Mises Daily Articles
Pre-Fascist Italy: Tax and Borrow and Spend
We are now able to see that this Italian society had set in motion certain streams of thought. We will see still others come into being. First we see the conviction of the people that there were economic and social problems affecting them that ought to be solved, that foremost among these problems were those of poverty and of crises, and that they were determined that the government do something about these problems. So deeply rooted were these convictions that no man could arrive in power who did not adopt them as part of his polity.
This situation became itself the parent of another settled conviction that began as a little trickle and finally cut its way deep into the terrain of Italian public thought. It began to flow as a full current in the regime of Agostino Depretis, who rose to power as premier in 1876.
From the beginning of united Italy the country had been ruled by the Right, some of them able statesmen and patriots inspired by the principles of liberation and unity. They were under the dominion of political rather than economic ideas. Meantime taxes rose, centralization became a specter to the liberals, and the demand for private security through social-welfare measures and public security through preparedness was ignored. The nation's prestige abroad was said to be deteriorating. The end of this was a political uprising against the cautious regime. And on the crest of this uprising Depretis rode into power. He was a journalist-politician who had allied himself in parliament with the Left. When he came into power it was as the leader of the Left, and as such he ruled as prime minister, save for a brief interlude, for most of the eleven years from 1876 to 1887.
He promised every sort of reform without regard to the contradictions among his promises. He promised to reduce taxation and increase public works. He promised greater social security and greater prosperity. When he came to power, he had no program and no settled notion of how he would redeem these pledges. His party was joined by recruits from every school of political thought. He found at his side the representatives of every kind of discontent and every organ of national salvation. The oppressed tenants along with the overworked and underpaid craftsmen of the towns crowded around him, beside the most reactionary landowners and employers, to demand, as one commentator said, the honoring of the many contradictory promissory notes he had issued on his way to office.
He was supposed to be a man of personal integrity so far as money was concerned. But he proved to be a leader of obvious intellectual dishonesty. He was shallow measured as a statesman, with only the most rudimentary knowledge of the grave problems of economics and social reform. But as a politician he was a craftsman of the first order. He had a cunning knowledge of men. If he understood only superficially the weaknesses and evils of the social system, he knew instinctively the frailties and vices of political leaders. He practiced a policy of pleasing everyone. He entered office with no settled plan of government, depending on day-to-day improvisation to meet the multiplying difficulties.1
A depressing fate has seemed to dog the footsteps of so-called leftist ministries of Italy. Depretis, with fellow liberals in key positions of his cabinet, adopted, when he came to power, the policies of his conservative predecessors and called them his own. He increased indirect taxation, dodged the solution of the problems he had promised to attack by naming commissions. When he entered office the budget was balanced. It remained so until 1884. However, the inevitable depression arrived and Depretis, the promiser of the better life, not knowing what else to do about it, turned to the oldest and most reactionary device — public works financed by government borrowing. He adopted the policy which in our own time has been called "tax and tax, borrow and borrow, spend and spend." The budget was thrown out of balance in 1884 and remained so for 13 years.
The budget had been unbalanced from 1859 to 1876, but Depretis' predecessors had ended that condition. Depretis unbalanced the budget in 1885–86 and now adopted this as a deliberate national policy. Living from hand to mouth to keep himself in power, seeking to placate groups of every sort, Depretis used the public funds freely. Roads, new schools, canals, post offices, public works of every sort were built with public funds obtained by borrowing.
Depretis now discovered he had got hold of a powerful political weapon. Political life in Italy was notably corrupt. Deputies could be bought. But Depretis found that, instead of buying the deputies, he could buy their constituents. Every district wanted some kind of money grants for schools, post offices, roads, farm aid. The premier found that he could buy the favor of the constituency by spending public money in the district. The deputy had to prove to his people that he was sufficiently in the favor of the premier to bring such grants to them. The philanthropic state was now erected in Italy and it was never to be dismantled.
Miss Margot Hentze describes the system thus:
Pressure was brought to bear through the organs of local administration, who were given to understand that "favorable" districts might expect new schools, public works, roads, canals, post and telegraph offices, etc.; while the "unfavorable" might find even their existing institutions suppressed. And the effect of these tactics was great. Many of the most eminent men on the Right lost their seats.2
The Encyclopaedia Britannica, 14th Edition, 1929, title "Italy," thus alludes to this episode:
In their anxiety to remain in office Depretis and the finance minister, Magliani, never hesitated to mortgage the financial future of their country. No concession could be denied to deputies, or groups of deputies, whose support was indispensable to the life of the cabinet, nor, under such conditions, was it possible to place any effective check upon administrative abuses in which politicians or their electors were interested.
The press was subsidized secretly. Journalists were flattered and some of them paid while others obtained handsome berths for their relatives. Indeed it was over a scandal connected with the press that Depretis was forced on one occasion to resign. His supporters were fond of speaking of him as "the incorruptible." He was styled by some of his enemies the "incorruptible corrupter of all." Thus the first liberal government in Italy made to its public life the dubious contribution of control with public funds and the policy of borrowing and spending.
