Stock Exchange Situation – Unemployment – Foreign Trade -New Issues and Savings – Bank Balance-Sheets

«The Economist», 8 gennaio 1927, pp. 68-69

Turin, December 31, 1926

The attention of financial circles is again almost exclusively focussed on the Stock Exchange situation. Closing settlement prices of representative variable dividend securities were as follows:

Since the last settlement day (December 24th) the market has gone from bad to worse. Bank of Italy touched bottom at 1,700, Banca Commerciale touched the 900 lire mark, Fiat went down to 275, and so on. From time to time short-lived recoveries take place, but they were almost always checked by a deluge of selling orders. At the present level of prices there is on the market quite a number of good first-rate securities – big banks, electricity, motor-car, land and house property – whose yields range from 6 to 10 per cent, and more. There is much speculation abroad as to the causes and probable outcome of the downward tendency. Some people point to the high rates of interest, from 8 to 9 per cent., which have to be paid for carrying over speculative accounts in the bourses. Clearly people get tired of paying such rates, with the results of throwing good money after bad. But in its turn, why are such interest rates current ? The revaluation or stabilisation theory, which is the most obvious reply, is a general theory, whose meaning is different from country to country, and from time to time. That in Italy, as in France, there is a revaluation crisis seems certain; but the features of it are not the same as, for instance in Germany or Great Britain. Huge figures of unemployment are, for instance, lacking. The average monthly number of insured workers receiving unemployment pay was only 34,413 in October, as compared with 24,221 in January, 1926. Of course, these figures refer only to the unemployed who are entitled to receive grants from the National Institute for Social Insurance, and, therefore, the total actual number of unemployed is higher. Statistics of this institute gives the total number at 79,678 as a minimum for July, and 156,139 as a maximum for January, 1926, with 148,821 for November. It does not seem probable that unemployment, although higher than in 1925, is going to be in Italy a great social problem as in other industrial countries. We are a predominantly agricultural country; many industries are located in agricultural regions; workmen or their relatives have connections with land, and derive aid from land-owning or land-tilling. Moreover, notwithstanding the rapid increase of population, there is a dearth of man-power in agriculture, so that land may act as a safety-valve against excessive unemployment distress in the cities.

The external trade figures do not as yet bear traces of that reduction in exports which had been prophesied as a consequence of the revaluation of the lira, and the disappearance of the premium on export:

An interesting symptom of the dearth of money is the decrease in the new appeals to the market made by joint stock companies:

The interesting feature of the table, after the great increase in the postwar period, when the lira was devaluating (from 1918 to 1922), is that in the years from 1922 to 1925 the absolute rate of increase was in each year almost exactly double that in the preceding year. In 1925 there was a frenzy of new issues – 8 billions against 4.7 in 1924. In 1926 the process is reversed; in the first eleven months of 1926 the increase of capital is only 3,496.4 millions against 8,017.1 millions in the whole of 1925. The decrease is due partly to the Treasury restrictions, as now each new issue has to be sanctioned by the Treasury, but is also the consequence of the difficulty of finding a market for the new securities. Banks, holding companies, capitalists, and operators were kept busy during the last nine months of 1925, and the whole of 1926 in writing down valuations of securities, according to the declining levels of stock exchange quotations, and it is probable that new savings of the middle and upper classes were absorbed by such writing down. Figures for banking deposits, therefore, do not bear evidence of increases comparable to these recorded up to the end of 1924 (in millions of lire):

From the slowness of the increase in the savings figures in 1925 and 1926 we must not draw the conclusion that Italians do not save. In addition to the big sum devoted, as mentioned above to writing down valuations of securities (Bachi’s general index of variable dividend securities went down from 163.4 at December, 1924, to 111.3 at November, 1926), big sums were invested in buildings (town and country) and in agricultural improvements. Landowners and farmers all over Italy are investing their savings in agricultural machinery, reconstructing old-fashioned farm buildings, irrigation, reclaiming of waste lands, &c. There is, also, much more caution displayed than in the last months of 1924 and the first of 1925. In those times big banking overdrafts were usual, and banks encouraged their customers to avail themselves liberally of the facilities afforded by them to industry and commerce, but after March, 1925, the general policy of the banks became quite different; month after month banks were insisting on the reduction of overdrafts. The banks’ situation is, therefore, more liquid. From a study of the balance-sheets of 50 banks it appears that the cash at hand increased between December 31, 1924, and October 31, 1926, from 1,679 to 2,207 millions lire. The proportion of the capital to total liabilities was also stronger; 2,441 against 29,666 millions at December 31, 1924, and 3,540 against 34,074 millions at October 31, 1926. Another index of the increased liquidity of the banks is the big increase of the banks of issue deposits. Whereas, as seen above, the ordinary bank deposits increased very slowly, the deposits of the banks of issue increased from 1,191.2 millions at the end of 1924, and 1,001.3 at the end of 1925, to 2,034.0 millions at November 30, 1926. As the Bank of Italy is the banks’ bank, it appears that commercial banks are aiming at keeping their positions more liquid and stronger. Italy is indeed passing through a difficult adaptation to a new level of prices; and, as usual some suffering is the inevitable accompaniment of the revaluation of the lira. But the final outcome of the process seems to be the elimination of the unfit, more liquidity in the banks, lower, and, therefore, saner valuations in the balance-sheets; more prudent ideas of future profits, and a consequent check on expenditure. Perhaps prudence will continue to give counsels of restraint in the coming months, but prudence and restraint were always in difficult times the best roads towards recovery and future prosperity.