Currency circulation and compulsory wheat pools

«Review of the economic conditions in Italy», marzo 1947, pp. 65-70

There is a problem which should claim the attention of every banker. The following table gives statistical data over a series of years on the amount of rediscounts made by the Banca d’Italia in respect of wheat pools:[1]

The fact that the figures given in the table above show a marked increase from year to year beginning with 1942 should cause no surprise. They merely reflect the rises in the prices paid to farmers from 200-300 lire to the present 2,500 lire. Next year, when the prices paid for foreign wheat (basis $ 2.60 per bushel, equivalent to 110-120 dollars per ton F.O.B. Genoa or Naples, which at the present current rate of

amounts to 44,000-48,000 lire per ton) will mark a further rise, the amounts discounted for the pools will increase still further. This is a feature of the problem well worthy of study, though it is not the most interesting in so far as the monetary circulation is concerned. What is of special interest in these last years, is the constantly growing trend of the series. While from 1940 to 1944 the amounts fell to a minimum towards the month of June, in correspondence with the junction between the old harvest and the new, in the last two years there has been only a slight, almost imperceptible flection; and whereas until 1943 the indebtedness of the Banca d’Italia began to diminish as early as December, in 1946 the maximum amount of 30,572 million lire was reached, and the figures for rediscounts have risen still further in January and February of the current year.

The enquires to which this situation may give rise are several. If there had been no pools what would have happened to this figure? If we suppose that the habits of farmers are such that they are willing to keep the wheat in their own granaries until such time as the consumers are ready gradually to absorb the stocks available for immediate use, taking into due account the time needed for grinding and bread making; and if we also suppose that millers, bakers, and edible paste manufacturers possess stocks of their own to tide them over the interval between the purchase of the wheat or flour and the sale of the flour, or bread, or edible paste, we should come to the conclusion that, in the absence of the pools, the transfer of the wheat from the farm to the consumer’s table might have taken place without recourse to the banks. This hypothesis was indeed valid in some parts of Italy, less so in others, where the farmers were more in need of money and the millers were obliged by local conditions, or by the size of their business, to handle quantities of wheat exceeding their available financial means.

In the case of those farmers who kept their stocks of wheat in their own hands, we may say that, instead of depositing with the banks the lire they would have obtained by the immediate sale of their wheat, they preferred to keep the latter on deposit in their own barns. They renounced the interest they might have received on their bank deposits because they judged it of less value than the rise they hoped for in the price of the wheat they held in their barns, and because they preferred to that money the feeling of security arising from the possession of the wheat and the joy they felt in seeing and letting their friends and neighbours see the fine well-stored heaps of grain. We make a mistake in attaching too little importance to these two feelings. We owe to the former the supplies provided at the opening of the two great wars by the numberless small stocks scattered all over the country which saved many and many people from hunger. Instinctively, a great number of farmers did what the Swiss Federal Council advised all its citizens to do before the opening of the last war: «let each of you accumulate stocks of food, stocks of all the things you need. We, the Federal Government, we also shall accumulate, but help us by forming, each of you for himself, a small family stock». In contempt of the laws which made even small hoarders liable to terms of imprisonment and fines, many Italians did what the Swiss Federal Council had urged as a patriotic duty; and such stocks, above all those held by the farmers, turned out to be of the greatest use. No less useful is the other feeling, that of pride, which induces the farmer to hoard in his granary the fine heap of wheat. It leads to a saving of the interest rates on the capital value of the wheat, it saves above all the costs of storing and conserving the wheat in Government warehouses. It costs the land-owning farmer, the tenant farmer, the metayer nothing to store the wheat and turn it over and over again once a week. This affords us a typical example of the utilisation of unoccupied means of production: the granary is there, the shovels are there, there is the farmer who takes pleasure in hearing the rustle of his grain turned over by the shovel; there is also the cat lying in wait to catch the rat.

All these things, to the extent in which they existed, have now ceased to be. The farmer is compelled to deliver his wheat to the Government pool where an official makes him sign a great number of very long forms, and shortly afterwards pays him the established price. With whose money? Partly with that of the banks which draw it on their deposits, and partly with that of other institutions which either have no deposits or have only scanty ones, and must apply for discounts to the Bank of Issue. And thus arise the 30 milliard and 572 million lire worth of notes issued up to December 20, 1946, and the 33 milliard and 331 million lire reached on February 20, 1947, with which the notes of the pools were rediscounted.