Those who imagine that the device of spending deficit money is an invention of present-day reformers may be interested in the record of Italian deficits:
The result of these spendings and borrowings, of course, was to create a great and ever-growing debt. By June 30, 1914, Italy's national debt was 15,766,000,000 lire — a huge sum in the purchasing power of that day for a country of Italy's size and poverty. The consequence of this was that Italy found herself, as she entered the war, under the necessity of immense war expenditures financed by huge borrowings on top of the already-staggering public debt. The effect of this debt, even before the war, was to impose an exhausting burden of taxation on a people too poor to live in decency. By 1913 the interest on the debt alone made up a fourth of all the public revenues. And by 1914, when people were grumbling about the oppressive cost of the army and the navy, the interest on the debt amounted to almost as much as both these sums.4
The debt and the servicing of it became the most harrying problem of the government. King and Okey said in 1909 that "the country is weighed down by taxation because the state has undertaken burdens beyond its strength," and added that "the financial question is at the bottom of half the difficulty in Italy."5 Certainly it intruded itself upon the discussions of every other question. Once having committed themselves to keeping things afloat by government spending, there was no escape from it. The device having been discovered as a means to power, there were always leaders who were willing to use it. Against them the more prudent and honest statesmen who counseled a sane financial policy were powerless. Good advice was unavailing against grants of money. Italy could never repay the debt. She could never hope to make a substantial reduction of it. And as the deficits mounted, prudent men could see no end ahead save disaster. The interest charge became so intolerable that when Giolitti was able to refund the debt at a lower rate of interest the achievement was hailed as Italy's "financial Risorgimento."
It is interesting to find the late Guglielmo Ferrero sounding a warning against Italy's borrowing-spending policy as far back as 1899. In a little-known volume called Militarism he told how the government had opened new roads, built public works on an elaborate scale, set up banks, organized great public services, spending on all this "fabulous sums" and "contracting heavy debts." These novelties, observed Ferrero, were copied from the French parliament and as a result the Italian parliament "finally grew to resemble the French parliament and became an instrument in the hands of an oligarchy." Then he called attention to the approaching denouement:
When the fountains of government abundance began to dry up, when through lack of funds and the impossibility of negotiating fresh loans the state was forced to check the extension of bureaucracy and to put a stop to public works, then and then only did the Italians realize what it meant to have allowed themselves to be made one of the most heavily taxed nations in the world.
Italy enjoyed a respite for 12 years from deficits after 1898 up to 1910. During that period she had a windfall in the shape of great remittances of cash from her emigrant citizens who had settled in America and who kept a continuous flow of funds back to the old folks at home. That played a very great part in balancing her budget, for there was a steady stream of emigrants leaving Italy — very poor people who contributed very little to the purchasing power of her population and whose departure removed a considerable army annually from among those who stood in need of government assistance, draining away large numbers of the unemployable population. Those who left became, by Italy's standards, heavy earners in the New World and were transformed into contributors to her national income rather than unproductive beneficiaries of it. The balanced budget despite this passed away definitely in 1911, not to return again until a great war and a subsequent revolution had swept from the people of Italy their freedom.6
- 1. Bolton King and Thomas Okey, in their excellent account of the Italy of these years, say of Depretis's government that "nominally it was more liberal than the Right, but it had inherent weaknesses which robbed its liberalism of reality … It drew its strength from the south and the south was the home of all that was unhealthy in political life. Most of its leaders, though patriots in a way, had small scruples as to methods." Italy Today, by King and Okey, Nisbet & Co., London, 1909.
- 2. Pre-Fascist Italy, by Margot Hentze, G. Allen, London, 1939.
- 3. The figures used here are based on the following: Pamphlet issued by Provveditorato Generale Delia Stato, Rome, 1925. Italian Government Finances, by H. C. McLean, for 1923 and 1925. Trade Information Bulletins Nos. 116 and 130, Commerce Reports, U.S. Dept. of Commerce. Italy's International Financial Position, by Constantine McGuire, Macmillan, New York, 1926, p. 63, et seq. Cambridge Modern History, Vol. XII, pp. 232, 233. Fascist Italy, by William Ebenstein, American Book Company, New York, 1939. The Fascist Experiment, by Luigi Villari, London, 1926. Encyclopaedia Britannica, title "Italy," 14th Edition, Vol. 12.
- 4. Italy's International Financial Position, by Constantine McGuire, Macmillan, New York, 1926.
- 5. Italy Today, by King and Okey, Nisbet & Co., London, 1909.
- 6. Dr. Gaetano Salvemini, whose contributions to the examination of the whole fascist experiment in Italy have been so great, makes one statement about the debt which does not correspond with the above account at one point. In a debate with Dr. Roselli, a fascist apologist, before the Foreign Policy Association, he said: "We were able during the fifteen years before the war to balance the budget always with a surplus." Mr. Constantine McGuire gives the following figure as the over-all deficit for the years 1898 to 1914: Revenues, 31,991,000,000 lire; expenditures, 36,804,000,000, a deficit for the sixteen years of 4,813,000,000 lire. The budget was balanced from 1898 to 1910. But this record ended in 1911 and was not resumed for another 15 years. In the 15 years before Italy entered the war the budget was balanced ten times and unbalanced five times.