Rising Prices and Exchanges: Falling Share Quotations

«The Economist», 13 novembre 1920, pp. 866-867

Turin, November 5

Professor Bachi publishes in the Economista his interesting index numbers for commodity prices and share quotations at the end of September. As the basis 100 of your and Bachi’s number indexes is the same, viz., 1904-1905, I place in the last column the Economist percentage figure for comparison:

Italian prices again rose in September, and surpassed the May record. All the groups contribue to the rise, but minerals and metals are at the top of the ladder; textiles are good seconds. An explanation may partly be found in the following figures of circulation and foreign exchanges:

The rise in prices appears to follow, at a certain distance of time, the fluctuations of the exchanges. As in October these continued to rise, we may expect a new corresponding rise in the October index of commodity prices. The note circulation keeps on increasing. The figure for December, 1919, divided in 12,901 millions lire for State account and 5,651 for commerce accounts, while the corresponding figures for September, 1920, are 12,794 and note circulation keeps on increasing. The figure for the increase of the note issues was not the State’s but commerce’s requirements. The statement is, however, somewhat misleading, as under the cover of commercial circulation are put loans on 5 per Cent. Consols and discounts of Treasury bills. Loans and discounts are made to private parties, but substantially are of the same nature as your banking credits for subscriptions to State loans. Part of the subscriptions to the last State loan and to Exchequer bills are thus financed by creation of paper.

In Germany, as the exchanges go up, so the prices of shares and stocks also rise, shares of industrial concerns being capitalised not on the basis of dividens, but on the valuation of assets and goodwill in a depreciating currency. The same phenomenon should hold good in Italy, whereas, in fact, the opposite has happened. As the foreign exchanges went up and the lira was depreciating, shares, instead of rising, began to tumble. Between March and September the lira, as expressed by the London exchange, lost from 35 to 30 per cent, of its nominal value. The course of quotations of 113 leading shares was as follows:

As the basis 100 in this table was the quotation of December, 1919, it is clear that these leading shares had lost in nine months nearly 20 per cent, of their value at the end of 1919. Textiles alone are quoted higher. The causes of the bad conditions of the Italian bourses are many: 1) The fear of the coming compulsory inscription of all bearer stocks and shares; 2) the general impression that inscribed shares will be much more difficult to sell and to give as collaterals for loans; 3) the selling by possessors who did not include some bearer share or stock in their declaration for the capital tax; 4) the uncertainty concerning the solution of frequent momentout problems – the huge deficit in the State budget, unwillingness to put an end to the bread subsidy, the advent of workers’ control on industry; 5) confiscation of war profits and the enormous payments to be made in cash at a moment when companies have not the liquid means to pay, and the banks are restricting credit. All these factors are pointing to liquidation, restriction of the spirit of enterprise, and inaction of speculators. Quotations are therefore dwindling, even in the face of a depreciating lira.