Drastic Deflation

A suave oval-faced Italian with a scrubby Vandyke beard, added half a cent last week to the value of the lira.* No prestidigitator, Finance Minister Count Volpi performed this modern alchemy by obtaining Premier Mussolini's assent to a hard-headed Cabinet decree enforcing deflation of the lira. So drastic is this reform that Signor Grandi, Under Secretary of State for Foreign Affairs, commented:

"No other Government in Europe could carry out the program we have embarked upon without placing machine guns in the streets."

Briefly, the Treasury was instructed to transfer $90,000,000/- to the Banco d'ltalia, on the basis of which two and a half billion paper lire will be retired from the six and a half billion now circulating. Similar deflation will be continued, year by year, as an annual budgetary expense. Meanwhile the Banco d' Italia will be given special supervisory powers over all other Italian banks to compel them to accumulate a surplus equal to 40% of their capitalization.

Of course this deflation of the lira will give rise to sweeping and painful industrial readjustments. For example: An Italian laborer now blows glass vases which are sold for 300 lire ($11.25). If the lira were restored instantly to par, the vase (still priced at 300 lire) would cost $57.90. No vases would then be bought by foreigners, and the laborer would be thrown out of work. Obviously, as the value of the lira increases, the price of the vase in lire will be lowered, but this type of readjustment always lags behind the rapid shift in international exchange, and therefore causes unemployment and suffering.

Continuing his comments on last week's really Herculean effort to restore the lira to parity, Under Secretary Grandi declared on behalf of the Cabinet: "As the artificial inflation of industry is punctured there will be many collapses, accompanied no doubt by much suffering, but it is the only honest path open to us and Mussolini in his decisive way has determined to see it through to a finish.

"Undoubtedly there will be unemployment for six months or so affecting 500,000 to 1,000,000 men. We expect a serious, but we hope transitory, crisis in industry. . . .

"The working classes will suffer, but we are sure all classes will support the Government. Italy is primarily a nation of the middle classes, which must be taken care of first, even though the richer classes and the proletariat suffer."

Naturally the hard-headed brethren of Wall Street welcomed this superCapitalist defi to Labor, promptly showed their approval of and confidence in the new decrees by buying so many lire that the price rose half a cent.

Economists, not so sanguine, shook their heads. They recalled the bitter fight waged to restore the pound to par ($4.86) though it never sank below $3.37. Before Premier Mussolini and Count Volpi the task looms of raising to 19c odd, a coin now worth less than 4c. The "deflation pains" of Italy seem likely to prove keen.

* Par 19.30c. The lira rose in one day last week from 3.28c to 3.75c on Wall Street, the dollar sinking from 31.01 lire to 27.80 in Rome.

/- Derived from the loan floated last year by J. P. Morgan.