1. Introduction

In a recent book synthesising the evolution of the world economy in the 20th century, Pierluigi Ciocca has included economic policy among the distinguishing features: «It was the century of Keynes, and therefore of economic policy» (Ciocca 1998, p. 30, original emphasis, our translation).

The conjunction “therefore” in Ciocca’s phrase leaves no doubt about his will: it amounts to saying that only and precisely after the spreading of the Keynesian macroeconomic paradigm, the term “economic policy” eventually achieved its semantic fullness and his historical-scientific seal.

To our opinion – and except for what we will specify in the following – this statement can be approved in its essence. Of course, during history there have always been interventions and decisions on economic matters by the Prince or the Government: it suffices to think of the measures taken to avoid or tackle the periods of famine. Sometimes those interventions have been adopted according to an extensive, even itemised, logic. However, the peculiar trait of the “modern” idea of economic policy is mainly that of thoroughness and pervasiveness: it consists of a substantial set of consistent and oriented public actions.

Also Jean-Paul Thomas shares this view (cf. Thomas 1998). He considers in particular the birth of the modern idea of economic policy as the outcome of a historic precipitation caused by the conjunction of two elements: «the fear of collective impotence», raised by the Great Crisis of the Thirties («an economic rupture, but also a rupture in terms of civilisation», ibid., p. 21, our translation), and the Keynesian scientific project, with its new ideas and instruments aimed at avoiding, thanks to economic policy, the repetition of such deep crises with all their inevitable social shocks.

The goal of this paper is linked to the aforementioned issue. We will consider the Italian case in the Twenties and Thirties and try to single out the prevailing ideas of economic policy, together with the particular contributions made by the Italian economists and the peculiarities deriving from the specific authoritarian political set-up, the Fascist regime.

Each of the following sections aims to single out a specific phase of that debate. First, the phase characterised by Alberto De’ Stefani as Finance and Treasury Minister (1922-1925); second, the period of the revaluation of the lira and the subsequent deflationary policy (1926-1930); third, the debate on the reasons for the 1929 crisis and on the measures to solve it; finally, the ensuing, more complex, debate, around the mid-Thirties, aimed to clarify the theoretical guidelines to interpret and “govern” an economy considered, almost by everyone, as “imperfect”. In the concluding remarks we will try to formulate a final comprehensive judgement on the Italian economic policy during the whole inter-war period.

2. Starting from scratch. The economic policy of Alberto De’ Stefani (1922-1925)

De’ Stefani’s speech to the Fascist congress in Naples of 24 October, 1922, dealt with the economic sides of the contemporary political crisis (Cf. De’ Stefani 1923, pp. 177-182). He particularly emphasised the current disproportion in Italy between the population in working age and the insufficient availability of capital equipments. Though the suggested solution stemmed from a familiar logic and an easy synthesis, this was not true, and De’ Stefani was fully aware of that, for its implementation: an accelerated rhythm of capital accumulation was called for. Here it is a highly significant fragment of De’ Stefani’s speech:

the employment of the workforce is determined and limited by the available physical capital. This quantity is given at any given moment. Public works and the imposition of a compulsory workforce’s size can do nothing to increase it; on the contrary they frequently facilitate the slow down of accumulation (ibid., p. 178, our translation).

It is immediate to observe that this sentence recalls the well known first fundamental proposition on capital by J.S. Mill: «The industry or productive activity is limited by the capital» (Mill 1983, p. 162). When applied to De’ Stefani’s case, this means that, provided the migratory solution is excluded (as it was in his premises), the re-absorption of unemployment can take place only in two ways: first, with the increase in savings, from which, according to him, the process of accumulation classically follows; and, second, thanks to the efficiency virtues of the free market, i.e. of the institution warranting the optimal allocation of productive resources, and hence the increasing of productivity.

It follows from this speech that, if capital is the scarce factor of production the utmost care will have to be taken to avoid any obstacle to its best employment and to its enlargement: the wage rate, the propensity to consumption as well as the amount of public expenditures are all variables which will have to be taken under firm control.

For De’ Stefani, who was at the same time an economist and the Finance and Treasury Minister, this reasoning amounted to both a stringent theoretical chain and an agenda for the things to do. It should be taken into account that in the background of his adherence to Fascism lay his refusal of the values and the political-economic programs of the Giolitti’s and post-WW I periods. De’ Stefani believed that those values and programs had raised the level of conflict and drama in the social relationships, had put in doubt the credibility and effectiveness of the free market economy and had made it possible to depart from the “healthy” principles of public finance.

Given all this, De’ Stefani turned out to be fully aware of the fact that the sought-after “return” to market could not take place in an automatic or spontaneous way, but only through a consistent program of economic policy encompassing at the same time liberist and authoritarian elements. The former in order to ensure that the market mechanisms, eventually freed of the constraints introduced by the previous interventionist policy, could again express their full efficiency power and their role as a spur to the individual motives of saving and investment. The latter in order to: a) limit the wage dynamics; b) implement an extensive program of privatisations; c) eliminate the budget deficit reorganising the public finance along the two guidelines of a lightening of the fiscal pressure on wealth and capital and of a drastic reduction of public expenses.

