Italy’s finances

«The Economist», 15 giugno 1940, p. 1043

The report of the Governor of the Bank of Italy, Signor Azzolini, to the annual meeting contained the following figures for December 31st, except this year:

The gold reserve has steadily fallen and there has been an increase in sight habilities. If it is assumed that discounts and advances correspond to the demand for money on the private market, while ways and means advances vary according to the needs of the public Exchequer, the major part of the increase in the note circulation can be explained by the exigencies of the State.

INCREASED STATE REQUIREMENTS. – This assumption requires, however, some qualification, since discounts and advances also reflect the increasing intervention of the State in economic activity. For example, the decrease in advances is entirely due to decreases of 330.8 and 381.9 million lire in the advances guaranteed by the Redeemable Compulsory Immobiliar, 1936, Loan and the 5 per cent. Rentes, respectively, both of which advances were made to facilitate the issue of the loans. The increase of 1,129 millions in discounts is mainly due to the financing of the purchase and processing of wheat by public State bodies, to purchases of cocoons, wool, hemp, rice and other materials, and to the discount of short-dated Exchequer bills.

The new State economic activities are in fact the best source of profit to the Bank of Italy. Trade discounts proper seem to be diminishing, in accordance with the policy of making the Bank of Italy a true central bank, and were only 149.5 millions at the end of 1939. Except in September, however, the banks, being in funds, did not offer their commercial paper for rediscount, and the Bank of Italy’s best customers are now the public bodies which finance armament and other essential industries and the purchase of agricultural products.

The requirements of the State are, however, the principal cause of the increase in circulation. Advances to the Treasury increased by 2,000 million lire in 1938 and by 6,000 millions in 1939. Ordinary expenditure in 1938-39 was 33,353 million lire, and extraordinary revenue 6,500 million lire, while revenue amounted to 27,576 million lire, leaving a deficit of 12,278 millions against 11,174 millions in the preceding year. Assuming that the advances by the bank to the Government were divided evenly between the half-years concerned, the Budget deficit of 1938-39 was covered as to 32 1/2 per cent, by the issue of bank notes, compared with a corresponding percentage of just under 9 the year before.

COST OF LIVING. – Signor Azzolini stoutly denies that the increase in circulation is inflationary, alleging that it was preceded and caused by the rise in prices. Prices have undoubtedly increased: the 1939 index number of wholesale prices at 99.4 (1928=100) was 4.3 per cent, higher than that of 1938, and from August, 1939, to February, 1940, the increase was 14 per cent. The cost of living increased by over 17 per cent, between March, 1939, and March, 1940. Average wages during the first ten months of 1939 were 10 per cent, higher than in the corresponding period of 1938. There was a general upward revision of wages and salaries amounting to 6-10 per cent, in March, 1939, and another of 10-15 per cent, in March, 1940. When allowance is made for the increase in employment, Signor Azzolini maintains that working class real income has remained stable.

June 1^st.