Italy Creates the Industrial Reconstruction Institute Summary

  • Last updated on November 10, 2022

As a response to the banking crisis of the 1930’s, the Italian government created the Industrial Reconstruction Institute, which bought bank-owned shares of stock in failing companies.

Summary of Event

In the 1920’s, Italian banks commonly purchased large blocks of stocks in firms to which they had lent money. By doing so, the banks could have an influence on management operations and, presumably, make sure that their financial interests were being handled responsibly. As a result of the worldwide economic depression of the 1930’s, which was precipitated by the stock market crash of 1929, many Italian businesses became undervalued, and their stock prices plummeted. Three major banks in Italy—Banca Commerciale Italiana, Credito Italiano, and Banco di Roma—faced failure because of their holdings in such businesses. The Instituto per la Rico Struzione Industriale (the Industrial Reconstruction Institute, or IRI) was created as a temporary measure to keep these banks afloat through the purchase of their stock holdings. The IRI thus obtained great potential influence over Italian business. Eventually, the IRI developed into a permanent holding company owned by the state but independent of direct government control. The IRI became a major tool for implementing economic and industrial policy controls in Italy. [kw]Italy Creates the Industrial Reconstruction Institute (Jan. 23, 1933) [kw]Industrial Reconstruction Institute, Italy Creates the (Jan. 23, 1933) Industrial Reconstruction Institute Banking;Industrial Reconstruction Institute Italy;banking crisis [g]Italy;Jan. 23, 1933: Italy Creates the Industrial Reconstruction Institute[08240] [c]Banking and finance;Jan. 23, 1933: Italy Creates the Industrial Reconstruction Institute[08240] [c]Organizations and institutions;Jan. 23, 1933: Italy Creates the Industrial Reconstruction Institute[08240] [c]Government and politics;Jan. 23, 1933: Italy Creates the Industrial Reconstruction Institute[08240] Beneduce, Alberto Menichella, Donato Mussolini, Benito Toeplitz, Giuseppe

Although the Fascist government of Italy (led by dictator Benito Mussolini) supported the use of public funds to subsidize private business, it did not create the concept. Just prior to World War I, in 1914, the Italian government had established an industrial business cooperative to provide funds for the production of war materials. In 1921, this cooperative was permitted to use Italian treasury funds to rescue two important businesses that had joint operations. These firms were the giant industrial company Ansaldo and the Banca Italiana di Sconto (the Italian Discount Bank). Two brothers who managed Ansaldo had earlier given Mussolini support for his newspaper, Il Popolo d’Italia. In 1923, partly to please the Vatican and partly to avert a major economic downturn, Mussolini worked directly to save the Banco di Roma through the use of public funds. Soon the Fascists were regularly transferring public money to private organizations. Of principal concern through this period was the survival of banks, on which consumer confidence and industrial development depended.

During the 1920’s and 1930’s, a small number of associations of industrialists and industrial organizations had formed and developed considerable power. The most influential, the CGII (General Confederation of Italian Industrialists), had assisted the Fascists when they attained power in October, 1922. Because of its close association with the government, it began to transform from a collection of private business interests to a powerful element of the public bureaucracy.

In November, 1931, it became clear that the banking community had more severe problems than could be solved by the methods used to help the Italian Discount Bank and others in the 1920’s. The CGII became adamant that the government do something dramatic to avoid severe bank failures. As a response, the Italian Mobilization Institute Italian Mobilization Institute (IMI) was created and given authority to collect funds from any source to rescue troubled banks. Although it continued to operate, the IMI did not satisfactorily accomplish its mission, in part because of an austere management style and in part because of the uncertainty of the private funds that were to be included in the mix of funds to be administered for failing banks.

The IRI was established as a last-resort response to the failure of the CGII. It was to use only public funds to directly purchase, from banks, shares of stock in failing companies that had been held in security. The creation of the IRI was an uneventful occasion, as most people regarded this extreme measure as only a temporary direct intervention of government into business affairs. The immediate need was to save three major banks from failure. Among them, only the Banca Commerciale Italiana was very reluctant to sell its industrial holdings to the newly created IRI. Giuseppe Toeplitz, director of the bank, finally gave his approval in 1933, and in doing so he firmly established the IRI’s legitimacy.