As a matter of fact, De’ Stefani’s program was accomplished under many respects. The public sector deficit fell, in terms of GDP share, from 12.1% in 1922 to 1.3% in 1926. The tax instruments were not employed to achieve this result; on the contrary, the tax pressure upon the categories with a higher propensity to investment was actually reduced. Instead, between 1922 and 1926 the public expenditures, again as a share of GDP, fell from 27.6% to 16.5% (see Zamagni 1990, pp. 313 and ff.).

It should also be remembered that in the De’ Stefani’s period an important process of privatisations took place, affecting many local public utilities (the so-called municipalised firms) as well as a few sectors of nationwide importance, like the insurance or the telephonic industries. In the field of the public administration and the State enterprises, about 65000 employees and 27000 railmen were fired.

The wage policy of the De’ Stefani’s period made it possible to gain control over the wage dynamics, to the point that the small nominal increments obtained by the workers were not enough to avoid the reduction of real compensations. The four years between 1922 and 1925 registered the highest increases in the industrial sector profits, as well as in the investments, the production and the employment, of the whole Fascist period¹.

Let’s go back to De’ Stefani and to the main traits of his economic policy model. The model emphasised the centrality of the firm and the necessity to re-establish virtuous conditions on the supply side, more than the role of demand and the principle of consumer’s sovereignty. A vision of economic relationships structured along a hierarchy of social classes functional to the accumulation process prevailed in De’ Stefani’s scheme. The classical dichotomy between productive and unproductive work found in De’ Stefani a new expression in the idea, repeated time and again, that the workers in the public sector were less productive than those in the private sector. The emphasis was on the conditions for development, more than on those defining an economic equilibrium and, in its turn, the economic development was seen as the outcome of a clash between a scarce resource, capital (which as a consequence had to be safeguarded with the economic policy), and an abundant resource, labour.

A. De’ Stefani had grown up, as an economist, wholly inside the neoclassical theoretical approach. Without any doubt, however, his set of ideas about the economic policy of that period also refers to the classical tradition of political economy. As a matter of fact, the classical political economy, giving a larger methodological and scientific relevance to the concepts of accumulation and economic development, had represented – exactly like De’ Stefani now intended to – both the historical background of a society with scarce production means and a declaration of willingness concerning what had to be done.

What about the other economists?

The rise of De’ Stefani to the leading role in the Italian economic policy undoubtedly raised positive expectations and endorsements in his fellow economists, starting from the most important and influent of the period, Maffeo Pantaleoni. As it has been underlined (see Marcoaldi 1980), Pantaleoni acted as an advisor of De’ Stefani’s economic policy guidelines. Among the latter we find the idea that, thanks to the full powers on financial matters received by the Parliament, the Finance Minister should act to ensure the highest degree of consistency and coordination of all the public decisions with an economic content; this with the aim to carry out the systematic draining of the economic policy conducted until then by the previous governments, characterised by massive public interventions, bureaucracy and socialism. Pantaleoni’s position was fed by financial rigour, a productivist ideology and political moralism. De’ Stefani perfectly embodied this position, gaining the approval of most Italian liberal economists.

Luigi Einaudi himself – despite his prompt critical declaration of the illiberal attitudes of the Fascist regime – wanted to publicly «praise the reforming endeavour of the Government in the field of finance» and approved most of the decisions taken by the first of Mussolini’s Finance Ministers (Faucci 1986, in particular pp. 194-211, our translation). Umberto Ricci, another liberal economist, joined De’ Stefani’s Cabinet and was referred to by the Minister himself, in a letter to Mussolini, as a person «whom he trusted completely»². Also Pasquale Jannaccone and Attilio Cabiati, two other influential economists of the period, praised De’ Stefani³, and the list could go on.

In particular, we want to underline that the endorsement of De’ Stefani’s project by the Italian economists reveals a common methodological position towards the relation between economic theory and economic policy. This relation is seen in its essence as a continuous line, along which it becomes possible to extend the scientific knowledge into the practical action, and through which the constant reference to the primacy of the theory avoids the risk of ending up endorsing a voluntarist empiricism or delusory reform projects. It is a methodological position with firm roots in Italy and which found in the likes of Ferrara, Pantaleoni and Einaudi its more authoritative supporters. While in Ferrara the cognitive and the practical motives were the twin aims of a unitary research project (Faucci 1995), in Einaudi we find again, almost a century later, a similar idea:

The economists do have something to say [...] they cultivate for knowledge purposes and arouse with the goal of affecting reality [...] In truth, between the theorems and the advices there is a very tight link (Einaudi 1973[1943], p. 356, our translation).

Such positions certainly favoured too straightforward interpretations of the intermediate phase separating the economic theory from the policy. These interpretations were therefore not appropriate to encompass the set of motivations and practical needs usually lying behind the determination of the concrete choices of economic policy. However, it should be noted that the credibility of such positions was strengthened during the period under scrutiny by at least two different circumstances.

