Except in the case of documents with numbered paragraphs, when it is obvious from the numbering that material has been omitted, diamonds () are used to indicate the omission of one or more paragraphs.

Chapter XIII:

Soldiers Battle With Economies

Although some of the emergencies of civilian life were overcome, the Italian economy was a serious problem throughout the occupation. In the first of the two stages which marked Allied efforts to cope with what can only be called the near breakdown of the Italian economy, civil affairs authority faced, in addition to the problems inherent in the initial war devastation, the difficulties arising from the limitations of early military policy. The U.S. Army had accepted these limitations-and persuaded the British to accept them also-in the planning period when, expecting to turn over civil affairs relatively soon to civilian agencies, they had felt justified in confining themselves to relief and very simple rehabilitation. Accordingly the Army restricted its supply program to food, medical and sanitary items, and other classes of supplies necessary to prevent disease and unrest from interfering with military operations. Seriously needed supplies in other categories, it was presumed, would be obtained by civilian agencies, though as matters developed, it was difficult or impossible for such agencies to secure from supply and shipping authorities allocations over and above those certified as militarily necessary. Thus, illogical as it may seem, it was easier for AFHQ to get thousands of tons of wheat than for it to obtain agricultural or industrial machinery occupying less cargo space and designed to reduce the need for imports by increasing local production.

Rehabilitation in the sense of reconstruction was to be reserved for civilian agencies; certainly, however, the military authorities were expected to rehabilitate the economy of the occupied country to the extent necessary to prevent civilian upheaval from interfering with military operations. What was not foreseen was the degree to which, in Italy, war damage alone would bring the Italian economy to the brink of disaster. Even a minimum rehabilitation program presented a problem of staggering proportions. Allied bombings and the far more destructive German demolitions had reduced the Italian economy to a shambles. Industrial plants had been destroyed or damaged; transport and communications systems had been disrupted; agricultural machinery and farm animals had largely been seized by the retreating armies. Moreover, in their efforts to make the country as useless as possible as a base of operations the Germans had laid their knives at the jugular vein of the Italian economy: the hydroelectric system on which, since Italy is lacking in coal, 90 percent of the industrial system depended. Earlier efforts at recovery had to be made amidst active military operations, which compelled the Allied forces to hang on to such supplies, transportation, and machinery as were available, as well as the relatively few large industrial buildings that remained intact. The physical devastation, bad as it was, was not as bad as the evils that came in its


wake. Invasion, only the last in a train of misfortunes, led to a general shortage of basic commodities, serious inflation, and a shakiness in the financial position both of private banking and of the government.

The situation in Italy was far worse than the drafters of military government economic doctrine could have foreseen when they enjoined GAO's "to revive economic life" and so "to develop the area as a source of supply for future operations." The question was not whether Italy could aid the Allies in the future but whether, within the limits of the supply program, the Allies could aid Italy sufficiently to make it usable for present military operations. In theory a re-examination of the entire concept of military necessity could have been demanded at this point to determine whether this concept could not validly be broadened instead of being defined in terms of fixed supply categories. But initially the Army was still trustful that the civilian agencies could, as planned, soon take over and meanwhile step into any serious breach. In the earlier stage, and until experience showed that this inveterate assumption was not valid, military authorities concentrated upon economic rehabilitation within the limits of existent policy, while at the same time attempting to provide such rehabilitation materials as were needed by the few plants capable of producing for the war effort.

Economic and financial experts in uniform were on hand who, while convinced at the outset that the measures available were chiefly palliatives, still hoped that palliatives might be sufficient for the time being. In some spheres, especially those where the expedient of Allied military lire could be employed, initial Allied measures did some temporary good. As a first step the banks were reopened a few weeks after the invasion of the mainland and unlimited withdrawals were permitted. Within a short time deposits were exceeding withdrawals and a complete financial breakdown was prevented. However, it was necessary at first for the Allied authorities to give aid to the government, not only in printing military lire but in lending them as well. The general policy was that the currency needs of the government should be met through the banks. In November 1943, however, an emergency arose whereby the Italian government had to pay off a maturing issue of government bonds. It was essential that this obligation be met if the credit of the government was to be maintained. With permission from CCAC, funds up to 300,000,000 lire were made available to the Treasury and the Bank of Italy. Thereafter, emergency arrangements were made for the Bank of Italy to assume responsibility for financing governmental needs, and direct advances by the Allied Military Financial Agency (AMFA) to provincial and local agencies were no longer needed. But distrust in the currency could not be suppressed and to the Allied Commission (AC), at least, there seemed justification in the government's plea that it needed financial assistance to offset the huge national deficit created by Allied expenditures in military lire for which Italy would have to pay the piper in the end. Later, in 1944 and again in 1947, the government was granted dollar equivalents for Allied lire expenditures in Italy. The extension of substantially less aid earlier in the occupation would have been more useful. But Allied public opinion was then indicated by the financial officer who wryly commented that Italians demanding financial help should be advised of the taxes in England.

The basic economic problem was control of inflation. The roots of the evil went back to the Fascist regime, which had spent lavishly to finance Mussolini's military exploits. The already weakened system of price and rationing controls collapsed with the invasion and, though the Allies con-


tinued all of them, the system could never be rebuilt. Nor did the reduction of controls to a few basic foods work much better. The inflationary spiral continued, wage increases were allowed and then disallowed, and farmers preferred to hoard wheat rather than sell at official prices. As the problem mounted, the FEA toward the end of 1943 dispatched a special mission headed by Adlai Stevenson to investigate. This group laid the principal blame on the expenditure of A.M. lire by Allied troops and also criticized by implication the rate of exchange of 100 lire to the dollar on the ground that it undervalued the lira. The FEA experts were skeptical of current theater hopes of successfully applying selective price controls and subsidies. Soon ACC itself became skeptical-just when the CCS, concerned over the mounting theater calls for wheat imports despite shipping stringencies, cabled AFHQ suggesting an attempt to defeat the black market by still more drastic measures. The Supply Subcommittee of the CCS added a second group of visiting experts to the theater at the same time that ACC was just setting up still a third group-an Anti Inflation Committee consisting of representatives of the U.S. and U.K. Treasuries as well as of some financial specialists already in the theater.

All three committees made useful suggestions although perhaps their chief usefulness lay in convincing higher authorities (in Washington and London) that not too much more could be done than was already being done. Some authorities in the theater, such as, for example, the vice-president of an ACC Section who believed that the worst ills could be overcome if the government were required to pay larger sums to Italians on relief, also seemed in need of an education in economics. But by and large, theater officials, professional soldiers as well as former civilians, were learning something of economics through hard experience. They were not surprised, therefore, when the Allied Anti-Inflation Committee reported that just as inflation had no single cause so there was no simple remedy. Both this committee and the Combined Supply Group, however, emphasized the need for a limited program of imports, not only to relieve severe shortages but also to help restore production, especially agricultural, and to counter inflationary tendencies. The difficulty with this suggestion lay not only in the continuing shipping shortage but even more since the type of imports recommended would not take too much cargo space-in the severe limitations on the Army supply program in respect to rehabilitation supplies. The latter difficulty would be overcome if, now that the 6-month period of military responsibility for civilian supply had ended, responsibility could be taken over as planned by civilian agencies which would have greater latitude in importing rehabilitation supplies. In February and March the Assistant Secretary of War negotiated on this question with both FEA and the State Department, and though these negotiations failed, the Secretary of War returned to the issue again in June in a letter addressed to the Secretary of State. The civilian agencies wished the War Department to continue its supply responsibility because they were now hopeful that before too long UNRRA could assume the burden-a hope the materialization of which was delayed again and again due to unforeseen difficulties.

Under the circumstances AFHQ and ACC could only continue to put their chief efforts into measures other than basic rehabilitation. As the visiting experts had advised, but as the theater would probably have done of its own accord, ACC intensified its attempts to increase Italian production. The measures included preparations for an all-out amassment program for the new crops, and the aid of the


Italian Prime Minister and even of the Vatican itself was enlisted for the attendant propaganda effort. In addition, as the Combined Supply Group had advised, ACC waged a campaign to reduce the number of ration cards by ferreting out the large number of illegal cardholders. Still further, it tried to get a greater proportion of local resources for civilian needs by reducing unnecessary military pre-emption. It did so chiefly by bringing the issue to the attention of the Supreme Allied Commander, Mediterranean Theater (SACMED) and gaining his support in a reorganization of the military Local Resources Board designed to give ACC greater representation. SACMED also gave signal aid by announcing, avowedly to reduce inflation and effect dehoarding of grain, an increase of the bread ration in Southern Italy to 300 grams. Finally, now being supported in this move by the visiting economists and supply experts, ACC requisitioned agricultural rehabilitation supplies, such as fertilizers, and at the same time requisitioned clothing and raw materials to stimulate local production.

Most of the supply requests had to be rejected by Washington because of shipping and supply stringency. Despite advice from the CCS that he would have to meet the increase in the bread ration entirely from local production, SACMED let the increase go into effect as the psychological effect of its announcement had already proved beneficial. The requisition for wearing apparel elicited in July an inquiry as to the basis on which it was justified; AFHQ tried to make out the best possible case on the ground of minimum civilian needs; the CCAC then asked directly whether. the requisition could be justified by military necessity; and AFHQ in its reply of 13 September, felt that it could not in good conscience answer in the affirmative. This, as AFHQ probably fore saw and as it was advised on 27 October, doomed the requisition within the framework of the military supply program.

On 15 September, two days after being asked whether civilian clothing was a military necessity, General Wilson addressed to the CCS a rather extraordinary communication, which is reproduced at the end of this chapter and which brings the first phase of rehabilitation efforts to its climax if not its conclusion. His motives may have included irritation over the wearing-apparel correspondence, a sense of injustice at Washington's criticism of the theater's efforts, a belief that reasoning could still produce some immediate good, and a judgment that even if it did not, the present unsatisfactory situation should be set forth in the record. Whatever the underlying motives which prompted it, the letter is marked by a tone which at least shows the exasperation of the sender. This did not preclude humor, as General Wilson referred to the case in which a requisition of paper for keeping Italy's tax records had evoked the inquiry as to whether it could be justified by military necessity. Instead of attacking the narrow interpretation of military necessity (which the British had never liked from the beginning) General Wilson took the still more radical course of suggesting that a broader criterion than military necessity now seemed to be called for if the Allies, in concentrating upon the current military aims, were not to be defeated in their ultimate objective of a reasonably prosperous and contented postwar Italy. He asked whether the directives on civilian supply and economic assistance could not be reconsidered, and he requested that, if it was now Allied policy to assist Italy beyond the point required by military necessity, he be informed of the extent and type of industrial rehabilitation desired, the extent to which, if at all, he might take


inflation into account, and the degree to which he could take measures for encouraging exports.

As he must have known even before the CCS so informed him, General Wilson had raised a question calling for political decision. Already the President and the Prime Minister had been driven by various forces and considerations to ponder this question, and in less than two weeks after SACMED's letter they announced jointly a new policy toward Italy. Its economic and supply implications conformed to SACMED's suggestions, and the subsequent history of Allied assistance to Italy revolves about the efforts to implement the new dispensation. (See Chapter XVII.)



