Not Just Another Recession
Why the Global Economy May Never Be the Same
IN the year 1927, the sixth of the Fascist era, Italian financial policy reached the goal which the Government of Benito Mussolini had determined to attain when in October, 1922, it began its work of financial reconstruction and its effort to provide ways and means for utilizing the productive energies of the Italian people. The reorganization of the Italian currency has been to date the crowning achievement of that policy, a deliberate policy carefully matured since my call to the Ministry of Finance over two years ago. It was executed rapidly and without publicity during a few days of arduous negotiation between the leading men of the Italian money market and representatives of banks of issue the world over.
The reform in question passed through the following phases: 1. Balancing of the national budget. 2. Consolidation of war debts. 3. Unification of the note issue and its concentration in the hands of the Bank of Italy. 4. Progressive and more efficient utilization of Italian resources in raw materials. 5. Gradual deflation in currency and in credit. 6. Consolidation of the floating debt, and reorganization in the Treasury department. 7. Regulation of the influx of foreign capital into Italian industry. 8. Reorganization in the whole field of production, and readjustment of taxes with a view to increased industrial efficiency. 9. Gradual amortization of the domestic debt. 10. Defense of the Treasury surplus by the reduction of State expenditures.
I am interested more particularly here in the later steps in our progress toward the resumption of gold payments, and specifically in developments that took place during the year 1927.
The question of currency was without doubt the Government's chief concern all during the year just past. It was always considered in the perspective of Italy's general economic situation. Efforts to take every advantage of the raw materials to be found within our boundaries, and to set our business and manufacturing on a sounder basis, accompanied and at times complicated our forward march toward a gold standard.
The struggle to bring our domestic production up to a level consistent with the enhanced prestige of the Italian State abroad had moments of particular importance.
In January, 1927, the pound sterling was worth something like 110 lire in Italy, while the dollar was around 23. These quotations fell rapidly on exchange till on April 26 the pound was at 86.30 and the dollar at 17.75. Behind such a remarkable improvement in the lira lay a most delicate maneuver on exchange. It taxed all the ingenuity of our financial advisors to avoid the crises consequent on a too violent appreciation. The purchasing power of any currency as compared with the currencies of other countries results from a complex of forces in which the aptitudes of a people for production and saving play a predominant part. Capacities for working and saving are traits which no one can deny the Italian people. In those virtues an appreciation of some twenty-five percent in the value of the lira between the last months of 1925 and the last months of 1927 finds adequate explanation and justification.
As a development collateral with these moral and material factors in the appreciation of the lira, we might note that in the year 1927 Italian industries made important borrowings abroad for essentially productive purposes. The policy of the Fascist Government toward foreign capital has not varied. Indeed, the exemption of foreign capital from our income tax was one of the government's first acts in the financial field: the Decree bears the date of December 18, 1922.
An increased inflow of foreign capital into Italy was certainly desirable. But it was just as necessary to prevent private interests from asserting themselves in this connection at the expense of the higher public interests of the country. That is why the Treasury assumed control of all borrowings made abroad by private enterprises. Any movement of capital from one country to another creates delicate problems of transfer and subtle disturbances in the balance of trade. Changes, furthermore, in the status of money are so important that control must be exercised over imports of foreign currencies, lest they disturb normal circulation, which, especially in times of appreciation, must be protected from even the slightest extraneous influences.
The Fascist Government solved these complicated problems without losing view of the interests of the country at large. These interests evidently required: first, an increase of the gold reserve in the Bank of Issue; second, some lightening of the burden of payments abroad, that goods might be imported without an immediate export of gold; and, third, the "unfreezing" of assets.
I would like to point out that the total of authorized borrowings amounted to 30 millions of dollars in 1925, to 68.8 millions in 1926, and to 122.8 millions in 1927 -- a grand total of 221.6 millions of dollars. Of the grand total the loans to the city governments of Rome and Milan (also to be applied to productive purposes) alone account for sixty millions.
The reserves in our banks of issue showed a constant tendency to increase during the year 1927. The gold held by our three banks of issue amounted to 2041 millions of lire, gold, at the end of 1925, and to 2479 millions at the end of 1926. This bullion passed into the gold reserve of the Bank of Italy, which assumed control of all holdings in gold and in par currencies formerly stored in the banks of the south, and which meantime had cashed the net proceeds of the Morgan Loan of a hundred million dollars. To this reserve (totalling 2902 millions) must be added the drafts held by the National Exchange Bank which, in accordance with the law abolishing fiat currency, must be transferred to the Bank of Italy to increase the gold security of its paper. The holdings in gold and par currencies now available at the Bank of Italy, as security for the paper it issues, amount to not less than twelve billions of the new lire (the latter taken on exchange at a rate of 3.66 lire paper for one lira gold). As a result, the reserve guaranteeing the present circulation of Italian paper may be put at 68 percent; while the security for all outstanding obligations of the Bank of Issue (that is to say, for its bank notes in circulation, its deposits, its outstanding drafts, and the cash deposited by the State Treasury with it) amounts to about 57 percent. The percentage of security required by the Decree of December 21, 1927, was 40 percent. It is evident, then, that the Bank's margin of reserve is far greater than was contemplated by the law.