The first is related to the fact that an economist, and not a politician, was placed in the key position as a trait d’union between theory and policy: Alberto De’ Stefani, who belonged precisely to the aforementioned tradition. Hence his propensity to interpret his role of Finance and Treasury Minister as the executive agent – the “secular arm”, we could say – of a scientific legacy he took for granted.

The second circumstance is the historical peculiarity of the first Fascist government which, characterising itself as a radical critique to all the preceding administrations, started an internally consistent way of governing, that is, a nullification of any previous logic of public intervention in the economy. A logic to which – and here lies the strengthening link – the then prevailing economic theory attributed no scientific dignity⁴.

All this could all but generate an objectively ambiguous situation. Many economists credited the Fascism with a quality in the art of governing unseen in Italy since the experience of the Destra storica (the Historical Right): the quality of performing an economic policy respectful of the constraints imposed by the primacy of the theory. The Fascist regime boasted of this quality («enough of the postman-State, the railman-State, the insurer-State» had been in 1921 Mussolini’s proclamation), but it quickly reneged it when conditions and opportunities changed. It was soon to become clear, in fact, that the goals of this liberist phase were much less enlightened than those assumed by the economists. The Fascist regime used it to mark a discontinuity with the past, to re-legitimate and re-activate the capitalist system⁵, and also to impose its first example of wage control policy. Once the recovery phase was over and new demands started to grow from the productive world, a new economic policy based upon a different system of solutions was called for.

De’ Stefani’s resignation, in July 1925, can be taken as the natural conclusion of a period which had deceived all those who believed that economic policy could be a much nobler art than that consisting in the eternal quest for a compromise among conflicting particular interests. This resignation marked the end of a short, although intense, season during which the above-mentioned economists wrongly thought that the liberal economy had eventually found its Pygmalion.

3. The return to gold (1926-1929). Monetary orthodoxy and the rehearsal of economic dirigism

The political reason of De’ Stefani’s fall was his reduced propensity to compromise among different interests; the technical reason was a stock exchange crisis and his failure to reconcile an expansionary economic policy with the balance of payments constraint⁶. When he resigned the exchange rate against the British pound was lit. 145, up from 95 in October 1922.

On 18 August, 1926, during a speech in Pesaro, Mussolini announced his intention to revaluate the lira. This was the official beginning of the so-called “battle of the lira”, which ended about one year later with two undoubtedly relevant achievements: the return of the lira to the full convertibility against the gold and the fixing of the exchange rate against the pound at the famous quota 90.

On the economists’ side, the monetary themes were highly debated as well.

No dissenting voice was raised against the opportunity of achieving monetary stability. On the contrary, diverging opinions emerged with respect to issues such as the criteria to be followed for the stabilisation process, the target level of the exchange rate, the economic effects of the monetary adjustment, the new role of gold.

It is better to distinguish between two phases of that debate, the dividing line between the two being the mentioned speech in Pesaro, following which – under the by then dictatorial regime – it became difficult to oppose Mussolini’s solution⁷.

Before August 1926 many voices were raised against the revaluation of the lira. Among them, those of G. Prato and R. Bachi, who stated their position in the “Riforma Sociale” (a liberal review edited by Luigi Einaudi), or that of G. Zuccoli in “Politica” (a nationalist review, very close to Fascist positions). The ideas of the latter reveal an undeniable similarity with the much better known position of J.M. Keynes:

Thus, inflation is unjust and deflation is inexpedient. Of the two perhaps deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier (Keynes 1923, p. 40).

Zuccoli’s words recall those of the English economist:

the shock induced by a revaluation is more severe for the national economy than that produced by a devaluation, because the latter, being to the advantage of the producer and to the damage of the capitalist, stimulates the production; while the revaluation, being to the exclusive advantage of fixed income invested capital and falling entirely on the producer, slows down the rhythm of production; and the economy of the new Italy has no need of delays⁸.

The revaluationist side was garrisoned by prominent economists, such as Achille Loria or Benvenuto Griziotti, and above all by Attilio Cabiati, who supported a radical and fast revaluation.

In brief, the variety of opinions ranged between those who feared that the revaluation could trigger negative expectations and destabilising situations in the business and the productive world (it is not accidental that the businessmen shared this view) and thus favoured a stabilisation of the lira at the current exchange rate or even a devaluation, and those who instead considered the revaluation as a compulsory goal to bring Italy back inside the framework of the international economic and financial equilibria⁹.

After the speech in Pesaro, the debate among the economists became more cautious, but it was not gagged, as proved by the open disagreement against the quota 90 showed, when the revaluation was already being accomplished, by Ettore Rosboch¹⁰.

In general, however, the Italian economists – even those who, like Giuseppe Prato, had previously expressed contrary opinions – judged favourably the ability of the head of Fascism to reverse the inflationary expectations, also acknowledging that the stabilisation at the quota 90 was to be considered as the outcome of a «judgement about the equilibrium among the opposing interests» (Einaudi 1929, p. 512); an equilibrium that solely the politician’s intuition, and not the scientific reasoning¹¹, could effectively single out.

