6 - The Second World War and the 1947 stabilisation

Summary

During the past few months and days, the recurrent question has been … what does the BI's governor do, when he repeats the old 1920 cry ‘let us break the printing press’ and then continues to sign notes endlessly…?

(BI R.A. 1946, p. 254).

Introduction

This chapter deals with the 1938–49 years, a period full of extremely important events. On the political–military front, there was the outbreak of the Second World War, the shifting of military operations from the African colonies to domestic soil, the fall of the Mussolini government and the resumption of conflict on the side of western powers. Then there was the German occupation, the rebirth of the Fascist regime in the north, the end of the war and the advent of the Republic. On the economic front, mostly as a result of political events, we register first a collapse in industrial output and then a surge in the velocity of money. These two occurrences caused the gap between aggregate demand and aggregate supply to grow wider, in turn generating an inflationary process, which turned out to be the most intense of the entire History. The country suddenly returned to price stability in the last quarter of 1947, concurrent with the implementation of a stabilisation programme that has been closely associated with Einaudi and Menichella. This programme has been the subject of controversy in terms of the underlying objectives, impact on monetary and credit aggregates and net benefits for the country.

This chapter begins with an overview of the war period. It then deals with the aggregate supply of goods and services. It continues with an analysis of fiscal policy and its impact on monetary policy.