Stabilization Policies
Post-war Europe

Both Italy and France experienced persistent, rapid and disruptive inflation after World War II, but both stabilized their economies within four years. None of the traditional explanations of these stabilizations can account for the difference in their timing. Some have attributed the Italian stabilization to restrictions on banks' reserve requirements, which in fact failed to reduce the growth of the Italian money supply, while similar provisions in France had no effect on inflation. Others maintain that the exclusion of the Communists from the Italian government in 1947 reversed inflationary expectations; but they were simultaneously excluded from the government in France, where inflation continued for another 18 months. Finally, the announcement of the Marshall Plan promised aid to France and Italy simultaneously, but it had no noticeable impact on French inflation for 18 months.
In Discussion Paper No. 594, Research Fellows Alessandra Casella and Barry Eichengreen argue instead that these economies' post-war inflations reflected distributional conflict. After the war the notional demands of government, households and firms exceeded national income. Inflation, fuelled by credit, reconciled these incompatible claims. Each interest group was initially uncertain about the impatience of the others and delayed offering concessions, so inflation persisted. Eventually, the least patient groups offered sufficient concessions to bring inflation to a halt. Casella and Eichengreen argue that the Marshall Plan was therefore a major factor in both stabilizations and that differences in political make-up and national investment strategies account for their different timing. The Marshall Plan increased the size of the pie to be shared, thereby reducing the benefits of delay relative to its costs and making early stabilization more likely.
In Italy, the stabilization followed almost immediately, but in France the distributional conflict remained unresolved for longer. Casella and Eichengreen suggest three possible explanations. First, politics may have been more polarized in France, with a larger penalty for the group offering concessions. Second, the Left was stronger in France and fought for longer. Third, the commitment of all social groups to the French government's programme of public investment meant that any reductions in excess demand had to come from immediate consumption; since the sacrifices required to halt inflation were larger than in Italy, each distributional interest had a greater incentive to hold out, and stabilization took longer to complete.

Halting Inflation in Italy and France After World War II
Alessandra Casella and Barry Eichengreen

Discussion Paper No. 594, November 1991 (IM)