New Loan – Passing of the Treasury Crisis -Exchanges, Prices and Wages

«The Economist», 11 dicembre 1926, p. 1011

Turin, November 27

No new features have developed since my last letter in the stock exchange markets. The number of securities which change hands daily is small; as can be seen from the interesting figures which are for the first time summarised by the Treasury, foreign exchanges hover between relatively small limits, excepting the French franc, whose fluctuations are more pronounced. Public attention is focussed on the new 5 per cent, national loan issue. Although the price of the old 5 per cent, is only about 84 to 84.50 lire, which, with a coupon of 2.50 lire due a month hence, means about 82.50 net, the new issue is a success. At the date of writing subscriptions total 1,000 millions lire. Undoubtedly subscribers are moved by a patriotic sense of duty. They feel that the Treasury must be put in a strong position, so as to be able to pursue a definite policy of defence of the lira. It appears from the Treasury account of October 31st that during the month of October 725 million lire of Treasury short bills had to be repaid on falling due. The cash in the exchequer went down to 62 millions lire, and the Treasury current account at the Bank of Italy, which at the end of February was 2,669.7 millions, and was still 1,970.4 millions at June 30^th, was reduced to 632.1 at September 30^th, and had been turned at October 31^st into an overdraft of 129.7 million lire. At present the crisis, thanks to the consolidation of the Treasury bills, is over. Effective revenue in the first four months of the fiscal year, from July to October, was 6,287.4 against 5,984.1 expenditure, with an excess revenue of 303.2 million lire. As the only cloud in the Treasury sky were the bills becoming due, the way is open, with good revenue coming in and the proceeds of the loan, to the solution of the monetary problem.

Public opinion is somewhat incensed by what seems to be unjustifiable resistance by the retail trade to the reduction of prices. At a meeting of the High Council of National Economy proposals were made for accelerating the process of adaptation of prices to the improvement in the gold price of the lira. It cannot be said, however, that wholesale and retail prices have been insensible to the improvement in the foreign exchanges. The following table was construed from the figures published in the new Monthly Bulletin of the Central Statistical Board (Bollettino mensile di Statistica dell’htituto centrale di Statistica del Regno d’ltalia, Numero 1., November, 1926, Libreria dello Stato). Hitherto current official figures had to be sought in the useful appendices to the monthly Treasury Account. Henceforth the Treasury Account will again contain only budgetary, public debts, and bank of issue official statements. Economic and financial statistics will be published in the new Monthly Bulletin of the Central Statistical Board, which is put under the energetic direction of Professor Corrado Gini. The first number is a rich mine of data, from which it would be possible to quote at length. As to the problem of the relations between foreign exchanges and internal prices, the figures in the Bulletin are as follows:

The conclusion is that the gold price of the lira fluctuated very much more than prices. Against an increase of 111.3 points between January and August in the gold price (i.e., dollar or sterling price) of the lira, wholesale prices increased only 32.4 points, and retail prices even fell 13 points. When foreign exchanges improved and the gold price of the lira diminished 130.9 points, from the end of August to November 15^th, wholesale prices diminished only 46.1 points, and retail prices even increased (up to the end of October) by 20 points. It cannot be said that fluctuations of foreign exchanges do not reflect themselves on internal prices; but their influence is slow, and sometimes is not wholly spent when a new movement begins in the inverse direction. Probably wholesale prices would have gone up after August, if the direction of foreign exchanges had not been inverted. One must add that wholesale prices would make a better showing, from the consumers’ point of view, if it were not for the British coal strike and its repercussions on prices of metals and on freights. The only group which marks an increase between January and the second week of November is the mineral and metals group from 625.0 to 767.3. Therefore, when the consequences of the coal strike are over, the general price index will go down. Wages are continually increasing, but are as yet lagging behind in comparison with the cost of living. There is, therefore, a just ground for the contention of the workers’ corporations that wages must not be reduced, and that, although rising, they are not in equilibrium with the increase of prices. Prices will have to move a long way downward before wages can be touched.