Subject: Recommendations concerning Italian Economic
Policies and Needs
Dr. Henry Tasca, Treasury representative attached to the Embassy, is
acting as courier in order to insure expeditious delivery and
distribution of the enclosed material within the Department. Dr.
Tasca, as the Department is aware, has been recalled to Washington
for consultation by the Department’s telegraphic instructions of May
5.
Admittedly, conditions are serious, and the present government has
not demonstrated its ability to rectify them. With special regard to
my views on our policies until such time as an adequate government
is installed, I respectfully refer the Department to my telegram No.
1078 of May 7.
[Enclosure—Extract]
Current Economic and Financial Policies of
the Italian Government
1. General Appraisal
The current economic and financial position in Italy reflects the
lack of confidence on the part of strategic economic groups in
the ability of the Government to direct and control the country.
There are four basic interrelated groups of factors accounting
for the prevailing forces of financial and economic
disintegration:
(1) Lack of inner consistency in the
composition of the Government.
Since the days of liberation it has been necessary to include in
the Italian Government, in varying degrees, representatives of
political parties with such widely divergent concepts of social
and economic reform that it has been difficult to prepare and
execute consistent national plans for reconstruction and
rehabilitation. In the field of finance, up until the present
Government, the Ministry of the Treasury was in the hands of the
Liberal[s]—that is, the spending side of the Government, [—] and
the Ministry of Finance—the collecting side—was in the hands of
the Communists, with both parties keenly endeavoring to outwit
and outmaneuver the other with respect to financial policy. The
Communists desired politically spectacular measures designed
simultaneously to destroy the dominant property owners.
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The Liberals wished to
preserve such classes as the backbone of economic
reconstruction. IRI was headed
by a Liberal but with left-wing Socialists and Communists in key
positions immediately below. The former wished the dissolution
of IRI, the latter the
transformation of IRI into the
central organ for State control of industry. Similar comments
may be made with respect to other ministries and to the
composition of the Government in general. These conflicts have
made impossible the adoption of the sharply defined policies
necessary to rehabilitate and reconstruct the Italian
economy.
(2) Political agitation.
The electoral campaigns in Italy which have taken place, and
those which are to take place during the current year, have had
the effect of disintegrating such cohesive forces as existed in
the Government which might have led to the adoption of viable
financial and economic policies. The attempt to build up
electoral strength has required a constant process of agitation.
Promises, which augment discontent and social unrest, are made
and the population is kept in turmoil. Such agitation has been a
principal cause in the loss of confidence on the part of the
people in their Government.
The agitation of the Communist Party deserves particular
attention. It is now a well-known tactic of the Communist Party
to remain in the Government and at the same time, particularly
through CGIL, to offer
corrosive opposition to the Government. This tactic (a) provides the Communists with a cloak
of respectability for the Party, and (b)
permits them to infiltrate into key positions. Threats of
general strikes have forced the Government to yield on wage
policy and expenditures for public works. Sporadic but frequent
public disturbances throughout the country frighten business
enterprise and accentuate economic difficulties, which in turn
provide a tool for the Communists to exert further pressure on
the Government publicly and thus seek to obtain further support
from the masses.
(3) Lack of public order.
The incidents which occurred during the course of one week in
Rome and Messina, which in one case involved jostling of and
threats to the Minister of Foreign Affairs and in the other case
the refusal of a group in Sicily to permit the Prime Minister to
speak, could not fail to lower further the prestige of the
Government. It has not been possible for a long time in certain
zones of Italy for the Government to make effective freedom of
speech, as is shown by the inability of a right-wing Socialist
leader to speak in the red zone of Emilia. The loss of prestige
of the Government incites holders of liquid assets, business
enterprisers and people in general to attempt to provide
individual economic security
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and gain in the form of commodity
hoarding, speculation, capital flight, etc. This in turn
accentuates the gravity of the economic situation. The lack of
public order permits extremist elements to disturb public
opinion by building up a psychosis of fear which is, in turn,
politically exploited. The fear of Communist seizure of power,
paradoxically, increases the number of adherents to the
Party.
(4) Technical incompetency.
