The Ambassador in Italy (Kirk) to the Secretary of State

No. 858

Sir: With reference to my telegram No. 168 of January 19, 7 p.m., 1945,47 I have the honor to enclose copies with ozalid of a letter bearing date of January 9, 1945 received from the Italian Minister of Foreign Affairs,48 and of an extensive Memorandum47 transmitted therewith stressing again (see enclosure to my despatch No. 588 of November 29, 194447) the gravity of Italy’s economic and financial situation and insisting upon the necessity of lightening the financial burdens derived from the Armistice terms in order to prevent the collapse of Italian economy and monetary chaos.

Specifically, as will be seen in the ensuing summary, the Memorandum makes two requests: (1) that a counterpart in dollars or sterling be established in favor of the Italian Government for all AM lire, however issued, and (2) that a similar counterpart be established for all payments made by the Italian Government “for the requisitions carried out by the Allied troops, for the supplies, services and works ordered [Page 1229] by the Allied Commands from the Italian industries, for the works carried out for those Commands in Italian construction yards and arsenals, as well as any other payment or debiting temporarily placed to the charge of the Italian Government and relative to expenses of occupation or of war or of any other nature made by the Allied Governments.” A summary of the document is given in the following 9 numbered paragraphs:

Setting the keynote for its following discussion, the Memorandum begins by emphasizing the grave deterioration of Italy’s economic situation and by asserting that certain aspects of this deterioration are closely connected with the application of the financial terms of the Armistice. The situation has now reached such a point, it adds, that the social and financial collapse of the country can be avoided only through a prompt and efficacious intervention for mitigating the immense burdens that weigh on the Italian people and by “an action of generosity and justice in its favor.”
Then follows a somber picture of the situation which will be faced by the Italian people following the devastation by war of the richer and more industrialized regions of the North and the financial ruin which the revengeful Fascist Government will leave in its train. As foreseen in the Memorandum, the road and railway system and the Italian ports will be found partly destroyed and completely disorganized; roads must be repaired, bridges rebuilt, rails relaid, rolling stock renewed, passenger cars and trucks provided. The reconstruction of harbor works alone will burden the State with charges running into billions of lire; and in addition it will be necessary to finance the reconstruction and repairs of public buildings destroyed or damaged by the war, the construction of housing in devastated regions, and the rehabilitation of a completely disorganized industrial system. To complete the picture, there will be the problem of pensions to ex-service men, payments due to repatriated prisoners, relief for interned civilians returning from Germany, and finally that of creating extraordinary public works to meet, especially in the North, the urgent problem of unemployment.
Describing next the grave state of Italy’s finances in the face of the enormous expenditures which the above-described situation will require, the Memorandum points to an exhausted treasury; a budget deficit which has progressively increased from 77.3 billion lire in 1941–43 to not less than 150 billion in 1943–44, with the certainty that the deficit for the current period will also be enormous; a public debt estimated as of last June 30th at 652 billion; and a note circulation of 260 billion as of the same date and expected to reach 300 billion by the end of the year (as compared with only 12.6 billion in 1935).
The exhausted situation of Italian economy, it is pointed out, sets a limit to the funds which otherwise might be available from increased taxation, making it certain that from that source it will not be possible to derive the vast sums necessary for economic reconstruction; which therefore will “require the generous contribution of foreign capital”. In this connection, the Memorandum mentions with gratitude statements which it says British and American statesmen have [Page 1230] made indicating that assistance in the form of such capital, as well as of technicians, will not be denied. It is essential in the meantime, the Memorandum declares, that the monetary situation should not further deteriorate, and to this end the most elementary remedy is that of eliminating all avoidable expenses and unnecessary burdens.
Assigning first place among the latter to the financial burdens arising from the application of the economic terms of the Armistice, the Memorandum sets off against the text of Article 33 of that instrument a summary of the charges which, it declares, Italy is carrying. Article 33 is quoted as follows: “The Italian Government will comply with such directions as the United Nations may prescribe regarding restitution, deliveries, services or payments by way of reparation and payments of the costs of occupation during the period of the present instrument.” In point of fact, the Memorandum continues, the economic and financial charges that weigh on the country can be summed up in the following groups:
  • a) Requisitions carried out by the Allied troops and consequent impoverishment of Italian economy.
  • b) AM lire issued and paid out by the Allied Command to the troops, for requisitions, supplies, works and services.
  • c) Supplies, services and works, ordered by the Allied Commands and the invoices of which the Allies intend to charge entirely to the Italian Government.
  • d) Works carried out by order of the Allied Commands in State building-yards and arsenals and not yet paid for.”
The point is then raised that as regards Italy the United Nations hold the position of an occupying power; that they not only occupy Italian territory, however, but also carry on a war against Germany on it, and that not all of the payments made in Italy by them with occupation notes or Italian currency placed at their disposal under Article 23 of the Armistice can properly be considered “occupation expenses”. From this category, it is submitted, should be excluded expenses incurred by the United Nations for the preparation of new operations against the enemy, there being in the Armistice “no clause which can be interpreted in the sense that the expenses of the United Nations as regards military operations for continuing the war against Germany must be put to the charge of Italy.” In short, Articles 23 and 33 of the Armistice, it is affirmed, must be interpreted in the sense that Italy’s burden “must be limited to those expenses that the United Nations incur in Italy in order to exercise the rights of an occupying power.”
Even this interpretation, it is contended, which the most extensive one that can be given to the financial clauses of the Armistice, completely disregards Italy’s status of co-belligerency, a status of which Italy obtained explicit recognition when she declared war on Germany. At that time, the Memorandum declares, it was stated that the conditions of the armistice could be adjusted by agreement between the Allied Governments in the light of the assistance that the Italian Government may be able to afford to the United Nations cause. In the latter connection it is commented that the Allied Powers know well the efforts that Italy has made; and that if the help that the United States, Great Britain and the Soviet Republic have received from [Page 1231] other countries associated in the war against Germany exceeds in practical results that which Italy up to now has been able to furnish, no country has undergone for the common cause such grave sacrifices or suffered such pitiless destruction.
While, the Memorandum goes on to say, it depends upon the Allies to establish the moment for eliminating the grave contrast between co-belligerency and the armistice, the serious dangers deriving from the application of the latter’s economic and financial clauses must as a matter of duty on the part of the Italian Government be called to the attention of the Allies in the most explicit and urgent fashion. For, under the previously-described condition of the Italian budget, if the Treasury must continue to be burdened with the heavy charges that are applied under the Armistice, how, it is asked, will the Italian Government be able to maintain the monetary situation? The financial and monetary situation, the Memorandum insists, contains dangerous germs of distrust which, should they develop thanks to the action of unforeseen circumstances, could make the slow but continual inflation degenerate into a monetary disaster which might produce incalculable economic and political consequences. If, however, according to the Memorandum, the Allies at this moment should take the decision invoked by the Italian Government, a feeling of confidence and relief would be produced in the financial field, and one of the essential bases would thus be laid for the issuance of a national loan which would tend to absorb a great part of the monetary circulation.
The Italian Government therefore begs the Allies to take into consideration the following requests:

a) All the AM lire, however issued, and all those that will be issued in the future will have to find a counterpart in dollars or sterlings in favor of the Italian Government. Exception will be exclusively made for those furnished to the Italian Government and not returned.

b) All the payments made or to be made by the Italian Government for the requisitions carried out by the Allied troops, for the supplies, services and works ordered by the Allied Commands to the Italian industries, for the works carried out for those Commands in Italian construction yards and arsenals, as well as any other payment or debiting temporarily placed to the charge of the Italian Government and relative to expenses of occupation or of war or of any other nature made by the Allied Governments will have to find full counterpart like the one indicated under N. 1.

“As regards the payments for the requisitions carried out by the Allied troops it will be furthermore equitable to bear in mind that the said requisitions were operated on the basis of prices not corresponding to the effective price of the goods or services which formed object of those requisitions. The reimbursement that the Allies ought to make could allow the Italian Government to constitute an adequate counterpart to the damages borne by Italian citizens only if such reimbursement were based on the prices current at the time of the requisitions.”

Copies of the above-summarized Memorandum have been received also by the British Embassy and the Allied Commission. The English [Page 1232] translation of the document which is included among the enclosures to the present despatch is one which accompanied the Italian text when submitted by the Minister of Foreign Affairs.

In forwarding the Minister’s letter and Memorandum, I wish to point out that the description of Italy’s disastrous economic and financial situation contained in the letter is not an overstatement. However, I am not in a position to evaluate from a technical or policy standpoint the possibility of complying with the requests of the Italian Government and I would like to have the Department’s views on the matter.

Respectfully yours,

Alexander Kirk
  1. Not printed.
  2. Ante, p. 1220.
  3. Not printed.
  4. Not printed.