[U.S. Army and Navy Manual of Military Government and Civil Affairs, Dec 43]

k. Economics. The basic economic policy of United States military government is two fold: first, to revive economic life and stimulate production in order to reduce to a minimum the needs of the area for United States and allied assistance and to develop the area as a source of supply for further operations, and second, to use available goods and services as efficiently as possible for the satisfaction of military and civilian needs. ♦ ♦ ♦


[AMGOT GAI 15 (see n. 35, P. 184), AGO files, AMGOT Plan, pp. 179-80]

3.... loans will be restricted to the minimum necessary for achieving their purpose. They will be made only in cases where they will assist in the restoration of order and rehabilitation of essential activities and are desirable from the point of view of the military effort and where local banks are not in a position to provide such financial assistance. AMFA is not intended to function as a competing agency to existing commercial banks. AMGOT officers should use every opportunity to discourage any impression (which will be only too likely to arise) that AMFA is to be regarded as an unlimited source of funds for all and sundry. ♦ ♦ ♦


[AMGOT GAI No. I, AGO files, AMGOT Plan, p. 81]

7. . . . Shipping space to import food must be avoided; food must at all costs, be secured locally if possible. It is most important that agriculture and fishing (subject to Naval approval) should be resumed and that everything should be done to assist the farming population to carry on with their work. ♦ ♦ ♦


[Ltr, McCloy to Hopkins, 30 Sep 43, CAD files, 334, OFEC (5-29-43) (1)]

♦ ♦ ♦ I have no doubt we can do the job with a little adjustment, but I do think that so far as Army responsibility for relief is concerned it should be confined to subsistence levels. We may have to undertake rehabilitation for our own purposes as we are already doing in Sicily, but so far we have tied it down to that and I think rightly. We have already distributed some seeds in Sicily but we balked at a very large farm tractor program for Italy generally that Governor Lehman wanted us to get started on. 1  ♦ ♦ ♦


[FEA Survey Gp, Brief Report on Economic Activities of ACC, 5 Feb 44, CAD files, 334, FEA, (10-26-43) (1) ]

♦ ♦ ♦ Goods for civilian consumption have never been provided to Italians on a charity or relief basis. It has been assumed even from the beginning that the Italians would pay. At the outset . . . AMG was directed to sell goods imported for civilian consumption at the highest prevailing legal price. This they did, collecting lire from civilian wholesalers. ♦ ♦ ♦


[Min of Mtg in McCloy's Office With Asst Secy of State Acheson, and Others, 23 Mar 44, ASF, ID, Hist of Civ Sup, DS-194]

♦ ♦ ♦ Mr. McCloy asked Mr. Acheson when the FEA and UNRRA would have money to relieve the Army of its relief responsibility. Mr. Acheson outlined the UNRRA problems and stated that in his judgment the Army should look to the greater part of 1944 with Italy as a supply responsibility. General Richards stated that this was very hard to justify. In reply Mr. Acheson stated his justification for the Army's continuing was that Italy had become a responsibility of the U.S. Government by virtue of our military operations and that for this reason the U.S. Government could not divest itself of the responsibility. He stated that the FEA and the Army were the only available agencies of this Government and that the FEA was in no better position than the Army since the FEA has always maintained that it is merely an adjunct of the military and an agent of the Army for certain procurement functions. Therefore, he added, if the Army did not feel it could use its funds, FEA could not do so. . . . In conclusion, he stated that he was arguing to get the Army to broaden its views on the relief problem so that it would retain relief responsibility in all areas until UNRRA or some other international relief agency could take over the job. ♦ ♦ ♦

Mr. McCloy stated that the Army was in good shape as long as it stuck to the wake of battle theory and that it was impolitic for the Army to be engaged in the relief business as such. He added that there is a point when Congress will very well ask what the Army is doing in Sicily. ♦ ♦ ♦


[Memo, Clay, Dir of Materiel, ASF, 5 Apr 44, on Conf With Civilian Agencies in the Office of McCloy, ID files, Basic Policy: Italy]

1. At a conference held in the Office of the Assistant Secretary of War, Mr. McCloy, on 4 April 1944, attended by representatives of the Bureau of the Budget, Foreign Economic Administration, State Department, and War Department, the following agreement was reached with respect to the submission of estimates to Congress for appropriations for civilian relief in occupied and liberated areas.

a. The War Department will present the estimates for the basic essentials for Western Europe for a period of six months, justifying these estimates on the basis of military necessity in connection with planned operations. This will involve increasing present budget estimates by adding thereto the funds which were to be requested by FEA for clothing, agricultural seeds and fertilizer, farm machinery, and sundries.
b. The War Department will continue its present provision of supplies for southern Italy and Sardinia until UNRRA is prepared to take over with October 1944 set as the objective date. It is presumed that military necessity will justify this continuance of operation. However, no additional funds will be requested for this purpose.
c. The War Department will continue its present provision of supplies for Sicily. However, the Foreign Economic Administration will develop ways and means to assume the responsibility for this area at the earliest feasible date, if possible, by 1 July. 2  ♦ ♦ ♦



[Finance Div, AMGOT Hq, Rpt, May 43-Nov 43, Spofford Rpt, ex. Y-11, p. 63]

1.... Ever since 1930 Italian budgets had consistently shown heavy deficits, . resulting from Italy's self-sufficiency campaign, the Abyssinian and Spanish adventures, and the administrative burden of the corporative state. Italy's additional war expenditures were 6o billion lire in 1940-41, and 80 inflationary borrowing methods. Thus the inadequate taxation program of the Italian government, declining revenues from existing taxes, the greatly increased currency circulation, the shortage of consumer goods and the surplus purchasing power consequent upon these factors, produced a heavy upward pressure upon prices which the government made numerous unsuccessful attempts to relieve. The deterioration of the wartime financial situation was obvious to the Italian people and the inflationary trend was thereby aggravated.

2. With this background in mind, the Finance Division of AMGOT Headquarters in Palermo created, as soon as the required personnel was available, the Finance Intelligence Office for the purpose of collating information on the inflationary picture and suggesting measures for dealing with it. ♦ ♦ ♦


[Finance Div, AMGOT Hq, Rpt, May-Nov 43]

6. At mid-August the available price data permitted the construction of an index only for Palermo. An index of twelve foodstuffs showed that black market prices were10000% of Italian official prices and 489% (unweighted) of AMGOT prices using 1940 as a base.♦ ♦ ♦


[ AMGOT Hq, Study of Cost of Living Among Palermo Relief Families, 11Oct 43, ACC files, 10000/100/1040]

The main diet of the poorer people in Palermo has regularly been bread, pasta, olive oil, beans and such green vegetables as are in season. Directly prior to the occupation, bread, pasta, olive oil, and horse beans were all available in the rationed amounts on the regulated market at the specified government prices. Fresh vegetables were not rationed and were obtainable.

Since the occupation, pasta, olive oil and horse beans are not obtainable on the regulated market and can be secured only in the Black Market. A comparison of the difference in the prices is as follows:

Pasta. Regulated Price

4.20 lire a kilo
except in Black
Black Market Price 50.00 lire a kilo
Percent of difference of Black Market price over
1090 p.c.
Olive Oil. Regulated Price

22.00 litre a litre
except in Black
Black Market Price 120.00 lire a litre
Percent of difference of Black Market price over
Horse Beans. Regulated Price 7.00 lire a kilo
Black Market Price 20.00 lire a kilo
Percent of difference of Black Market price over

Bread is obtainable now on the regulated market regularly in the full daily ration amounts only if the family representative is always fortunate enough to be approximately in the front 2/3 of the bread line, which is not very likely. The people in the rear of the line get none, because there is insufficient quantities of bread in the stores. Our investigation showed that the families interviewed generally obtain bread only three days a week instead of seven. Therefore, they can thus secure only 7 of the rations allowance of 150 grammes per day. To obtain the remainder they must resort to the black market at what are to them prohibitive prices. The black market price of bread is eight times the regulated price.

Many women with numerous children, being widows or wives with husbands absent from home find it difficult to stand long periods in the bread lines, since they have nowhere to leave their children. Yet if they do not stand in line, they do not get any bread at a price they can afford.

Green vegetables are not rationed and are freely obtainable in season, but the price has increased since the occupation by about 2000%. Because there is little variety on the market at any single season the people cannot eat vegetables to the exclusion of all other foods.♦ ♦ ♦


Prior to the occupation, the relief granted was barely sufficient to live on. Now with the greatly increased cost of living and the unobtainability of most kinds of staple food within their economic reach, the condition of people in Palermo on relief appears to be somewhat less satisfactory than before the occupation. ♦ ♦ ♦


[Msg, AFHQ to CCAC, 20 Oct 43, OPD Msg files, CM IN 19050]

A series of processions and strikes in Palermo against alleged insufficiency of wages and high price of foods caused disorderly demonstration outside Municipio and Prefettura on 19 October. Italian troops fired on demonstrators and killed 14 persons. There were no Allied casualties. British troops are being confined to barracks and leave of U.S. personnel has been cancelled. ♦ ♦ ♦


[Finance Div, AMGOT Hq, Rpt, May-Nov 43]

7. Upon instructions from the Economic and Financial Council on 13 September, the Intelligence Officer of the Financial Division prepared a comprehensive plan for inflation control.... The chief recommendations in this report were:

(a) Tax revenue should be increased and the existing system reviewed.
(b) Savings channels should be restored.
(c) Pressure for wage increases should be resisted.
(d) Appeals continued to troops to use discretion in local spending.
(e) Energetic enforcement of all price and rationing orders.
(f) Systematic supervision of distribution channels, notably wheat and olive oil.
(g) Importation of certain basic commodities.
(h) Construction of a price index to measure cost of living. ♦ ♦ ♦


[Ltr, Lt. Comdr Frank A. Southard, Jr., Financial Advisor, AMGOT Hq, Program for Inflationary Contl in AMG Territory, 22 Sep 43, in Finance Div, AMGOT Hq, Rpt, May-Nov 43, p. 68]

2. As much as by any other criterion, the AMG will be judged by the resoluteness, capacity, and energy with which it attacks the inflation situation in Sicily.♦ ♦ ♦


[Finance Subcom, AMGOT Hq, Rpt, The Problem of Public Finances, Prices, and Inflation Control in Italy, 13 Oct 43, Spofford Rpt, ex. Y-11, p. 69]

♦ ♦ ♦ The usefulness of Italy as a base for continued military operations would be gravely prejudiced should the financial situation materially deteriorate. ♦ ♦ ♦


[Civ Sup and Resources Div, AMGOT Hq, 15th AGp, Rpt on Operations in Sicily, for Jul-Oct 43]

15 (a) By Proclamation No. 8 prices of foodstuffs and goods officially in force before D Day were to remain at the pre-occupation rates, except for commodities subject to seasonal or regional variation for which SCAO's were to fix fair prices based on those normally current. Many factors made this difficult to enforce, however: the natural tendency of the Italian to "sting" a foreigner, especially the supposedly wealthy Anglo-Saxon race; the knowledge that the lira had been devalued, leading to attempts to increase prices by an equivalent amount; the flourishing black market; the tendency of the soldier to pay any price asked and often not to bother about the change; the shortage of stocks and consequent desire to realise on those that there were, etc. There was no organized attempt to control prices of other goods at first, with the natural result that where these goods existed, prices rose alarmingly and daily. Vigorous measures were taken with the co-operation of the military authorities in Syracuse, where prices were soon under control and several shopkeepers in prison; but in Palermo the evil was never tackled, and was still rampant at the end of October. General Orders 4 and 5 were published in September; it was, however, much harder to arrest rising prices than it would have been to prevent them from rising at all.

(b) General Order No. 4 .fixed prices for goods and services generally at the pre-occupation level, and required all items displayed for sale to be plainly marked with its price; lists of these prices were to be sent to CAO's. This order, with the co-operation of the purchasers, could have been enforced as regards the markings of prices; it was not so easy, however, to decide whether those prices were in fact the pre-occupation prices. CAO's had no time to check them, and often


in fact no data against which they could be checked; while in Palermo, if every offender against the order were prosecuted, every trader and hawker in the city would have been in the courts. With General Order No. 4 a list was issued to SCAO's giving overall maximum prices within which they were to set prices in their ,provinces.

