Bankers’ Speeches – The Bank of Italy – Stabilisation of the Lira -Velocity of Circulation – Foreign Loans

«The Economist», 16 aprile 1927, pp. 808-809

Turin, April 15

In his speech at the meeting of the Bank of Italy, Signor Stringher, the Director-General, drew attention to the increase in the current private deposits at the Bank of Italy, which from an average of 754.3 million lire in 1925 rose to 1,164.6 millions in 1926, mainly owing to a new departure, which was adopted provisionally as from September 30, but which will, perhaps, have far-reaching consequences for banking organisation in Italy. Until September, 1926, the Bank of Issue was not truly a central bank, for it lacked one of the fundamental characteristics of a central bank, namely, that of being the depository of the liquid funds of other commercial banks. Big commercial and savings banks did not deposit at the Bank of Italy, and consequently the Bank of Issue could not control the money market. The reason was that the Bank of Italy paid too low a rate of interest on deposits, with the result that other banks preferred to keep their funds in hard cash in their tills, or to buy short-dated Treasury bills or to make advances to stock exchange operators. With the disappearance of short-dated Treasury bills since the November consolidation, and inactivity on the stock exchanges, the banks were at a loss how to use liquid funds. The Bank of Italy then stepped in and announced that it would accept from certain banks, and in a limited number of cities, sight deposits at 5 per cent, interest. Special deposits were at once made of 695 million lire, increasing to 1,374 millions at November 30, and decreasing to 867.8 millions at December 31 owing to the usual end-of-the-year requirements. The new policy, if continued and enlarged to more numerous banks and places, will, perhaps, prove a good step toward the creation of a true central bank and a unified money market.

Signor Stringher dwelt in his speech only on past history, and is silent on future development. As to the effect on industry of the monetary deflation policy after August, 1926, he points out that a certain decrease of economic activity in the second half of the year, the contraction of the internal demand in the hope of still lower prices, the higher cost of banking accommodation, protraction of payments by commercial customers, instability of foreign exchanges, and striking variations of prices of raw materials make economic prospects uncertain. He hopes that the new year will be good for industry, inasmuch as the relations between Capital and Labour remain pacific, foreign loans are forthcoming, and commercial treaties with foreign countries favour exports. He urges industrialists to make strenuous efforts to reduce costs of production, and to eliminate bad investments. But he says nothing as to whether he thinks revalorisation or stabilisation the best means of obtaining economic recovery. Other bankers voice more openly the industrialists’ desire for stable money. Signor Toeplitz, the Director-General of the “Banca Commerciale”, points out that deflation will produce good results only if prices and costs can be reduced, and his remarks suggest that he hopes very much to see shortly the lira stabilised at a fixed point.

Signor Orsi, chairman of the “Credito Italiano”, made in his speech an interesting comparison between the gold value of the average circulation per inhabitant in several countries in 1913 and 1926. By gold value is meant the average paper circulation divided by the 1926 index of paper prices. While in Switzerland the average circulation per head was 83.67 gold francs in 1913 and 150.68 in 1926, in Belgium 143.74 and 156.20, and in France 145.79 and 180.85, Italy was the only member of the former Latin Union where the average circulation per head was reduced from 78.17 to 68.87 gold francs between 1913 and 1926. As Italy’s requirements of circulating money cannot be less today than in 1913, the logical consequence would be either that prices must be reduced or that the quantity or velocity of circulation must be increased. This seems to be Orsi’s conclusion; for he insists that the deflationist policy can and must be continued, provided that substitutes for money (cheques, circular cheques, postal accounts, clearing houses) can be made more and more use of. The recent appointment of a Treasury Committee to investigate and make proposals on methods of monetary payment, such as cheques, suggests that the Government also, while firm on the policy of gradual reduction of circulation, is alive to demands from banking and trade circles for an increased velocity of circulation.

The sharp fall in the foreign exchanges which has recently occurred, and which has brought the pound sterling from an average level of 112V4 for February to 101.70 on April 4th, is commented on in the following remarks from Signor Stringher’s report: “The large offers to Italy, thanks to the increased prestige of her public finance and credit, of foreign loans, mainly from the United States, had, and continue to have, a favourable influence in the foreign exchange market. This is very helpful, provided always that we are careful to make a moderate use of them and to guard against future disturbance of our foreign payments balance”. As Signor Stringher has always been, in his long banking career, very guarded in his words, we are perhaps justified in supposing that he looks with some misgiving to the time when interest and amortisation instalments on the present loans become due, and that, fearing future revulsions, he would prefer, if possible, methods of issuing loans which could not influence the foreign exchanges.