4 - The First World War: inflation and stabilisation

Summary

The Management has been able to carry out a number of expansions and changes in printing facilities, overcoming quite a few obstacles in fitting premises, acquiring new machinery, obtaining supplies and training personnel. As a result, against an output of five million notes, recorded in 1913, eighteen million were issued this past year. The Management is satisfied with the outcome of its endeavours.

(Banca d'ltalia R.A. 1917, p. 48).

Introduction

The world war shattered the domestic and international mechanisms which for two decades gave Italy monetary stability, both in absolute terms and in relation to the rest of the world. Between 1914 and 1920, the inflation rate, measured in terms of the national income price deflator, rose progressively from zero per cent in 1914 to 34.7 per cent in 1920 (figure 1.2). Over the same period, the lira price of the pound climbed from 25.3 to 77.5.

This chapter deals with the evolution and consequences of macroeconomic policy during the war. With regard to the first aspect, we shall emphasise fiscal policy as this appeared to be the dominant and destabilising impulse. We shall then examine monetary policy by illustrating the limits of funding the massive increase in government spending through additional taxes or the placement of public debt. With respect to the second aspect, we shall focus on the process of internal and external depreciation of the lira.

As usually happens when the economy is in a state of emergency, during the period Italy resorted to policies of direct control of domestic prices and exchange rates. Consequently, we shall attempt to assess both the effectiveness of such policies (during and immediately after the war) and their possible side effects.