(c) General Order No. 5 called for a declaration of stocks over a specified minimum of grain, oil, sugar, vehicles, tires, fuel, building materials, etc., and trafficking in the commodities specified in the order was forbidden. Declarations had to be made to CAO's by 15 October, so that it was not possible to consider the results at Headquarters by the end of the month; it was pointed out by all SCAO's, however, that they had neither the staff nor the time to examine these declarations in any detail. ♦ ♦ ♦


[App. D to Memo, 30 Sep 43, considered at 13th Mtg, Exec Council, AMGOT Hq, 1 Oct 43, ACC files, 10000/143/447]

3. After inquiry, consultation, discussion and considerable reflection, one is forced to the conclusion that AMGOT is not likely to be more successful in effecting control than was the former administration....

5. It is submitted that a control of the whole range of agricultural products is doomed to failure and that it may be possible to control reasonably effectively a limited number of products....

6. The only practical method of ensuring an equitable distribution of commodities in short supply is by rationing. It is, however, suggested that the list of rationed agricultural products and derivatives be strictly limited to absolutely essential articles of consumption. The list for the present should be confined to bread, flour, pasta, olive oil, and sugar. The maximum ration for each commodity for each province, depending on the supply position, should be advised confidentially to each S.C.A.O. who should be permitted to fix a ration within those limits which he feels could be honoured. The ration would be subject to periodical revision according to the supply position. 3


[Civ Sup and Resources Div, AMGOT, 15th AGp, Rpt, Jul-Oct 43]

15. d. A memorandum on inflation prepared by the Financial Division declared that the way to combat the Black Market was to introduce adequate food and consumer goods into normal trade channels; it was unfortunate that, for reasons given earlier in this report, this measure could not be taken, though there was full agreement with the theory.



[Hq AMG, Rpt for Nov 43, ACC files, 10000/101/501]

(96) On 20 November 1943 General Order No. 14 granting a temporary wage adjustment was published, granting salary increases to governmental employees in accordance with a stipulation schedule and permitting private employers to make increases in accordance with the same schedule.

(97) During the month considerable labor unrest was evident, traceable to two causes: (a) Lack of adequate' supply of food at reasonable prices; (b) Wages insufficient to maintain a minimum standard of living....

(98) An example of the kind of situation that arose is that of the Societa Generale Elettrica della Sicilia. On 8 November, 650 employees of the Societa Generale Elettrica della Sicilia in Palermo left work to search for flour substitutes,


leaving 50 essential workers at the plant. At the conference that day, the workers insisted their action was not a "strike" but a human and necessary attempt to obtain food for their families. At the same time increased wages were demanded. The workers returned to work when it was explained that efforts were being made to make food available and that a wage increase was under immediate consideration. .. .

(99) The issuance of General Order No. 14 undoubtedly reduced the demand for higher wages; however, the wage increases did not compensate for the actual increases in the cost of living. The scarcity of food, the increasing black market, and the rising cost of living continued to contribute to labor unrest at the end of the period under review. 4  ♦ ♦ ♦


[Hq AMG, Rpt for Dec 43]

(75) In December increases in wages and salaries for public employees were authorized in Regions I and II, and authority was given for the adjustment of wages between private employers and employees. The order was naturally well received by private employees, but . . . the effect it had in helping them has been nullified by the rapid increase in prices. Prices have risen sharply, particularly in Region II in the provinces bordering on Apulia and Campania. This was caused in part by foraging parties entering the Region, with or without permits, to buy foodstuffs. Lack of personnel made effective control of these actions practically impossible, especially with respect to those operating under the cloak of military authority, against whom civilian police could not be expected to take any action. Some illustrations of the extent to which prices have risen in Region II, largely as a result of such foraging parties, may be cited. On the coastal road south of Taranto fowl which previously sold at 25 to 35 lire now bring 150 to 200, while turkeys previously sold at 150 to 200 lire now sell for 800 to 1200. Eggs which were in ample supply at 3 to 4 lire early in October, are now practically unobtainable at 14 to 15 lire. Preliminary reports on a black market grain case indicate that several tons of wheat were sold originally for 1600 lire per quintal and resold for 2300. ♦ ♦ ♦


[Memo, Col Spofford, Actg CofS, Hq, AMG, for AMG Officers in Hq AMG and Rgn 1, 8 Dec 43, ACC files, 10000/141/4]

1. Control of inflation in areas under A.M.G. (or A.C.C.) is one of the major requirements of A.M.G. Under this policy substantial additional wage increases cannot be granted, for such increases would be powerful inflationary forces. Officers are requested and instructed, therefore, to be extremely careful when wage questions are being considered to do or say nothing contrary or prejudicial to the A.M.G.'s efforts to control inflation.

2. Officers should understand that substantial additional wage increases leading to inflation are more harmful in the long run to the people than are the results of the present wage scale. The quantities of goods available in the area under A.M.G. control is limited to the amount on hand, plus the amount which can be produced in the area, plus the amount which can be imported. Because of war conditions payment of higher wages, with the consequent higher prices, will not alleviate the supply situation by increasing significantly the amounts of goods produced or imported. However, by furnishing added impetus to the inflationary tendencies the higher wages and higher prices will do positive harm. Inflation disrupts the civilian economy and creates civil unrest, thus reducing the amount of goods produced and available for consumption. The lot of the civilian is made worse and progress of the Allied armies is hindered because more men and more resources must be diverted to uses behind the combat lines. ♦ ♦ ♦


[Memo, Mason-MacFarlane, Chief Cmsr, ACC, for AFHQ, 3 Jun 44, ACC files, 10000/136/427]

5. I had a meeting yesterday evening with Badoglio and the Ministers for Finance, Agriculture and Interior. They pressed me very hard indeed on the subject of raising salaries and wages


in Italy, particularly those of civil servants and Government officials. They painted a most gloomy picture and stated very definitely that they would be unable to prevent serious disorders if something were not done rapidly to alleviate the situation. . . .

6. I informed them that as they already knew, I was doing all I could to secure an increase in the bread ration and that this was an obviously better way of dealing with the situation rather than an increase in wages which could under existing conditions be nothing but a vicious palliative. They agreed unreservedly, but stressed the importance of being able to announce any increase in the ration at the earliest possible moment. Failing this it would be absolutely necessary to do something about wages. ♦ ♦ ♦


[Allied Anti-Inflation Comm. (Italy), 5  Rpt, 19 Jun 44, ACC files, 10000/136/429]

5. The inflationary pressures are being held in check with the greatest difficulty. The primary control is the pegging of wages, which in turn depends on the purchasing power of current wages, in terms of a minimum subsistence ration. ♦ ♦ ♦



[Ltr, MGS, AFHQ, to CCS, 10 Jan 44, ABC files, 014, Horrified, Govt, sec. 2 (CCAC Memo for Info No. 19)]

1. With a view to agreeing on a price policy to be followed in Italy, the Military Government Section of this Headquarters called a conference 5-6 January at which were represented other interested Sections of this Headquarters and the field organizations primarily concerned, namely, the Central Economic Committee, the Allied Control Commission and Allied Military Government Headquarters, the Allied Military Government 15 Army Group, and the Allied Commission for Sardinia....

2. The price policy embodied in these documents may be summarized as follows:
a. As to prices of local goods, the inflationary trend should continue to be resisted, and to this end the prices of certain important commodities should be held at low subsidized levels for the time being. The determining of individual prices or of general price ceilings, and the nature of the rationing system, are special problems lying within this general policy and are matters to be dealt with in the field.
b. As to prices of imported goods, the general policy is that all imports will be charged as book entry to the Italian Government at landed cost, either in the appropriate foreign currencies or in lire as the Combined Chiefs of Staff may direct. The prices at which the imports will then be sold should in general be not less than landed cost; but sales at a loss may be permitted if a price based on landed cost is so high as materially to disturb the general price structure. The resulting subsidy in these latter cases will be for the account of the Italian Government. Even though legal retail prices are not fixed, Allied authorities will watch and if necessary control the retail price of imported goods, consulting with Italian authorities where appropriate.
c. As to prices of exported goods, Italian producers will be paid in lire at prices judged to cover actual production costs plus a fair margin of profit except where a lower price prevails in the open market. The goods thus purchased for export will be sold abroad at prices prevailing in the market of sale, except in the case of French Africa and Corsica where prices will be related to f.o.b. prices of comparable articles in world markets.... 6


[Min of Remarks of Col Bernstein, Financial Adviser, Hq ACC, at Conf on Price Policy, AFHQ, 5-6 Jan 44, MTO CAO-701]

3.... (1) On behalf of Headquarters ACC/ AMG, Colonel Bernstein gave a general review of the rise in prices which had been going on and is tending to go on in all regions of Italy and dealt with the price control system adopted to arrest such upward movements, namely the fixing of legal prices for basic goods and the


issuance of a general list of price maxima as a guide to local enforcement. The view was expressed that rise in prices was inevitable, but that it should be slowed down, particularly during the next three to six months. In his view it would continue to be necessary to subsidise certain basic commodities and to control prices for them, as letting all prices move up to the level of landed cost would only upset the present structure and would lead to further increases in wages. ♦ ♦ ♦


[FEA Survey Mission, Rpt on the Econ Activities of ACC, 5 Feb 44, ACC files, 10000/143/453, app. A, Rpt for Mar 44]

4. Price Control

... At a meeting of AMG officials in Algiers on 5 and 6 January, it was agreed that price increases in Italy are in general to be resisted and that the AMG will continue to have the responsibility for establishing legal prices for basic goods. However, the control and fixing of maximum prices was delegated to operations in the field, and it was agreed that each case was to be dealt with locally on its merits within the framework of the general policy.

The fixing of satisfactory and enforcible maximum prices is, as our own experience in this country indicates, an extremely difficult task calling for the services of experts in all lines of business. Even to fix and adjust maxima for basic commodities only will require the continuous efforts of a specialized staff. AMG does not appear to have any such staff at the present time. Furthermore, the fixing of maximum prices in relation to cost in a period of tremendous scarcity and rapid inflationary rises is next to impossible. Certain vital prices in Italy, such as the prices of wheat and coal, are heavily subsidized by the government and cannot be increased from artificial levels without serious disturbance to the whole cost of living. All in all, the prospect for price control is not bright. ♦ ♦ ♦


[Eton Sec, ACC; Rpt, 1 Sep 44, ACC files, 10000/154/328, p. 89]

II Situation at the beginning of March 1944
Control over prices and wages had almost completely broken down. Control of wages was mostly confined to government, public utilities and banks. Control of prices was largely confined to the part of the wheat and olive oil crop which was amassed, and to imported foodstuffs. Public utility rates, railroad rates and fares also remained under control, and the law freezing rents was still being observed wherever tenants continued to occupy the same premises that they had occupied before the Allied invasion.

Furthermore, such control as existed was largely local in character, and without central coordination. In the four provinces of Apulia that had remained under the King's administration, price regulations in effect were largely those existing under fascism, with minor modifications but without effective enforcement. In Sicily, price restrictions had been removed on all but a few key commodities. In Naples, enquiry revealed the existence of an extensive list of price ceilings which AMG had imposed in October 1943, upon entry into Naples, but which no attempt was being made to enforce.

III Establishment of the Price Group

The Price Group was created on 8 March 1944, to reconcile and combine the viewpoints of the various subcommisisons on price policy. ♦ ♦ ♦


[Eton Sec, ACC, Rpt, 1 Sep 44]

♦ ♦ ♦ In the deliberations of the Price Group, there have usually been two principal points of view. First, the Subcommission which makes the recommendation, usually either Agriculture or Industry and Commerce, is concerned with setting a price that will encourage production, and somewhat reduce the temptation to sell through illegal channels. This may mean, and often does mean, not merely a price that will enable producers to make both ends meet, but often one that will be sufficiently attractive to producers to evoke a spirit of semi-voluntary cooperation with the authorities....

