Bourse Slackness – Reduction of Expenditure – Mussolini on Devaluation Rumours – Bank of Italy Reform – Gold or Gold Securities?

«The Economist», 28 luglio 1928, pp. 177-178

Turin, July 17th

Summer, as usual, means less business for Italian bourses. The volume of transactions for 35 representative dividend-bearing securities, which had increased steadily from a daily average of 4.05 securities sold per thousand issued in December, 1927, to a maximum of 10.69 per thousand in the week from May 14th to 19th, decreased again more rapidly to 2.25 per thousand in the week from July 2nd to 6th. The average level of quotations decreased also, however not touching such low bottoms. The general average (December, 1925=100), which had risen from 64.06 on July 29, 1927, to 80.25 on December 31, 1927, and to a maximum of 90.56 on May 26, 1928, fell to 82.94 on July 6, 1928. Inquiry into the causes of the morose behaviour of the bourses does not reveal a worse outlook in industry. Commodity prices have not receded, industrial half-finished products hovering between (basis 1913=100) 446.4 in December, 1927, and 445.5 in June 1928, and finished products between 560.9 and 568.7, while national products in general rose from 473.8 to 485.3 and export products from 461 to 479.9. Unemployment is decreasing; after reaching 439,211 at the end of January, the figure fell regularly to 306,629 at the end of May, while partially-employed men decreased from 133,420 at the end of November, 1927, to 45,569 at the end of May.

Current talk relates the modest rise and subsequent slump in Italian bourses to the more spectacular recent movements in New York, Paris, and other foreign Stock Exchanges. Foreign investors had begun to take interest in Italian variable dividend securities, which were deemed to be at a too low level, and the interruption in June and July of such foreign purchases in a market where national investors are timid may have contributed to bring about a revulsion of prices. A contributory cause of the spring rise may have been the impending stabilisation of the French franc. When stabilisation at about 125f to the pound sterling seemed imminent, some faint hope began again to be felt among struggling industrialists that Italy would follow suit and revise her level of stabilisation from 92.46 to about 120-125. If such a feeling was really widespread, and if it was a real factor of the May rise in the Bourses, is doubtful. It is certain that Signor Mussolini, in his usual trenchant manner, put an end to such wild hopes, for in a speech before the representatives of Italian industry assembled in Rome of June 22nd, he said: “Talk about the Government revising the stabilisation level in imitation of what France is about to do is grotesque, and the sales of lire to that end are criminal. These attempts to depress the lira will be again unflinchingly dealt with. On the basis of the present level there is already established an equilibrium which it would be sheer madness to change or imperil. The Government could not remain an hour more in office if it were guilty of such folly”.

The stabilisation decree of December 21, 1927, has had a sequel in a decree of June 17, 1928, and in the decisions of the general meeting of the Bank of Italy’s shareholders held in Rome, June 18, 1928. The administration of the bank of issue will be henceforth in the hand of a Governor (Signor Stringher), with a general director and a vice general director as his executive officers. They are elected by the general meeting of shareholders, but are approved by the Treasury. Shareholders will be represented by a general council, whose functions will be more supervision than effective direction. The capital will be increased from 240 to 500 millions lire issued and from 180 to 300 millions paid up. Of the new 200,000 shares, 100,000 are allotted to old shareholders without further payment, in consideration of old reserves, and 100,000 are allotted at the price of 1,300 lire each to Italian savings banks. Most important, from a general point of view, are the new regulations with regard to note issues. The Bank is obliged to hold a reserve in gold foreign securities of at least 40 per cent, of her total current debts, i.e., notes, cheques, current private deposits and Treasury deposits up to 300 millions lire. If the reserve should decrease below the 40 per cent, level and not below 30 per cent., the Bank will pay a tax equal to the official rate of discount increased by 10 per cent. For every further decrease of 10 per cent, in the reserve the tax will be further increased by 10 per cent. The notes and cheques not covered by gold reserves will be subject to a tax of 1.5 per cent.

The Treasury can ask from the bank advances up to a maximum of 450 millions lire at 2 per cent, yearly interest. Notes issued against such advances must be covered by the usual reserve of 40 per cent., but their uncovered portion is not subject to the ordinary 1.5 per cent. tax. No fixed proportion between the gold and gold securities portions of the reserve will be compulsory. Signor Stringher, in his report, uttered prudent but very significant hints about his intention of increasing the gold at the expense of the gold securities portion. The first and the last balance-sheets published by the Bank after the December 21, 1927, decree may be, from this point of view, summarised as follow (in millions of lire):

The interesting features are, first, the increase of gold proper and next the preference given to investments in foreign States bills as against private bills and banking deposits. As yet the increase in gold is not very marked, but Signor Stringher observes that the Bank of Italy “is not alone in the world, and we must not be at a lower level than other central banks of issue, which intend to give to their notes a real guarantee. We must not be in a hurry, but we must persevere patiently and continually in the same direction”. Which words mean, if they have any meaning at all, that the Bank of Italy’s future gold policy will be to increase slowly her gold and diminish her gold securities reserves, so as to be able to abandon the present gold exchange standard in favour of a gold bullion or gold standard.

The replacement of Signor Volpi by Signor Mosconi as Finance Minister has taken financial circles by surprise, but has not had any marked influence on business. Signor Mosconi is a Senator and Councillor of State. He was a Prefect, and is considered as a new man in financial problems. Chamber of Deputies and Senate Budget Commission’s reports urging economies in the public budget perhaps influenced the appointment. Certainly he has a very useful task before him in reduction of public expenditure.