Note Issues and Prices – Trade Balance – The Exchange Outlook

«The Economist», 29 maggio 1920, pp. 1203-1204

Turin, May 21

Signor Bonaldo Stringher, general manager of the Bank of Italy, has published a second edition of his “Notes on the Position of Circulation and the Money Market During and After the War”, which had proved so interesting to students of public finance in Italy. This second edition is even more useful, as it brings up to date figures and facts which it is very difficult to gather elsewhere. He gives the following figures of issues of paper money in millions of lire:

So far as I am aware, this is the only authoritative and complete statement of the various note issues in Italy. A few words may be useful to explain it. The bank notes are divided in two sections – notes issued for account of trade (loans on collaterals and discount of trade bills), and notes directly issued to the exchequer. This second section corresponds roughly to British ways and means advances; these are notes which the three banks of issue hand over to the exchequer at a nominal rate of interest (from 0.10 to 0.25 per cent.), so that the exchequer may be able to make current payments. It is financing the war by paper issues.

The first section of notes – “trade notes” – are covered by gold and silver, and equivalent reserves, or issued against trade bills or loans on collaterals. It is highly probable that, if during the years from 1915 to 1917 the whole of this section were genuine trade issues, during 1918 and 1919 the figures were swollen by causes not connected with trade, but with war. The situation between trade and State issues is not today so clear as it was formerly.

The State notes, corresponding to British 10s and £ 1 “Bradburys”, went on increasing as prices rose. The same allegations are heard in Italy as in Great Britain from Treasury circles that not a single note has been issued beyond the requirements of trade necessity, and the same replies come from the economists, namely that the continued issues are the causes of the increases of prices, and of the increased clamour of commerce for more and more notes. The figures in the last column relate to the small notes for one and two lire (10 or 20 pence at the par of exchange), which were issued after September, 1917, to provide a substitute for silver coins, which were fast disappearing from active circulation. At December 31, 1920, against the 262.4 millions lire of little notes existed a reserve of 175.6 millions lire of silver coins. At the high price of silver the wisdom of not selling this silver stock is questionable.

As the total paper issues increased prices went up. The index number of Professor Bachi (basis 100 on the mean of 1901-05, as in the Economist index) was 119.8 for 1914 (mean of monthly index numbers), 167.2 for 1915, 251.6 for 1916, 381.9 for 1917, and 515.5 for 1918. The mean index number for 1919 is as yet not calculated, but the figure was 572.8 at December 31, 1919. The prices upon which Professor Bachi makes his calculations are wholesale prices. The increase in the cost of life for working and middle classes is less than 472.8 per cent.; perhaps 300 per cent. But it is sufficient to explain the unrest among the masses.

Space forbids me to point out the reasons which causes me to hope that the worst point has been surpassed. Owing to the brilliant success of the last (sixth) National loan – 20 billions lire, a truly astounding figure for Italy, of which, however, 13 billions were paid in exchequer bills and other short-dated State debt certificates, and only 7 billions in cash – a stop has been put to new increases in notes issued. The figures for February 29th and March 20th point to some reduction. If the stop is to be final, better times are ahead of us.

The figures of our international trade are also promising. I give the figures for January and February, 1920, the latest available (in millions of lire):

The prices for both years are those of 1919, so that the figures are significant for quantities and not for values. But the trend of the movement is unmistakable. The balance of trade is redressing, and as the movement dates from July, 1919, we may hope that at last the lira will appreciate in the International markets, provided that the check to new note issues is severely maintained.