Stock Exchange – Bank Rate – Foreign Trade – Industrial Activity – Sugar Import Duty

«The Economist», 12 gennaio 1929, pp. 60-61

Turin, January 6

The November boomlet was short-lived. The general average of variable dividend securities was at the end of December 88.29 (basis 100, December, 1925), which is higher than the 73.15 level of the end of December, 1927, but lower than the maxima of 90.56 and 90.43 reached at the end of May and November, 1928.

During the first week of the New Year there was a lively market in Fiat shares, which, having closed the year at 590 lire, shot up to 700 lire on favourable news of rising New York quotations; but at the week-end fell to 650. Bank of Italy shares went badly, losing about 180 lire per share, notwithstanding the free distribution of one share to every three old ones. It appears that a special technical reason for the fall of the leading Italian security was the prohibition of future dealings in it. Only cash dealings can be made henceforth in Bank of Italy shares, with day-to-day prolongations and no end of month settlements. The prohibition of futures aims at excluding speculation from the market of a security which is issued by a public body; but it took the market by surprise, and forced sales. Reviewers are searching for explanations of the Bourse depression. The rise of the offical rate of discount from 5 1/2 per cent. (June 25, 1928) to 6 per cent., which was announced this morning, can be dismissed as a real cause of the depression, as the Bourse market is financed quite independently of the Bank of Italy, and the sums needed for prolongations are today truly paltry.

The rise of the rate of discount appears to have causes deeper than the purely financial ones. In my last letter, while noting the increase in the cash gold reserves of the Bank of Italy from 4,547.1 million lire at January 10, 1927, to 5,051.9 million lire at November 10th, I stated that other gold reserves (gold foreign credits and foreign States bills) had decreased between the same dates from 7,558.8 to 6,038.4 million lire. A month later, at December 10, 1928, while the gold reserve was stationary, the foreign credits and bills reserve had further decreased to 5,944.2 million lire. The Bank of Italy is therefore acting very wisely in raising the rate of discount to counteract the outward movement of its gold reserve.

The easiest explanation of the decrease in the reserves is the foreign trade balance. The excess of imports over exports, which was 4,392.5 million lire in the first eleven months of 1927, increased to 6,789.6 million lire in the same period of 1928. A great part of the gap was presumably filled by the usual invisible items of credit: travellers’ expenses, freights and, though diminishing, emigrants’ remittances. The balance must be made up by opening of foreign short credits, a few long-term issues, some sales of Italian securities (Fiat, Snia, Pirelli, Isotta Fraschini, Montecatini, &c, shares); and, lastly, sales of gold credits and bills of the Bank of Italy reserves.

There are, however, reasons for believing that the big excess of imports over exports will in due time bear some good effects. In part the excess is due to the bad 1927 harvest, which forced exceptional imports of wheat and other foodstuffs in 1928; this should not be repeated in 1929, as the 1928 wheat harvest was better. Partly, however, the excess is due to the increased imports of raw materials and half-manufactured products. In the first ten months of the year imports of raw jute increased from 42,104 tons in 1927 to 47,973 tons in 1928 (131.7 to 144.1 million lire), of raw cotton from 173,411 to 189,932 tons (1,419.7 to 1,797 million lire), of raw wool from 30,881 to 38,895 tons (484.4 to 617.3 million lire), of dried cocoons from 1,042 to 2,023 tons (from 45.3 to 79.7 million lire), of broken iron, pig-iron and steel from 599,181 to 720,060 tons (244.4 to 240.2 million lire), of copper and broken copper from 48,947 to 65,200 tons (303.7 to 391 million lire), of cellulose from 94,075 to 141,158 tons (138.1 to 173.2 million lire). Industrialists, who during the revaluation process of the lira in 1927 had bought less and less raw material (the excess of imports, which was 870.6 million lire in January, 1927, sank to 144.0 in August), but had drawn on their stocks without replenishing them, began to take courage in past spring, when the stabilisation was some months old and the monetary situation once more seemed stable. The replenishing of stocks, with the consequent accelerated imports of raw materials, has inevitably put a pressure on the Bank of Italy reserves; but if the above analysis is correct, and no unknown factors are at work, exports should in their turn increase in 1929 and change the direction of the gold currents.

Reports from the industrial sections indicate an increase of activity. The employment percentage (number of men working in September, 1926=100), which was 94.7 per cent, at the end of August, increased to 95.6 at the end of September and to 96.3 at the end of October. Almost all industries report progress except silk spinning, shipbuilding and cement. Unemployment, after decreasing from the maximum of 439,211 at the end of January, 1928, to 234,210 at the end of July, increased again to 283,379 at the end of October, but is lower than at the end of October, 1927, when the figure was 332,240.

The wheat import duty was increased last September from 75 to 110 gold lire per ton, and the duty on sugar is now also raised from 24.75 to 36 gold lire. The duty was 28.85 gold lire before the war, was suspended during the war, abolished in 1923, put at 9 lire in 1925, and afterwards steadily increased. These increases will surely aid the extension and better culture of wheat and sugar-beet lands. But the crucial question is whether they will also aid the lowering of the cost of living, and therefore the cost of those agricultural and industrial goods which we must increasingly export in a competitive world if we are to pay for the increasing imports needed by our expanding population.