Italy’s Lost Decades: Trade, Capital Flows, and Currency Crisis, 1861–1883

After Unification in 1861, the Italian government pursued an ambitious policy of investments, largely funded by foreign capital. Italy experienced a short boom that ended in 1866, when a collapse in credit nearly led to an Argentinian-style default. This was averted by adopting a prudent fiscal policy and suspending the convertibility of lira into gold. Imports of capital dried up and the GDP stagnated until the end of the century. We examine the link between fiscal policies, capital inflows, and economic outcomes underlying the impact of devaluation on trade, and the minimal effects played by capital imports on the real economy.