The official site of Italy's central bank

From the 1950s to Maastricht

The stormy years

The 1960s ended in the midst of serious economic difficulties. The end of the Bretton Woods System (August 1971), the switch to floating exchange rates and the sharp rise in oil prices ushered in a long period in which two evils previously considered antitheses coexisted: stagnation and inflation.

Inflation in Italy was notably higher than the average for the other industrial countries. Between 1973 and 1984 the rate was never below 10 per cent. In addition to world price rises, Italian inflation had major domestic causes: severe labour market tensions, an increase in public expenditure without a corresponding increase in revenue and lack of competition. An important role was also played by the removal of the discipline of fixed exchange rates.

The policy of stabilizing securities prices became too onerous and was abandoned. In order to sustain investment and at the same time keep a check on domestic demand, while containing rises in interest rates, in 1973 administrative credit control measures (a ceiling on bank lending and portfolio constraints) and foreign exchange controls were introduced. Monetary policy in Italy, as in the other industrial countries, tended to be restrictive and to focus on explicitly announced medium-term target aggregates (total domestic credit).

In 1975 Carli left the governorship to be replaced by Paolo Baffi, who had been Director General since 1960. During the foreign exchange crisis of 1976 the Bank made the lending ceiling more constraining and tightened foreign exchange controls to make the restrictive measures more effective.

The Bank repeatedly underscored the costs and limitations of this set of policy tools. Action was begun to enhance the ability to conduct monetary policy through the market, especially via the buying and selling of securities (open market operations). To this end, in 1975, the first steps were taken to create a true money market, with procedural changes in the issue of Treasury bills and a reform of compulsory reserves.

In December 1978 Italy joined the European Monetary System, negotiating a broad fluctuation band for the lira of 6 per cent above or below the central rate, while the other participating countries had a narrower band of plus or minus 2.25 per cent, because Italy's inflation differential, though narrower, was still substantial.

Supervisory action sought to encourage the capital strengthening of banks, to improve their by-laws and organization, and to broaden the scope for competition. In the second part of the decade on-site inspections became more extensive and analytical techniques were perfected. To meet the growing need for international supervisory cooperation, the Basel Agreement was signed in 1983.

In 1979 the leadership of the Bank of Italy was struck down by a judicial initiative regarding banking supervision. Although the action subsequently proved to have been completely groundless, Governor Baffi was incriminated and Deputy Director General Mario Sarcinelli arrested. The events were a difficult test for the Bank. Thanks to the general demonstration of solidarity on the part of qualified opinion, both Italian and international, and the independence and prestige of the Bank and its staff, the institution weathered the crisis.

Paolo Baffi chose to resign in October 1979 and was replaced by Carlo Azeglio Ciampi, who had been appointed Director General in 1978 following a long career in the Bank.