Investment Uncertainty – Deflation – Unemployment -International Trade – Awaiting Stabilisation

«The Economist», 24 dicembre 1927, pp. 1146-1147

Turin, December 18

At the higher level reached after the bottom prices touched in June, the Bourses have relapsed into inaction, and the public cannot be persuaded to buy securities at all. Transactions are purely professional, taking place between operators who try to recoup office expenses and get a small profit by exchanging daily a few securities between themselves. Where new savings are being hidden is a mystery. Direct investments in building are absolutely at a standstill, inasmuch as the much-reduced exemption from taxes and new rent restrictions to four times the pre-war level make building unprofitable. Uncertainty about future prices of agricultural products has also suspended activity in the land market, and made agriculturists hesitate before permanently investing in land improvements. Net investments in joint-stock companies in the first 10 months of 1927 totaled 1,627,1 millions lire, against 3,937.6 for the whole of 1926, and 8,062.7 for 1925. Money should therefore be accumulating in the bank coffers, waiting for the end of the revaluation crisis and more favourable opportunity of investment. It does not appear, however, that the accumulation of new savings is going on in an appreciable way. Deposits of the ordinary savings banks increased from the low-water mark of 12,751.6 millions lire in February, 1927, to 13,363.8 millions lire at the end of September, and Signor Belluzzo recently announced further increases of 72 millions in October and 158 millions in November; but already in September 1926 the figure was 13,069.2 millions lire, so that the increase is not very big. Statistics of postal savings, which are the second next place for deposits of savings in Italy, only take us up to May, 1927, when they had dropped to 9,840.6 millions lire from the highest figure of 10,598.1 reached in September, 1926. Deposits in ordinary banks and other credit institutions are stationary, and are, moreover, not complete, as ordinary banks do not consider sums received in current account as deposits, but put them under “Creditors” item. Probably the most representative figure in this field is the deposit figure of the Bank of Italy, the only one which has greatly expanded in past year: from 1,341.6 millions lire in September, 1926, to 2,473.5 in October, 1927. That is truly illuminating, because the increase is due to sums which the ordinary banks cannot invest, for lack of demand, in discounts and advances to trade and industry, and therefore deposit temporarily at the Bank of Italy.

The feature of the moment is that new savings are not forthcoming, but old savings are superabundant, owing to the reduced requirements of trade and industry during the deflationist process. Perhaps it is a great achievement that savings are nominally stationary; which means that between August, 1926, and December, 1927, they increased 40 per cent, in purchasing power. So great would that achievement be that we almost ought to despair of attaining it, because it would amount to saying that Italy would have surmounted the revaluation crisis not only without loss, but with a big increase in its circulation (bank and saving deposits) capital. Such a result would have to have been obtained in spite of the almost overwhelming difficulties against which industry and agriculture must struggle: 1) Wages cannot be lowered in proportion to the reduction of selling prices of the product of industry, the reduction in wages being only 10 to 20 per cent., against 30 per cent, for prices; 2) the incidence of taxes, which, according to a recent report of Senator Mayer to the Senate, increased from 13 per cent, of the national income in 1913-14 to 20 per cent, in 1925-26; 3) the incidence of debts, on which interest and amortisation must be paid in appreciated money. In the face of such obstacles it is a wonder how the unemployment figure is kept low; wholly unemployed were 305,930 at the end of September, 1927, against 89,434 at the end of September, 1926; partially unemployed 133,568, against 14,519. There is a big absolute increase, but not so formidable as it might have been. Some explanation can be found in the efforts which employers are making to keep men employed at least for a part of the week, a practice which obviously cannot continue for long, because it increases the pressure of general fixed expenses on costs of production.

How industry has fared, during so trying a period, against international competition cannot as yet be exactly measured. For the first ten months of the year exports amounted to 12,775 million lire, against (after allowing for the 15 per cent, increase for 1926 for the sake of comparability of figures) 17,287 million lire in 1926, a decrease of 26 per cent., roughly corresponding to the lowering of the prices level. The total weight of exports is, indeed, slightly increased in the first nine months of the year from 3,200,228 metric tons for 1926 to 3,217,457 for 1927. Imports by weight are also increasing, but the one biggest item of increase (coal from 7,318,775 to 8,691,918 tons, easily accounted for by the British strike of 1926) covers the total increase of 1,023,525 tons. Wheat imports increased also from 1,678,443 to 1,912,691 tons, owing to the comparatively low 1926 harvest. On the other hand there are some striking decreases in particular imports: – Raw cotton from 189,418 to 159,543 tons; raw wool from 36,386 to 29,293 tons; pig-iron from 149,658 tons to 100,919; scrap iron from 579,750 to 545,291 tons; iron and steel ingots from 91,354 to 61,595 tons; machinery from 92,763 to 59,625 tons; cellulose from 105,237 to 83,463 tons; nitrate of sodium from 52,117 to 44,679 tons; calciocianamide from 41,535 to 25,873 tons; potash manures from 37,807 to 15,357 tons. Industry and agriculture thus seem to be marking time and waiting for better times before replenishing their stocks. They are buying raw materials from hand to mouth, not daring to embark on new schemes for the future. Legal stabilisation of the lira and a new stable equilibrium of prices, wages, taxes and debts is the only cure for the present uncertainty; a slow cure, indeed, on the 90 lire for each pound sterling level, but analogous to the British process of the return to gold, and one through which we must perforce pass.