The thesis that the revaluation satisfied also, if not chiefly, political criteria was not hidden. It was Gino Arias – the economist writing in “Gerarchia”, the review directed by Mussolini himself – who stated in many articles the multiplicity of the objectives which the revaluation aimed at: a) the defence of the middle classes «to whom the Country and the Fascism owe so much» (Arias 1926, p. 668, our translation); b) the raising of the Nation’s prestige; c) the lowering the cost of the imports in a country such as Italy, largely dependent on foreign trade for the supply of many raw materials (coal, grain, etc.)¹².

After the return to gold, with the decree of 21 December, 1927, the debate among the economists turned, on one side, towards considering such measure as part of the general problem of the functions of the State in the economy, and, on the other side, towards evaluating its deflationary consequences.

With respect to the first issue, we register the widespread consensus of the economists for the achievement of the convertibility. This because, as Borgatta said, «The return to a gold-based money represents in its essence a massive limitation to State interventions in economic life» (Borgatta 1928, pp. 258-259, our translation).

The predominance of such an anti-interventionist interpretation of the return to gold bears witness to the fact that, still at the end of the Twenties, the currents of thought different from the liberal one (as the corporativist thought) were clearly in the minority in Italy.

Concerning the second issue, the economists were aware of the relevant adjustments that the new gold parity would require to variables such as wages, costs, prices, etc. However, the deflation was basically considered as a hard but healthy necessity imposed by a wider historic-economic process aimed at leaving definitely behind all the effects and the “harnesses” of the war.

As a comment to this position, we think that in the attitude of the liberal economists one can discover again a too partial or too schematic interpretation. The return to gold was clearly an operation in which the economists could single out the chrism of a global and orthodox vision of the economic equilibrium. In the Italian experience, the operation was also conducted with substantial technical shrewdness. However, in the context of the Fascist dictatorship, the return to gold was also an operation used to magnify, and not to curb – the Fascist officials did nothing to conceal this – the regime’s propensity to carry out economic functions in an ever more pervasive and dirigistic logic. This was soon to be proved by both the wage policy and the events bringing, through the Iri (the Institute for the Industrial Reconstruction), to a redefinition in a State-oriented sense of the ownership structure of the Italian industrial and banking systems. We will come back to these issues in the next section, where we deal with the debate on the economic crisis of 1929.

4. How to get out of the crisis – Part I: Official positions and secret solutions

Moving from the Twenties to the Thirties, the central theme of the economic policy debate changed dramatically. However, at least initially, the guidelines to frame in a scientific way the phenomenon of economic crisis (the new topic which replaced the monetary debate) were essentially unchanged.

It should be noticed, in fact, that the first signs of the international economic crisis following the Wall Street crash (October 1929) were easily explained by most Italian economists in terms of a well-known scheme: the crisis was a negative, sometimes traumatic, event, but conceptually not an extraordinary one. On the contrary, it was part of a more general kind of phenomena, the economic fluctuations, which in a physiological way set the pace for economic development¹³. In case of pathological crises, the responsibility had to be found in human mistakes, and not in the inability of the economic system to self-regulate¹⁴.

Therefore, the conceptual guidelines through which the problem of the economic crisis was tackled can be synthetically exposed as follows:

1. The solution of the crisis is “faster” the more its effects are left free to come about, without imposing from above any corrective or pre-emptive intervention. In the terminology of Einaudi – who, despite opposing the regime, still was the main reference for many of his colleagues – the “wet-nursery”, that is, the policy of rescuing ailing banks and firms and of delaying bankruptcies, had to be absolutely avoided.

2. The solution of the crisis is “easier” the more the economic system is flexible. In the liberist jargon, this formula meant (and still means) that the economic system should be oriented towards the competitive scheme; in the area of intersection of the jargons of the liberist and of the corporativist economists, the formula actually required a lowering of the nominal wage rate according to the new international value of the lira.

These blueprints were consistent with the theoretical explanation of the crisis more popular among the Italian economists: that based upon the so-called over-investment approach to the business cycle.

As it is well known, this had been the topic of the debate following Keynes’s Treatise on Money (1930) and, later, The Means to Prosperity (1933). According to the English economist, excessive saving was the main problem of developed economies. To get out of the crisis and improve the entrepreneurs’ profit expectations, a policy of incentives to investment was needed. This policy had to be based upon an increase in the supply of credit at low interest rates – under a logic of managed currency – as well as on the implementation of public works’ programmes. Thus, even before the publication of The General Theory, Keynes was looking for a solution to the crisis grounded on aggregate demand policies.

The Italian economists, instead, stuck by the over-investment approach, thus recommending an opposite policy of incentives to saving, through a discount rate increase and supply-side interventions, consistently with the two aforementioned blueprints.

A theoretical and practical consequence of this approach was the debate and subsequent decisions on the wage policy. It is therefore necessary to make a brief digression to focus on the so-called “corporative wage” issue.

