Kingdom of Italy's external borrowing and domestic ...

Financial History Review, vol. 8, part 1, April 2001. Printed in the United Kingdom © 2001 Cambridge University Press.

Kingdom of Italy’s external borrowing and domestic monetary policy between the two world wars1 MARINA STORACI and GIUSEPPE TATTARA Dipartimento di scienze economiche, Universita’ di Venezia, Canaregio 873, 30121 Venezia, Italy

Cyclical inflows of funds had strongly influenced the Kingdom of Italy’s economic development since its establishment during the 1860s. Initially, the government raised capital abroad for creating the new state’s basic infrastructure, while foreign private capital directly financed the growth of railways. External funds had importance again from the 1880s, when the lira was declared convertible. During this period, direct investment played a greater role, particularly in the banking sector. Large ‘mixed’ banks, backed by foreign capital, supported the development of important industrial sectors, such as electricity generation and steel production. Foreign lending during the 1920s had a new pattern, with large capital flows intermediated by the American market. The financing of the First World War had transformed the United States into a major creditor economy, giving its statesmen the backing to play the role of guarantor for a new political stability, and for devising economic conditions to restore financial and social equilibrium in Europe. International stabilisation with the return to the gold standard was a crucial element of this policy for various reasons. It was a step towards central banks gaining independence from national treasuries, and an attempt to establish political and social control over the disarray of 1919–20. It was also a clear sign that the United States was a source for stabilisation loans and long-term foreign investment.2 1 The authors wish to thank Ministero della Ricerca Scientifica e Tecnologica for its financial support and, for helpful comments: M. de Paiva Abreu, A. Fishlow, T. Szmerecsanyi and participants at the Xth International Economic History Congress,where a longer version of this article was discussed. Two anonymous referees were of great help in reworking part of the draft paper and in focusing more directly on a few crucial issues. The following abbreviations have been used: Banca Commerciale, Archivio storico = ASBC; Segreteria Toeplitz = ST; copialettere Toeplitz = CpT; and Ufficio finanziario = UF. Banca d’ Italia, Archivio storico = ASBI; Fondo Beneduce = Beneduce; Fondo Azzolini = Azzolini; Ufficio rapporti con l’estero = Estero; and Operazioni finanziarie = Op. fin. National Archives Record Administration, Washington, Record Group = NARA, RG. 2 ‘the gold-exchange standard ... remained America’s price for remitting capital back to Europe’: C. S. Maier, Recasting Bourgeois Europe. Stabilization in France, Germany and Italy in the Decade after World War 1 (Princeton, NJ, 1975), p. 589.

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American overseas loans subsequently peaked in 1927 and 1928, declining thereafter and came to an abrupt halt as a result of the stock market crash. During the First World War Italy had received large financial inflows from its Allies. After the cessation of these resources, foreign capital gained importance between 1925 and 1928. Although the inflow over the 1920s took place over a limited time period, foreign capital played a very important role in the finances of the Italian government and private firms. This is because large Italian undertakings had commenced substantial capital programmes from the beginning of the decade. Investment in plant and equipment consequently grew at a very high rate and, initially, was financed by short-term bank loans and share issues taken up by the mixed banks. The arrival of foreign long-term capital in 1925 constituted an immediate relief for these institutions. Italian monetary policy over the second half of the 1920s mediated the contradiction between required external stability, internal deflation and substantial capital inflows. The inflow of funds entering the country, initially sought for stabilising the central bank’s reserves, was at odds with the government’s deflationary policy and, consequently, was waived in 1927. Foreign borrowing during 1928 was not to be sustained, whereas the repercussions of international deflation caused Italian banks to experience a liquidity crisis that eventually brought about the financial system’s complete restructuring. Firms were pushed towards financial investments and the banks, increasingly indebted in real terms, tried to stabilise their liabilities by investing in their debtors’ shares. The following discussion and analysis begins in section I with a sketch of the main aspects of Italy’s development during the early 1920s. Foreign funds’ importance and the progressive integration of the Italian system into the international capital market are discussed in section II. Section III briefly considers the economy’s structural weakness, whereas the basic contradiction between exchange revaluation, austerity and foreign finance is reviewed in IV. In section V there is an analysis of the withdrawal of foreign funds from Italian firms as a consequence of the precarious equilibrium in which the gold bloc countries found themselves. This was caused by either the devaluation of other currencies or because currencies were prone to devaluation, which pressed for the formulation of domestic solutions to meet the debt crisis. In the conclusion – section VI – we speculate upon the relationship between the real and financial aspects of the depression. We also consider the overall financial restructuring of the domestic system – through the creation of IMI and, later, IRI (the public body to which substantial portions of industrial shares within the mixed banks’ portfolios were transferred). I The Italian government and local administrative bodies offered safe prospects to foreign investors. Furthermore, the Mussolini government’s economic policy was presented as ‘liberal orthodoxy’, involving a balanced budget, the curbing of

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Table 1. Annual percentage rates of growth at constant prices (1938), and growth of real wages

Period

GDP (1)

Manufacture (2)

Public utilities (3)

Investments (4)

Exports (5)

Real wages (6)