The circulation of bank notes shows a noteworthy reduction during the year 1927. At the end of 1926, when the Government's policy of gradual deflation and of restriction in credits had been in operation for four months, the notes in circulation amounted to 20,133 millions. At the end of 1927, the figure was 18,200 millions. With the return to the gold standard, the Bank of Italy, now the only bank of issue, is at last free to close its accounts with the State Treasury, as the 4227 millions worth of notes issued by the State will be repaid to the Bank from the Treasury with the profits incident to the appreciation of the gold reserve.
The consequences which an appreciation in the value of currency inevitably produces on the economic life of a country (such as reduced income, slumps in sales and in earnings) have received careful attention from our Government, which took steps on August 1, 1927 -- the Decree was retroactive -- to mitigate certain taxes which directly affected costs of production and manufacturing activities. The Government did not hesitate to reduce its income from taxation even at a moment which was particularly critical for the State Budget, which is now feeling the consequences of a slackened rhythm in the increase of tax yields. Financial equilibrium is being sought in a few taxes widely distributed: they are relatively light but they bear upon a large proportion of the national income. This fact gives assurance that the future of the State Budget is secured. It will easily surmount any momentary difficulties it may encounter. Reductions in expenditures already provided for seem more than sufficient to meet possible reductions in tax yield.
The Italian Treasury finally returned to solid ground with the consolidation of the floating debt on November 6, 1926.
Balance between public income and public expenditures does not necessarily require that national savings be withdrawn from enterprises so as to meet deficits in the State budget; indeed the Fascist Government has carried out its policy of amortizing the public debt through repayments of capital lent from domestic savings to the Treasury. The Government has created a Sinking Fund for its domestic obligations, thus laying an adequate technical foundation for their regular and rapid reduction. As a result, savings will be concentrated in organs of production and exchange which will be sure to take full advantage of them. Since it began operations on August 1, 1927, the Sinking Fund has acquired 300,000,000 lire worth of securities. Following sound traditions of financial policy familiar in Anglo-Saxon countries, the Sinking Fund takes over: first, such surpluses as are found at the end of each fiscal year; second, Government loans recovered from other States (Rumania, for instance); and third, repayments of borrowings by municipalities. If we include the surplus of 435 millions ascertained for the fiscal year 1926-7, we find that the Sinking Fund already has at its disposal in the neighborhood of two billions of lire.
Lower production costs and increased efficiency have been facilitated by important reductions in the taxes laid upon mergers and by measures designed to bring under centralized managements kindred enterprises not sufficiently profitable by themselves. Italian manufacturers, especially of textiles and in the metal working and machine industries, have been quick to appreciate the consideration shown them in fiscal policies; and improvements in equipment and organization in the factories have shown immediate effects on prices and on the cost of living.
Having thus constructed sound technical and economic underpinnings for its financial structure the Government felt free, after nine months of stability in exchange, to abolish fiat monies by removing all restrictions on the convertibility of paper into gold or par currencies. It should be borne in mind that, both legally and in fact, Italy's paper has never been interchangeable with gold since the year 1894. The Fascist Government has been the first Italian ministry in all that period to remove limitations which set so many obstacles in the way of the development of our business abroad.
To be sure, the stabilization of our currency, considered in its relation to the monies of other countries which have returned to a gold standard, involved the greatest effort economic Italy could possibly make in improving the purchase power of the lira in terms of gold and commodities. That the operation has laid great burdens upon private individuals and upon those who carry the grave responsibilities of public finance, the Government is keenly aware. But the problem is to get back once and for all to the conditions of production and living which obtained before the period of heavy inflation set in. The chance fortunes, the lucky strokes of business which were made possible in those days by violent shifts in exchange and by variations in market values resulting from those shifts, must be replaced by the solid profits that accrue to men who work hard and show intelligent enterprise and skill in managing their business. We now have a definite measure of values reflecting the comparative situation of economic Italy in the economic world at large. This enables business to figure its budget sand estimate its resources accurately, and removes any excuse for surprises in the future.
In administering the budget of State just as in managing the budgets of their own homes, Italians must train themselves to watchful efficiency. It is in that conviction and with that intention that Fascist Italy begins its first year on a gold basis.