4.1. Corporative wage and wage policy

With a law in 1926, the Fascist regime had given shape to its authoritarian and anti-democratic inclinations even in the field of industrial relations. The right to strike was denied, the independent trade unions were de facto put aside, the universal effectiveness of the decisions taken by the fascist workers’ and employers’ unions (the only ones with a legally recognised status) was sanctioned, and a system of arbitral courts for labour issues (Labour Courts) was set up.

The economists had to acknowledge the new situation and, trying to find a rationale for it, used their theoretical tools to propose different interpretations. The latter can be synthetically summarised as follows¹⁵.

a) Some economists considered the corporative wage as a call for the formulation of a new theory of value, which had to give up the traditional individualistic, hedonistic and competitive premises. As a consequence, the new theory had to provide an explanation for the wage rate consistent with an ethical and organic notion of the State as well as with the goal of making the corporativism the new cornerstone of scientific economics (G. Arias, F. Carli, U. Spirito).

However, as concerns the problem dealt with here, this line of thought did not achieve any significant result, neither theoretical nor applied.

b) Other economists, on the contrary, elaborated a more cautious and complex interpretation. They tried to demonstrate that the corporative wage did not contradict the dominant scientific paradigm, but, following the logic of successive approximations, called for its updating.

These economists started from the empirical premise that the competitive markets of the modern economic systems were progressively transforming themselves into imperfect or monopolistic markets. This had happened also in the labour market, especially after the Fascism had made it legally akin to a bilateral monopoly.

Since the peculiarity of the latter market form with respect to the standard, perfectly competitive case was the impossibility of finding a determinate equilibrium (as G. Masci pointed out in his analysis), the economists who shared this view were free to introduce into the wage problem some institutionalist or welfare economics features. In concrete, these features could, for example, put on equal grounds the two parts in the contract, therefore overcoming a market power situation allegedly favourable to the employers (R. Benini); or could simply provide the workers with a greater bargaining power, in order to let them obtain higher wages (C. Arena); or, finally, could depict the role of the State in the labour market (through the Labour Courts) not as that of a mere mediator, but as that of an agent pursuing its own utility or some other extra-economic values, in order to stress the validity of an organic view of the economic phenomenon (G. Demaria).

As a comment to these views, we note that they at least favoured a few concrete accomplishments in the field of social policy, like the strengthening of the social security and pension agencies. However, the efforts to give a theoretical backbone to the goals of the social peace, or of a heavier bargaining weight for the workers, or of a more democratic set-up for industrial relations, ended in failure, as these issues proved to a great extent alien to the Fascist regime.

c) Finally, according to a third group of economists, the concept of “corporative wage” evoked a disturbing ghost, that is, the dirigistic principle sanctioned in the 1926 law. To get rid of this ghost, the corporative order was depicted as a «system of open groups» (Del Vecchio 1930, p. 509, our translation). In the case of the labour market, to talk about open groups – or, as Einaudi named them, corporazioni aperte (cf. Einaudi 1934) – meant to force the fascist workers’ union (monopolist on the supply side) to follow a strategy of quantity maximisation (that is, to seek full employment) and not a price strategy (that is, one aiming at higher wages). This idea was the support for the analysis of those economists who were more sympathetic to the free market approach.

Since the historical events were pushing for a stronger wage rigidity and more widespread monopolistic features, the law had to intervene to re-establish the competitive logic. In other words, the corporative wage, though achieved through a different mechanism, that is, through the compensating intervention of the State, had to mimic the neoclassical competitive wage. Einaudi’s position is the most representative of this line of thought:

To make this procedure logic it is enough to start from the premise, undisputed in pure Economics, that the hypothesis of unlimited competition gives the optimal solution for the wage. Starting from this premise, the policy-maker could legitimately try to achieve with different means (a decision by a judge, an agreement between associations, etc.) the same optimal solution for all the cases in which the hypothesis of free unlimited competition is not validated and so cannot produce its effects (Einaudi 1931b, p. 316, our translation).

In this third group featured also economists opposing the Fascist regime. However, the idea of a “corporativism of open groups” recalled also that of wage flexibility, which after the Great Crisis had been shared both by the economists, regardless of their sympathy for the corporativism, and by the official policy of the regime.

It was up to another prominent economist, Marco Fanno, to embody this converging position. In an important study on the theory of business cycles (Fanno 1931b), he viewed the downward rigidity of nominal wages as one of the causes of the widening of cyclical fluctuations, and therefore of the losses to the producers and of the delayed beginning of the new upward phase of the cycle. On the contrary, the possibility of a simultaneous adjustment of the nominal wages to the new general price level would allow – as Keynes himself had stated in the Treatise on Money – a prompt return to a new equilibrium position which, with respect to the original one, would feature only a modification of the quantity of money and the prices.

In a paper on the regime’s review, “Lo Stato”, Fanno translated his theoretical approach into an economic policy proposal: a legally enforced reduction of the nominal wages – a proposal which had been effective in the Italian corporative system since 1927¹⁶ and which envisaged an «economy with simultaneously moving prices»¹⁷.

