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The Economist

The Real Monetary Problem – Balance of Payments -Budget Surpluses – Circulation and Public Deposits

«The Economist», 10 luglio 1926, pp. 69-70





Turin, July 6



The vagaries of the rate of exchange, which has gradually increased from the level of 125 lire to the pound sterling at the end of April to about 140 lire at the present time, continue to be the most important problem in the economic life of Italy. I will try to indicate what is, in my judgment, the exact economic point on which the solution of the problem depends. It is not the so-called balance of trade. True, we have had, in the first four months of the year, an excess of imports over exports of 3,761.1 million lire; but we had an almost exactly equal excess in the past year of 3,746.1 million lire; and even if we suppose that the total excess for the whole year will be the same as in 1925 – viz., 7,896.8 million lire – we do not get at a figure appreciably higher than the pre-war figures, which oscillated around 1,200 million gold lire from 1860 onwards – i.e., from the birth of the united Italy we always had an excess of imports over exports, and rates of exchange were frequently at par. In 1923 and 1924, notwithstanding the excess of imports over exports, the international balance of payments was evenly balanced, remittances of emigrants, expenditure by foreigners travelling in Italy, national merchant marine income, &c, making up for the commercial gap. We have not, for 1925 and 1926, figures for the invisible items of the balance of payments, but there is no probability that they will differ very much from past experience.



The Budget balance is no longer a factor in the falling value of the lira. Whatever opinions may be held about present Italian politics, one fact is certain that figures published in the official documents over the signatures of the Director-General of the Treasury and of the Accountant-General of the State are undoubtedly true. Charges of forged figures, which I sometimes see in foreign newspapers, are absolutely untenable. The published figures show the real situation of the Italian Budget. I am almost tempted to say that the situation is too strong. In the first 11 months of the past financial year the surplus of revenue over expenditure was 811.8 million lire. And this is not the end of surpluses. In our system of accounting, in the revenue figure we include the taxes to be recovered, and on the expenditure side the disbursement to be made on account of the appropriations of the year. At the end of the year the Treasury retains more or less big sums of money, which are not technically surpluses, because at some future date, possibly a very distant date – let us say 1930 – a call can be made on them for meeting belated expenditures appropriated in 1925-26. Cash surpluses are, therefore, much larger than Budget surpluses.



How much larger cash surpluses are than Budget surpluses can be judged from July 1, 1925, to May 31, 1926, figures; the surplus of actual revenue over actual expenditure was 3,049.6 million lire, as against 811.8 million lire Budget surplus. True, the difference is not technically a surplus, it may, in fact, be expended one or two, or perhaps 10, years hence. But, as a matter of fact, it is not being expended at present, and it is highly probable that, in the course of time, many appropriations will become obsolete, and the corresponding expenditure never will be made, so that what is at present only a cash surplus will become a true Budget surplus.



Our Treasury is, therefore, in a very strong position. The Finance Minister can boast of a Budget surplus of about 800 million lire, and of an additional unexpended surplus of 2,200 million lire. These surpluses are, for the time being, so big that the Finance Minister can view with equanimity the increase in prospective public works expenditure, which is the consequence of the Government’s grandiose programme of reconstruction of Southern Italy.



The only feature which calls for explanation, and for a very prudent policy, is a different one, on which financial critics usually do not lay any stress. In spite of the big Budget and cash surpluses, the Treasury found it necessary to increase the total of public internal debt from 90,847 million lire at June 30, 1925, to 92,033 million lire at May 31, 1926. Why? The reasons are many, and it would take too much space to enumerate them. Among them is one which bears directly on the paper money problem, and which can be explained only by a reference to paper issue figures:




Bank of Issue and State Notes Issued


Commercial Discounts

Sums Held by the State Treasury in Current Account at the Bank of Italy


For Trade Account




December 31, 1923





June 30, 1924





December 31, 1924





June 30, 1925





December 31, 1925





May 31, 1926







The figures in columns 1 and 2 are good; the total of paper issue, after reaching top figures at the end of 1925, is diminishing, and is being kept under the 20 billions level, which is the safety line of our foreign exchange. Also figures of issues of notes for trade account are at present decreasing. But column 3 shows that commercial discounts – that is, the mass of bills and acceptances discounted by the banks of issue – are continually increasing. Our banks of issue, notwithstanding the limitation of note issue, support an expanding structure of commercial and industrial activity. They do not support the expansion by the increase of their private deposits, for these deposits are practically stationary. The means of support come out of public deposits. After decreasing to a minimum of 236.2 million lire at June 30, 1925, public deposits rose to the big figure of 2,471 million lire at May 31, 1926. This figure of public deposits at the banks of issue is, perhaps, the most significant one in the interesting and well-compiled monthly bulletin of our Treasury. It means, in short, that the Treasury utilises the best portion of its Budget and cash surpluses in keeping a big deposit at the Bank of Italy; and this public deposit is the source from which the Bank of Italy draws the means to make larger advances to commerce and industry, notwithstanding the decrease in note issue. As it is, public deposits are note issues in being. For, if the Treasury were to diminish its deposits to 236.2 million lire as at June 30, 1925, then the total note issue would be forced to jump up by about 2 billion lire. This is the crux of the present situation, which lies not in the balance of payments, not in the Budget situation, but in the risk of an increase in note issue consequent upon an unforeseen obligation causing the Treasury to withdraw deposits from the Bank of Italy. The monetary problem, from a strictly monetary point of view, can be put thus: how to keep the total note issue under the 20 billions level, even when the public deposits are reduced to their normal level of, let us say, 500 million lire.



Italy has solved other bigger financial problems, and she will solve this lesser monetary problem. Gradual restriction of discounts by banks of issue to the 4 billion lire level, gradual corresponding increase of discounts by other ordinary banks and savings banks through an increase of private saving – these are the only visible methods by which it will be possible to put an end to the risky business of financing industry through public de­posits. Signor De Stefani decreased public deposits from 2,011.2 to 236.2 million lire; the present Minister will, no doubt, attentively watch this last door remaining open to a possible increase of circulation, and close it in the course of time against all future threats against the stability of the lira.

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