The opposing point of view was usually held by the Finance and Labor Subcommissions. Finance was influenced by its policy of holding the line against inflation into resolving every doubt in favor of a lower price rather than a higher one. Labor was concerned with the fact that while the Price Group was continually recommending increases in official prices, the Labor Subcommission itself was under rigid orders to hold the


line against an increase of wages, and was doing so with considerable degree of success, at least in those occupations in which some control of wages is possible.

The final recommendations of the Price Group have, on the whole, represented the first of these two points of view rather more than the second. The reasons for this were:

(1) that there was usually some doubt, often considerable doubt, as to whether any price limit would actually be enforced, and
(2) that a feeling of conviction, however strong, that cost statement was inflated, did not suffice to indicate precisely what the correct figures would be, and
(3) an almost complete lack of relevant information.♦ ♦ ♦


[Msg, TAM-162, CCS to AFHQ, 9 Apr 44, ACC files, 10000/136/427]

A serious view is taken here of the critical nature of inflationary developments in Italy. It is recognized that political and military conditions make it difficult at this time to introduce and administer measures to counter effectively the inflationary pressures. ♦ ♦ ♦

In view of increased import programme, is it possible to arrange with Italian Government to impose and enforce stricter measures against black markets?
Programme of control of Italian Government finances and curtailment of budgetary deficits should be pursued with utmost vigor by ACC and the Italian Government should be made fully aware of its responsibility for taking all possible corrective measures.
Also request ACC to continue vigorously its present efforts, both as to maximizing production and facilitating transportation and distribution in connection with local crops.


[Memo, Econ Sec, ACC, for All Concerned, 10 Apr 44, ACC files, 10000/154/347]

2. The present position regarding price controls is chaotic. A large proportion of the existing legal price limits are disregarded by everyone. The civilian population is coming more and more to take it for granted that laws regarding prices exist only to be broken. This situation tends to bring all laws, and the authorities who make or sanction the laws, into disrepute.

3. This headquarters believes that price controls should be retained only in connection with those commodities for which:
(a) price control is urgently necessary for reasons of economic policy, and
(b) enforcement of price control is practicable.

All price controls which do not satisfy these conditions should be abolished, and all restrictions on trade in commodities not subject to price control should be abolished...

4. It is the view of this headquarters that price controls can be enforced only if accompanied by effective control over supplies and channels of distribution. Hence this headquarters desires to proceed immediately with a review of the existing price controls, to determine which ones should be retained, and to have established and enforced a uniform and workable system of price controls for all of Italy free of the enemy. ♦ ♦ ♦


[Conclusions of Rpt of Allied Anti-Inflation Comm. (Italy), 19 Jun 44, ACC files, 10000/136/429, p. 29]

4. Stricter price control, control of distribution and of the allocation of consumer goods, raw materials and equipment, are extremely important, but in the present state of supply will be palliatives and insufficient to avoid inflation.

5. Although the financial measures are important, most of them cannot be effective in the immediate future.

6. To prevent rapid deterioration of the Italian situation, some increase in the import of consumer goods, raw materials and equipment is essential.


[Econ Sec, ACC, Rpt, 1 Sep 44]

♦ ♦ ♦ Only that measure of interference with normal economic incentives which limited personnel of ACC has been able to accomplish has prevented more serious inflation, starvation and serious disorder. Only the controls supervised by ACC have prevented a much larger portion of available food from going to the black market at a higher price. This in turn would have increased labor unrest and demands for


wage increases, resulting in a real inflationary spiral of prices and wages. ♦ ♦ ♦


[Memo, Hq ACC, Status of Anti-Inflation Recommendations . . . 24 Oct 44, ACC files, 10000/136/427]

The degree of inflation has of course increased. The exact increase in the price index and in currency circulation will be found in the Monthly Reports of the Finance Subcommission for July, August and September. The Government deficit has increased as more territory has come under the jurisdiction of the Government. Allied expenditure has also increased. There is still an extreme shortage of practically all goods....


[Rpt, Allied Anti-Inflation Comm. (Italy), 19 Jun 44, ACC files]

3. Prices in liberated Italy have increased considerably more than have means of payment.... A cost of living index computed by ACC for Region 3 (which includes Naples Province) and covering clothing, rent, fuel and miscellaneous, as well as food, shows a rise of 320 percent since June 1943, and 133 percent since September.♦ ♦ ♦



[Interim Rpt, Italian Govt Finances-Last Quarter of 1943]

2. Information on Italian State finance is difficult to obtain because of the scarcity of able Italian finance personnel; lack of Italian governmental files, communications and transportation facilities; dislocation and other difficulties caused by the war; and the absence of the Government from Rome.

3. The Italian Government has been operating at a deficit since the fiscal year 1930-31. In the last quarter of 1943, the Government has had only four provinces of Puglia (Bari, Brindisi, Lecce, and Taranto) to draw on for its revenues. Normal State expenditures in these four provinces usually greatly exceeded revenues. From 12 September 1943, on top of the normal expenditures were imposed the expenditures of the Central Government.

6. The deficit of the Government in the last quarter of 1943 was financed by advances from the Banca d'Italia (around three-fourths of the total), and AMFA (around one-fourth of the total). The bulk of the funds advanced by the Banca d'Italia came from bankers' deposits funneled into the Banca d'Italia by shutting off other outlets for bank funds. ♦ ♦ ♦


[Msg, CCAC to Eisenhower, 5 Nov 43, OPD files, 311.23, CAD, sec. VI]

... Due to prospect of gradual termination of AMG and in conformity with terms of the Surrender of Italy, under which the Italian Government will make available such Italian currency as the United Nations may require, it is considered highly desirable that provision of supplies of AM Lira notes should be suspended and superseded as soon as practicable by supplies of Italian currency. Pending possession of adequate printing facilities and supplies of Banknote paper in the area, arrangements should be made here or elsewhere on behalf of the Italian Government for the production of such lira currency.

It is requested that you now enter into further negotiations with the Italian Authorities relative to supplying of Italian currency as indicated above, and that you keep us advised of developments. Production demands on the Treasury Department make it difficult to increase its present delivery schedules of Allied Military Lira currency.... ♦ ♦ ♦


[Finance Subcom, ACC, Interim Rpt, Italian Government Finances-Last Quarter of 1943, Summary, Spofford Rpt, ex. 4-R]

8. The Italian Government has no facilities for producing its own currency. Although the armistice terms provide that the government shall make available such currency as the Allied Forces require, actually it has been necessary for us to supply the Government with currency. Arrangements are now being made to use the facilities of American bank-note companies under the supervision of the United States Treasury for the manufacture of Italian lire, and to import plates, ink, paper, and other necessary supplies into Italy so that the currency eventually can be manufactured in liberated Italy.7


[Msg, AFHQ to CCAC, 24 Oct 43, OPD Msg files, CM-IN 14687]

Italian government meeting service charges on debt in Sardinia and four provinces of Puglia, and issuing postal savings funds in Sardinia. It appears evident service charges must generally be met in non-German occupied Italian territory in order to pave way for improvement in public credit essential to handling fiscal problems, including mopping up of excess funds in hands of public. Consequently it is urged that change be made in monetary directive so as to permit resumption by Italians of service on Italian debt and permitting AMFA to advance AM lire for this purpose.... 8


[Msg, CCAC to AFHQ, 17 Nov 43, OPD files, 311.23, CAD, sec. VI ]

... AMFA is authorized to make advances to Italian Government, including the Italian armed forces, whenever such action is deemed desirable in view of military necessity and duly related circumstances.

In TAM 66 [TAM-MAT, the cable series between CCAC and AFHQ] we advanced the general principle that Italian needs should be handled through regular banking channels in so far as possible and AM Lire supplied to the banks when the banking system is short of currency. This principle should not be followed if you determine that you can more effectively enforce controls which should be exercised over Italian expenditures by advancing funds directly to the Italian authorities rather than by having the Italian authorities obtain their funds from the banks.

It is necessary, in the interest of checking inflation, to keep expenditures by the Italian Government to a minimum. Control by the Control Commission and its agencies over budget, pay of troops, etc., will therefore be necessary. The method of such control can best be judged by those on the spot. You should, irrespective of shortage of currency, maintain sufficient control or scrutiny of Italian expenditures to satisfy yourself that anticipated expenditures are proper and reasonable in amount. You should make arrangements so that a statement of anticipated Italian expenditures and receipts be furnished to you at stated intervals. ♦ ♦ ♦


[Interim Rpt, Italian Govt Finances-Last Quarter of 1943]

5. The existing Italian budgetary procedures make impossible any scientific expenditure control. A more efficient system of procedures is being prepared. No attempt was made to control expenditures of the Badoglio Government until December, and even then, there was not enough data available, and due to poor communications, not enough could be collected in time to permit any substantial control over the December budget. ♦ ♦ ♦


[Finance Div, Hq AMG, Rpt for Dec 43, Spofford Rpt]

(94) During the month there was a partial resumption of the servicing and amortizing of the Italian state debt, which was received very favorably by the public. The amount of Italian 4% Treasury Bonds, 1934-43 issued in Sicily and Region II was small, and the repayments to date have involved an even smaller cash turn over than was anticipated. The resumption of full dealings in one-year Treasury Bonds on 15 December ... has resulted in new subscriptions ... which already exceed the repayment of three months' arrears in maturities and the sales of unmatured bonds. ♦ ♦ ♦


[Econ Sec, ACC, Rpt, 1 Sep 44]

4. As soon as the branches of the Banca d'Italia were again part of a functioning central banking system, arrangements were made for the Banca d'Italia to assume responsibility for financing all Governmental expenditure.9  This system eliminated the need for ACC to advance currency


for Italian Governmental uses. The Allied Financial Agency [AFA] had earlier advanced money to help meet communal, provincial and state deficits. Through the institution of a system of financing whereby the public deposited money in the banks, the banks redeposited the money at the Banca d'Italia, and the Banca d'Italia made the money available to the government, the necessity for further AFA advances was eliminated.

From 30 January 1944, no AFA advances were made to the National Government. This system was extended to the AMG regions and from 1 May 1944 all advances of AFA funds on any level in the AMG regions were stopped. Only in the AMG Fifth and Eighth Army Areas may such advances still be made. Even here, these are greatly minimized by using the Banca d'Italia to move currency forward as soon as possible. Not only were all currency advances by AFA for Italian governmental purposes stopped, but the Banca d'Italia was able to make an initial repayment of AFA of over one-third of the previous advances made, or a total of 2,100 million lire. ♦ ♦ ♦


[Interim Rpt, Italian Govt Finances-Last Quarter of 1943]

3. If any substantial volume of resources were provided to the Italian Government by the United Nations most of the problems of the Badoglio government would be solved for the present. (The provision of AM lire cannot be regarded, of course, as aid in this sense, as AM lire under the Armistice Terms are an obligation of the Italian government not of the United Nations). However, the basis on which we must operate is that the Italian government must in the main meet its difficulties with the resources available to it.

4. The mission of the Finance Subcommission must therefore be that of aiding the Badoglio government in conducting a rear-guard action. The best that we can do is:

(a) Assist the government in increasing its revenues within the narrow limits possible of the existing taxation system.
(b) Control expenditures by making sure that they are made for approved purposes and that there is a minimum of waste.
(c) Assist the Italian government in rehabilitating its credit as best it can in view of the situation.
(d) Exercise as much of a drag as possible on inflation by holding down the issuance of new currency to the bare minimum.
(e) Use our influence through the Ministry of Finance to discourage increases in costs, prices, and incomes.


[Memo, Finance Subcom, ACC, 29 Mar 44, ACC files, 10000/136/429, app. to Rpt, Allied Anti-Inflation Comm. (Italy), PP. 51-52]

1. The Italian Government's argument as presented in Marshal Badoglio's letter and as presented orally by the Minister of Finance to representatives of the Finance Subcommission from time to time is briefly as follows: 10

(a) The present rate of exchange increases substantially incomes of soldiers spent in Italy and constitutes, therefore, the major inflationary factor.
(b) People in Italy are "exchange rate conscious." The sharp downward revision in the exchange value of lire has caused psychological reactions which have aggravated the inflation problem in liberated Italy.