Fanno’s formula was sympathetic with the official economic policy guidelines of the regime. It was natural, therefore, for the corporative literature to take possession of it. This swift appropriation, however, was not entirely justified. The roots of Fanno’s view, in fact, were to be found in the contemporary international theoretical debate (stimulated by Keynes’ contributions), as well as in an approach still drawing from the neoclassical model and from its flexibility features which only a virtual, if not real, competitive market could warrant.

4.2. Imi and Iri in front of the crisis

Regarding the other relevant issue emerging immediately after the beginning of the Great Crisis, that is, the attitude to be taken with respect to the financial problems of the banks and of many large firms, the Italian public authorities initially retained their wait-and-see approach. The official position was still tuned on the leit motive of the gold parity and the quota 90, rejecting or, better, not even thinking about any solution based upon competitive devaluations or aggregate demand interventions, such as public works and the likes.

However, the development of the economic policy in the four years 1930-1933 – the period of the deepest economic crisis – was not as linear as envisaged in the official position. The emblematic case of this sort of dissociation between the claims and the actual decisions was the foundation of the Imi (the Istituto Mobiliare Italiano) in 1931 and of the Iri in 1933.

As concerns the Imi, it was presumably set up, as L. Gangemi said, «taking the lead from an event, the necessity to liquidate the industrial investments of the Banca Commerciale» (Gangemi 1932, p. 201, our translation), the most important Italian bank at the date. To tell the truth, the economists and the outside observers were fundamentally uncertain as to whether the Imi had been created to undertake the rescue of failing banks or to tackle and solve the old problem of banking specialisation in Italy. The new institute, in fact, had been secretly devised by the Government and launched in response to a pressing necessity. The economists lacked any information about it, so they tried to explain its functions following their own personal inclinations. Someone even saw an analogy between the Imi and the new institutes created in the US by the Hoover administration, the National Credit Corporation and the Finance Reconstruction Corporation (cf. Arena 1932).

Actually, the different hypotheses figuring out the Imi as the instrument designed to shorten the recession were contradicted by the prudent pattern of its first years’ operations. It is true that, also thanks to the Imi, a non-restrictive monetary policy was implemented¹⁸, but it is certain as well that the centrality given during the crisis’s years to the exchange rate stability (which impeded the use of the exchange rate as an additional instrument of economic policy) validated the opinion of those, such as E. D’Albergo (1932, p. 12), who underlined the passive role that the Imi should take with respect to the events of the economic crisis.

Also the Iri’s role was initially framed into the orthodox guidelines of economic policy. As a “temporary” institute, it simply had to give the Bank of Italy the possibility to liquidate the credits given to the industrial sector, thus to confirm

the very consistent anti-inflationary policy of our Government and the firm intention to guarantee and defend the liquidity of the banking system without making recourse to new emissions (Galli 1933, p. 13, our translation).

As a long term credit institute, the Iri was instead considered as the final element to complete, under the logic of specialisation, the structure of financial intermediation in Italy.

Therefore, at least in the very first period of their life, a “continuity view” prevailed for both the Imi and the Iri. The latter, like the former, was considered as part of a more general project to return to normal economic conditions. A sharp commentator, albeit critical about this logic of continuity, synthesised as follows the meaning of those operations, which he did not consider entirely innovative:

the crisis derives from the will and the action of the State; therefore it cannot be solved without the intervention again of the will and the action of the State, although addressed in the opposite direction (Pacces 1933, p. 213, our translation).

Embedding them in a wider historical perspective, the events of the Imi and the Iri take a more significant meaning. The secretiveness characterising their foundation and the initial uncertainty, even in the public authorities’ design, surrounding their tasks, demonstrate that these institutes were not the outcome of a well-defined economic policy project, but, on the contrary, of an experimental approach and of the financial emergency. In that period, in short, the Fascist regime did not manage to give a consistent and systematic design to its interventions in the economy.

We think that the peculiar secretiveness of these interventions should itself be interpreted as a sign of a weakness on the proposals’ side, a weakness that the Mussolini’s regime, so careful to defend its faultless appearance, could not afford to reveal.

A final observation. We have noted that the Imi and the Iri were embedded in a logic of continuity and essential respect of economic orthodoxy. As a matter of fact, instead, they were the outcome of empiricism and some conceptual innovation stimulated by emergency. The urgency was to react with some adequate interventions to the devastating effects of the crisis and also – at least in the Italian case – to the deflationary approach started with the “battle of the lira” in 1926. This empiricism and this emergency logic, however, were not without consequences.

On the basis of these first approaches to economic intervention, a new and more pervasive idea of the economic functions of the State took shape and imposed itself – and this not only in the official declarations. It was not a coincidence that exactly in that period ended the cultural and scientific supremacy of the economists faithful to the tradition of the self-regulating ability of the market economy. As we will see in the following section, other approaches gained a dominant position, although in a political framework ever more deprived of opportunities for a scientific debate.

