The Second World War exerted a multitude of effects, impacting France and its colonies, including Syria, both economically and politically. Due to its reliance on France, the primary headquarters of the Bank of Syria and Lebanon was relocated from Paris to Beirut. Additionally, the French High Commissioner modified the 1938 agreement through decisions and decrees issued via the board of directors. These directives primarily addressed the elements comprising the cash coverage.
These amendments were aimed at enabling the Bank of Syria and Lebanon to fulfill the demands of occupying armies for requisite banknotes. Consequently, the proportion of commercial bonds included in the coverage was raised to 25% of the circulating money supply, and all loans extended by the bank to the state were incorporated into the coverage.
All the aforementioned measures were aimed at streamlining issuance operations, allowing the bank to conduct issuances without necessarily covering them with francs or other currencies. Instead, it could utilize alternative means at its disposal. Conversely, following the occupation of Syria and Lebanon by Allied armies, the region experienced significant expenditure of sterling cash to fulfill the armies' demands for local products and goods. While the British armies initially faced the necessity of paying a considerable portion of their expenses in Syrian pounds during their presence in Syria, they ultimately opted to sell pounds to exchange offices to obtain Syrian Pounds.
The exchange office facilitated the transfer of sterling pounds and various currencies it acquired to the central treasury of Free France, in exchange for French francs. French francs constituted 98% of the currency in circulation. In addition, an amount totaling 800 million Syrian pounds was similarly constituted. Consequently, an equivalent sum was requisitioned by France for Syrian production. Following the March 1941 agreement between the French and British governments, the exchange rate between their respective currencies was established. The agreement outlined its potential applicability to all territories under the jurisdiction of the Defense Council of the French Empire, both existing and prospective.
After the Allies occupied Syria, the exchange rate was established at 883.125 Syrian piasters per British pound. The expenses incurred by the allied armies led to significant inflation in trade volumes and bank deposits. According to a report by the Board of Directors of for the years 1941-1945, the Bank of Syria and Lebanon estimates that 7/8 of this inflation resulted from the substantial quantities of Syrian pounds demanded by the allied armies from the exchange office in exchange for foreign currencies.
It is noteworthy that the increased circulation of money due to the armies' expenses was not accompanied by corresponding imports from abroad. Consequently, prices began to rise continuously, and the effects of monetary inflation became evident in the country. There was no mechanism in place to allow local capital to leave the country, thereby alleviating pressure on the local market. Consequently, a decision was made to permit such capital outflows, resulting in a reduction in monetary inflation, as approximately 400 million Syrian pounds left the country within three years.
