Rate of exchange, budget and economic conditions in Italy

«The Economist»,27 settembre 1913, pp. 606-608

Sir, – As I am the editor of the Riforma Sociale, of whose annual supplement by Professor Bachi, entitled L’Italia Economica nel 1912, you published a lengthy review in your issue of August 30th, I think you will consent to a few comments on some of your reviewer’s observations.

First, as to the rate of exchange. Your reviewer, quoting Professor Flora, writes that the present high rate of exchange, due in part to the issue of £ 5,000,000 (125 million lire) in Treasury bills, is equal to an additional tax of 82 million lire on 3,604 million lire of imports, or to a tax of 1,250,000 lire on the 60 million lire paid by the Exchequer on the Public Debt.

As a matter of fact, the £ 5,000,000 were not Treasury bills, but gold transferred from the Cassa dei Depositi e Prestiti, where they lay as a guarantee against the State notes, to the Treasury, and thence to the Bank of Italy’s reserve, to be used eventually as a guarantee against a corresponding issue of £ 5,000,000 of additional bank-notes. Moreover, the five million additional bank-notes were not issued, and could not, therefore, cause the rise of the exchange.

I do not think that the high rate of exchange, which rose from 100.50 in the year 1911 to 102.80 in the first months of 1913, to decline recently, in August last and in the present month of September, to 101.40, is equal to a tax of, say, 3 per cent, on the 3,500 million lire of imports. If the price of imports is raised the price of exports is correspondingly raised; and as the exports, visible and invisible, amount to the net figure of 3,500 million lire, the gain is theoretically equal to the loss. The high rate of exchange is pernicious, as economic theory shows, not because it is high, but because it fluctuates, first rising and the declining. As all prices do not fluctuate at the same rate, some producers and consumers and creditors are bound to suffer, while other producers and consumers and debtors gain; and it happens that the greatest number will suffer, while the relatively few gain.

As to the causes of the recent fluctuations of the rate of exchange, opinions differ widely in Italy. Some eminent writers – and their opinion is corroborated by the high autority of Signor Stringher, the director-general of the Bank of Italy, and of Signor Tedesco, the Treasury Minister – ascribe the rise to unrest in European money markets, accumulations, and perhaps to some decline in the invisible exports – i.e., in the credits for remittances of foreign visitors in Italy and Italian emigrants abroad. These writers assume that the mischief will in the end mend itself, the money markets will be again normal and the currents of invisible exports will again flow towards Italy; and they point to recent experience – the last decline from 102.80 to 101.40 – as a proof of their thesis. Another group of writers, to which I belong, think that the greatest part of the rise of the exchange rate is due to over-issue of bank-notes between December, 1910, and December, 1912. Previous to the £ 5,000,000 operation – to which your reviewer alluded – the total bank and State note issue increased from 2,468 to 2,678 million lire.

The increase was probably in part the consequence of a decrease on the credit side of the Government current account with the Bank of Italy. The Bank of Italy is the banker of the Government; and the Government deposits are high or low according to the state of the Treasury, as is the case in Great Britain as between the Treasury and the Bank of England. Up to 1911 the credit balances in favour of the Government were sometimes very high, up to 300 million lire; in 1912 they fell below 100 million lire. To reimburse the public deposits, the Bank of Italy was compelled to issue notes, and so the note circulation rose. It is true that these notes were entirely covered by gold and silver; but we contend that a note issue which is not exchangeable at par can be excessive, even when fully covered.

The debate, which has been carried on in scientific reviews like the Giornale degli Economisti and the Riforma Sociale, and in daily newspapers, such as the Corriere della Sera, Giornale d’ltalia, Tribuna, Stampa, Economista d’ltalia, was highly interesting, and many of the arguments used were akin to those which were current in Great Britain in the first and second decades of the last century. I hope that the practical result of the controversy will be satisfactory. The opposing groups have maintained their original views; but the director-general of the Bank of Italy has emphatically asserted its intention of limiting the existing issue till the rate of exchange falls below the gold point. Second, as to Budget manipulation. Your reviewer unfortunately confuses the careful and prudent observations of Professor Bachi with the comments thereon, couched in strong and technically incorrect journalistic language, of the Critica Sociale. The truth is that our Italian Budget methods are somewhat too refined and scientific. Our national Budget is divided into four sections: I. Effective income and expenditure; II. Railway building; III. Capital accounts; and IV. Sums which appear alike on the credit and debit side of the Budget. Leaving out of account the fourth section, which is purely figurative, one may easily perceive that the nature of the first section is entirely different from the second and third section. The first section comprehends the effective income by direct and indirect taxes and the effective annual expenditure. The second and third sections relate to expenditure on capital account, which can be rightly offset by issue of debts. If you build a railway which costs 100 million lire you can rightly incur a debt of 100 million lire, as the railway will not consume itself in a year. In practice, the railway and other capital expenditure in past years were partly offset by excess of income over expenditure in the first section, and partly by issue of debts. The real surplus in Italy cannot be gauged without considering all the sections of the Budget.

