Stock Exchange Revival – Budget Surplus -Treasury and the Money Market – Prices

«The Economist», 17 aprile 1926, pp. 789-790

Turin, April 1

Since my last letter things have had a decided upward turn in the Stock Exchanges. The betterment originated with the reduction from 6 to 5.50 per cent, of the rate of interest allowed on yearly Exchequer bills on February 15th and to 5 per cent, on March 8; but the movement was accelerated by the formation of a strong consortium among the principal banks, headed by the Bank of Italy, with a fund of 100 million lire and a fighting backing of 400 millions more. Bears which were largely oversold were obliged to cover, and prices recovered. Thus Sip (electricity) shares, which I left in my last letter at 185, were quoted for settlement in March at 205, Edison at 680 (from 630), Tessuti Stampati (cotton printers) at 1240 (from 1150), Cascami seta (silk) at 1400 (from 1230), Snia (artificial silk) at 374, after cutting a dividend of 25 lire (366), Chatillon at 285 (270), Beni Stabili (house property) at 680 (654), Fiat (motor-car) at 560 after a cut of 30 lire for dividend (472), and so on.

State revenue makes a very good showing. Our Budget-making is more scientific than the British, as we take account not only of revenues collected, but also of taxes due, not only of real disbursements of the Exchequer, but also of expenditure budgeted for but as yet to be made; and we also carefully distinguish between expenditure or revenue on account of the fiscal current year and of preceding years. The months from July, 1925, to February, 1926, close, therefore, so far as the figures relate to the present fiscal year, and include expenditure legally to be incurred, with a surplus of 337.7 million lire. But if the Italian Budget were made somewhat after the British fashion of de-facto revenue obtained and expenditure incurred, the first eight months of the current fiscal year would make a much better showing; the de-facto revenue was 14,301.8 million lire and the de-facto expenditure 11,506.1 millions; so that the Exchequer obtained a cash surplus of 2,795.7 million lire. True, most of the cash surplus should legally be spent in some future period, but in the meantime the Treasury is enjoying a big cash surplus. It may be also that some expenditure legally to be made will never come up, so that the cash surplus will convert itself into a Budget surplus. The result of the cash situation of the Exchequer has been a large increase in the funds deposited by the Treasury at the Bank of Italy. This amounted to 236.2 million lire at the end of the past financial year (June 30, 1925), and rose to 2,689.0 million lire at February 28, 1926. This large balance gives the Treasury a strong control over the money market. If the sum were withdrawn, the Bank of Italy would restrict discounts and advances and increase the official discount rate. In addition, the Treasury is able to buy from the joint stock companies the proceeds of dollar loans, as I explained in my past letter. A novel situation is thus arising in Italy somewhat akin to the situation existing in the U.S. by the dual control of the money market by the Federal Treasury and the Federal Reserve banks.

A situation which puzzles public opinion and has given rise to much obloquy is the difference between wholesale and retail prices. After rising to the high-water mark of 731 in August, 1925 (basis 100 for 1913), Bachi’s index number declined continuously to 704 in February, 1926; and the purchasing power of the lira, calculated by the Milan Chamber of Commerce, correspondingly increased from 14.6 per cent, of the 1913 level to 15.3 per cent. The stabilisation of the lira had thus reacted logically on wholesale prices. Retail prices, as portrayed by the cost of living indices (basis 100 for July, 1920), did not follow suit, but increased between August, 1925, and February, 1926, from 138.11 to 145.55 in Milan, from 144.66 to 149.24 in Turin, from 137.77 to 138.73 in Venice, and from 144.7 to 151.3 in Florence. In July, when the increase in house rents con sequent on the abolition of wartime restrictions will become effective, the cost of living will rise still further. Already the protests of house tenants are so universal that in several cities municipal authorities have felt obliged to constitute boards of conciliation for the fixation of rents. A fear is entertained that new increases in the cost of living will occasion a new rise in wages and in costs of production and impair the export possibilities of Italian industry. It does not seem, however, that real wages are increasing faster than prices, and Professor Mortara believes that, if in 1924 the real wages level was lower than in 1913, in 1925 the two levels are tending to equilibrium, without wages at yet getting the better of prices.