ITALY: Battle of the Lira

The devaluation of the British pound also hit the Italian lira. The Italian cabinet had decided not to devalue the lira, which had already been drastically devalued two years ago, but to let it find its own level on a more or less free market. Forthwith the lira fell from 630 to more than 700 to the dollar. The Communists thereupon challenged Premier Alcide de Gasperi’s government to parliamentary debate.

The government accepted the challenge. Said Treasury Minister Giuseppe Pella, who had just returned from Washington: “We have some excellent cards.”

Antonio Pesenti, Communist economics expert, fired the first broadside in what the Italian press had dubbed the battle of the lira. Said Pesenti: “Unless the government revises its economic and financial policies radically and immediately, our dear country will plunge into the most frightful economic chaos . . .” Then Minister Pella played his trump cards. He announced 1) an immediate 10% reduction in the controlled price of bread, in answer to Communist alarm cries that as a result of the lira’s slump prices would rise; and 2) the purchase in Washington of a little more than $100 million worth of gold (100 tons) to back the lira.

In Washington after the pound devaluation, Pella had negotiated to convert into gold some of Italy’s dollar reserves, accumulated through exports by Italy’s hard-working industry. The U.S. had sold him the gold at $35 an ounce (the open market price in Italy is about $50). Gold now backs 17% of Italy’s currency. Technically, the difference between gold reserves and dollar reserves is not great, but psychologically Pella’s stroke worked. Impressed, the Chamber of Deputies gave the government a two-to-one confidence vote.

By week’s end, the lira rallied at 688 (free market rate) to the dollar. Commodity prices showed no signs of rising. The Italian government had clearly won a round in the battle of the lira.