Stabilisation Regulations – The Gold Exchange System – Independence of the Bank of Italy -Decreasing Treasury Revenue

«The Economist», 10 marzo 1928, pp. 485-486

Turin, March 4

Two royal decrees dated February 26, 1928, disclose the eagerly awaited regulations concerning the convertibility of the Bank of Italy’s notes into gold and gold bills. The main provisions are: – 1) The Bank of Italy must give in exchange for their notes, if tendered at the head office at Rome, the equivalent in gold bars or in gold bills, at the option of the Bank; 2) if the Bank chooses to pay in gold bars, it must give 7,919,113 grams of gold for every 100 lire; 3) if the Bank prefers to pay in gold bills, it must give gold bills drawn on countries in which banknotes are convertible into gold. The rate of exchange is the current one, but not higher than the rate fixed for the export gold point. At present the export or higher gold point is fixed at 19.10 lire to the American dollar; 4) the Bank is not under statutory obligation to give notes against gold bars or gold bills tendered, and thus it may appear that the gold exchange is a “limping” one, and does not forbid a further improvement of the exchange under the 19-lire rate; 5) but the end is to be reached by a different obligation laid upon the Bank of Italy – i.e., that of buying and selling gold or gold bills, so that the rate of exchange cannot increase over the 19.10 lire to the dollar limit, nor decrease below 18.90. There is not a substantial difference between the open obligation of giving notes against gold and the more subdue duty of opposing cheapening of gold in terms of lire. If exchange rates should tend to fall below the lower gold point (18.90), the Bank will be obliged to sell notes against gold, and so to increase circulation. It appears that the adoption of this system was prompted by a terror of increasing circulation and the consequent unwillingness to insert into the Statute Book a regulation which openly authorised the Bank to issue an unlimited amount of new notes to prevent, if necessary, the improvement of the exchange rates under 18.90. But the obligation of keeping exchanges between 18.90 and 19.10 means, perforce, if it has any meaning at all, that the Bank has the authority to issue notes against gold bought in order to prevent a fall below 18.90; 6) the extent of the obligation is somewhat eased by the fact that the February 26^th decrees do not suppress previous regulations about buying and selling gold bills on foreign countries. As Signor Volpi frankly told the Senate during the February 17^th session, the Government would consider it very imprudent to abolish at once all restrictions in this field. Restrictions will be relaxed later, but, in the meantime, foreign bills can be bought and sold only for commercial purposes approved by special Government authorities. Therefore, it would not be possible to deplete Bank gold reserves by demands originating in a panic of capitalists anxious to invest their savings in foreign countries; nor, conversely, is the Bank under the risk of being submerged by a deluge of gold bills tendered to it, on the threat of the rate falling under 18.90, for loans in foreign countries are authorised only after strict scrutiny by the Government. Nor are existing restrictions on the export and import of gold abolished.

In the February 17^th session Signor Volpi made another declaration. “The note issue”, he said, “is thenceforward put under the responsibility of the Bank of Italy, which means that credit operations will be decided exclusively from a banking point of view”. These words, being preceded by a warning to those who clamour for State intervention in favour of private enterprise, mean that the Government will in future abstain from exercising any influence on the Bank of Italy’s operations. This will be somewhat of a novelty in Italy; for issue banks have been hitherto more or less under Government influence, and credit concessions savoured not infrequently of political or social or public safety justifications. For the first time in the history of Italian banking it is openly recognised that, if the bank of issue is to remain the only and supreme controller of the foreign exchanges, it must be kept entirely free from Government interference.

The public accounts are beginning to show the effects of stabilisation. I give below some figures relating to the most interesting items of the cash revenue for the period from July 1^st to January 31^th (in millions of lire):

From the high-water-mark of 1926-27 there is a decline sufficient to bring revenue under the 1925-26 level. Total figures of revenue and expenditure were as follow (for the seven months’ period and in millions of lire):

It must be noted that these figures relate to the de facto incomings and outgoings of the Treasury. There is another set of figures in the Italian system which is published side by side with the above, and refers to the revenue which is bound to enter into the Exchequer, on the year’s estimate, and to the expenditure which must be made on account of the year concerned, even if actually postponed to the following year. On that score the excess of revenue over expenditure was 300, 214 and 67 million lire respectively for the above-mentioned periods. The latter set of figures is more rational; but the first one is more useful when studying the actual movements of sums going in and out of the Exchequer. From the above figures, the equilibrium of the public Budget appears to rely mainly on the reduction of expenses.

Yesterday the official rate of discount, which was raised on June 18, 1925, to 7 per cent., was lowered to 6.5 per cent. Even so, the official rate remains much higher than the current rate for good commercial paper, which can be discounted easily at 5 1/4 – 5 1/2 per cent.