«The Economist», 3 agosto 1935, p. 231
A Royal Decree in the Gazzetta Ufficiale of July 22 provisionally suspended the duty of the Bank of Italy to keep a gold reserve not less than 40 per cent, of its note circulation and other sight liabilities. The last complete statement (that for June 30th) gives the percentage of gold reserve to total notes and sight liabilities as 41.55 per cent., and the percentage of gold proper to notes as 42.90 per cent. The Press emphasises that the suspension is due to the Treasury’s decision to pay in cash all sums falling due in foreign countries; and that to keep faith and pay debts is vastly better than a formal homage to the 40 per cent. idol. True; but it could have been added that the 40 per cent, rule is bogus, discarded in theory and unworkable in practice; and that the function of a gold reserve is not to be frozen, but to be used, and even exported, when necessity arises. The vital points for the future of the lira are not the little more or the little less of the gold reserve, but the quantity of notes issued; and further, as has repeatedly been remarked in this correspondence, the composition of the “discounts” and “advances” items. So long as the note circulation is about 13,000 million lire and other sight liabilities do not exceed the present 1,000 million mark; so long as discounts and advances and “other debtors” are subject to the usual ebb and flow around normal levels, the lira is safe. In the past Italy has experienced monetary troubles almost only as a result of the inordinate rise in “discounts and advances”, which means the issue of new notes against frozen assets. That way came the disorder of 1893, and also that of 1916 and the following years. There is no trace now of such expansion. The figure of advances to the I.R.I. (Institute of Industrial Reconstruction) is even decreasing; and the severe tradition inherited from Stringher’s days makes it reasonably certain that “discounts and advances” will be kept within due limits.
Turin, July 27.