At this stage, Mussolini was careful not to appoint people with strong stands either for or against fascism to management positions. The first president of the IRI, Alberto Beneduce, appeared to be the type of neutral person of whom Italy and the world at large would approve. Appearances, however, were somewhat deceiving. Beneduce had long been active in politics, and as a member of the moderate Social Democrat Party, he had served in several minor positions as statistician, and from 1921 to 1922 he served Italy as minister of labor and welfare. Mussolini and Beneduce developed a relationship of mutual respect despite their philosophical differences; both were technically competent and yearned for power, regardless of labels.

In 1935, Beneduce became convinced that the future of governmental intervention in business in Italy should take the form of managerial directives and strategies rather than direct financial subsidization. The IRI thus made no more loans or purchases of bank-held stocks. These functions were returned to the IMI in March, 1936. In June, 1937, the IRI became a permanent government agency, responsible for overseeing industrial production, management, and strategy of those companies in which it held major blocks of shares. The business community objected, but IRI prevailed, primarily through the vast amount of control, through stock ownership, it had obtained in earlier years from failing banks.

In those industries in which productivity and innovation had remained at relatively high levels, repurchase of ownership was possible, but the majority of companies were unable to regain ownership. The IRI, therefore, continued to have a significant amount of control of industrial operations, principally in industries that did not operate at a profit. It had controlling interests in a number of key industries, including electricity, machinery, shipping, and telephone systems.

Because stock purchases by the IRI were not complete takeovers (the institute did not buy all the shares of any one company), the resultant industrial model was that of a mixed economy, with ownership of manufacturing industries shared between the private and public sectors. The war years devastated Italy’s production capacity, but the IRI survived largely through the efforts of its early leaders and the demand for the heavy industrial products created by large-scale warfare.

Significance

The short-term impact of the IRI was to stabilize the Italian banking system through reorganization of industrial stock portfolios and the sale of such stabilized portfolios back to the banks. The IRI eventually became a permanent holding company and a major economic institution with direct influence on political and social institutions, and much of postwar Italy’s cultural character was shaped by the IRI’s presence and activities. In addition, by the end of the 1960’s, Great Britain, France, Canada, Australia, Sweden, and Germany had all established state holding companies based on the IRI model.

For a time, the future of the IRI was in doubt. The war destroyed approximately 45 percent of Italy’s production capacity, and much of the capacity that remained had to be reconstructed for the production of peacetime goods. The years immediately following the war saw uncertainty over the country’s development, and a 1946 statute reaffirmed the 1937 legislation establishing the IRI as a permanent agency. That act was soon disavowed, but it was replaced by more permanent (but equally controversial) legislation in 1948. The Allies severely restricted the IRI’s management, and although aid provided under the Marshall Plan was necessary for any economic redevelopment, such aid was highly controlled. The Christian Democrat Party, the ruling party of the postwar period, was undecided as to how much influence the IRI should have, and the government presented an ambiguous direction for the IRI.

Nevertheless, the IRI was permitted to grow for two primary reasons. First, there were economies of scale in large industries that could be exploited by the IRI’s centralized administrative apparatus. Second, the IRI instituted policies that were perceived as humane, such as retaining employees who were not needed in order to prevent their deportation or conscription to Germany. By 1949, the IRI had achieved its prewar capacity. From the mid-1950’s, it had an influence on virtually every aspect of Italian society. The Italian economy experienced remarkably rapid growth during the postwar period, and although a number of factors contributed to this growth—including the European Common Market, the Marshall Plan, foreign investments, and increased domestic consumption—the IRI is generally acknowledged as the single most important factor behind the Italian economy’s expansion.

The IRI benefited private industry in important ways. Its operation reduced responsibility for unprofitable ventures, thus encouraging entrepreneurship and maximization of profit-producing investments. The IRI’s decision to issue stock was particularly helpful to private industry: Businesses could buy shares of ownership in the holding company which, in turn, held ownership in their firms. In consequence, the IRI had more capital and could blur the lines between public and private sources of funds, which created an extremely strong cover for the “mixed” economy. The IRI thus posed no threat to private initiative but did provide for centralized economies of scale and protection against economic disaster.

