Credit to Agriculture – Reduction of Deposit and Discount Rates -Credit Restrictions – Increase in Gold Reserves -Possible Stabilisation

«The Economist», 22 ottobre 1927, pp. 698-699

Turin, October 10

The credit situation was debated in the Press during September, especially as it affects agriculture, where the price slump in cereals, rice, and cattle is greatly distressing farmers. Meetings were held in Turin and Rome between representatives of Real Estate Loans Bank (Istituti di Credito Fondiario), Savings Banks, and other public credit bodies with the object of creating funds for promoting agricultural improvements and giving short credit to farmers after the harvest. Farmers complain of being obliged to undersell their products as soon as harvested to pay expenses, taxes, and current debt, and hope that, if they are granted liberal credit at low rates, they will be able to postpone their sales and thus obtain better prices. It is interesting to observe, however, that they prefer short credit to long amortisation (30 years) loans, fearing, as Minister Belluzzo observed, obligations in fixed amounts of lire which may, over a long period, change greatly in value. To overcome these fears, and to encourage agricultural improvements, the State grant aid up to 2.50 per cent, towards payments of interest on loans mortgaged on land, and applied to the increase of production. These loans should be financed from sale of long-dated securities, or from deposits of savings banks; not from current bank deposits. In the field of ordinary banking there must be plenty of funds, as the big four banks have announced another reduction from October 1st of the rate of interest from 4.50 to 3.50 per cent, on sight deposits, from 5.50 to 5 per cent, on three months’ deposits, and from 6 to 5.50 on deposits of longer term. Discount rates have also been reduced from 7 to 6.50 per cent. The maintenance of the official rate of discount at 7 per cent, may, however, suggest that the restrictive credit policy of the Bank of Italy is unchanged. The following table, abstracted from page 602 of the September Official Bulletin of the Central Statistical Institute, seems to lend colour to the suggestion. For clearness and brevity I have left out figures of State notes (5 to 10 lire), decreased from a maximum of 2,427.7 millions lire (December 31,1923) to a minimum of 1,117 millions lire (August 30, 1927), but partly counterbalanced by the introduction of new silver coins for 5 and 10 lire; of the gold deposited in foreign countries, and of the silver coins, as being earmarked for special uses:

The obvious and the most interesting deduction from the above figures is that the change which is going on in Italy at the present is not so much due to circulation as to credit deflation. The circulation proper (notes issued by the three issue banks and now by the Bank of Italy) is lower than the high-water mark of December 31, 1925; but it is not lower than in May, 1926, and December, 1923, and approximates the average of the last five years. The “potential” circulation – i.e., the private and public deposits, which the Bank of Italy may be obliged to reimburse at sight, being in that case forced to issue new notes – is less than at the maximum of December, 1923, and May, 1926, but is higher today than at any moment since June, 1926. The most interesting change to be found on the assets side of the Bank of Italy balance-sheet. There is a big continuous decrease in the amount of discounts and advances, which today are 5,500 millions lire less than at the end of December, 1925. Whether the credit deflation is a cause or a consequence of the improved foreign exchanges is something akin to the problem which of the two, the egg or the hen, was the first. Probably, at the beginning, there was some credit deflation; then came the improvement in the foreign exchanges, and, in their turn, better foreign exchanges reduced the need of circulating capital in industry and trade and of recourse to the Bank of Italy’s discounts. As, however, on the liability side there was not any decrease after August 30, 1926, there must have been found a new investment in place of the greatly decreased discount and advances. For the new investment you must look at the gold in Italy and gold credits in foreign countries’ figures. These are not, as other figures, in paper lire, but in gold lire. Therefore the increase between August, 1926, and August, 1927, of 35.9 million lire in the gold holding and of 928.8 million lire in foreign gold credits (sight or short-dated securities or gold deposits in foreign places), total 964.7 millions gold lire, corresponding at the present rate of exchange to about 3,500 millions paper lire. If we may trust a subtle interpretation of Signor Mazzucchelli in the last number of the Rivista Bancaria (Milan), the Bank of Italy possesses, in addition to the above gold coin and bills reserve, another reserve hidden under the description of “miscellaneous debtors”, corresponding to about 1,500 millions paper lire. Bank of issue figures are always difficult of interpretation, as the secretive-ness of the Bank of England directors proves; but one may feel on sure ground in suggesting that what happened was partly this: – Big Italian manufacturing concerns particularly public utilities, raised gold loans in the United States, and were thus enabled, by the cession of the gold proceeds of the loans to the Bank of Italy, to reduce their overdrafts here, so that figures of discounts and advances of the issue bank could greatly diminish without havoc. This is a partial interpretation, because about 450 millions gold lire of the increase in foreign gold credits has come, not from purchases of the gold proceeds of private concerns’ loans, but from the cession of the Morgan State loan of 90 millions dollars. The outcome is that the Bank of Italy is at present in a very strong situation, because against an actual and potential circulation of 21,440.3 paper lire she holds a gold and gold bills reserve of 2,388.4 millions gold lire, equivalent, including the 1,000 millions paper lire of hidden reserve, at the present rate of exchange, to 9,600 millions paper lire – i.e., to 44 per cent, of total banking circulation. If we note that since the compulsory consolidation of last November, no short-dated Treasury bills have been outstanding, we can conclude that Italy could, if she wished, legally stabilise the lira at the present level of 90 lire to the pound sterling.