Italy. The foreign exchanges scare. Extraordinary payments for wheat. Paper issues stationary. The inter allied debt problem

«The Economist», 18 luglio 1925, pp. 107-108

Turin, July 4

The new turmoil has apparently spent itself. The past month was characterised by a continuous rise in the foreign exchanges rates, which eventually took a rather alarming turn. The financial world has been since February last in an excitable mood. I have endeavoured to describe in past letters the origin and the phases of the crisis so far as relates to bourses, quotations of joint-stock securities, losses of operators, and so on. Operators, when their mind was concentrated on the slowing-down of prices of variable dividends securities, were not alive to the undercurrents in the foreign exchanges. Meanwhile, little by little there was originating in the exchange market a very delicate situation.

In the year 1924 imports were exceptionally heavy: 19,388.4 millions lire against exports of 14,318.3 millions lire. The adverse movement was accentuated in the first four months of the present year: 9,088.3 million lire on the side of imports and 5,346.1 on the side of exports. The excess of imports over exports, which was 5,070.1 million lire in 1924, reached 3,742.2 million lire for the four months, January to April, 1925. The most important cause of the adverse balance was the low wheat yield of the past agricultural year. In the four months from January to April, 1925, we were obliged to import 1,198,312 tons of wheat, against 582,865 tons in the corresponding months of the preceding year. The exceptional rise in the adverse commercial balance was not compensated by invisible exports. The number of foreign visitors in Italy is, indeed, increasing enormously, especially since April, in virtue of the jubilee year of the Roman Catholic Church. But we are feeling the pinch of diminished remittances of emigrants from America. In the first place, the quota of Italians admitted in the United States is ridiculously low; and, in the second place, emigrants already living in America are urged to deposit their savings in local savings banks, so that remittances to Italy may be diminished.

Against the increased need of foreign exchanges, importers were slow to cover themselves. When in the period January to April the price of the pound sterling oscillated between 115 and 117 lire, importers postponed covering, in the hope that the price to be paid might diminish. They preferred to borrow exchanges from month to month. Exchange borrowings were repeatedly prolonged, until early in June importers, seeing that foreign exchanges, instead of receding, continued to rise, suddenly took alarm. Then came a stampede, when, fearing still higher increases, everyone began to cover.

A second cause of the rise was the conduct of certain exporters, who, seeing sterling and dollars go up, preferred not to sell bills received in payment of goods sold abroad, in the hope of a more profitable sale later. The general public came third. When the pound reached 130 lire wild fancies spread: that the lira would be de-valued; that the Government planned the introduction of a new gold-lira, which the public assumed would mean outright cancelling of the present paper-lira. The beginning of official Washington conversations on the inter-Allied debt problems and the publication of the huge bill of $ 2,133 millions presented by America instantly persuaded some people that we would never be able to pay, that the State was bound to bankruptcy, and that the lira would follow the German mark. From Saturday, June 27th, to Wednesday, July 1st, we lived days of true panic. People began to sell Consols at every price: old 3.50 per cent. Consols were to be had for 58 lire net, new 5 per cent. for 80, Treasury seven and nine-year bonds were offered for 80 lire, a price which in certain cases of bonds falling due in 1928 signified an investment at 12 or 13 per cent. July 1st was the blackest day, when Consols and Treasury bonds found no buyers, and the exchange on London ran almost to 150 lire, and on New York to 30.60. The reaction from the worst was sudden. Signor Mussolini promptly issued a declaration that the Government had not even thought of a gold-lira; and the Washington conversations were suspended until the Italian delegates could bring back from Italy facts and figures illustrating the effective ability of Italy to pay.

At this point reaction was imminent. Foreign exchanges receded; and at the time of writing (July 4^th) the pound sterling is to be had for 133 lire and dollar for 28; old 3.50 per cent. Consols are up to 67.40; new 5 per cent. to 86.35; and seven and nine-year Treasury bonds to 91 lire. People are wondering how they were scared out of their securities at the level of 58 and 80 lire respectively.

Figures of total paper issues are as follows: – December 31, 1923, 19,674.3 million lire; June 30, 1924, 19,952.8. December 31, 1924, 20,514.2; May 31, 1925, 19,843.5. As long as the Treasury and banks of issue do not increase the quantity of paper issued, how can paper depreciate? In an editorial note, your newspaper wondered why Italy delayed, notwithstanding our good financial situation, to stabilise the lira at a fixed gold exchange. It is extensively felt in Italian financial circles that the problem of the stabilisation of the lira cannot be put on the practical stage until the problem of inter-Allied debts is settled. Very small sums can be paid by our taxpayers to the service of external debt. But Italy must know exactly where she stands before embarking on new monetary schemes.