One of the most important consequences of the forced loan issued in 1926 was the improvement of the National Bank's financial situation. Indeed, the Bank profited directly from the part payment of the public floating debt, which required almost half of the money that was gathered from the loan. In the beginning of January the Bank's cash balance was 208 million drachmae, but until the end of the month it had reached 957 million. The Bank withdrew immediately from circulation banknotes that had been issued using as collateral the account of the Committee for Refugee Settlement.
In addition, the forced loan had a short-term effect as an anti-inflationary measure in economy. The restriction of the public's buying power by 1/4 decreased the demand of consumer goods as well as money circulation by 25%. That brought a short-term improvement, as already mentioned, to the rate of the drachma against the pound. From the beginning of March however, the drachma started to fall again and until mid-April it had reached lower levels than those attained before the forced loan. Additionally, the government policy that allowed the National Bank to provide the market with large quantities of foreign exchange, in order to stabilise the rate of the drachma, resulted in the jeopardising of the Bank's exchange reserves, without stopping the downward trend of the drachma. Between May 1925 and August 1926 the drachma had lost 55% of its value against the pound (460 drachmae in August).
The lack of trust in the national currency (as a result of the first forced loan in 1920) had been intensified after the new forced loan and had encouraged exchange speculation which, combined with the demand of money, dissipated once more the National Bank's deposits. Therefore, in the summer of 1926 the National Bank despite its conservative lending policy ran the risk of liquid assets narrowness, as well as of the dangerous decrease of exchange covers. The Bank was once more incapable of continuing its credit granting function. It was also forced to decrease even more the circulation of money due to the loss of exchange covers. Exchange reserves decreased from £ 3,182,825 in December 31, 1925 to £ 606,000 in July 31, 1926. As a result, monetary circulation that varied in proportion to the fluctuations of the exchange covers, shrinked correspondingly. The National Bank was put under pressure in order to sell exchange to the market, something that would bring about the loss of significant reserves, at a time of considerable upward fluctuations in the rate of the pound. That was the major cause of contrariety between the Bank's administration and the dictatorship of Theodoros Pangalos. |