2. The extent to which soldier expenditures constitute an inflationary factor in liberated Italy is exaggerated in the Italian Government's argument. A reduction of these expenditures will not change the course of inflation in Italy, although it may slow down the inflationary process. ♦ ♦ ♦

3. . . . Distrust of the currency is undoubtedly present in Italy; and it may have some effect in stimulating inflationary price movements. But will one exchange rate rather than another change distrust into confidence? Changes in the exchange rate, whatever the character of the change, are an extremely important factor in creating distrust. To change the exchange rate now would increase the distrust of the people in the currency, particularly since the currency would be fixed at a value which is obviously too high to be maintained over a long-run period. 11


[Reform of the Italian Tax System, app. to Financial Recommendations, Rpt of Allied Anti-Inflation Comm. (Italy), 19 Jun 44]

♦ ♦ ♦ Action must be taken to correct the following extreme weaknesses of the Italian revenue system:

1. an assessment procedure that is both unduly slow and highly inaccurate;

2. a collection system which invites high costs, collusion and corruption;

3. excessive reliance on per quantum consumption taxes.12


[Lt Gen John Clark, Chief Admin Officer, AFHQ, 30 Jul 44, Comment on Rpt of Allied Anti-Inflation Comm., p. 32, CAD files, 319.1, ACC, sec. 2]

♦ ♦ ♦ While this headquarters concurs in the general recommendations as to taxation and revenue contained in Section III of the body of the report, it expresses no opinion on the recommendations set forth in the Appendix entitled "Reform of the Italian Tax System." It is believed that the implementation of the general recommendations in the body of the report must remain primarily a matter for the Italian authorities. Implicit in the development of the policy of tax rates and exemptions are a number of broad social and political questions which this headquarters does not undertake to appraise.


[Paraphrase of Msg, AFHQ to CCS, 12 Oct 44, CAD files, 014, Italy (1-25-42) (1), sec. 7 ]

1. An administrative memo of the Headquarters (No. 95 of 1943) has governed, since December 1943, Allied local procurement of supplies, services and facilities in Italy. This memo was premised on the obligation of the Italian Government under the Armistice terms to make available such resources or services as the U.N. may require [see Chapter IX, Section 51. The general policy, accordingly, except in combat zones or for minor day to day procurement, was to avoid payment by Allies.

2. There have been numerous exceptions to this policy of non-payment. Such exceptions have been due to difficulties of the Italian Government in arranging financing for firms which supply services, goods or facilities to Allies and which need cash to maintain operations, and have been due to serious shortcomings of Italian Government procurement services.

3. Administrative memo No. 95 modified on 1 August 1944 by Administrative Memo 31 of 44 was drawn up to meet this situation. This directs ACC to require the Italian Government (a) to improve the procurement services and (b) to set up a lira account to enable the Allied Forces to make cash payments for supplies, services and facilities where it is impracticable to have recourse to Italian procurement agencies. Wherever feasible, the general policy of nonpayment is preserved.

4. The lira account, which would operate comparably to the franc account in North Africa, would have the following advantages.

a. The expenditure of funds drawn by Allied Forces from AFA, which are charged to Armed Forces appropriations in Washington and London, would be reduced since payment would be out of funds provided by the Italian Government.
b. Payments to local enterprises would be facilitated because of reductions on Allied side to pay and the long delays on the part of the Italian Government in arranging direct reimbursement.
c. The Italian Government would be encouraged to improve procurement services to Allied Forces (the franc account in North Africa operated in this way).

5. There have emerged out of protracted discussions between ACC and this Headquarters the following political objections to the establishment of a lira account at this time.

a. The quantity and value of Allied procurement, supplies, services and facilities in Italy would be revealed to the Italian Government.
b. It would focus attention on the obligations generally of the Italian Government under the Armistice by rendering visible the present invisible deficit that is currently accruing to the Italian Government.

6. Prime Minister Bonomi and Minister of the Treasury were presented informally with the terms of administrative memo No. 31 on 9 October 1944. The political effect of the proposed lira account would be "disastrous" according to the statement of the Prime Minister. Adverse public reaction is feared by Bonomi to any step by the Government to assume direct and


open responsibility for Allied payments in Italy since this would imply that our Government had abandoned efforts to obtain a modification of the financial clause of the Armistice. Bonomi also fears the effect of additional deficit financing on public confidence. Such additional deficit currently would be over one and one half billion lire per month.

7. From the standpoint of financial policy and from a technical viewpoint, this Headquarters considers the establishment of a lira account desirable. Pending advice from you whether political objections override the advantages, action however is being delayed. 13


[Memo, Hq AC, Actg Chief Cmsr to C-5 AFHQ, 5 Feb 45, ACC files, 10000/136/91]

1. On 9 Jan 45 the Minister of Foreign Affairs of the Italian Government presented to the Allied Commission in Rome a long memorandum dealing with the economic and financial difficulties faced by Italy and with the financial measures the Italian Government believes necessary to mitigate these difficulties.

2. Briefly summarized, the Italian memorandum argues as follows:

a. The financial situation of Italy is extremely difficult since both the national deficit (estimated at 300 billion lire) and the need for reconstruction expenditures are rapidly increasing.
b. The memorandum lists certain remedial steps which can be taken. . . . It is argued that little can be done along any of these lines if the Italian economy is in imminent danger of economic and financial collapse. The first condition, therefore, is that the Allies furnish financial relief designed to:

(1) Increase the confidence of the Italian people in the lira, and
(2) Make possible the purchase of essential supplies abroad.

c. This financial relief should take the form of setting up credits in dollars or sterling corresponding to (I) the total amount of AM lira issued by the Allies, and (2) the total payments by the Italian Government on behalf of the Allies, whether chargeable to the "costs of occupation" or the costs of carrying the war against the enemy from Italian soil.
d. In leading up to this proposal the memorandum is at great pains to make a distinction (which is not carried over into the proposals) between the costs of occupation and the costs of carrying the war against the enemy from Italian soil. The memorandum also dwells on the contradiction between the Treaty of Armistice and the state of co-belligerency, quoting the announcement that the conditions of armstice would he modified in Italy's favor to the extent of Italy's contribution to the common war effort.

5. The tone of the memorandum reveals a sense of self-righteousness and a lack of realism. . . . The memorandum places stress on the destruction wrought on Italian soil by the use of the country as a battlefield; but the use of Italy as a battlefield is surely to be traced to her participation in the Axis partnership rather than to a voluntary choice by either Italy or the Allies.

6. The Allied Commission agreeing that Italy needs financial relief, emphatically does not agree that the Allies owe it to Italy in any legal sense. It is therefore recommended that the proposals summarized in paragraph 2 c above not be approved by the Governments of the United States and the United Kingdom.

7. It is further recommended, however, that further measures of financial relief for Italy be urgently adopted by the United States and/or the United Kingdom Governments, even if such measures cannot result in any early purchase of shipments of supplies. ♦ ♦ ♦


[Memo, Southard, Financial Adviser, AFHQ, i6 Feb 45, ABC files, 014, Italy, sec. 4, app. C to CCS 789]

♦ ♦ ♦ With this recommendation of the Allied Commission I am in strong disagreement, on three grounds: (a) The Italian financial situation is not one in which foreign "stabilization" loans will be of any material benefit. (b) The Italian Government and the Italian people should not be led to expect that their financial and economic problems can be solved by entries in the books of the U.K. and U.S. Governments or central banks. (c) Having in mind the heavy demands that will be made on the U.K. and U.S. Governments by all the liberated countries, dollar and sterling credits should be related to approved programs of rehabilitation and not granted in bulk sums in advance solely for their anticipated psychological effect on the internal financial situation of the borrowing country. ♦ ♦ ♦


[Ltr, Lt. Col. N. T. Board, Rgnl Finance Officer, Abruzzi Marche Rgn, to a Provincial Comissioner (PC) 27 Jan 45, ACC files, 10500/115/113]

... Were I a Provincial Commissioner I would have plastered up on every wall in my Province the fullest details regarding the taxes that we have to bear in England. It would be an eye opener to these people and might cause them either to reform or to abandon themselves from the highest precipice.♦ ♦ ♦

The next time you have a protest regarding taxation, I suggest you bring the following points home to them. Our opinion is continuously being sought regarding 1) inflation and 2) whether we intend to maintain the value of the Lira. You do not require me to tell you what effect that non payment of taxes is going to have on the former. Regarding the latter, are we likely to bolster up the value of the Lira when the Italian people themselves are not prepared to play their part? Every province brings forward excuses why it should not pay taxes. ♦ ♦ ♦



[Msg, CCS to Gen Wilson, SAC, MTO, 25 Feb 44, MTO files, CAO/701, CM-IN 13801]

Supply authorities, both U.S. and U.K., gravely disturbed by increasing size your requirements of food for civil relief, which if fulfilled, are bound to have serious effect on other commitments. It is therefore of greatest importance that U.K. and U.S. Governments should be in possession adequate information as to conditions in Theater, particularly as regards food, so that they can relate your requirements to other needs. In absence of such information it might become necessary to consider cutting down your demands because of their impact on other requirements which may have equal or greater priority since position may soon arise where your and other demands cannot be met in full.

In order to avoid this necessity, or to ensure at least that in any necessary reductions the claims of your theater are fully represented and understood, it is most desirable that study should be made on the spot by persons who have knowledge of overall requirements and can report on conditions which have necessitated increased demands. Such information will also be of greatest value in planning for other areas. ♦ ♦ ♦


[Ltr, Hilldring to Gen Holmes, DACofS, G-5 SHAEF, 21 Mar 44, CAD files, 400.38 (2-20-43), sec. 5]

... One of the outstanding conclusions to be derived from the Italian experience is that the greatest possible effort should be directed towards agricultural rehabilitation, the purpose being to hold the demand for foodstuffs made upon U.S. and U.K. to the absolute minimum. In Italy and Sicily indigenous production has failed to meet expectation by a wide margin, and it has been necessary to import considerable quantities of foodstuffs, with the resulting drain on U.S. and U.K. stockpiles and shipping.


[Ltr, Badoglio to Mason-MacFarlane, Chief Cmsr, ACC, 26 Mar 44, ACC files, 10000/136/384]

I submit to your benevolent study the very grave problem of food supply for the populations of the liberated territories. As you are aware, almost all supplies in the "Ammassi" have been exhausted for some time.
So that the food supply is now based almost exclusively on the ration distributed by the Allies. ♦ ♦ ♦

This ration reduced to calories, we have from 500 to 540 calories per person, compared to the 3000-3200 necessary for the average person for light work, and 4000-5000 necessary for heavy work.
These figures, in the enormous gap between what is and what should be, are so painfully significant as to require no illustration on my part.
And as this situation is closely connected with agricultural production and social tranquility, I make once again a warm appeal to you so that once again you will bring all your influence and friendship to bear on this problem which is not


only Italian, but has similar importance also for the United Nations.


[Ltr, Mason-MacFarlane to Badoglio, 31 Mar files, 10000/136/384]

♦ ♦ ♦ I agree that the calorific value of this ration is small but you know better than I to what extent the population can obtain supplementary food such as vegetables and nuts which are very high in calorific property. Vegetable and nuts which are very cheap can more than make up for all the calorific losses due to deficiencies in the other part of the ration.

You plead for importation of more food. I must point out to you, however, that while giving every consideration to this the Allied Nations must take the view that the remedy in part lies in the hands of the Italian people themselves. It is true that almost all the supplies in the Ammassi have been exhausted. It is equally true that the Italian producer has signally failed to take his quota to the Ammassi. There is, I believe, sufficient olive oil in occupied and liberated Italy to feed the whole population on an adequate ration. It has not been produced. It will be difficult to persuade the people of the Allied Nations to help a population which in this respect has failed collectively to help itself.

