The Colonial Origins of the Greek Bailout

1 April by Jamie Martin

CC - Flickr - Bruce Krasting

When news broke two weeks ago of the harsh terms of a new bailout for Greece, many questioned whether the country still qualified as a sovereign state. “Debt colony,” a term long used by Syriza and its supporters, was suddenly everywhere in the press. Even the Financial Times used the language of empire: “a bailout on the terms set out in Brussels,” as a 13 July editorial put it, “risks turning the relationship with Greece into one akin to that between a colonial overlord and its vassal.”

Suggestions like these have invited historical comparison. One parallel that’s been mentioned is that of Egypt during the late nineteenth century. In 1876, as a heavily indebted Egypt approached bankruptcy, the Khedive Ismail Pasha agreed to the creation of an international commission, staffed by Europeans, with oversight of the Egyptian budget and control over certain sources of public revenue. This arrangement, designed to ensure the timely servicing of foreign debts, opened a new and extended period of intensified European intervention in Egypt – the Caisse de la Dette Publique was not abolished until 1940.

In the case of Greece, the comparison to nineteenth-century Egypt carries polemical weight largely as metaphor: Eurozone leaders should not treat Greece as if it were a semi-colonial territory. But there’s more at work here than just metaphor – at least historically speaking. As recent works in international history have demonstrated, there are important, and often obscured, continuities between the institutions and practices of European imperialism and the systems of global governance created or expanded in the second half of the twentieth century. |1|

This is no less true in the case of international financial supervision and administration. The first time that an international organization oversaw a program of austerity designed to win the confidence of foreign creditors, it was precisely the experience of foreign financial control in Egypt, and in other “debt colonies” like it, that provided a model for how that program should be designed.

In the spring of 1921, the young League of Nations, still struggling to define its economic role, was called upon to help rescue the defeated and dismembered Austrian state from crippling hyperinflation and financial instability. |2| It immediately began work on an ambitious international scheme of financial reconstruction. |3| Nothing like it had been attempted before in the heart of Europe; the only real precedents for it came from the governance of territories overseas or – in the case of Greece during the 1890s – on the European periphery.

The major problem League officials faced at the outset of their work in Austria was how to ensure that the new and weak post-Hapsburg state could be counted on to carry out the painful reforms they thought necessary to stabilize its currency: an immediate halt to the printing of money and a heavy dose of fiscal austerity. With these reforms in place, the Austrian state could apply for foreign loans and gradually restart normal economic activity. But it was clear they would not be popular on the street: Austria had one of Europe’s strongest social democratic parties and some of its best-organized public unions. Laying off thousands of officials, cutting benefits, and raising taxes would not to be taken lightly; industrial unrest, some League officials feared, was inevitable.

What was needed was a system of external supervision in Vienna, led by someone from outside Austria and detached from national politics. A “neutral” disciplinarian, in other words, who would make sure that the state was doing all that it could to stabilize its currency – even in the face of domestic political turmoil. Foreign creditors also demanded external supervision over the assets the Austrian state assigned as securities on their loans. Without these guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). , League officials feared, few would send their money to Austria. In order to qualify for outside assistance, the Austrian state thus had to agree to a dramatic curtailment of its sovereignty.

The only models for this kind of financial supervision came from the administration of the public debt of states and colonies outside of Europe, or on its periphery, in the nineteenth and early twentieth centuries: Egypt, Ottoman Turkey, China, the Dominican Republic, Tunisia, Greece, and so on. These externally administered systems of control tended to be put into place after foreign lenders, fearing a loss, pressured their governments to intervene diplomatically or even invade the debtor state or colony. An agreement would then be reached to hand control over the debtor’s fiscal policy to a foreign commission. This commission would oversee public spending to make sure it did not jeopardize the servicing of debt. Sometimes it would take direct control over sources of state revenue.

In the early 1920s, bankers in Britain, the U.S., and Europe saw the problem of Austrian financial instability as little different from these cases. If loans were to be given out, they insisted that a system of fiscal control in Vienna be created that was essentially identical to that of the Ottoman Public Debt Administration or the Chinese Maritime Customs Service. League officials protested; these forms of administration could not be brought directly back to “civilized” Europe without causing severe political distress. No similar abrogation of the economic sovereignty of a white, European, Christian state – with the exception of Greece – had ever been attempted before.

