740.00119 Control (Italy)/2–1345: Telegram

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

388. Section I. During last visit of Macmillan to Rome officers from G–554 AFHQ came here to discuss with AC55 a reply to Tam 44556 regarding proposed directive on Italian financial matters and prepared a draft which was taken by G–5 officers to AFHQ with the intention of having it transmitted from Caserta to Combined Chiefs of Staff. Although discussions on this draft are apparently still being carried on in G–5 where the general lines of Department’s 84, February [1] to AmPolAd are known and although draft has not been submitted to offices of political advisors to SACMED for concurrence I submit following paraphrase thereof based on text as agreed upon in conferences in Rome:

Section II. [Begin paraphrase] This message is an agreed view following consultation with Acting President and Chief Commissioner of Allied Commission:

57 Two main proposals are made in Tam 445: (1), that the Italian Government again control foreign exchange transactions; (2), that it should again become the only issuing authority for all lira currency, [Page 1236] including all AM lire already in circulation, whether for the purpose of meeting obligations to the Allies under Armistice Clause 23 or for its own use. Since these proposals conform with the developing policy of the Allied governments toward Italy which is to have it assume the responsibilities ordinarily associated with sovereignty, I support both of them.
In each case there is a question, however, as to when such changes should take place.
Both experience and probity are required in the difficult technique of exchange control and neither can easily be found at this time in Italy. Some of the most expert persons are now in German controlled Italy and those remaining are suspended and awaiting epuration hearings. In order to obtain at least a nucleus of competent men we are trying to expedite hearings but must exercise considerable care. The Italian Government assisted by Allied Commission is now developing exchange control machinery substantially like that of 1917–1919, that is operated by Banca d’Italia as agents of Italian Treasury. So far as we know, neither the government nor the public have ever requested acceleration of date when full responsibility would pass to Italian hands. Furthermore, the Allied governments have an interest to the extent to which they have to make foreign exchange available to the Italians either now or in the future in making sure that the little foreign exchange now at the disposal of the Italian Government is not wasted through improper or imprudent management. In telegrams Tam 136 and 398 and Tam airgram 2458 you have urged the need for exercising control in all transactions in the currencies of neutral countries as well as in the operation of post liberation accounts in the United States and United Kingdom and you, therefore, seem to share this view. You may feel that these considerations weigh against any premature relinquishment of controls. I shall meanwhile continue the policy of preparation for transfer of full responsibility to the Italians whenever you may so direct.
Regarding the second proposal, the Italians at some date clearly must publicly shoulder the burdens which they have not had to face simply because the Allied invasion came from the south and consequently for almost a year the note printing facilities were not available to the Allies and were found destroyed when they were reached. The Italian Government was thus unable to make currency available in fulfillment of its obligations under article 23. I sympathize fully with your desire to make the Italians face this issue and to realize that possible escape from or reduction of their obligation is an illusion. It is due only to the above military circumstance that AM lire have [Page 1237] had to be printed and imported and yet I do not doubt that both the government (as evidenced by its recent memorandum) and the public hope that the Allies might be persuaded to make available sterling and dollar credits commensurate with the currency thus created. This control over the issue of currency, I must warn you, since it means the open assumption of an obligation of the Armistice which the Government publicly has declared it is seeking to avoid, may well appear to the Italians far from a welcome concession or as of no advantage. Whereas the lire account proposed last autumn, if carried out, would have meant a charge of some 15–18 billion lire annually to the government’s budget, the new proposal would mean an increase in the government’s debt to the Banca d’Italia of some 50 billions immediately and budget charges of some 5 billions of lire would continue each month.
In a recent memorandum59 to the Governments of the United States and the United Kingdom and to the Allied Commission, the Italian Government has requested the dollar and/or sterling counterpart not only for all Allied military lire outstanding but also to cover all payments which the Italian Government has made or will make for supplies, requisitions, services and work furnished to or ordered by the Allied forces. I do not think it likely, but unless the two Governments propose to accept this demand, they must face the question whether it is wise in the name of “decontrol” to make the Italian Government and people resolutely undertake their financial obligation at this particular moment. The arguments in favor of so doing without further delay, I recognize, are both in logic and in equity very strong: The realities should be faced by the Italians. It is the outward and visible sign of a sovereign state that it issue and control its own money, and they might as well do so at once since they will have to swallow this bitter medicine at one time or another. In present circumstance, on the other hand, it is arguable that the government is weaker than it ever will be again. If the proposal in Tam 445 precipitated a crisis, it is possible that no government might be formed at all. It took 12 days to produce a government at the last crisis. Furthermore, the people in general retain what has been called an uncritical confidence in the value of the lira, despite the grave financial situation of the country, and I should not like to do anything to destroy the present confidence in the currency. Savings are made, bank deposits continue, contributions for life insurance, assistance societies and the like flow in, and so far there has been no sign of any panic flight from money into goods.
In view of these considerations, although I agree that assumption by the government of responsibility for its currency is desirable, I feel that I should invite your attention to the fact that in deciding this question due regard should be given to the wide issues and potential dangers which I have set forth. Should you determine to go ahead with the proposal, however, I should like to make informal soundings as to the likely reaction of the Italians before making any demands officially.
All of the same considerations apply with respect to the establishment of a lira account although in a reduced form. It is technically desirable but it is difficult politically.
My experts at AC and at this headquarters have advised me in the following sense with respect to the proposals concerning AFA contained in Tam 445:
The Allied forces in Italy regardless of their location with respect to Italian Government or AMG territory must continue to receive an adequate volume of lire currency from AFA. Consequently, if responsibility for all currency is assumed by the Italian Government, AFA should either physically draw currency from the government or obtain currency from abroad as at present for Italian Government account, but for military use. After the non-military currency arrives, moreover, the remaining stocks of AM lire should be retained by AFA and it should have the right to use them in an emergency.
The Finance Sub-commission including AFA will require some months to complete the process already begun of ridding itself of financial operations such as mentioned in paragraph L–A of Tam 445. Certain operations which must be continued by AC and which are in addition to those mentioned in paragraph L–C of Tam 445 include civilian supply and financial accounting and the financing of Advisory Council and AC–AMG.
The transfer of AFA to headquarters, therefore, could not be accomplished for several months and even then would require the creation of another Finance Sub-commission section to continue handling many current functions of AFA.
The wider problem of giving “a greater measure of responsibility in financial matters” to the Italian Government is dealt with only to a limited extent in Tam 445. The AC is concerned at present in varying degrees between advice and control with many other areas of financial operations such as the following:
The AC assists the government in its own territory in the control of expenditure and finds it necessary to a certain extent to bring pressure upon the government from time to time to prevent essential communications and other services necessary to the Allied war effort from breaking down.
The AC collaborates with the government in the collection of revenue, the development of new sources of revenue, the improvement [Page 1239] of existing techniques of collection and in the effort to reduce collection costs and generally stimulate the efficiency of the revenue service.
With regard to governmental accounting within and without the budget, the AC works with the central accounting authority in attempting to keep a close check on budget deficit, expenditure and disbursement deficit.
With the Italian Government the AC is trying to obtain normal operations of domestic insurance, but is keeping a tight control at the same time as required by Tam 417 over insurance interests abroad.
In the field of property control and in the absence of any instruction in detail from CCS, the AC has been trying to conserve the properties of Allied nationals in Italy and to arrange appropriately for the transfer of this responsibility to the Italian Government.
I intend to continue as heretofore until otherwise instructed. End of paraphrase.

