Bold Gamble

To the black-market money exchanges in Rome's Piazza Colonna, the news came as a profound shock. But to Italian exporters, U.S. importers and world traders everywhere, the news was the best out of Italy in months. Last week, the Italian government abandoned the fictitious value it had set on the lira. It devalued the lira from 350 to the U.S. dollar to what it considered its true worth--the last month's average black-market price of 589 to the dollar.

By this financial stroke, Italy hoped to 1) wipe out the domestic black market in lira, and 2) add to its store of dollars by encouraging U.S. remittances, the tourist trade and export trade to the U.S. The chances seemed excellent that Italy would accomplish both.

Lesson for France. The move was well timed. It came when Italy had surpluses for export (olive oil, wines, glassware). By reducing the cost of Italian products (in terms of other currencies) the government put Italian business in a position where it could sell to the world, and in particular to the U.S.

Most important, if the daring financial gamble is won, it may encourage other European nations with overvalued, rachitic currencies, notably France and Greece, to push through their own tough financial programs. (Without realistic devaluation of many European currencies, the Harriman committee on foreign aid warned, "further aid from this country will be wasteful and ineffective.")

Italian exports have been dropping fast, due to the weird double currency standard under which Italian exporters were forced to operate. The government had required them to exchange half of any dollars they earned at the "legal" rate, let them sell the other half in the free (i.e., black) market. But as the exporting manufacturers had to pay for imported raw materials at the black-market rate, the squeeze robbed them of their profits--and their incentive to produce.

Lesson for Free Traders. The devaluation was the most spectacular move in a drastic governmental program to end Italy's wild inflation. The author and guiding head of the plan is famed Economist Luigi Einaudi, 73, a frail, dry man who sometimes sounds as dull as the retired professor that he is. But as Vice Premier, Minister of the Budget and Governor of the Bank of Italy, he has put an unprofessorial wallop into his actions. Although he is one of Italy's outstanding apostles of unfettered free enterprise, Einaudi has not hesitated to fight inflation with hard-handed governmental control where he thought it was needed.

To force manufacturers to unload hoarded stocks, taxes were upped. To nip the credit inflation, he halved the lending power of Italian banks. To tide over small companies, the government formed the Fondo Industrie Mecaniche, a sort of RFC. In two months it has already made loans of 5 billion lira.

All this has curbed inflation to such an extent that the black-market value of the lira dropped from 640 in August to 570 last week, thus setting the stage for devaluation. Henceforth the value of the lira will be adjusted once a month according to the average free-market rate of the preceding month.

Lesson for Reds. The first results of the new devaluation program looked good. When Italy cut back the value of the lira before (last week was the third time since the liberation), domestic prices went up. Last week, they dropped. In Rome, housewives found that poultry, olive oil and sugar prices were down 20 to 50%; meat which had cost up to 900 lira a week before could be bought for under 500. Farmers, who had refused to sell their products when the lira was becoming more worthless every day, now hastened to unload as it increased in real value.

Nevertheless, some businessmen worried over the long-range dangers of the program. In making loans to businesses through the Fondo Industrie Mecaniche, there was grave danger that the government might gain control of so many companies that Free-Trader Einaudi would find he had no course but to set up a state-controlled economy. In this same fashion, Mussolini's state-run holding company (Istituto di Ricostruzione Industriale) had gained control of an enormous part of the economy.

But these distant dangers are less fearsome to Italian businessmen than the current dangers of uncontrolled inflation. And the first results have been enough to give them hope that Italy--if provided with U.S. raw materials--may finally have a program that will cure her sick economy. The final success of the program will depend on the skill with which the De Gasperi government can combat the rule-or-ruin tactics of the Communists (see FOREIGN NEWS). But the program's first success last week was measured by the energy, bordering on fury, with which the Communists were trying to disrupt an economy which was showing the first dangerous signs of recovery.

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