Foreign Relations of the United States, 1946, Paris Peace Conference: Documents, Volume IV

Doc. No. 26 (E).

Memorandum on the Economic Consequences of the Peace Treaty

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III. Economic Clauses

1. The Italian Delegation has the honour of presenting to the Economic Commission for the Peace Treaty with Italy its remarks and considerations concerning the provisions contained in the Draft Treaty falling within the province of Commission, namely Articles 64 to 71, 73, 74 and Annexes III, VI, VIII.

2. In presenting its remarks concerning the aforesaid Articles and annexes of the Treaty, it is the Italian Delegation’s duty to set forth as briefly as possible Italy’s actual economic and financial situation and the principal measures required, to avoid a total collapse of the country’s economy and finances and make possible a normalisation though slow and gradual.

This exposition shows that, unless the economic provisions of the Treaty are profoundly and sometimes radically revised, it would be practically impossible for Italy, despite all the efforts of the Government and the people, to carry them out.

The normalisation of Italy’s economy and finances so as to provide a minimum standard of life for the country’s 47 million inhabitants, is obviously a preliminary condition for the nation’s political and social balance and the basis for Italy’s international economic relations. This normalisation however, on which is based the political and social balance of the nation, cannot be brought about by Italy’s efforts alone.

For these reasons the provisions of an economic nature should be considered as a whole before examining each one in detail.

3. In order to estimate the economic consequences of the Peace Treaty, one must consider:

I. War damages suffered by Italy;

II. Italy’s present economic and financial situation;

III. Renunciations laid down in the draft Peace Treaty;

IV. New burdens determined by the draft Peace Treaty.

I. War Damages

4. The war assumed characteristic and even unique aspects in Italy. Italy fought two wars: one unfortunately, on the side of Germany, the other on the side of the Allied Powers. Consequently she was exposed to a double offense. Then, to quote Churchill, she saw the war pass like a harrow of fire over practically the whole of her territory from Sicily to the Po Valley.

The war caused destruction everywhere: to houses,^* public works or works of public interest (harbours, roads, power stations, acqueducts, etc.), railways,^† the merchant navy,^‡ industrial plants,^§ agricultural equipment, livestock and forests.

The destruction has been so terrific that if the reconstruction indispensable for meeting the fundamental needs of the country were to be carried out, a sum of at least 3.000 billion lire would be called for, namely six times the total annual expenditure of the State budget which is about 500 billion lire.

It should be remembered that the great majority of the damages sustained by Italy refer to the period after the Armistice of September 3, 1943, when, as a consequence of Italy’s having voluntarily placed herself at the side of the Allies, the devastations and looting of the German vengeance were added to the destruction caused by the war fought on Italian territory for almost two years.

Italy formally requests that this circumstance be constantly borne in mind when determining the economic and financial clauses of the Treaty.

II. The Present Situation in Italy

5. The seriousness of the situation in Italy can be judged from the following data concerning the main aspects of the country’s economy.

a. State budget:

Annual expenditure	530	billion	lire.
Annual revenue	180	—	—
Annual deficit	350	—	—

The deficit is limited to the above sum because State expenditure is reduced to a minimum; compensations for war damages are extremely limited and restricted only to the poorer classes; very few subsidies are paid to the unemployed, and these in the form of charity and only to the most desperate cases; relief for illnesses and for tuberculosis, which is rampant among ex-prisoners of war and children, is absolutely insufficient.

Local collectivities (townships, provinces and relief organisations), despite the very limited sums paid out, also report deficits in the same proportions as that of the State budget.

b. Domestic public debt. Including the debt to the Bank of Issue, this has passed from 146 billions in 1939, of which only 41 billions were floating debts, to about 1.200 billions at present, of which over 850 billions are floating debts. When Italy entered the war against Germany in September 1943, this debt only amounted to a little over 350 billions.

c. Monetary circulation. This has passed from 24.5 billions in 1939 to 395 billions in 1946, including occupation money. In September 1943, the monetary circulation was not quite 120 billion lire, including Allied money already spent after the landing in Italy, so that there has been an increase of 275 billions from the beginning of our co-belligerency up to the present.

d. Balance of payments. In the years preceding the war, Italy’s trade balance always presented a deficit. On an average our exports covered only 70–75% of our imports; nor were the other assets of our balance of payments (tourism, emigrants, remittances, shipping freights) sufficient to neutralise this deficit; consequently the reserves of the Bank of Issue were considerably reduced.

