan Wars, Greece had no problems obtaining credit at reasonable conditions on the European exchanges, and numerous direct investments streamed into the country. The majority of European bankers now perceived Greece as a potential financial market, albeit a risky one.⁹ The two Balkan Wars, starting in 1912, significantly changed business activities and banking in the region, and thus mark the end of the research period. In terms of the political history of Greece, the Goudi coup of 1909 and the subsequent coming to power of Eleftherios Venizelos in 1910 similarly heralded a new era, so that it seems reasonable to end the study period here. How, then, did Greece develop into a promising financial market in the perception of foreign bankers in the period from the Greek Revolution until the Balkan Wars?¹⁰ This starting point leads on to interesting questions of financial and banking history: How did bankers make investment decisions in the nineteenth century?¹¹ How and via which paths did bankers access relevant information about interesting markets? How did they interpret this information? What forms of risk management did they develop and maintain, and how did they establish trust in the international context of globalising finance? The small size and limited economic importance of Greece in worldwide terms limit its comparability with other investment markets. However, pronounced contrasts in Western European perceptions of the country render it particularly interesting with regard to the cultural dimension of financial transfers. As images of Greece were and are so contradictory and powerful, the Greek example is especially suitable for an investigation of the multifacetedness of investment decisions.

Financial business in Greece was led by banks from Switzerland, France, Great Britain, Bavaria and – after 1871 – the German Empire; this sets the geographical framework for the investors. In terms of the area of investments, research is limited to the territory of the Greek state, which slowly increased in size throughout the nineteenth century. This excludes the area that was added to Greece after the Balkan Wars, as this was knowledge the actors could not previously be aware of, except possibly in the form of the ‘Megali idea’ (the notion of a large Greek state) that may have encouraged them to speculate on territorial expansion.¹²

Is Greece a risk?

‘Classic’ banking history would tend to focus on profit rates and risk premiums when answering this question. Traditional accounts of banking history assume that nineteenth-century bankers adopted a utility maximisation approach to investment projects and assessed the potential profits in order to decide whether to accept or reject a specific project. Other motives usually attract little attention. The aim of this cultural-historical investigation is to move beyond this approach and to consider the entire spectrum of motives that influenced bankers’ investment decisions. Rather than assuming that bankers carefully conceived and followed some master plan, pursuing geostrategic axes across the Mediterranean for instance, the focus is on situative constellations of decision making.¹³ Profits, on which all banking houses depend, are not neglected here. However, the analysis also includes bankers’ statements preserved in the archives where they speak of additional and/or sometimes completely different kinds of motivation: their burning Philhellenism, their emotional enthusiasm for Greek antiquity, their drive to further their own reputation or improve their political relations, their fear of the competition, their dependence on once-chosen paths, their imperial fervour, to mention but a few. In banking history research, such findings, reflections and explanations tend to be dismissed as hollow, legitimating phrases, as ‘obvious pure ideology’ (Reitmayer 1999, 207, tr. by K.S.). However, findings from behavioural psychology and historical emotions research suggest that such statements should be taken seriously: they play an important role in the self-perceptions of financial market actors and significantly influence their decision making through various justification mechanisms.

This work thus adopts a meta-meta perspective (Gillespie 2008): observing the European bankers while they observed Greece. How did the bankers make their decisions, e.g. how did they differentiate between danger and risk, between investment and speculation, between trust and control? What risk strategies did they have and how did these strategies change over time?¹⁴ The explicit focus is on bankers and not on other investors such as private individuals, who are much more difficult to trace in the sources and whose inclusion would require not only qualitative, but also quantitative methods. Most attention is paid to the long-term investments of bankers in industry, in the banking sector and in Greek state bonds, particularly project financing (Gourvish 2008), where it is much more difficult to determine potential risk in advance than is the case, for instance, with the granting of credit. Even today, it is not possible to measure the so-called operative risk of such project finance; due to the many incalculable factors involved, it can at best be estimated in terms of categories (Hughes 2007, 27f.). How did the bankers deal with this operative risk? The aim of this research is to analyse their decision-making processes with reference to Greece, combining the approaches of banking history and cultural history.

What types of bankers are we dealing with? In the nineteenth century, European banking was in a phase of profound change. The so-called merchant banks of the early modern period dealt with exchange and finance business as just one branch of their activities alongside trade, but around the end of the eighteenth century, banks developed that focused, sometimes exclusively, on financial matters (Chapman 1984). These were initially only private banks run by one family or individual. In the course of the nineteenth century, the face of the international capital markets and thus the banks then changed fundamentally. While at the beginning of the century government bonds offered the highest profits, by the end of the century industrial finance played a decisive role (Cottrell 1980).

At the same time, other new business formats developed as members of the European middle classes looked for investment opportunities for their savings. In Great Britain, the founding of joint-stock banks was permitted from 1825 (Cassis 1990, 74f.; Kynaston 1994, 40), and they then spread across the continent in the following decades (ibid., 2012, 69).¹⁵ This form of organisation allowed the public to invest even smaller sums in large projects and thus promoted capital accumulation, which was most necessary for industrial growth. This development brought new challenges for bankers as the new financial products required specialised, trained salespeople and involved new bureaucratic and administrative tasks. Hired managers took over the business of these banks and, in the context of corporate governance, were required to report to supervisory boards and shareholders at regular intervals, legitimising their actions. This led to a professionalisation o...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Preface to the English translation
• Part I Introduction
• Part II Foreign investment in Greece in the nineteenth century – nine case studies
• Part III Conclusion
• Acknowledgements
• Abbreviations
• Weights and measures
• Dates
• Figures and table
• Archives
• Persons index
• Places index
• Subjects index