The fact that the Banca d’Italia has witnessed – I say «witnessed» because their origin in not due to an operation of its own free choice but depends on the law as well as on the political-economic system which has grown up in the country and with which it must necessarily comply – these notes arise solely in connection with the pools, does not mean that the volume of the monetary circulation has increased by a like amount. What did the farmers do with the sums they received, in advance and may be even against their will, for the wheat they sold? Some of the notes they hoarded, stuffing them into their big wine or oil bottles to protect them from the rats, and these notes represent that part of the currency – and some surmise it is a very considerable part – which so long at it is hoarded does not influence prices. Some of them were deposited in the post-office savings banks or other banks from which they flowed back, by various ways, to the Treasury. In this case – other things being equal – they have increased the balance of the Treasury current account, or they have gone to swell the current accounts of the banks with the Bank of Issue, and in both cases, as the notes returned to their original source, the circulation was reduced in like measure, or, to express it otherwise, it is thanks to them that the circulation has not increased by more than 33,331 million lire.

It would nevertheless be a mistake to suppose that these two uses – hoarding and depositing with the banks – offer a full explanation of what has taken place. I am under the impression that the major part of the money received by the farmer for the products delivered to the pools has been spent to pay their hired labour, to meet family expenses, and for the purchase of instrumental goods: ploughs, carts, fertilisers, calves, sheep, etc., of which they had long been in need. We shall feel later on the benefits of this improved equipment of the farms; meantime we have to note that the paper lire printed by the presses of the Bank of Issue in so far as they were, when issued, new notes added to those already in existence, exercised, to the extent to which they were spent, their natural effect: they represented new demand not offset by new products which could not be created by virtue of the notes themselves, and they therefore caused prices, wages, and incomes in general to rise. To some unknown extent these notes have stuck to the thing and become part of the necessary circulation. In one form or another, in this or that item of the balance-sheet of the Bank of Issue, we shall find that this part of the notes, issued for pool requirements, has now become part and parcel of the necessary currency in circulation of which we shall never again be able to get rid.

The problem may be stated in yet another way. Let us suppose that in the absence of the pools, in an agricultural region different from that first imagined, the farmer was in the habit of selling his wheat at once to the miller to turn it into cash and that the miller was in the habit of obtaining credit from his bank to meet the needs of the wheat season; and let us further suppose that the bank took all these wheat bills and rediscounted them with the Bank of Issue. If the sum amounts to 30 milliards and if the notes are newly issued, how long will it take for them to return to the bank? Within the usual four months, if that time suffices for grinding the wheat, turning it into bread and edible pastes, and if the price paid by the consumers returns from the baker to the miller, and if the latter honours his bills when they fall due. There may be some renewals; the 30 milliards will not be presented all at once to be rediscounted, but will be scaled out over the agricultural year, but it would seem that, as a rule, they should return in full to the Bank.

But in case of the pools, working in conjunction with the political price for bread and edible pastes, an essential difference can be observed. Of 2,700 lire paid by the pool authorities to the farmer and of the further 2,300-2,400 lire paid for the processing of the wheat, less than half follows the usual path, returning from the consumer to the baker, from the baker to the miller, and from him to the bank, and finally to the Bank of Issue; but the original 2,700 lire are paid by or debited to the Treasury. Soon, if there is no change in the political price of bread the sum will be much larger. But the Treasury reimburses the Bank only to the extent to which it is able to meet the «total amount of Treasury expenses» from tax receipts and by recourse to the money market (loans, Treasury bills, bank deposits). Beyond those limits, it does not reimburse, or does so by opening credits on other accounts, without any actual return of notes. As we may classify Government expenses according to a debatable scale of priority, if we suppose that the expenditure incurred for the political price of bread is avoidable, and if we suppose further that it is all in excess of the volume of public expenses that can be covered by tax receipts and by recourse to the money market, we are led to the conclusion that, on the basis of such suppositions, all the 2,700 lire of the price of wheat are a permanent burden on the currency circulation.

The considerations above set forth are only some of those that may be made on the obscure problem of the influence the compulsory pools exercise on the circulation. To the extent to which it can be asserted that the pools cause a permanent increase in the volume of the circulation, it can also be asserted that they obtain the contrary effect to that which the legislator wished to secure. The purpose of the pools was to combat one of the factors leading to a rise in the cost of living, but they have led, instead, to a general rise of prices, i.e. a rise in the cost of living which is probably much heavier than the rise in the price of bread which they prevent. Good intentions in this case are matched by evil results; with this aggravation, that when, to avoid increasing losses, it will become necessary to abolish the political price of bread, the rise in prices which has already occurred will remain as a permanency. This will do no harm to all those, and let us admit they are the majority, who can bring their own prices, their own wages and salaries into keeping with the increased price level; but it will be devastating and deadly for those social classes who, in whole or in part, will be unable to rise to the surface again.

Before closing these pages I again wish to warn readers that the conclusions here reached are hypothetical, and only hold good to the extent to which the hypotheses on which they are based hold good. And these are only some of the possible hypotheses, and their only purpose is to invite student and bankers, who are those best acquainted from the inside with the problem of providing the monetary instruments required by the pools, to bring forward other hypotheses, of a different and more complete character.