World War II and post-war monetary stabilization

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World War II - with the country divided, combat throughout most of Italy and foreign occupation - inflicted substantial damage on the national economy. The lira fell to a thirtieth of its pre-war value (by comparison, during World War I it had fallen to one fifth of its initial value).

The Bank of Italy, like the country's other institutions, experienced some dramatic moments. Its administration was split in two. Separate commissioners were installed, one in the Nazi-occupied North, in the Social Republic, and another under the Allies in the South, in the Kingdom of Italy. The appointment of Luigi Einaudi as Governor (in January 1945) laid the basis for the return to normality at war's end.

The reconversion to a civilian economy, though difficult, did not cause instability for banks, as it had at the end of the World War I, because, thanks to the 1936 reform, they did not have substantial non-liquid assets. But the situation of the lira was much more worrying and the end of 1946 saw the re-emergence of runaway inflation.

The restoration of monetary stability, achieved between 1945 and 1948 with a sound, consistent plan, had four essential points. The first was halting inflation. In the summer of 1947 the compulsory reserve mechanism was refined and targeted to the needs of monetary control. The power to vary the reserve ratio was assigned to a new body, the Interministerial Committee for Credit and Savings (Comitato Interministeriale per il Credito e il Risparmio - CICR), chaired by the Treasury Minister. The reform, clearly specifying the determination of the monetary authorities to put an end to inflation, affected expectations and cut off the rise in prices. The second point was the re-establishment of a limit to the monetary financing of the State: in May 1948 the overdraft on the Treasury's current account at the central bank was limited to 15 per cent of budgeted State spending. The third point was joining the international financial community: in October 1946 Italy was admitted to the Bretton Woods institutions. The liberalization of trade and foreign exchange began, and after the devaluation of November 1947 the two-tier foreign exchange market disappeared. The Italian Foreign Exchange Office was formed to handle foreign currency transactions. Italy would later become part of the European Payments Union, created in 1950. The fourth point was the reorganization of banking supervision: after the abolition of the banking inspectorate, created in 1936, the supervisory function was assigned to the Bank of Italy; political responsibility was entrusted to the CICR, whose meetings were attended by the Governor as head of its technical arm.

The protection of savings was enshrined in the new constitution of 1948, Article 47. The strengthening of the lira, to which Director General Donato Menichella contributed greatly, laid the foundations for the non-inflationary growth of the successive period.

From the aftermath of the war to the early 1950s, the actions of the Bank of Italy were essential to attracting and managing the international aid (Interim Aid, Marshall Plan and World Bank) that served to bring Italy out of emergency and to kick-start reconstruction.