The situation threatens to be terribly serious for the years to come: our import needs, to meet normal requirements as well as the exceptional demands of reconstruction, have increased; the invisible items of our balance of payments have ceased almost completely and there has been a heavy drop in our possibilities of exportation for the following main reasons:

• —40–45% of our exports consisted of manufactured products, more than half of which were made from imported raw materials which now, unavoidably, we shall be short of owing to payment difficulties and the needs of all the countries devastated by the war;
• —20–25% consisted of vegetables and fruit, of which about 70% was sent to the countries of Central Europe, whose capacity of absorption is very low at the present moment and will only pick up very slowly.

Such imports as are indispensable to ensure a minimum of subsistence to the population and sufficient occupation for the working classes to avoid social disturbances, amount to 1.200–1.500 million dollars a year.^║ For the next few years such exports as are possible and the other assets of our balance of payments cannot be anticipated to cover more than 30–40% of the aforesaid requirements, so that Italy will have a deficit fluctuating, according to various forecasts, between 750 and 950 million dollars.

These figures, which do not take into account debts falling due before and after the war or further burdens such as the imposition of reparations on Italy or other payments to foreign countries, contain the fundamental drama, of Italy’s national life, which for the next few years can only be solved by the opening of foreign credits.

Without these, the standard of life of the Italian people, whose food consumption even before the war was below minimum physiological requirements and is now reduced to from one-half to two-thirds of those requirements, would become unbearable.

Prices of food have increased about 36 times as compared with prewar prices, whereas workers’ wages have only increased 13–14 times and clerks’ salaries 9–10 times.

In actual value, therefore, pay is reduced to barely 40% of pre-war rates for workers and 30% for clerks. All this has brought about a lowering of the standard of life, of which we have ample proof, moreover, in the heavy increase (almost double) in the most serious social diseases. Tuberculosis mortality, which in 1938 was about 8 for every 10.000 inhabitants, rose to 15.4 in 1945.

It is only thanks to the generous assistance of the United States and of other Allied Nations that have supplied food, industrial raw materials and coal, either direct or through U.N.R.R.A., that it has been possible, to a certain extent, to attenuate the terrible sufferings of the Italian people, to keep inflation within bounds and to uphold the delicate Italian economic situation. The balance maintained so far with great difficulty is absolutely lacking in stability: any factor of a technical or psychological nature could upset it from one moment to another, provoking complete monetary chaos and the collapse of the whole economic system.

So far the basis of this precarious system has been the confident hope of the Italian people that the provisions of the Peace Treaty, putting an end to a state of uncertainty and confirming indisputably the promises made to Italy with regard to her co-belligerency, would improve economic and financial conditions. It is easy to see that these expectations will be deluded if to the present situation are added the further burdens determined by the Peace Treaty.

III. Renunciation of Claims by Italy

6. Attention must be drawn to the three following points which would be disastrous for Italy’s recovery.

a. Cessions and renunciations both of some of Italy’s territory and of territory outside Italy.

It is certainly not our intention to argue about the reasons and foundedness of these cessions and renunciations, but the fact remains that these losses will increase Italy’s difficulties enormously.

The public works and property built by Italy especially in Albania, in Africa and in the Dodecanese Islands, amount to a figure of about 1.5 billion dollars and private investments in these territories exceed 800 million dollars. But these figures do not give the full measure of the losses to Italian economy. The proceeds in foreign currency from the harbour and industries of Trieste, the bauxite and coal in Istria (this latter covers one-tenth of Italy’s requirements and represents half of her output), the drop in the labour outlet to these regions and in trade exchanges with them, have also to be added to the losses mentioned farther back.

It is for these reasons that Italy must request, if territorial cessions and reparations are imposed on her, that due account be taken of her investments remaining in these territories.

b. Italy is called upon to renounce all rights and claims against Germany (Article 67). The latter would include also the machinery carried off by the Germans (for about 80 billion lire) which, were it available, would contribute vastly to Italy’s industrial reconstruction. For the most part this machinery was up-to-date and among the best that Italian industry, very modestly equipped, possessed. Perhaps Italy is also to be called upon to waive her claims to about 70 tons of gold taken by the Germans after the Armistice, from the small quantity that was all she had left.