I must remind you that with the advent of the harvest imported supplies from abroad will decrease as this country will be expected to depend more and more upon its own resources. This is a question of agricultural production and distribution and it is the duty of the Italian Government to do everything possible to ensure maximum production of all foodstuffs, and their availability to the population.


[Msg, Combined Sup Gp, CCAC/S to Econ Sec, ACC, 13 Apr 44, ASF, ID files, Civ Sup in Italian Theater, app. 3-D]

♦ ♦ ♦ a). The estimates of number of ration cards are prepared by the Italian Provincial Officials and are used as the basis for computing import requirements. These estimates are admitted by the Italians themselves to represent higher figures than the actual number of population requiring rations. Moreover the Italian Government itself has no record of number of farmers who retained official allowances of their own products. The present percentage of 75% of total population represented by ration cards against which imported flour/wheat is issued in presently occupied Italy is considered by the Group as inflated and should not be used as indication of population to be fed with imported grain during future operations in other areas. Although efforts are being made to obtain more accurate ration card figures Provincial Supply officers of ACC are not yet in- a position to give revised figures.

b). The Group believes that this situation results in larger demands for imported food supplies than are actually needed. Reductions in total requirements of the Italian area after 1 August 1944 could undoubtedly be effected if proper machinery were instituted for obtaining more accurate estimates of the number of ration cards actually required. 14  ♦ ♦ ♦


[Memo, Combined Sup GI) for Econ Sec, ACC, 28 Apr 44, ASF, ID files, Civ Sup in Italian Theater, app. 8-B]

3. In making specific application of . . . basic directives to agricultural work in Italy, it would appear that the maintenance of wheat production at the highest possible level and an equitable distribution of the amassed product are highly desirable if Allied shipping and supplies are to be conserved. This Theater requested last December that 700,000 tons of wheat and flour, in addition to other foods, be imported into Italy for civilian feeding during the first six months of 1944. It is to be hoped that an effective production and amassment program for the crops in Italy will prevent a recurrence of such enormous requests this coming season, when all of the Allied resources may be taxed to the utmost. Notwithstanding long-term considerations in respect to Italian agriculture, it is far better that Italians produce wheat, even at a temporary economic loss, than for Allied lives and ships to be lost in importing it as was the case this season. Wheat is not a new crop being foisted upon Italy, and considerations which have to do with soil exploitation should be submerged during the war emergency, as has been done in the Allied countries that supply the wheat imported into Italy. The debatable issue of what is best for Italian


agriculture from a long-time policy viewpoint is not a strong factor under present war circumstances of necessarily having to limit all shipments of civilian supplies to the minimum. A prime objective of military government work in agriculture is to see to it that this saving of shipping is accomplished. ♦ ♦ ♦


[Memo, Enforcement of Grain Collection in Sicily, issued by Hq ACC, 6 Jul 44, to All Concerned, ACC files, 10000/105/663]

1. The terms of the decree ordering the collection of grain is to be enforced in Sicily with the greatest vigour. We must expect opposition and obstruction from the people and drastic measures will be necessary.

2. The following action by the Italian Government, ACC and other authorities is recommended:

A. By the Italian Government

(i) A firm statement should be made by the Prime Minister over the air and in the Press, to be repeated at frequent intervals, making it clear:

(a) that the price of L. 10000 per quintal will not be increased by war bonus or any other means;
(b) that the collection of grain will be enforced by every means at the disposal of the Government and that heavy penalties will be imposed on offenders;
(c) that it is the duty of all Sicilians to make themselves self-supporting as an Island by bringing in the grain for proper distribution.

(ii) This statement to be followed by continuous propaganda and to be backed up by personal tours of the Island by the Minister of Agriculture and if possible the Prime Minister himself (not by Under Secretaries), directed towards the collection of grain and not towards political purposes. The High Commissioner and Signor Orlando should carry out similar tours.

(iii) Direction to be given to the High Commissioner and the Italian tribunals that penalties against the decree must be increased to the maximum and offenders brought immediately to trial.

(iv) Instructions to be issued by the Ministers of Interior and Agriculture to Prefects and Agriculture Inspectors insisting on drastic action being taken and a Special Order of the Day to be issued to the Carabinieri concerning their responsibilities in helping to collect the grain and to arrest speculators.

(v) Arrangements to be made (with MMIA [Military Mission to Italian Army]) to place the maximum number of Armed Forces (including Carabinieri) at the disposal of the High Commissioner to enforce the decree.

(vi) The acceleration of the promulgation of the road haulage decree which enforces the formation of the Provincial Consorzi to utilise private trucks on call at fixed tariffs. ♦ ♦ ♦

B. By the Vatican

The intervention with special directions to Cardinal [Luigi] Lavitrano for a special drive through the Churches.

C. By A.C.C. Headquarters

(i) The appointment of Colonel A. E. Young, Assistant Director of Public Safety Subcommission, as officer in charge of enforcement of grain collection under the authority of Regional Commissioner, Region I.

(ii) Arrange for the employment in Sicily of 7,000 parole POW about to be made returnable to the Italian Army or for the dispatch of two battalions from elsewhere.

(iii) Arrange for the immediate dispatch of inner tubes for motor tyres for requisitioned cars.

(iv) Consultation with the Ministry of Justice for the rapid trial of offenders against the decree.

(v) Immediate consultation with PWB and PRO [Public Relations Officer] with the object of getting out forceful propaganda appealing to the emotions of the people and dispatching suitable officers for this purpose. ♦ ♦ ♦


[Memo, Gen Alexander, GOC, AAI, for AFHQ, 21 Jul 44, ACC files, 10000/596/427]

5. The essence of the criticisms levelled in the report against the working of the Local Resources Board is that, instead of confining itself to allocating among the Armed Forces that amount of local resources which has been found by the Allied Control Commission to be surplus to minimum civil requirements, the Board has arrogated to itself the function of determining also the civil requirement. To some extent there is ground for this criticism. In the first place I do feel that the


influence of the Allied Control Commission on the Local Resources Board and its Committees has not received due weight. .. .

8. To correct the alleged shortcomings of the Local Resources Board, the report proposes the creation of an "Allied Economic Council." .. . The task of this Council would be to assess minimum civil requirements. The Local Resources Board would remain in being and be responsible for allocating the surplus after the civil requirement has been determined....

10. The Local Resources Board is an established organization. It unquestionably gives satisfaction to the fighting Services. Its procedure is understood. I think that it would be a great pity to weaken it by the establishment of a second and overriding body. 15 ♦ ♦ ♦


[Min of Remarks of Col A. N. Hancock, Deputy Rgnl Cmsr, Sicily Rgn, at Conf of Rgnl Cmsrs, 22 Aug 44, ACC files, 10000/101/443]

2. Sicily has one major problem at present-the collection of its own grain harvest. One of the two recognized deficiency provinces has collected 60% of its quota. Palermo has collected less than 6%. In spite of vigorous action of prefects, ACC officers, etc., satisfactory results are not yet being obtained. The new High Commissioner, [Salvatore] Aldisio, did not think it possible to collect more than two thirds of the quota. He believes there is organized resistance in some provinces and that a social security problem is looming ahead. In practice the policy of laying down quotas is not working out. 16 ♦ ♦ ♦


[Memo, Brig M. Carr, Rgnl Cmsr, Sicily Rgn, for Hq, ACC, 28 Sep 44, ACC files, 10000/105/663]

10. . . . The High Commissioner is, I feel, untiring in his efforts to achieve a successful amassing, but he cannot obtain co-operation and is severely handicapped by lack of drive and a spirit of laissez-faire (coupled with the normal official working hours) from all subordinate offices, and passive resistance on the part of the farmers, including the big landowners....

11. Presumably, it might become necessary in the not too distant future, in view of the grave bread problem with which the Island may be faced, to take some stern and comprehensive measures, such as the requisitioning of all grain on the Island and of all mills. Such measures could only be taken if backed by sufficient force.



[Ltr, Southard, 22 Sep 43]

♦ ♦ ♦ Import basic commodities such as wheat and sugar for resale.

It is recognized that this action gives rise to serious policy problems. 17 But there are two reasons why it would be helpful. One, as everyone knows, is that it will weaken the speculative forces now maintaining the black market. The second is that it will give farmers a greater incentive to sell their crops if they can buy some coveted article such as sugar with the money they obtain. In many countries under similar circumstances it has been the common experience the farmers prefer to hold commodities instead of money. ♦ ♦ ♦


[Clabaugh, Chief, Econ Sec, CAD, Rpt for Dir, CAD, 28 Feb 44, CAD files, 319.1 Foreign (3-28-43) (1), sec. I ]

5. p. . . . The Sicilian and Italian experience indicates the importance of importing limited amounts of agricultural and industrial supplies. Even where apparently not justified by military consideration, such a program would in fact aid the military effort by increasing the local production and thus saving shipping. This of course should be the test. But other benefits include a reduction in unemployment and the relief burden and an improvement in internal security. ♦ ♦ ♦


[Combined Sup Gp, Report for CCAC/S, May 44, ASF, ID files, Civ Sup in Italian Theater, Mar-May 44]

II. 1. Amassment

(a) Conditions in Italy require rigorous amassment of essential food crops to provide for equitable distribution of domestic products at reasonable prices. Successful amassment will be dependent upon (1) establishing and enforcing an equitable system of prices and rationing for products to be amassed and also for essential items used in production and in living, and (2) establishment of an effective amassment organization.
(b) For the immediate future, amassment should cover wheat and barley, pulse, and olive oil.

3. Fertilizers.-Phosphates and nitrogenous fertilizers must be made available if Italian food production is to be maintained at desired levels.

(a) Nitrogenous fertilizers cannot be produced domestically in adequate quantities in time for the 1944-45 crop season, and Allied imports of minimum needs will be required.
(b) The domestic capacity for the production of superphosphates should be utilized by arranging for the importation of rock phosphates and of materials needed for practicable emergency rehabilitation. ♦ ♦ ♦


[Digest of Memo of 5 May 44, Dir, Agriculture Subcom, ACC to Rgnl Cmsrs for Agriculture and Other Officers, in the Brochure, Reactivation of Italian Agriculture, Rome, Jul 44, p. I, ACC files 10000/109/825]

2. a. Basic economic policy of Allies is to revive economic life and stimulate production in order to reduce to a minimum the needs of Italy from the Allies and to develop Italy as a source of supply for further operations. ♦ ♦ ♦

d. The over-all criterion of essentiality in emergency rehabilitation is that of saving shipping space and conserving essential Allied Supplies. If the import of a few tons of parts for drainage or irrigation machinery would result in the production of large quantities of essential foods that would otherwise have to be imported during 19:75 there is reason for a specific request accompanied by a well-considered statement of justification. ♦ ♦ ♦


[Allied Anti-Inflation Comm. (Italy), Rpt, 19 Jun 14, 18 pp. 20-22]

The Economic Section of the Commission recognizes, and the Committee concurs, that in order to provide a minimum of essential consumers goods as an inducement to farmers to bring their crops within governmental control and to provide a minimum subsistence for all persons in the liberated portions of Italy, there must be a marked increase in the supply of consumers goods. It is also recognized that shortage in tonnage and a short position in consumers goods industries in the United States and the United Kingdom militates against any considerable increase in imports to Italy of civilian supplies. It is therefore the objective of the Allied Control Commission and of the Italian Government insofar as possible to


bring about the increase in the supply of consumers goods through domestic production and manufacture. In this way, it is hoped to obtain a maximum increase in civilian supplies with a minimum import of consumers goods and those raw materials, equipment and transport which would make possible local production and distribution of consumers goods in quantities considered essential. ♦ ♦ ♦

