The Italians had to fight alongside the Allies to liberate the northern part of their own country. By early 1945, the war in Italy was over, Mussolini was dead, and King Victor Emmanuel III began the process of transforming Italy into a free society. Along the way, the monarchy would be turned into a republic in 1946.
The leaders of the new Italy faced a difficult task. How does one lead a nation back to liberty after years of tyranny? It was a complicated process, with many decisions to be made along the way. One principle was clear: the virtuous cycle in which democracy and economic deregulation encourage each other, as historian Piercamillo Falasca writes:
In the very first years after the Second World War, a group of liberal market-oriented economists and politicians attained key positions in government, swept away Fascist legislation, and instituted democratic politics and free-market reforms. A central figure was the anti-Fascist journalist and economist Luigi Einaudi, one of the most prominent Italian classical liberals, who returned to Italy and served after the war as Governor of the Central Bank, then Minister of Finance, and finally President of the Republic; he greatly influenced the economic policies implemented by Prime Minister Alcide De Gasperi (1945-1953) and, after De Gasperi’s death, by his successor Giuseppe Pella, and others.
Italy had suffered in multiple ways: The physical destruction of war, the economic devastation of Fascism’s high tax rates, and the social restrictions imposed by Mussolini’s ideology. The Fascists had driven public expenditures up significantly, to over 30% of GDP.
Fascism’s destructive effects on the Italian economy included wage and price controls as well as the nationalization of various industries.
The postwar task was to somehow rebuild Italian society and the Italian economy, as well as the nation’s physical infrastructure. The economists and government officials of the immediate postwar years were brilliant thinkers, but they remain relatively obscure figures, not often mentioned in history books, as Piercamillo Falasca writes:
Some of those figures may not be well known outside of Italy, but they represented an extraordinary “exception” for European political culture. After twenty years of Mussolini’s Fascist regime and the horrors of war, that group of classical liberals represented the only hope for the nation to emerge from its totalitarian past into democratic capitalist freedom. The context they operated in could hardly be considered an easy one. Italy was a poor country that had been devastated by Fascist collectivism and war; most of the population was both unemployed and uneducated; infrastructure was absent or very poor; a powerful Communist Party threatened to replace Fascist collectivism with Communist collectivism; and state-controlled companies dominated much of the economy.
A “democratic capitalist” approach was the truly free market which would restore a sense of human rights and civil liberties to Italy. This stood in sharp contrast to the ‘crony capitalism’ or ‘state capitalism’ which was the ‘planned economy’ or ‘command economy’ of Mussolini’s Fascism.
The approach known as ‘classical liberalism’ allowed Italy to become a free society, in which political beliefs and opinions of all types could be freely discussed and debated. It is the mechanism of the free market economy which enables a truly democratic society.