The removal of the aforesaid clauses from the draft Treaty, at least as far as the period of co-belligerency is concerned, is necessary for moral and juridical reasons arising from this co-belligerency.

c. Italy is requested to accept the orders and decrees of the Prize Courts and other measures emanated on this subject by Allied and Associated Powers after September 1, 1939 and consequently to waive all claims concerning Italian merchant ships. (Art. 66, No. 1 c and No. 5).

When Italy entered the war, five hundred and sixty thousand gross tonnage of merchant shipping were or took shelter in harbours of the United Nations—most of them in harbours of Nations that only went to war with Italy or broke diplomatic relations with her later on.

Moreover, at the time of the Armistice, ships for a gross tonnage of about 800.000 tons were in territories occupied by the Germans; part of these were sunk or sabotaged by the Italian crews so that they should not be used by the Germans.

Quite apart from any recognition of Italy’s co-belligerency, it seems only fair, for obvious reasons of justice, that the remaining ships or those that can be salvaged, belonging to the aforesaid categories, should be restored to Italy.

Italy who, before the war, imported by sea about 20 million tons of goods, was left at the end of the war with only 15 p. 100 [per cent] of her merchant fleet; she has now to bear in her balance of payments—in which this item was formerly an asset—the burden of hundreds of millions of dollars.

A fair re-examination of these provisions of the draft Treaty could lessen the need, especially in these next few years, for the huge quantities of foreign currency which will otherwise be necessary for shipping freights.

IV. New Burdens

7. Attention is called in particular to the following burdens:

a. The expenses the Italian Government would have to incur in applying Article 64 for war reparations.

It is not possible for the Italian Delegation, at the present moment, to estimate these expenses as the Draft Treaty, though determining the sum to be paid to the Soviet Union at one hundred million dollars, does not establish the amount of reparations to be paid to other Nations, or the sources from which further reparations should be paid.

The Italian Delegation must repeat its opinion, however, that reparations cannot be considered as something apart, to be added to the cession without compensation of important property that other provisions of the draft Treaty allot to some of the Nations claiming reparations from Italy.

b. The obligation leaving to the Italian Government the whole burden (Art. 66, no. 2) of compensating its citizens for requisitions during the period of co-belligerency and for the furnishing of supplies or services to the Allied and Associated Powers and after that period, as well as for non-combat damage caused by the presence of the forces of aforesaid Powers in Italian territory.

c. The obligation contained in Article 66, No. 4, according to which the Italian Government is to assume full responsibility for the occupation currency issued by the Allied military authorities.

The items mentioned in b and c amount to enormous sums.

It is true that when the Italian Government signed the Armistice, it undertook to assume responsibility for items b and c; but, at that time, there was reason for both parties to anticipate that the occupation troops would only remain in Italian territory for a short time and also that the number of these troops would be quite small, considering the enthusiastic reception they had received from the Italian people.

Instead, for military reasons, Italy was turned into a huge base for operations against the German troops, including those stationed in the Balkans and in Central Europe. Consequently the number of Allied troops that poured into Italy and the requirements for supplies and services were far in excess of what would have been needed merely for the occupation of Italy.

These burdens, therefore, should be lightened considerably, both in recognition of our co-belligerency—which moreover placed heavy financial burdens on Italy’s shoulders—and in consideration of the fact that Italy’s exhausted economy could not bear up under them.^¶

d. The obligation contained in Article 66, No. 5, according to which Italy is to waive all claims in favour of Italian prisoners of war—arising out of the Geneva Conventions of 1929 concerning the treatment of prisoners of war—for the work they undertook to do of their own free will for the United Nations and the Italian Government’s consequent obligation to make these payments itself, is very high.^**

e. The obligation that Article 68 would impose on Italy to compensate United Nations nationals for damage sustained by their property in Italy, no matter at what time it occurred and consequently also during the period of co-belligerency and no matter who (Italians, Germans or the Allies themselves) caused it.

f. The liquidation of Italian property abroad contemplated in Article 69 is doubly serious from an economic standpoint for it means not only a loss of income in foreign currency, but also that the Italian Government will be obliged to compensate the owners of the aforesaid property.

It seems impossible to understand why, when—as we have shown and as has been acknowledged—Italy must try and find the means for her reconstruction in the strengthening of international economic relations, she is to be deprived of activities abroad which are the basis of traditional business relations.

8. The Memorandums presented separately show how serious the renunciations requested of Italy and the burdens to be imposed on her are, and contain the reservations made by the Italian Delegation. But even the brief considerations set forth so far are sufficient to prove that Italy’s economy and finances, already thoroughly exhausted, cannot bear the burdens laid down by the draft Treaty.