There are, moreover, several separate accounts, which do not enter into the Budget, e.g., the Budget of the State railways, the Budget of the Commissioner of Emigration, of the Religions Fund, and the all-important Treasury account. Expenditure on the war in Lybia was first charged to the Treasury account, to be amortised in successive years by appropriation of the Budget surpluses. Over 200 million lire have been thus amortised up to date.

I admit that these Budgetary methods are somewhat complicated; and some eminent Parliamentarians have criticised the present Government on that account for concealing from the public the true cost of the war. But even in Great Britain some expenditure has in the past been charged to separate accounts, if not without expostulation; and I suppose that the German and Austrian and Russian Budgets are much more difficult to analyse than our Italian Budget. It might, I think, be made more clear to the general public; it is clear enough to those who understand the principles on which it is based. To the initiated it seems a not over-difficult task to unravel the mysteries of the various capital and current accounts contained in our Budget and in the annexed accounts.

The gist of Signor Bachi’s argument is that the Budgets after 1910-11 are not comparable with the Budgets of a decade ago, as the contents of the various sections were changed in the meantime by laws and regulations; so that a surplus in 1912-13 is a different thing from a surplus in 1900-1901. Several competent men have in and out of Parliament advocated a return to previous rules, which they consider more clear, and have opposed the new methods, by which an actual expenditure is spread over a number of future years, or the gross amount of public debt increased in various ways not clearly perceptible by the general public, as by subsidies to railway companies, &c. There are many men in Italy who think that our Budgetary methods, however theoretically perfect, may be usefully amended; but it is incorrect to describe – as does the Critica Sociale, which your reviewer quotes – a Budget as false which is technically made up according to existing laws and regulations.

Lastly, as to the present condition of Italian industry and commerce. As I write from the country I am not in possession of the statistics which would enable me to give an exact review of actual conditions. I am not, therefore, able to gauge the accuracy of your figure of 800,000 probable emigrants from Italy this year. The figure seems exaggerated; but, were it correct, I would point out that the rise of emigration in 1913 is common to other European lands – in the first eight months of 1913 the emigrants from the ports of Hamburg and Bremen were 306,879, against 193,108 in the same period of 1912 – and may be in part explained by the more attractive economic outlook in the immigration countries.

I would summarise the conclusions of Bachi’s Annual and of subsequent facts as follows:

1. Italy is going through an economic period requiring the greatest care and wisdom on the part of the leaders of commerce and industry. After some years of prosperity the world is faced by the possibility of a crisis. Italy cannot escape the common fate of all other countries, if that fate is to be realised.

1. Greater caution is needed in Italy than in France, in Great Britain, or in Germany, but not greater than in Austria-Hungary, because of the depressed situation of some great industries, e.g., cotton, iron and steel, silk, &c. The root of the evil for these branches of industry lies in the overproduction which commenced after 1900, and culminated in 1905 and 1906, which were years of feverish activity.

1. The Lybian and Balkan wars, by their pressure on the money market, have aggravated the depression by which these industries were already afflicted; but the depression originated in over-investiment, over-capitalisation, an excess of floating debts. The industries which were not already in a bad way from internal causes have not felt as yet serious losses in consequence of the war.

1. Much will depend on the present agricultural outlook. As the 1913 wheat crop was good and reports of a good wine crop are coming in, I hope that the agricultural section of the population, which is the backbone of Italian economics, will be flourishing. As an index of the conditions of the agricultural community, one may quote the figure of the new deposits in the postal savings banks, which are mostly agricultural savings, and which are in the first seven months of the present year 37,833,282 lire higher than in the corresponding months of 1912.

1. The savings of the urban section of the population seem also not to have diminished. The 400 million lire of new Exchequer five-years 4 per cent, bonds have been entirely absorbed, and during 1913 capitalists have been buying no inconsiderable quantities of foreign bonds and rentes. No one can guage the sum of Italian investments in foreign securities, but, as a guess, I will quote a figure of from 50 to 100 million lire yearly, which may be a very small sum for Great Britain, but is a great sum for us, but now emerged from the list of debtor countries. Italy is not as yet a creditor country, but the interest and dividend item is bound to be in future years a not indifferent item on the credit side of our international balance of payments.

The crucial economic problem of the moment seems to be the elimination of the consequences of past over investment, and the freedom to be given to labour and capital to invest in industries natural to our country. Two different methods are advocated to that end. The old Protectionist method, which claims State aid to suffering industries, and higher and more “scientific” protection to promising branches of industry and agriculture; and the new Free Trade method – which is a revival of the older Cavourian system – which insists on the necessity of freeing the numerous branches of Italian industry and agriculture, whose productivity is high and is naturally rising, and which are capable of utilising the great capabilities of our intelligent, able, skilful working people, from the chains of high prices of raw materials and food. A movement is being organised by the Lega Antiprotezionista, which already has ramifications in Rome, Turin, Milan, Florence, &c, for bringing the truths of Free-trade before the public.

Much more could be said on the various aspects of Italian finance and economy, but I fear I have already trespassed on your valuable space. – I am, Sir, yours truly,

Luigi Einaudi

(Professor of Finance at the Turin University

Editor of ha Riforma Sociale)

Celle Ligure, September 9^th, 1913.