Stock Exchange – Credit Restriction Policy – Unemployment -Bankruptcies – Imports and Exports

«The Economist», 19 marzo 1927, p. 586

Turin, March 4

The recovery of the stock market which was noted in my last letter continued its course after January 22^nd, but in February the rate of progress somewhat abated, as may be seen from the index number of the Milan Chamber of Commerce (basis December, 1925=100):

The turnover figure is the number of securities dealt in during the week preceding the date put at the head of the column, per thousand of the outstanding number of shares.

It will, perhaps, be useful to draw attention again to a feature of our monetary situation which I have previously discussed (see Economist, July 10, 1926). This situation was also the subject of some comments in your correspondence columns and in Mr Gregory’s book on “The First Year of the Gold Standard”. The gist of my contention then was that so long as commercial discount figures increased a decrease in the note issue did not matter, because the bank was obliged to draw from other resources the wherewithal to increase discounts, for instance, by disposing of the big sums held from time to time by the Treasury in current account at the bank. There was always the danger that if the Treasury decreased their deposits the bank would be obliged again to increase the note issue. The following table shows how things developed before and after the new monetary policy announcement in the Pesaro speech, August, 1926 (in millions lire).

The figures seem to countenance the thesis of a distinct change of policy since the middle of 1926. Until April, 1926, the sums placed by the bank of issue at the disposal of trade and industry by means of discounts and advances went on, more or less regularly increasing, this being made possible by the reimbursements received from the Treasury of notes advanced to it during the war period. Between 1920 and 1925 the bank reduced or increased the note issue according to the increase or diminution of current accounts, debts, and private or public deposits. A contraction of State deposits always threatened an increase of note issue, because it was not thought possible to restrict discounts or advances.

After April, 1926, a marked contraction of public deposits took place, and at the end of October and November there appeared an overdraft against the Treasury current account, and even in December and January the public deposits were insignificant. The reversal was the obvious consequence of the big reimbursements of maturing Treasury bills, and was, by the way, the cause of the consolidating decree with which the calling-up process was stopped. The decrease of “other” resources would have called, had the past rule been followed, for an increase of the note issue. However, the note issue in January, 1927, stands at the same level as in April, 1926, and we see for the first time a vigorous contraction of discounts and advances, both decreasing from 13.689 to 10.490 millions lire. This is truly deflation, which should bear fruit in due time.

It was natural that the credit restriction should produce some discontent. Increasing attention is devoted to figures of unemployment (total unemployed increasing from 79,678 in July to 181,493 in December), and of bankruptcies (monthly average 652 in 1926, against 602 in 1925), but neither figure appears so far very threatening. Monthly bankruptcies were 617 in 1913, so that the increase barely corresponds to the increase of population and of the territory of the State.

Foreign commerce statistics for 1926 closed with an excess of imports of 7,200.6 million lire, as against 7,926.2 in 1925. The only one of the eight categories of the official statistics in which Italy has a favourable balance is “textiles”, where, mainly thanks to the low cotton prices, the excess of exports increased from 1,780.9 to 2,277.7 millions lire. Imports increased in 1926 against 1925 in quantity by 1,708,825 tons (from 22,681,219 tons in 1925 to 23,390,044 tons in 1926), and decreased in value by 329.3 millions lire (from 26,200.5 to 25,871.1), so that we have been able to buy more goods at a lower price than in the preceding years. On the contrary the quantity of exports decreased by 564,724 tons (from 4,786,302 tons in 1925 to 4,221,577 in 1926), while the value of exports increased by 396.3 millions lire (from 18,274.3 in 1925 to 18,670.5 in 1926). Thus we sold a smaller volume of goods at higher average prices; in a general way it may be said that the export trade was not so badly hampered as might have been feared, first by the vagaries of the exchanges and then by the credit restriction policy.

«The Economist», 19 marzo 1927, p. 586

Turin, March 4

The recovery of the stock market which was noted in my last letter continued its course after January 22^nd, but in February the rate of progress somewhat abated, as may be seen from the index number of the Milan Chamber of Commerce (basis December, 1925=100):

The turnover figure is the number of securities dealt in during the week preceding the date put at the head of the column, per thousand of the outstanding number of shares.

It will, perhaps, be useful to draw attention again to a feature of our monetary situation which I have previously discussed (see Economist, July 10, 1926). This situation was also the subject of some comments in your correspondence columns and in Mr Gregory’s book on “The First Year of the Gold Standard”. The gist of my contention then was that so long as commercial discount figures increased a decrease in the note issue did not matter, because the bank was obliged to draw from other resources the wherewithal to increase discounts, for instance, by disposing of the big sums held from time to time by the Treasury in current account at the bank. There was always the danger that if the Treasury decreased their deposits the bank would be obliged again to increase the note issue. The following table shows how things developed before and after the new monetary policy announcement in the Pesaro speech, August, 1926 (in millions lire).

The figures seem to countenance the thesis of a distinct change of policy since the middle of 1926. Until April, 1926, the sums placed by the bank of issue at the disposal of trade and industry by means of discounts and advances went on, more or less regularly increasing, this being made possible by the reimbursements received from the Treasury of notes advanced to it during the war period. Between 1920 and 1925 the bank reduced or increased the note issue according to the increase or diminution of current accounts, debts, and private or public deposits. A contraction of State deposits always threatened an increase of note issue, because it was not thought possible to restrict discounts or advances.

After April, 1926, a marked contraction of public deposits took place, and at the end of October and November there appeared an overdraft against the Treasury current account, and even in December and January the public deposits were insignificant. The reversal was the obvious consequence of the big reimbursements of maturing Treasury bills, and was, by the way, the cause of the consolidating decree with which the calling-up process was stopped. The decrease of “other” resources would have called, had the past rule been followed, for an increase of the note issue. However, the note issue in January, 1927, stands at the same level as in April, 1926, and we see for the first time a vigorous contraction of discounts and advances, both decreasing from 13.689 to 10.490 millions lire. This is truly deflation, which should bear fruit in due time.

It was natural that the credit restriction should produce some discontent. Increasing attention is devoted to figures of unemployment (total unemployed increasing from 79,678 in July to 181,493 in December), and of bankruptcies (monthly average 652 in 1926, against 602 in 1925), but neither figure appears so far very threatening. Monthly bankruptcies were 617 in 1913, so that the increase barely corresponds to the increase of population and of the territory of the State.

Foreign commerce statistics for 1926 closed with an excess of imports of 7,200.6 million lire, as against 7,926.2 in 1925. The only one of the eight categories of the official statistics in which Italy has a favourable balance is “textiles”, where, mainly thanks to the low cotton prices, the excess of exports increased from 1,780.9 to 2,277.7 millions lire. Imports increased in 1926 against 1925 in quantity by 1,708,825 tons (from 22,681,219 tons in 1925 to 23,390,044 tons in 1926), and decreased in value by 329.3 millions lire (from 26,200.5 to 25,871.1), so that we have been able to buy more goods at a lower price than in the preceding years. On the contrary the quantity of exports decreased by 564,724 tons (from 4,786,302 tons in 1925 to 4,221,577 in 1926), while the value of exports increased by 396.3 millions lire (from 18,274.3 in 1925 to 18,670.5 in 1926). Thus we sold a smaller volume of goods at higher average prices; in a general way it may be said that the export trade was not so badly hampered as might have been feared, first by the vagaries of the exchanges and then by the credit restriction policy.