Requisitions for imports of clothing, footwear, and materials for their manufacture and repair were forwarded by the Allied Control Commission to Allied Force Headquarters on 10 March 1944.♦ ♦ ♦

 The Committee wish to emphasize the extreme importance of meeting these requisitions immediately as an aid to combatting inflation. ♦ ♦ ♦


[Paraphrase of Msg, Gen Wilson to CCS, 8 Jun 44, ABC files, 430, sec. 1 (CCS-602)]

. I am authorizing a temporary increase in the bread ration now officially in force in southern Italy to 300 grams effective i July. This is an increase of 40 grams over the previously authorized target figure of 260 grams, but only 200 grams have been possible from the recent supplies under our control. It is not intended by this measure to increase the total bread consumption, and I am reserving the right again to reduce the bread ration if the supply situation after the harvest has been collected should make this necessary. ♦ ♦ ♦

The chief purpose of the proposed increase is to prevent the failure of the program of amassing; that is, the collecting of grain in warehouses controlled by the government. The proposed increase at this time would have a very great psychological effect, and my expert advisers believe that it might make all the difference between achieving a goal of 43% collection and failing to collect more than 20 to 25%.♦ ♦ ♦

I have been influenced, in addition to reasons set forth above, by views expressed in your TAM 162 [see Section 4] emphasizing importance of pursuing stronger measures against black market and arresting inflation in Italy. It has been reported by the Anti-Inflation Committee recently appointed by the Chief Commissioner, in which representatives of British and American Treasuries are included, that prevention of further rise in wages is the keystone of antiinflation policy. Wage earners are now obliged to pay black market prices to supplement ration of 200 grams. It will be impossible, if this continues, to resist general demands for wage increases which if granted would intensify greatly inflationary situation. It is urged by the Committee that black market in food and other necessities be broken by control of supplies at source and by enforcement of strict rationing at controlled prices. If there is no increase of the bread ration and vicious system of allowing supplementary ration to be acquired in black market continues, we incur not only the grave risk of breakdown of amassing program but every prospect of inflation getting out of control and threatening seriously maintenance in liberated territory of economic and social stability.


[Paraphrase of Msg, CCS to Gen , 26 Jun 44, ABC files, 430, sec. I (CCS-602/1) ]

♦ ♦ ♦ Note is taken . . . that an increase of the official bread ration in Italy has been authorized and announced by you. It has been shown by careful study here that maintenance of the new ration scale would probably result in wheat import requirements greater than shipping and supplies which are available in the light of the needs of other European areas. Moreover, the hope had been entertained that an effective amassment of the harvest in Italy would bring about wheat-import requirements substantially less on a per capita basis than those of the past season....

It is necessary, in the light of the above, now to advise you that you will have to meet entirely from the Italian crop any additional consumption in which the increased ration scale results. 19


[Ltr, Gen Wilson to CCS, 24 Sep 44, MTO, HS files]

♦ ♦ ♦ It is apparent that the purpose for which the temporary increase was granted has been, in large measure, achieved. The amassment is, on the whole, proceeding successfully, particularly in the areas where the larger ration has been actually distributed. While it is impossible to measure the effects of this factor with accuracy, I believe that there has been collected


substantially more of the current harvest than would have been the case had the lower ration remained in effect. Moreover, the anti-inflationary effect of the increase has been definitely felt. In Naples the black market dropped rapidly upon increase of the ration, and the cost of living has since resisted upward pressure, due largely to the availability of a subsistance ration without recourse to illegal channels. Accordingly, I am satisfied that the action which I felt compelled to take in June has proved well advised. ♦ ♦ ♦


[Memo, CCAC Sup SubComm., 27 Oct 44 (CCAC 115/1), ABC files, 430 (26 Nov 43), sec. 2]

4. In LAC 541 dated 16 July 1944 . . . AFHQ advised that the clothing program could not be justified on the basis of military necessity but that provision would:

a. Provide minimum essential needs for persons in liberated areas.
b. Induce families to bring their crop within governmental control.
c. Assist price control and fiscal measures by soaking up excess purchasing power. ♦ ♦ ♦

9. In NAF 778 dated 13 September 1944 (C.C.A.C. 138) it is implied by AFHQ that the Theater cannot certify a program of clothing for Southern Italy to be required within the limitations of existing policy governing civilian supply during the military period.

10. In view of the foregoing, it is apparent that SACMED is unable to certify the clothing program as required to discharge the military responsibility for civilian supply within existing policy governing such responsibility. In the absence of such certification under existing policy governing military responsibility for civilian supply, the Sub-committee is not justified in authorizing for procurement the program requested by SACMED. The program set forth in LAC Air gram 32 should be referred to the Combined Liberated Areas Committee for appropriate action.20



[Memo, 17 Feb 44, MGS, AFHQ, to Industry and Commerce Subcom, ACC, repeated to Anti-Inflation SubComm., 25 May 44, ACC files, 10000/154/977]

♦ ♦ ♦ No industrial rehabilitation will be undertaken in liberated Italy which is not
A) Absolutely essential to military needs whilst the war is going on, and
B) Essential to the minimum civilian needs of individual territories.


[Grady, Deputy Vice President, Econ Sec, ACC, Report, 20 December 1943 to 4 March 1944, to Department of State, 28 Mar 44 [hereinafter cited as Grady, Rpt to Dept of State, 28 Mar 44], P. 13, CAD files, 334, ACC (3-28-44), Bulky Pkg]

Efforts to stimulate industrial output have .. . been greatly impeded by several factors, including the general shortage and destruction of facilities and supplies, and the priority requirements of the military operational authorities. A further limitation has resulted from delays in obtaining imports of essential supplies. Such items as a few hundred tons of caustic soda for the soap industry, or of carbide for miner's lamps in the sulphur industry, and of explosives for coal mining, amount to little in the aggregate as compared with the amount of local production for local use or for export, which they make possible. Serious delay in the resumption of such local production occurs when the arrival of these essential items is delayed for months while the necessary requisitions are assembled and revised to meet the precise formal requirements of the military supply system, and are forwarded through the various headquarters -in the chain of authority until they finally reach the agencies in Washington which will finally consider and decide upon them, before they can be finally procured and shipped.


[Grady, Rpt to Dept of State, 28 Mar 44, pp. 10-11]

C. Restoration of Transportation Facilities is perhaps the most essential factor in the resuscitation of Italian economic activity. In all three


phases-rail, road, and water, transportation facilities are far below the minimum necessary to enable full use to be made of Italian manpower and to reduce dependence on outside supplies. Dilapidation and destruction of existing facilities, coupled with the heavy pressure of military demand for operational purposes, make it difficult to procure transportation for even the most essential civilian needs, and have compelled the application of strict control, particularly in the case of the railways.

(1) Railway transport is under the control of the Director General of the Military Railways, responsible to the Commander in Chief. Operation is partly by military crews, partly by civilian railway men. After immediate operational requirements are met, secondary military and essential civilian requirements are dealt with on the basis of bids from the regions, filtered through the Transportation Committee to the Movements and Transportation Organization of A.F.H.Q....

The serious need for repair of rail and equipment will become intensified as additional territory is liberated, in view of the very effective procedures of destruction being employed by the German forces. In view of the overall shortage of transportation equipment required for the Allied war effort, it seems unlikely that any substantial rehabilitation of Italian railways will be accomplished for an extended period.

(2) Road transport is likewise in a very attenuated condition (aside from military movement) because of the shortage and breakdown of vehicles. Local road transport seems to rely largely on the two-wheeled native horse- or donkey drawn wagons. As an emergency measure connected particularly with the distribution of the emergency food imports, some one thousand trucks are in process of being turned over by the military authorities for essential civilian transport, two hundred to be operated by the military authorities with Italian drivers and the balance to be operated, under A.C.C. supervision, by private Italian transport companies. . . .

Thus with road transport as with rail transport, although some diversion of facilities from military work has been arranged to meet the very minimum of essential, civil requirements, any thoroughgoing rehabilitation of internal transportation facilities, essential as it is to the improvement of local economic activity, must wait until primary military necessity has been satisfied. ♦ ♦ ♦

(3) . . . On the one hand there is a general deficiency of vessels of the coaster type, and on the other hand such schooners as have escaped destruction are either requisitioned for military purposes . . . or are in concealment or engaged in uncontrolled "black market" activities.


[Rpt, Allied Anti-Inflation Comm. (Italy), 19 Jun 44, ACC files, 10000/136/429]

1. Some degree of inflation is common to all countries at war, arising from an increase in purchasing power without a corresponding increase in goods to be bought. This characteristic rise in prices can only be kept in check by steps designed to prevent excess purchasing power being spent e.g., taxation, public loans, pegging of wages, control of prices, rationing, allocation of resources, etc.

2. In the liberated portion of Italy few of the conditions necessary for holding inflation in check could be expected to operate. The previous system of taxation and war controls was identified with Fascism and in any event was administered from Rome. The collapse of Fascism and the separation of liberated Italy from the Capital paralyzed many branches of the Government. In the circumstances, it is reassuring that the situation is not worse. Inflationary tendencies are dangerous, but are not yet out of hand....

4. Three main forces are responsible for this rapid rise of prices in Italy.

a. The first of these forces is the very high level of Allied military and Italian Government expenditure, financed principally by the exceedingly inflationary methods of overdrafts on the Central Bank (in the case of the Government) and disbursement of military lire (in the case of the Allied expenditures). Some progress is being made in increasing tax revenues, but the Government deficit is now running at about 3 billion lire per month.♦ ♦ ♦
b. The second factor tending toward inflation in Italy is the extreme shortage of practically all goods. This shortage, together with the rapid increase in purchasing power mentioned in (a), has been responsible for the growth of a black market of dangerously large proportions.
c. The third influence in the inflationary situation is public distrust of the currency. This factor probably has not so far reached dangerous proportions. People are still willing to deposit


money in the banks and are still buying postal bonds in moderately large volume. But "regular" dollars and sterling sell at fluctuating premia in the black market, a situation which is evidence of an incipient distrust of the lire which may readily assume importance should the public lose hope of effective stabilization.

5. The inflationary pressures are being held in check with the greatest difficulty. The primary control is the pegging of wages, which in turn depends on the purchasing power of current wages, in terms of a minimum subsistence ration. The keystone of this structure is cheap bread and the success of bread rationing at a low, subsidized price derives from getting control of the grain harvest and reducing the temptation to sell in the black market. An important factor is the willingness of the farmers and the public generally to hold cash and bank deposits and to save money rather than spend it. As was indicated in the preceding paragraph, a most dangerous situation would arise if people became unwilling to hold money and rush to buy goods at any price, as happened in Germany in the early twenties and as is now happening in Greece. ♦ ♦ ♦


[Ltr, Stimson to Hull, 5 Jun 44, CAD files, 014, Italy (1-25-43), sec. 7]

It has been the understanding of the War Department that plans for the participation, if any, of the United States in European economic reconstruction would be formulated and announced by the Department of State to be carried out by appropriate civilian agencies after the military period. Under these instructions and concepts, our military civil affairs agencies have confined themselves to the relatively restricted field of relief and rehabilitation and, in the absence of any definition of national policy of economic reconstruction, have obviously been unable to point their activities toward any such program.

It has occurred to me that it would be helpful if the Department of State would advise the War Department of whatever long-range plans it may have formulated for United States participation in European economic reconstruction so that arrangements can he made for the coordination of the limited activities under Army jurisdiction with any larger program which may be contemplated.
The area of immediate concern is, of course, Italy.