Without the fundamental raw materials essential to modern life, first among which is coal; with an agricultural output that is very far from satisfying the minimum needs of a growing population crowded into a very restricted cultivable territory; with a foreign trade more than 60 p. 100 [per cent] of which, for over half a century, was carried on with European countries which are now suffering the after-effects of war too—Italy’s difficulties would be immense even if no renunciations and further burdens were imposed on her by the Peace Treaty.

Owing to the country’s conditions, therefore, and quite apart from any reasons of justice and equity, it seems necessary for some of the aforesaid renunciations and burdens to be removed completely and for others to be very much reduced; also, such sums as are established should be payable over a long period of years, beginning not less than six years after the coming into force of the Peace Treaty.

Meanwhile, assistance should be granted to Italy—as has been the case during the last few years—so as to enable her to improve her balance of payments and normalise her finances on the basis of a growing output, fed by incoming raw materials. The assistance needed from outside will be proportionately less if it is possible to get back from Germany the property she removed from Italy and if the German credits of all kinds having accumulated legitimately in favour of Italy, during the period of co-belligerency, are paid to her.

During the five years which are anticipated as being necessary for the reconstruction of her economic forces, Italy should be relieved of payments abroad for debts incurred before the end of the war.

Unless the aforesaid measures are adopted and the amendments mentioned further back adapted to the provisions of the Peace Treaty, period of depression will ensue for Italian economy, even more serious than that of the last few years when, as already mentioned, it was assisted by some of the United Nations. The new expenses for reparations and compensations and the consequent need to issue huge quantities of paper money would deal a death blow to the Italian State budget, which already has a heavy deficit. The lira would collapse completely and all the efforts made by the democratic Governments up to the present to maintain order throughout the country would have been in vain and probably the assistance Italy has been receiving—and that it is indispensable for her to continue to receive—would lose much of its effect.

Everything possible must be done to avoid such a situation. Italy appeals to the understanding and generosity of the Nations with whom, unfortunately, she was at war in the beginning, through the fault of Fascism. Italy trusts that this appeal will not remain unheard when the economic clauses of the Peace Treaty are definitely drawn up.

It is up to the United Nations to tone down with wisdom the demands laid down by the draft Treaty, whether they regard reparations, renunciations, compensation or indemnities, and limit them to the possibilities of the Italian people. It is only thus that Italy can be enabled to work, produce, resume her international trade relations once more and avoid the calamity of inflation. It is only thus that Italy, once more a co-operating force in the community of free nations, can be enabled to meet her international obligations.

The Italian Delegation trusts that the contents of this Memorandum and also the specific remarks set forth apart will be remembered when the various Articles of the Treaty are examined.

The Italian Delegation is ready to furnish any data that may be asked for to prove the statements made in this memorandum.

1. The number of rooms destroyed and damaged amounted to 6.800.000, of which 1.878.000 were totally destroyed. [Footnote in the source text.]
2. In July 1945 the number of engines was reduced to 55% and the number of trucks, to 46% as referred to the pre-war period. 38% of the lines in use were destroyed; for double track lines the decrease amounted to 68%. Further, 17 km. of iron bridges and 37 km. of stone bridges needed to be re-built or repaired. The destruction suffered by fixed installations was so serious that barely 25% of Italy’s pre-war railway traffic was possible. [Footnote in the source text.]
3. On June 30, 1939 the Italian merchant navy had a gross tonnage of 3.500.000 tons, to which were added during the war, new constructions for about 350.000 tons. By the end of the war this fleet was reduced to 500.000 tons, namely 15% of its total gross tonnage. [Footnote in the source text.]
4. The destruction was most serious in Southern and Central Italy. The industrial zone of Naples, which is one of the poorest towns, was completely devastated and the same may be said of the Northern Tuscany zone and of other smaller ones. In 1945 the output of the hydroelectric plants of the Apennine network was reduced to 30% of its pre-war output. [Footnote in the source text.]
5. The report presented by U.N.R.R.A. to the Session of its General Council at Geneva 5–17 August 1946, admits that Italian imports for 1947 should amount to 1,261 million dollars. [Footnote in the source text.]
6. This necessity has already been realised by the United States Government which has opened a credit in dollars to compensate for part of the occupation money. [Footnote in the source text.]
7. The United States acknowledge to Italy a credit in dollars for prisoners of war claims. [Footnote in the source text.]