Perhaps the most outstanding example of this influence was in the development of the Italian steel industry. For purposes of national security and to support the auto and other heavy industries, reduced dependence on imported steel was a high priority in postwar Italy. The country had very few deposits of iron ore, the basic material for the production of steel. The Italian steel industry, therefore, had always depended on steel scrap as a raw material. This approach, however, put the Italian industry at the mercy of worldwide supply and demand for scrap. Under the leadership and financial sponsorship of an IRI group called Finsider, a scrap-steel plant near Genoa was rebuilt to accommodate raw iron ore. Dredging operations produced channels that would permit oceangoing freight vessels to dock at the shore-based plant. Direct importing of raw iron began, essentially eliminating dependence on steel scrap. An immediate result of this was to ensure Italy’s membership in the European Coal and Steel Community. This, along with a long-term contract with Fiat to supply auto-quality steel, ensured an adequate supply of raw iron ore and a demand for product.

Most researchers attribute a number of positive social consequences to the influence of the IRI. From 1948 to 1972, employment rose by 93 percent, sales rose a phenomenal 1,300 percent, and investment rose 1,500 percent. The result of these developments was creation of a highly productive economy that by the 1980’s was among the world leaders. Such rapid growth meant wide availability of consumer goods, incomes with which to purchase them, and a comfortable standard of living.

The IRI’s impacts beyond Italy were also substantial. The British Industrial Reorganization Corporation was established in January, 1966, followed in March, 1970, by the French Industrial Development Institute and the Canada Development Corporation, and in June, 1970, by the Australian Industries Development Corporation. All were modeled principally on the Italian IRI. What began as a temporary measure to save three banks from failure on the eve of World War II became a major economic institution of Italy and a model for the institutional arrangements in the mixed economies of many other nations. Industrial Reconstruction Institute Banking;Industrial Reconstruction Institute Italy;banking crisis

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Allen, Kevin, and Andrew Stevenson. An Introduction to the Italian Economy. New York: Barnes and Noble, 1975. A detailed and adequate reference on the Italian economy up to the 1970’s. Chapters 1 and 7 present detailed discussions of economic developments in the 1930’s and 1940’s, with a focus on the state sector.
  • citation-type="booksimple"

    xlink:type="simple">Clough, Shepard B. The Economic History of Modern Italy. New York: Columbia University Press, 1964. An extraordinarily thorough treatment of the economic history of Italy from the late nineteenth century through the mid-1960’s. The Fascist period is discussed in chapters 7 and 8. Provides a helpful discussion of the context within which the IRI was created and developed.
  • citation-type="booksimple"

    xlink:type="simple">De Grand, Alexander. Italian Fascism: Its Origins and Development. 2d ed. Lincoln: University of Nebraska Press, 1989. This relatively short book presents a very readable and concise history of Italian Fascism. The development and impact of the IRI are reviewed in several pages.
  • citation-type="booksimple"

    xlink:type="simple">Holland, Stuart, ed. The State as Entrepreneur. London: Weidenfeld & Nicolson, 1972. Comprehensive analysis of the IRI as the prototype state holding company. Provides considerable factual information about the formative period of the IRI as well as its long-term impacts on other economies.
  • citation-type="booksimple"

    xlink:type="simple">Kindleberger, Charles P. Manias, Panics, and Crashes: A History of Financial Crises. 4th ed. New York: John Wiley & Sons, 2000. General survey of financial speculation and monetary crises from the eighteenth century to the late twentieth century.
  • citation-type="booksimple"

    xlink:type="simple">Posner, M. V., and S. J. Woolf. Italian Public Enterprise. Cambridge, Mass.: Harvard University Press, 1967. Brief examination of the role of state enterprises in Italy for the period 1952-1967. Devotes much attention to the role of the IRI and provides informative discussion of the IRI’s origins. Also discusses the long-run impact of the IRI on the postwar economy of Italy.
  • citation-type="booksimple"

    xlink:type="simple">Sarti, Roland. Fascism and the Industrial Leadership in Italy, 1919-1940. Berkeley: University of California Press, 1971. Brief but thorough analysis of the relationship between the Italian Fascists and economic developments of the period 1919-1940. Provides detailed insights into the personalities important to the creation and development of the IRI as a product of Fascist authority and, at times, the direct involvement of Mussolini.
  • citation-type="booksimple"

    xlink:type="simple">Wicker, Elmus. The Banking Panics of the Great Depression. New York: Cambridge University Press, 1996. Examines the origins, magnitudes, and effects of five individual banking panics. Features figures, tables, references, and index.

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