Luigi Einaudi and the Lessons from the First World War: Inflation and War Taxation as the Enemies of a Liberal Society

In the early 1920s Luigi Einaudi analysed and discussed the impact of war finance on the Italian liberal regime. The First World War represented a major test for the liberal approach in economics as it entailed planning and coordination efforts, but also a dramatic surge in public spending, inflation and public debts. After the war, Einaudi focused on wages and war finance as major causes of high inflation and associated income redistribution that, in the end, affected the whole of the liberal regime in Italy. The collapse of the liberal regime and the ascent of fascism proved such traumatic events that Einaudi, as an economist, embarked on a long journey of gradual revision of his thought. Eventually, Einaudi evaluated the economic and financial conduct of the war critically by highlighting its limits and flaws, the redistributive effects of high inflation, especially during the difficult post-war transition when Italy was severely hit by social and political unrest. The war and its consequences constituted a unique laboratory and, since 1945, Einaudi had the chance to test his own analysis when, as governor of the Bank of Italy, he successfully steered the country towards monetary stabilisation, recovery and, ultimately, economic growth.