San José State University
Department of Economics
& Tornado Alley
It is ironic that Italy, which was economically at the forefront of the ancient and medieval world, was so far behind Britain, France and Germany in the era of the Industrial Revolution. Up until 1861 Italy was not united. It was divided into minor kingdoms many of which were controlled by the Habsburg Empire. It was the Kingdom of Sardinia which included Genoa and the Piedmont as well as the Island of Sardinia which, with French assistance, defeated the Austrians in 1859 and united Italy in 1861. The political leader of the Kingdom of Sardinia was Count Camillo Benso di Cavour.
Count Cavour who was appointed Minister of Marine, Commerce and Agriculture in 1850 was also made Minister of Finance in 1851 and ultimately Prime Minister in 1852. A few months after the formation of the Kingdom of Italy in 1861 Count Cavour died. Without Cavour's leadership Italy experienced a decline in its progress toward industrialization. It was not until 1890 that Italy began to industrialize.
Benito Mussolini in his early life was a socialist from a socialist family. He was named after the Mexican revolutionist Benito Juarez. Just before World War I he was the editor of a socialist newspaper for workers. The socialist movement's position on what was becoming World War I was that it was a war for the capitalist classes and that the labor movement should stay out of it. Nationalism overwhelmed Mussolini's socialism and he supported Italy's entry in the war (on the Allied side). Many Italians such as Mussolini thought that Italy did not get justice in terms of territorial settlements at the end of the war despite having been on the winning side. After the war there was social turmoil in Italy and socialists and communists were winning control of many city governments. Mussolini organized the Fascist Party to counter the socialists and communists and, through a march on Rome, gained control of the Italian government. Mussolini ruled Italy as a dictator during the late 1920's and 1930's. He allied himself with Hitler.
When the Italian armies were defeated the German army kept Mussolini in control of what was called the Italian Social Republic. Its nature was essentially socialistic.
With the retreat of the German armies Mussolini and his young mistress were captured by partisan fighters. Mussolini and his mistress were hung upside down and beaten to death.
Italy is relatively poor in natural resources such as coal and its agricultural land is not very productive. The war destroyed its transportation and housing. On top of the unavoidable problems the Banca d'Italia added inflation through extensive issue of paper money. Some inflation was unavoidable when the wage and price controls of the Fascist regime were removed. The amount of currency in circulation had increased 18 fold between 1938 and 1945 but the price controls had prevented this from being manifested in higher prices.
Italy did not choose to carry out a currency of the type used in West Germany. Instead the monetary authorities decided to restrict bank lending by imposing a 25 percent reserve ratio on the banks. This had the effect of absorbing the excess liquidity of the banking system. The Treasury was prohibited from borrowing from the Central Bank unless there was specific authorization to do so.
The Italian Government inherited from the Fascist regime extensive holdings in industry. It owned 80 percent of the shipbuilding industry, 60 percent of the pig iron industry and 40 percent of the industry for building railway rolling stock. An agency L'Instituto per la Ricostruzione (IRI) functioned as a holding company for these state enterprises. It had been initially set up to protect the interest of depositors in failing banks, but in the late 1940's it focused on communications, electricity, shipping, shipbuilding, steel and engineering. IRI began to function as a means of keeping failing businesses from laying off workers.
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