Nevertheless, League officials studied these mechanisms of debt enforcement and used them as blueprints for Austria. In charge of the League program on the ground was a “Commissioner General,” who was stationed in Vienna and given veto power over the Austrian budget. He could refuse to make outside funds available if the austere reforms that were called for weren’t proceeding according to schedule. He answered to a multinational Committee of Control, and the whole system was set up and coordinated by the League’s Financial Committee in Geneva. The man chosen as Commissioner-General was the mayor of Rotterdam, Alfred Rudolf Zimmerman, whose credentials for the job included the successful suppression of a socialist uprising in 1918. He quickly became one of the most powerful, and hated, men in Vienna.

League officials went to great lengths to describe the system they had designed for Austria as different from those for Egypt, Turkey, and China. Private creditors, in this case, were not placed directly into control of Austrian fiscal policy; this kind of arrangement was simply unthinkable, they insisted, in a modern and “civilized” European state. Instead, the League of Nations was to serve as a mediator, or buffer, between these creditors and the Austrian state. This would lessen the humiliation faced by Austrians, while working to prevent foreign creditors, should they face losses, from pressuring their governments to invade. Instead of calling for gunboats, they could now bring their complaints to Geneva.

It was important for the bureaucrats and experts leading Austria’s reconstruction to emphasize that it was the work of a purely neutral international organization. They did so partly to conceal what was obvious to observers: that their system for Austria did, in fact, share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. important similarities with those designed for the non-European world. During these years, for example, “Ottomanization” had become a popular term of abuse in Germany as fears mounted that a similar administration would be instituted in Berlin. |4| League officials faced frequent criticism that their work in Vienna represented a dramatic violation of Austria’s sovereignty, and even that they had taken advantage of the country’s postwar weakness to “institute a foreign tyranny.” |5|

What they had brought to Vienna was not quite an Ottoman– or Chinese-style public debt administration. But it wasn’t too far off. |6|

The League of Nations instituted similar programs of financial reconstruction in several different Central and Eastern European states over the following years. The Austrian scheme also helped to shape the Dawes Plan of 1924. While Europe’s financial stability did not last into the 1930s, the League’s work in Central and Eastern Europe had a long afterlife, providing an important source of experience and expertise for the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
. |7|

The deep origins of the IMF’s later “structural adjustments” schemes can be found here, as can the recent Greek bailout program. When these early reconstructions schemes were first being put into place, there were few models of economic governance for their designers to draw on. The best they could do was bring a form of semi-colonial administration back to the metropole – despite the dangerous precedent they knew this might set for the treatment of a sovereign European state.



|1| Most recently in Susan Pedersen, The Guardians: The League of Nations and the Crisis of Empire (Oxford: Oxford University Press, 2015).

|2| See Patricia Clavin, Securing the World Economy: The Reinvention of the League of Nations, 1920-1946 (Oxford: Oxford University Press, 2013), for a pioneering study of the League of Nations’s economic work.

|3| The most thorough account of the League’s financial reconstruction of Austria is in Nathan Marcus, “Credibility, Confidence and Capital: Austrian reconstruction and the collapse of global finance, 1921-1931.” Unpublished PhD Dissertation. New York University, 2012.

|4| Stefan Ihrig, Atatürk in the Nazi Imagination (Cambridge, MA: Harvard University Press, 2014), 26.

|5| Salter, “General Survey,” in League of Nations, The Financial Reconstruction of Austria: General Survey and Principal Documents (Geneva, 1926), 82.

|6| Anne Orde argues that the League’s administration in Austria actually had more control over Austrian public finances than did its Ottoman and Chinese counterparts. See Orde, British Policy and European Reconstruction After the First World War (Cambridge: Cambridge University Press, 1990), 144-145.

|7| On this point, see Louis Pauly, “The League of Nations and the Foreshadowing of the International Monetary Fund.” Essays in International Finance, 201 (Princeton: Princeton University Press, 1996), 1-52.


Jamie Martin

Harvard University



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