Central Bank at War: Subservient to the Government

Central banks’ behaviour in times of war is dealt with reference to the First World War. It is characterised by the governments’ overwhelming need to meet their enormous expenditure. Given the insufficient revenues from taxes and borrowing, the gap is met by central banks’ monetary financing. The central bank cannot but comply with the government’s requirements, and this generates inflation. These developments are particularly relevant in Italy, that is burdened at the end of the war by high inflation and large domestic and foreign indebtedness. Inflationary conditions prevail everywhere, and cause the suspension of the currencies’ gold convertibility, with the exception of the United States, which emerges from war as the world superpower.