5. How to get out of the crisis – Part II: Economists’ doubts and the regime’s (wartime) certainties

To summarise the previous point, it appears that during the early Thirties Italy lacked an explicit anti-crisis strategy. Actually, this bewildering situation was common also to other European countries as well as to the United States¹⁹, and produced a significant delay in the correct evaluation of the crisis. As we will see, for what concerns the Italian economists’ community, the delay amounted to three or four years.

Around mid-Thirties, following the war in Ethiopia and the subsequent economic sanctions decreed against Italy by the League of Nations, the economic policy scenario underwent a drastic change. A lower degree of dependence from imports (autarchy) was pursued and a concrete effort to organise a wartime economy was undertaken.

Mussolini’s statements, such as «the crisis is of the system», «the capitalist mode of production is outmoded»²⁰, or his call for «a regulating plan for the Italian economy»²¹, were welcomed and echoed by the economists faithful to the regime.

In general, however, these new programmatic suggestions were interiorised by many economists simply as a further confirmation of an awareness already matured during the crisis: that of the need to critically re-consider the function of the market as an instrument to secure the conditions of stability and development; and also that of the need to analyse the economic system along dynamic, and not simply static, lines²².

As it has been correctly noted (Zagari 1982, pp. 52 and ff.), this new phase of the debate was catalysed by an essay by L. Amoroso and A. De’ Stefani on the Logica del sistema corporativo (The Logic of the Corporative System), published in 1934 (Amoroso – Stefani 1934). For the two authors, the thesis according to which the competitive market warranted the best allocation of the productive resources had to be accepted only as a first, insufficient, approximation. Additional hypotheses, concerning the role of the expectations (the “directive forces”, in their terminology) and of the lags (the “inertia forces”) occurring during the adjustment process towards equilibrium, had to be added to the scheme. The existence of expectations and lags – which can in concrete determine, under a cumulative logic, persistent situations of disequilibrium between demand and supply – invalidates the well-known Say’s law and makes it indeterminate the outcome of the market adjustment mechanisms²³.

It was not difficult to make a further step in this direction and figure out the State intervention as necessary to reach a sequence of “dynamic” equilibria in the sector of the formation and the employment of capital.

In parallel to that opened by Amoroso and De’ Stefani, there was another research line which, like the former, had many similarities with what was being elaborated abroad at the level of “high theory”.

The presence of monopolistic elements in the working of the market was interpreted as the outcome of structural and irreversible transformations on the supply side, and a theory of price under a regime of «competition among monopolists or, better, of imperfect competition» (Masci 1934, our translation) was formulated. Very active along this research line were authors such as L. Amoroso, A. De’ Stefani, G. Masci, R. Benini, A. Breglia, C. Arena, F. Vito, G. Demaria, M. Resta²⁴.

Inside the analytical framework of imperfect competition, it was consequential to focus again on the very concept of “extra-profit”, or “surplus”, as the inevitable result of a market system not founded anymore on the price-taking or the marginal cost-pricing rules. This time, however, the concept was not discredited, as it was customary following Einaudi’s view of bringing back the outcomes of the imperfect economic system to those of the perfectly competitive scheme. The extra-profit was instead used to lay the foundations of a “new” approach to economic policy: new because it implied a “permanent” equilibrating function for the public intervention in the economy, and also because it made it possible – just through that public function – to undertake a conscious policy of social choices. As Masci said:

it is thus not excluded that the corporative regime could operate also in a direction opposite to that indicated, that is, in the direction of moving the economic system away from certain equilibrium points associated to the regime of absolute competition, sacrificing the present utility of the largest number for some present or prospective utilities considered more important from the national and social point of view (Masci 1934, p. 574, our translation).

As a general point, we note that all these theories shared the willingness to demonstrate the compatibility or even the symbiosis between the economic logic and the political aims. If successful, this effort could give rise to a different economic policy, alternative with respect to that of the liberist tradition, with its mainly negative prescriptions.

However, we need to point out another peculiar feature connecting cross-sectionally many of the suggestions devised to provide a theoretical foundation to the public intervention in the economy. For all the possible targets, were it the management of the “expectations” with the aim of blocking the sequence of cumulative disequilibria, or the correction and the exploitation of the “market imperfections” to pursue some given economic or political targets, or the reduction of the economic fluctuations, or the transformation of the Iri into an institute for the economic programming of the “key industries” of the country, for all of them, we repeat, the meaning and the direction of the respective proposals of economic policy remained always biased towards “the supply side of the economy”, more than towards the demand side. Under this respect, we can safely conclude that the neoclassical model continued to dominate, even when it inspired State intervention solutions, like the ones we have just referred to.

To explain this peculiarity of the Italian economic thought in the inter-war period, it is useful to make recourse to both economic and historical-political motives. The first set of explanations refers to the well-rooted scientific penchants of the Italian economists. We have already dealt with them: an over-investment explanation of the business cycle and the crisis, an essentially orthodox monetary and interest theory, the heuristic centrality of the price and, especially, of the wage flexibility for the theory of economic equilibrium.