Section III. Without presuming to enter into technicalities, I can only say with regard to the foregoing that it is an unhappy commentary on Allied policy and practice in Italy if, owing to a failure to take reasonable measures to strengthen the position of the Government and improve conditions in the country, it is considered inadvisable to establish now financial measures which would have been realistic and practical if determined months ago and which must eventually be put into effect as a part of a safe economy in Italy.

To my mind the liberation of the north should not be regarded as a potentiality for increased strength to the present government but as an eventuality fraught with fresh burdens which may prove unbearable and consequently contributory to a state of disorder throughout the country similar to but greater in extent than we have already witnessed in other areas. To confront the present government in its present state of weakness and disillusionment with the necessity of adopting measures which, taken by themselves, increase their responsibilities before the country without concrete and present benefits may be found by Allied financial experts here too drastic a dose but even that will not be established without determining accurately the measured views of all the interested ministries of the government. Some steps to that end are, I understand, envisaged.

In conclusion I can not refrain from submitting however that if the Italian Government can be assured that the President’s expressed views as regards food and transport requirements for Italy may be regarded as in process of execution and, that the American policy to substitute a more realistic status for Italy in place of the present armistice regime has been accepted for implementation, the Italian Government should then be able to absorb the shock of the contemplated financial measures particularly in view of the fact that they are fundamentally salutary and do not in themselves preclude the possibility [Page 1240] of eventual credits to Italy which may prove necessary and constructive. And even if that is too optimistic a view and the government fails in the test outlined above it can be argued that the consequences of such a revelation of weakness would be more easily dealt with now than at the time of the real emergency when the north is liberated.

  1. Headquarters staff division dealing with civil affairs.
  2. Allied Commission.
  3. Not printed.
  4. The numbered paragraphs were not transmitted in chronological order; as here printed, they have been restored by the editors to the usual numerical sequence.
  5. None printed.
  6. Memorandum of January 9, 1945, not printed; for summary, see despatch 858, January 26, from Rome, p. 1228.