Proceeds of Loan – Bank of Italy – Exchanges

«The Economist», 7 maggio 1932, pp. 1024-1025

Turin, April 18

The outstanding event of the past fortnight was the remarkable success of the one billion lire issue of nine-year 5 per cent. Treasury Bonds, a success even more remarkable than was previously anticipated. The total sum subscribed was around 4,400 millions. This heavy oversubscription was in part due to the anxiety of capitalists anxious to secure the largest possible sum in case of allotments; but it was largely due also to a genuine offer of savings by the public. As Signor Olivetti observes in the Stampa, the fact that subscriptions did not proportionately reduce bank deposits, suggests that in Italy also there has been a certain amount of hoarding due to mistrust of banks and stock exchanges. The subscription, which whould have remained open until April 20th, was closed at the end of the second day, and an official statement soon afterwards announced that the Treasury would keep 4 billion lire, returning the remaining 400 millions to subscribers. On April 9th a motion was voted by the Great Fascist Council to the effect that 905 million lire were to be used in repayment of the 4.75 per cent. Treasury Bonds, due on November 15th, one billion to finance public works and State purchases of industrial supplies, one billion to meet the Budget deficit, and the last billion to be credited to the Liquidation Institute, so as to enable it to reduce its debt towards the Bank of Italy. Such an allocation is highly significant, as it means that, leaving aside the first billion, which is merely substituted for the old 4.75 per cent. Bonds, the other three billions will be divided into two parts, of which two are to be put into the State Exchequer. These two billions will go far to cover the 1931-32 deficit.

The most interesting utilisation of the proceeds of the loan is, however, that whereby one billion lire is credited, through the Liquidation Institute, to the Bank of Italy. The Bank of Italy balance sheet of March 31, 1932, shows on the assets side a credit of 1,613 million lire with the Liquidation Institute, which I have previously described as a reservoir of frozen assets, which should have been dried up little by little by means of generous gifts on the part of the State and the Bank. Its origins go back to the great postwar slump of 1921-22, when about 4.000 million lire of frozen assets -which really amounted to losses – were taken over from the Banca Italiana di Sconto and the Banco di Roma. With a patient stewardship, the figure was reduced to 626 millions at the end of 1930, to go up again in the spring of 1931, reaching at last the above sum, for which the Banca Agricola Italiana, a bank connected with the many Gualino ventures, were mainly responsible. The loss should have been made good by means of a yearly gift of 200 millions from the State Exchequer and of part of certain banking taxes and of the profits of the Bank of Italy. The allocation of 1,000 million lire out of the proceeds of the Treasury Bonds issue, will again reduce the credit of the bank to a manageable figure and enable it to reduce circulation correspondingly, or, according to the current opinion, to increase discounts and advances without resorting to inflation. In short, this Treasury Bonds issue, in so far as this one billion is concerned, would have been a device for snatching notes from timid hoarders and putting them again in circulation; a somewhat costly device, but understandable enough in these hard times. Much speculation is afoot as to who will benefit from the enlarged credit policy of the Bank of Italy. Discounts and advances reached on March 31^st the total of 5,637.7 million lire, against 4,371, 3,940, 5,213, and 3,853 at the same date in 1931, 1930, 1929 and 1928 respectively. There seems to be no need in the face of these figures for any reflationist credit policy. If easier banking facilities by the Bank of Italy are deemed necessary, it will probably be not so much for the sake of stimulating industry as of easing its financial situation, which, indeed, is industry’s most urgent problem at present, in Italy as elsewhere.

The solution of this problem, however, cannot be taken in hand at present, on account of the foreign exchange situation. During 1931 the gold held by the bank increased by 329.5 million lire; but the gold exchange securities diminished by 2,156.3 millions, with a net decrease of total reserves of 1,826.8 millions. During the first quarter of 1932 gold increased by 1.6 million lire, while gold exchange securities decreased by 636.5 millions. The total reserves on March 21st (5,627.9 millions gold and 1,533.7 millions gold securities) are, however, amply sufficient to guarantee a circulation reduced to 13,876 millions. The puzzle in the Italian position with regard to foreign exchanges and the balance of international payments is: since the excess of imports over exports in the first quarter of 1932 was of only 530.5 million lire, against which should be credited the invisible items of our balance of payments, certainly still favourable notwithstanding a decrease in foreigners’ expenditure and emigrants’ remittances, what is the cause of the decrease in the gold exchange securities held by the Bank of Italy? The recall of foreign deposits should have spent its force in 1931. Except for a rediscount of 367.8 milhon lire obtained by the Institute for Industrial Loans (Consorzio sovvenzioni valori industriali) from the Bank for International Settlements at Basle, there are no current capital sums due from Italy to foreign markets. On the contrary, it is probable that Italians have large foreign balances, though these are partly frozen. Professor Mortara, in the Prospettive economiche for 1932, also endeavours to solve the puzzle, quoting among other causes of the decrease of reserves in the face of a favourable balance of payments, possible purchases of future lire, exceptional credit terms to foreign buyers – Russian buyers for instance -difficulties in the cashing of foreign credits, keeping abroad by Italian exporters of their funds, and exports of capital. Reasoning from known data, and barring unforeseen developments, hopes are entertained that the tendency to a decrease in the foreign exchange securities held by the Bank of Italy may have spent its force, and that any further decrease will be due to a deliberate policy of the bank of exchanging gold securities for gold proper.