The second set of explanations made reference sometimes to the peculiarities of Italy as a late-comer country, giving reasons for government interventions oriented to speed up the process of the Italian industrial matrix; some other, to the specific features of the Fascism: the claims of the Mussolini’s regime of being the government form most suited to tackle the problems of the modern times were often made on economic grounds. The stress was put, in particular, on its reordering and regulating functions, especially in the field of the turbulent and out-of-control industrial relations.

When Italy, following the Ethiopian war, finally adopted the so-called “armed economy” perspective – which it was not to abandon until the end of the Second World War – the logic of the control and the comprehensive management of the productive world was necessarily even more emphasised.

This last observation enables us to point out a peculiar feature. The economists’ efforts aimed at defining the characteristics of a more effective public action in the economy often led to the issue of the economic “targets” for the public policy. These targets were chiefly identified inside what may now be taken to represent the specific 20th-century approach to the issue, that is, inside the perspective of the social welfare and of the benevolent answers to the more urgent social requests (were it the exit from the economic crisis, or the reduction of the unemployment rate, or the creation of new social security institutions, etc.: all these are examples of targets singled out by the Italian economists of the period). Conversely, very few of the economists emphasised, during the Thirties, the need to use economic policy to favour the newly formulated war or power targets of the Fascist regime.

We think that this dissociation bears witness to the fact that a full consonance between the Fascist regime and most Italian economists was never reached. Typical of the period were the situations in which – for lack of any previous information – the economists were called to express their opinions only after the decisions of economic policy had been taken.

It must be added that the dissociation between ends abstractly asserted following a welfare economics approach and ends concretely pursued by the Fascism shows also that the Italian economists remained always in touch with what in the meantime was being elaborated by the international economists’ community²⁵.

We cannot of course deal extensively with this point, embedded in the more general issue of the international circulation of ideas. We limit ourselves to summarise the peculiar (and thus not generalisable) episode of the reception of Keynes’s General Theory in Italy.

We cannot avoid to note an objective convergence during the second half of the Thirties between the Italian economists and Keynes on the necessity to revaluate the role of economic policy²⁶. Similarly, the propensity showed by our economists to abandon the microeconomic approach in favour of a macroeconomic one²⁷, and to question the positive and the predictive value of Say’s law, provides additional evidence to the conclusion that also the Italians were looking for a new scientific synthesis, from which practical suggestions could be taken in order to tackle consistently the traumatic consequences of the Great Crisis.

This, however, exhausts the similarities between the Italian economists and Keynes. What we said before concerning the monetary, the business cycle and the wage policy theories, and also concerning the attitude to consider the crisis as an event which could be solved with structural interventions on the supply side of the economy, are all elements which makes it impossible to talk about a significant influence of Keynes’s thought in Italy during the period before the Second World War²⁸.

6. A schematic epilogue

In the paper we have singled out four different phases of the Italian economic policy in the inter-war period. Here we synthesise them.

The first phase, corresponding to the years 1922-1925, was characterised by the systematic effort to wipe out the economic policy confusingly followed by the Italian governments before the rise of the Fascist regime. This is also the period in which the economists’ role was deemed important and essential. The economic policy elaborated by the economists amounted to a practical application of well-consolidated theories. The economists – and Alberto De’ Stefani in particular – deluded themselves with the false hope of being capable – during the critical transition from the theory to the reality – to remain self-consistent.

The “return to gold” was the main target pursued during the second phase (1926-1930). It reveals that the Italian economists still enjoyed a certain prestige in orienting the Government’s choices. However, they gave a not very farsighted free-market interpretation of the revaluation process of the lira, and considered deflation a tough but healthy process for the restructuring of the economy, following the blueprints of the still dominant economic orthodoxy.

The first two phases share an apparent common trait. They both testify the will of the public authorities to think of the economic policy as a comprehensive set of actions, devised according to a consistent plan directed towards an announced and well-identified target.

The third phase – from 1930 to 1933 – had a very different character. Uncoordinated or even contradictory Government’s orientations and actions lived together. The official policy still followed the traditional recipe, based upon the fixed exchange rate and the internal price flexibility, to get out of the crisis. However, the regime was forced to adopt decisions oriented in a very different direction, in order to save the main banks of the country from the financial collapse. The interventions increased quantitatively, while an experimental emergency logic – no more an well-established economic theory, as in the first period – was the true “guideline” which marked the economic policy of the period. However, it is clear that this was also the period during which the economists’ reflections on the so-called “market failures” took shape.

During the fourth and final phase the Italian economists started to define the terms of a new theoretic approach and tried, and partly succeeded, to shape a new project of economic policy: “new” because it now identified a significant orienting role for the State inside an economic system which was commonly taken as imperfect. The project presented a specific additional feature, that of directing the goals of economic policy towards the typical targets of welfare economics. All these efforts, however, were in vain. The last phase, in fact, was also that of the maximum distance between the economists and what the Fascism was actually doing through its “armed economy”.

Despite this distance, however, the discredit thrown by history on Mussolini’s wars tainted also most economists of the period. It was not casual, therefore, that when the Second World War was over the debate among the economists started again as if this fourth phase had never existed.

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