Bank of Italy’s Report – The Alternative to Open-Market Policy

«The Economist», 27 aprile 1929, pp. 924-925

Turin, April 9

The report read by Signor Stringher to the annual shareholders’ meeting of the Bank of Italy has fully met the expectations of financial circles. The yearly averages of discounts, advances and day-to-day loans (through the clearing-houses) made by the Bank of Italy (in millions of lire) are as follows:

The item “frozen credits” fortunately is rapidly approaching extinction, and it is anticipated that the total will fall well under the one milliard limit before June 30, 1929. The increase in current operations until 1926 and the decrease in the last two years throw light on the old and the new monetary policy. The deflation in 1927 and the stabilisation in 1928 were accomplished through restriction of credit. Trade asked for less money as prices were decreasing and less money was needed. But the low 1928 level indicates also that the Bank of Italy did not come to the rescue of weak concerns. Some among the lesser banks failed in recent months, and there is some talk of difficulties in a big Trieste cotton textile firm and its associates; but the balance sheet of the Bank of Italy bears no traces of aid to those old inflationist remnants. With “old” frozen credits disappearing and the current operations at their lowest ebb, the situation of the Bank of Italy appears to be very strong indeed.

The main currents of change during 1928 may be traced as follows (in millions of lire):

As I have quoted only the principal items from both sides of the balance sheets, totals do not tally exactly. But the trend is illuminating. Notes and other sight and current debts of the issue bank decreased by 1,312,3 million lire, because notes no longer have to be kept in circulation for keeping up old frozen credits. As fast as old losses are liquidated, notes go back to the Bank. Secondly, notes and other sight debts were reduced because the public (or on their behalf ordinary banks, which are the most important customers of the Bank of issue) tendered notes or drew on their current accounts against gold securities. The main change of the past year was indeed, the increase by 504.8 millions of coin or bar gold, and the decrease of 1,539.9 millions of other gold securities. The immediate cause of the net decrease of the gold reserve was, as Governor Stringher announced, the necessity of making up the deficit in our international balance of payment. Gold securities are sent out because notes were superabundant after the monetary reform of December, 1927. Italian experience is perhaps one of the most interesting recent verifications of the Ricardian theory of the international movements of precious metals (gold securities are claims on cash gold). The steps were as follows:

1. Before monetary reform, internal prices were adequate at a level of, say, 120 lire to £ 1 sterling.

2. Notes and other sight debts were adequate in amount to the level of prices.

3. After stabilisation at the level of 92.7, gold internal prices are in 1928 still higher than foreign gold prices.

4. Therefore imports increased (by 1,666 million lire) and exports decreased (by 1,205 million lire).

5. A deficit arises which must somehow be paid. Customers of the Bank of Italy (either directly or through their banks) tender notes or draw on current accounts in payment for gold securities.

6. Gold securities of the Bank of Italy decrease, but notes and cheque circulation decrease also.

7. So far we have dealt with past history. Coming to prophecy, we may suppose that the decrease of note and cheque circulation, which, by the way, is continuing (at March 10, 1929, the total was further decreased to 19,804 million lire), reduced still further internal paper and gold prices. When the equilibrium between internal and foreign prices is finally restored, imports will again decrease and exports increase, and the balance of international payments automatically be adjusted. The monetary manoeuvre will then be perfect.

As far as we can see, we are bound to compliment, Signor Stringher on his admirable silent handling of the process. Nobody cares for the cries of those last remnants of inflationism, who would have preferred to keep the notes for internal use and borrow the gold securities toward meeting foreign engagements. Signor Stringher, in refusing these absurd claims, has deserved well of his country.

Coming to less momentous matters, the report is interesting also because it deals for the first time with the duties of supervision of other banks, which legislative Acts of September 7 and November 6, 1926, entrusted to the Bank of Italy, making it not only the supreme bank but also the legal guardian of other banks. New banks, must now obtain the permission of the Bank of Italy, before starting operations; similarly, no new branches of established banks can be opened without her leave. Inspectors may be sent; abnormal increases of individual credits to single customers may be vetoed; balance sheets must be submitted every two months; a due proportion between capital and deposits must be kept, and so on. During 1927, leaving out of account some small rural banks, the number of savings banks diminished by 35; of joint-stock banks and private banks by 43. The concentration and reduction movement is bound to continue. At the date of the report, Signor Stringher could predict that 491 banking concerns out of a total of 4,197 will disappear before long.

It is suggestive of the marked differences between our own experience and that of the United States, that in the whole 121 pages of the report, not a word can be found on open-market policy. The Bank of Italy did indeed, possess 1,080.3 million lire of public securities and a further 186.8 millions were allocated to miscellaneous funds. But the securities are held as investments of reserves or of pensions funds; not, as is the current policy in England and America, as a means of intervening in the money market, depleting it of funds by sales, or refurnishing it by purchase of securities. Perhaps the only Italian approximation to open-market policy is the variation of the rate of interest granted on the deposits of the ordinary banks. In autumn, 1926, the Bank of Italy, being desirous of restricting credit in the open market, granted 5 per cent, interest on the ordinary bank deposits, thus absorbing money which could have been utilised in Stock Exchange and other operations. Deposits which in 1927 averaged 2,147.9 million lire went thus to a maximum of 3,688.2 at February 20, 1928. Such absorption of money from the market being no more necessary, the rate of interest was then reduced to 4.50 per cent, at March 6, 1928, to 4 per cent, at March 26^th, to 3.5 per cent, at June 25^th, to 3 per cent, at August 6^th, to 2.75 per cent, at September 1st, and to 2.50 per cent, at March 11, 1929. Deposits decreased gradually to 1,525.2 million lire at December 31, 1928, and at March 10, 1929, were 1,703.9 million lire. Creating a safe remunerative harbour for superabundant money, and inversely expelling it in times of scarcity, seems to be the new policy evolved recently in Italy; a policy which may well deserve a close study.