8 - The seventies

Summary

We have asked ourselves whether the Bank of Italy would have been able or could have refused to finance public deficits. … Such an action would place the government in the impossibility of paying salaries to public servants … and pensions to people. While this action would have the [technical] appearance of a monetary policy initiative, in practice it could be construed as an act of subversion, for it would bring about a paralysis in the institutions.

(BI R.A. 1973, p. 418)

Introduction

In this chapter we investigate the seventies. The distinctiveness of this decade is not the output slowdown, but the high inflation rate, relative to both Italy's recent past and the experience of other industrialised countries. The key factor underlying the high inflation turns out to be, once again, a profligate fiscal policy and a central bank subservient to the financing needs of the fiscal authorities. The monetary authorities adopted a new intermediate target, total domestic credit, which sanctioned the supremacy of fiscal policy over monetary policy.

A high seigniorage is the natural corollary of fiscal disorder and a compliant monetary policy. This was indeed true for the seventies; to collect such a seigniorage the country was financially isolated from the rest of the world through a pervasive and complex web of capital and exchange-rate controls.

The seventies versus the fifties and the sixties

The obvious point of departure for our comparison of the fifties–sixties and the seventies is government finance, which is the largest shock for the economy. Government expenditures were 28 per cent of national income in 1970; by 1978 they had almost doubled.