[Ltr, Hull to Stimson, 8 Jul 44, CAD files, 014, Italy (5-25-43), sec. 7]

Questions of policy pertaining to rehabilitation and reconstruction which were the subject of inquiry in your letter of 5 June 1944 have been under consideration in the Department for many months. It has been recognized that the responsibility of the Army would be a limited one and confined largely to rehabilitation of those industries and public works which will be necessary for the further prosecution of the war or which will result in production of supplies which otherwise would have to be imported and which perhaps would prevent suffering and unrest among the civilian population. Perhaps some further work of rehabilitation, again in very limited amount, will be carried forward by the United Nations Relief and Rehabilitation Administration. It is expected that at the next council meeting there will be discussed the question of its activities in ex-enemy areas. In any event, much more will need to be done by other civil affairs agencies in order to restore the productive capacity of the liberated areas.

The Department, together with other agencies of this Government, has been actively engaged in planning for rehabilitation and reconstruction. A memorandum prepared in the Department on reconstruction financing and related problems has been approved by the President and steps are now being taken toward the implementation of the recommendations which were made. The policy as outlined is that this Government will engage in a properly considered program of foreign investment to aid in the financing of reconstruction in war-torn areas, including facilitating the export of capital goods for such purposes. ♦ ♦ ♦


[Paraphrase of Msg, Alexander Kirk, U.S. Political Adviser, to State Dept, 17 Aug 44, CAD files, 400.38 (2-2043), sec. 9]

To improve conditions in liberated Italy we must have the transportation facilities to get a more just distribution of supplies . . . and better production from the view of industrial establishment available, most of these having been seized by the military. So-called military considerations should not be translated as solely consideration of the military. . . . We are talking about only relieving conditions by better distribution and use of what is here and have no reference to wiping out the black market or eventual rehabilitation which only foreign imports can bring about.


[Econ Sec, ACC, Rpt, Hq ACC for Sep 44, [hereafter cited as Econ Sec, ACC, Rpt, 1 Sep 44], ACC tiles, 10000/154/328, 1 Sep 44, p. iii]

4. The paramount priority of the military over the civilian economy and the lack of effective power of pressure on the civilian side have depressed the civilian economy not only where there has been a clear-cut choice between military and civilian needs, but also in many cases where a slight military inconvenience would have meant a large civilian gain. A good example of the former is the case of phosphate rock. After months of hard work in preparing the fertilizer industry to resume production, phosphate rock was not shipped from North Africa for treatment in Italy. Example of the latter is the case of a rope factory (Corderia Napoletana) which was completely ready for production but which was used instead as a QM storehouse, while other buildings were available as storehouses. The lack of power of ACC to effect changes in cases of the latter type is well illustrated by the fact that the Army Air Forces successfully took over a Rome hotel which had been previously allocated for ACC headquarters officers' billets. ♦ ♦ ♦


[Memo, Brig. Gen. William O'Dwyer, Vice President, Econ Sec, ACC, for Actg Chief Cmsr, ACC, 22 Aug 44, ACC files, 10000/136/117]

2. Italy does have an extensive social insurance system including provision for sickness, invalidity, marriage, maternity, old-age, death and tuberculosis insurance, unemployment insurance, and relief, and workmen's compensation. The benefits paid under the system are, however, completely inadequate. The basic benefit for unemployment insurance, for example, varies from 2.5 to 7 lire daily for manual workers, and from 4 to 12 lire daily for non-manual workers.

5. With reference to paragraph 3(a) of my letter of 16 Aug. 44, it is my thought that, in view of the woeful inadequacy of the benefits under the present system of social insurance, the Government should prepare a program of relief which would provide adequate food, clothing and housing to every person in need. ♦ ♦ ♦


[Draft of Reply Made to O'Dwyer Orally by Capt Stone, Act,- Chief Cmsr, ACC, 6 Sep 44, ACC files, 10000/136/117]

2. a. In your letter of 16 August 1944 you pointed out (and I agree that your statements are sound) that persons in the lower income brackets are unable to sustain themselves because of the inadequate supplies of food, that the available housing is inadequate and that the stock of clothing will he inadequate to meet the rigours of Winter. It does not appear to me that any reasonable amount of tampering with the present schedule of relief payments can relieve these inadequacies. I should think that it was elemental that an increase in monetary payments with no increase in the quantity of food, housing and clothing available will simply increase prices without in any way ameliorating the condition of recipients of relief. ♦ ♦ ♦


[Ltr, Hilldring to Col Spofford, ACofS, G-5, AFHQ, 29 Jun 44, CAD flies, 380, Reconstuction (4-30-44)]

♦ ♦ ♦ We have been concerned around here, both the British and the Americans, for some time about the inability or the indisposition of ACC and AMG, particularly ACC, to undertake in a serious, forthright, and effective manner, the institution of a systematic rehabilitation program in Italy.

We have no fault to find particularly with the relief side of the program. . . . What we refer to are those measures and the importation of those means which will reduce the importation of food, drugs, coal, clothing, etc.

I have talked to ... dozens of ... people who have come out of the North African Theater in the last few months, and they all tell me the same story. They say that we in Washington and the British in London and you in Algiers have a complete comprehension of the necessity for a program of systematic rehabilitation, but that the idea either is not understood or is not accepted in ACC. Our authority to carry through our relief obligations in the next year in Europe is in jeopardy at the moment because of the disinclination or the inability of ACC, . . . to get into the business of making Italy self sustaining, and to get into this business with vigor and efficacy. .. .


[Ltr, Col Spofford, ACofS, G-5, AFHQ, to Hilldring, 7 Sop 44, CAD files, 380, Reconstruction (4-30-44)]

... While I understand your position, and appreciate well the serious nature of the problem, my investigations and talks at ACC have convinced me that the record is not as bad as you have been led to believe.


... I propose in this letter to try to give you the picture as I see it, and to indicate some of the ideas and plans that are being developed for the future.


a. Scope of the Task. It is important that the task of rehabilitation in Italy be viewed in proper perspective. This task is not a small one or one that can be accomplished in a short time. It is necessary to live in Italy to appreciate the extent to which the country's power to produce has been destroyed, its economy disorganized and its people demoralized. Over 40 million people have been supported in the relatively small area of Italy in the past by means of a highly intensive system of production that required many years and large amounts of capital to build. To rebuild it after this war, many years and large amounts of capital will again be required. This is the task of a generation and not in our life-time will it be completed. A few Allied officers, working in the most difficult conditions, over the course of a few months or a year can only scratch the surface of the problem.

b. Degree of Destruction. The extent of the destruction suffered by Italian industry cannot be over-estimated. The destruction by Allied bombing was considerable, but it is the demolitions of the retreating Germans that have been most effective because of the thorough and scientific manner in which they have been carried out. . . . With its power to produce extensively destroyed, it will be difficult for Italy to meet its minimum needs at home and buy the foods and other goods it must obtain from abroad. .. .

c. The Scarcity of Transport. Some of the difficulties that have affected the problem of rehabilitation may also be mentioned. Chief among these has been the scarcity of transport. The armies, as a general practice, pressed into service practically all of the country's automotive transport, and carried it forward with them as they advanced; the railroads have been almost wholly destroyed and to the extent that they have been put back into operation by the Army they haul for the most part military supplies; few coastal vessels can operate because of restrictions on the use of ports and the shortage of fuel. As a result it has generally been with the utmost difficulty that parts could be moved to a factory to repair it, or that raw materials could be gotten to it or the finished product gotten away. .. .

d. Taking of Supplies by the Armies. The difficult logistical problems involved in the operation through Italy have forced the armies to resort to a maximum of local exploitation. Supplies of every description have been requisitioned by the military to fill the needs of the moment. Faced with immediate requirements, the armies could not plan the most economic use of such supplies, and little consideration could be given to the difficulties created by the seizure of stocks which had been gathered for civil purposes. The same logistical considerations which prompted such seizure by the Armies apply with even greater force to the program of replacement of these civil supplies....

e. Taking of Productive Facilities by the Armies. Perhaps more serious in its effect on Italian industry, has been the requisitioning of plants and warehouses and the taking of machinery by the armies. Such large industrial buildings as are found relatively intact are useful as billets, bakeries, etc. and as warehouses for military stores. Where plants have been used for these purposes, delicate equipment has almost inevitably been damaged by the troops occupying the premises. Machinery and electrical gear required by one or the other of the services have been removed. Military expediency does not permit of consideration of the long-term benefits of selective requisitioning, and thus industrial plants are frequently immobilized by the removal of a few vital machines for army uses. Losses of this kind, difficult to replace promptly even in normal times, are for the most part irreplaceable under existing conditions. These are problems in which, by reason of the necessary priority granted to tactical troops, the ACC up to the present has had little power to interfere, but which have obviously retarded its efforts toward essential rehabilitation. ♦ ♦ ♦


a. . . . A large part of the time up to the present has been consumed, necessarily, in studying different industries, Visiting various factories, and preparing programs of rehabilitation. In all, more than a thousand different plants have been surveyed by the Industry Subcommission and reports have been submitted covering several hundred. To the first of August approximately 1,342,000 tons of shipping had been saved by products which have been obtained for use by the Allies in Italy. While a substantial part of this total has been procured by the services themselves, a not inconsiderable share results from the work of the ACC.

III. g. . . . The need for a comprehensive directive on rehabilitation is being felt increasingly at both AFHQ and the ACC. Such a directive should state in clear terms what Allied policy on Italian economic rehabilitation is, for as you will


appreciate, it is difficult for us and the ACC to carry out to the satisfaction of Washington and London a policy which has never to our knowledge been clearly expressed. A comprehensive directive would deal inter alia with the following points: how many and what industries should be rehabilitated; to what points should rehabilitation of these industries be carried; what is the terms of the program we are expected to develop; what are its objectives; is Italy to be made self sustaining (to use the words of your letter), or are the more liberal economic principles identified with our recent State Department policy to be followed; by what standards can we measure our success or failure in rehabilitating individual industries and the Italian economy as a whole? We would be glad to co-operate with you in the preparation of such a directive. ♦ ♦ ♦


[Paraphrase of Msg, Gen Wilson to CCS, 15 Sep 44, ACC files, 10000/136/256]

1. As the operational stage in large parts of occupied territory is ended, and as battle line in Italy moves north, I believe it necessary that there be a re-examination of problems of civilian supply and economic rehabilitation. In the forward areas purely military "actors continue to be predominant, but problems connected with civil administration, especially of an economic nature, raise general problems on which I require guidance in my position as President of the Allied Control Commission. ♦ ♦ ♦

3. The limited directives which have prevailed appear no longer to be adequate in the light of the altered operational conditions. The Armistice agreement which governs the Allied Control Commission's operations includes no commitment to the people of Italy as to any measure of economic aid. But, presumably because of the known humanitarian policies of the two governments, there has arisen the expectation if not the assumption among Italians that there would be forthcoming an additional measure of relief and assistance. In both countries public utterances have tended to encourage this view. Furthermore, if at this stage the two Governments continue to consider only what is essential to the interests of the war effort, they may lose the opportunity of ensuring the creation of a reasonably prosperous and contented postwar Italy, which is one of their long-term interests. Despite this fact the criterion of military necessity governs and is being strictly adhered to in the provision of supply. . . . An example which is not of much importance in itself but which indicates the kind of question now arising-in answer to a requisition of paper necessary for proper keeping of the records of Italian taxes, it is asked (CAL 566) if the paper is essential to the control and management of the civil population.

4. For the above reasons I ask that the directives which determine the furnishing of civilian supply and economic rehabilitation [Chapter V] be reconsidered, and that, if it is the policy of the governments to assist Italy beyond the degree required by strict military necessity of the Allied troops, there be a revision of the standards applicable to that assistance. I request especially that I be informed:

(a) to what degree, if any, it is desired that there be carried out industrial rehabilitation in Italy and what industries should be given priority if any rehabilitation is desired.
(b) to what degree, if any, I may take inflationary factors into account, and to what extent I am responsible for measures to counter the tendencies toward inflation.
(c) within the limits of available shipping, to what degree, if any, should experts be stimulated and machinery to handle export trade be created. ♦ ♦ ♦


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