The loss of confidence of the strategic groups in the economic
system is undoubtedly also to be attributed in part to repeated
examples of gross incompetency demonstrated at the ministerial
level. To a lesser degree this is also attributable to epuration
of top civil servants. For many months the public was kept under
the threat of fiscal currency conversion, a threat which finally
succeeded in causing holders of currency to dishoard and to lose
confidence in the future of the paper lira.
The threat of currency conversion was publicly made over the
radio day and night to force subscription to the Reconstruction
Loan, with the argument that currency holdings would be taxed as
a part of the capital levy program in the process of
preparation. The effect of such threats was to emphasize the
instability of the lira and to decrease the desire of people to
subscribe to the Loan. The interest rate on the Loan, in
addition, was low relative to the prevailing interest rate
structure. The net result was that the Loan was a failure, and
attempts to hedge against the anticipated inflation multiplied
to dangerous proportions.
Since currency conversion was supposed to form part of the
capital levy, and since those subscribing to the Reconstruction
Loan would not, to that extent, be subject to the capital levy,
the final decision to abandon currency conversion penalized
severely persons who had dishoarded currency to purchase
Reconstruction Loan bonds. When the quotations on the stock
exchange of the Reconstruction Loan fell to below 80, then the
Government stepped in again and raised the interest rate on such
securities held by persons who would not be subject to the
capital levy. The net effect of the entire operation on the
public was to demonstrate an astonishing degree of
incompetence.
Another example of incompetency, with a political flavor, was the
manner in which extraordinary financing was placed in the
forefront, particularly by the Communist Minister of
Finance,3 as the
solution of the problem of budgetary deficits. Various types of
extraordinary revenue-creating measures were announced and
adopted, providing the public with the sensation that such
measures would yield sufficient revenue to cover the budgetary
deficit. The most recent of these measures
[Page 901]
has been the adoption of the
capital levy, which in its present form will take very many
months, if not years, before any substantial flow of revenue can
be realized. The declaration of holdings, the examination of
such declarations on the part of the appropriate governmental
authorities, the assessment of the levy, the possibility of
appeals on the part of the tax-payers, as well as the very large
number of persons involved in view of the low gross value of 3
million lire subject to the tax, will all consume many months
before any significant volume of revenue is collected. When such
measures are adopted and the budgetary deficit position not only
continues to remain serious but actually worsens, the
psychological effect upon the people takes the form of a growing
conviction that the most drastic technical measures are
insufficient to “save the lira”.
A third example, on a smaller scale, has been the establishment
by the present Minister of Treasury and Finance of a committee
on credit control to study the ways and means of establishing
effective credit controls in Italy. In view of the fact that
this problem has been under study for many years and in view of
the fact that under the 1936 banking act an effective system of
credit control had been established, subsequently abandoned in
1944, the matter did not require study at this time. Informed
business and financial circles can only believe that the
Government is either incompetent or acting in bad faith.
In these circumstances the question arises, how much of Italian
disorders and political instability are due to deliberate
fomentation and unrest on the part of political elements and how
much are due to economic difficulties and the relatively low
standard of living. Indices of consumption and real wages would
appear to indicate that the position with respect to the masses
in Italy has not deteriorated substantially during the last
year, and that in fact the probability is that the political
agitation is retarding economic recovery rather than economic
difficulties retarding the achievement of political stability
and equilibrium. This view is of prime importance in connection
with the problem of further external aid to Italy.
If it is true that the economic position could be substantially
improved through political measures, then aid to Italy perhaps
should be based upon the quid pro quo of
necessary changes in political orientation and policies.
There are presented below a series of concrete recommendations
regarding present financial and economic policies of the Italian
Government. The recommendations indicate at the same time the
defects in existing policies.
[Here follow: II. Recommendations on Tax Policy; III.
Recommendations on Government Expenditures; IV. Improvement in
Government
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System of
Recording Government Expenditures and Income; V. Recommendations
on Exchange Control; VI. Recommendations on Currency; VII.
Recommendations on Credit Controls; VIII. Recommendations on
Wage Policy; IX. Recommendations on Price Policy; X.
Recommendations on Commodity Distribution; XI. Recommendations
on Employment; XII. Recommendations on Foreign Trade.]