1921–25 1926–29

5.09 2.63

11.39 2.71

13.77 7.72

15.53 8.29

7.69 0.00

0.12 -3.7

Sources: Columns 1, 2, 3: P. Ercolani, ‘Documentazione statistica di base’, in G. Fua’ (ed.), Lo sviluppo economico in Italia, III (Milan, 1969), XII 1.1.A; columns 4, 5: ibid., XII 4.1.A; column 6: V. Zamagni, ‘Una ricostruzione dell’andamento mensile dei salari industriali e dell’occupazione 1919–1939’, Collana storica della Banca d’Italia. Contributi, V (Bari/Rome, 1994), Table 8.

inflation, a fiscal policy favourable to firms and wage control.3 Following the immediate postwar crisis, the economy had undergone rapid expansion. Between 1921 and 1925 GDP increased by 22 per cent in real terms, manufacturing by 54 per cent while public utilities grew even more rapidly.4 Wage increases were moderate in relative terms and profits increased (Table 1). High profits, derived from moderate wage claims, aided the industrial boom, which was also fostered by the fiscal privileges granted by the new regime and increasing exports, propelled by the German market’s postwar disruption. Private demand was consequently the most dynamic component of aggregate demand. Finance for manufacturing investment became exceedingly important during the early 1920s. The main source was profits, levered to greater level by fiscal incentives and wage restraints. However, larger firms also enjoyed the mixed banks’ support, as during pre-war years.5 These institutions supported industrial undertakings through the provision of short-term facilities that were regularly renewed, and via the stock exchange. Between 1920 and 1925 subscribed capital grew by 135 per cent, while the ratio between shares quoted on the stock exchange and total shares rose significantly – from 22 per cent to 36 per cent. This trend was most noticeable for firms in major sectors and, for instance, electrical utilities’ shares quoted on the stock exchange reached 75 per cent of their total equity.6 The exception was steel undertakings, which were oversized even in 1939. 3 See G. Salvemini and V. Zamagni, ‘Finanza pubblica e indebitamento’, in Banca d’Italia, Collana storica della Banca d’Italia. Contributi, II (Rome/Bari, 1993), p. 171 ff. 4 See P. Ercolani, ‘Documentazione statistica di base’, in G. Fua’ (ed.), Lo sviluppo economico in Italia, III (Milan, 1969), Table XII.1.1.A, p. 402. 5 The mixed banks’ support of Italian industrialisation is a major controversial field of study and not debated here. Some critical notes on Gerschenkron’s classical idea of the banks as ‘agents’ of industrial development can be evinced from P. Ciocca and G. Toniolo, ‘Industry and finance in Italy’, Journal of European Economic History, 13 (1984), pp. 117–18. 6 See S. Baia Curioni, ‘Evoluzione istituzionale della Borsa valori in Italia dal 1918 alla vigilia della legge bancaria del 1936’, in Banca d’Italia, Collana storica della Banca d’ Italia. Contributi, V (Rome/Bari, 1994), p. 180 and Table 5.

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Consequently, the Italian stock exchange experienced a further development surge in its history, following that of 1900–07. The principal commercial banks supported the demand for shares directly and through contangos. Their managements’ strategy was a reaction to that which had been pursued prewar – concentrating upon short-term profits arising from financial intermediation in the short term, and placing shares on the market over the medium term. As a result, the mixed banks came to hold a substantial amount of shares, far more than had been the case during the opening years of the century.7 Private savings preferred, as usual, Treasury bonds because the financial system contained few specialised non-banking institutions throughout the interwar period.8 Foreign capital played little role in this phase of development. Monetary and fiscal policies dampened the post-war industrial reorganisation crisis and fostered the subsequent expansion. At the end of 1921, Banca d’Italia established a banking consortium to liquidate Banca di Sconto’s claims on Ansaldo, one of the most important steel-making and engineering groups. Banca d’Italia also acted as a last resort lender for Banco di Roma, which was thereby refinanced. These two rescue operations, along with some minor ones, explain the enlargement of credit granted to private firms between 1919 and 1921, and the increase in the circulation despite the Treasury ‘wiping out’ money. Over the two ensuing years, a sizeable part of the bank of issue’s active balance was related to financing industrial reorganisation due to the postwar crisis, and to increased rediscounts and advances (in real and monetary terms) extended to the private sector to support the subsequent cyclical upswing (Figure 1). The weakening economic situation had become abundantly clear by 1925. The primary causes were foreign. The balance of payments initially shackled the economy as there was an unexpected increase in food imports, with the lira consequently beginning to depreciate. Domestic prices rose, there was speculation against the lira and a rush to buy real goods, real estate and industrial shares. The monetary authorities intervened by raising the discount rate, and taking measures to curb speculation on both the foreign exchanges and the share market. However, currency speculation was fed through too many channels and, as a result, restrictive measures were unsuccessful. With regard to the Stock Exchange, share trading was blocked.9 This was an unexpected and unpredicable shock for the market, which was listed and wholly national. It eventually brought about a fall in prices. The resulting violent 7 See Ciocca and Toniolo, ‘Industry and finance in Italy’, p. 113 ff. 8 During the first half of the 1920s the state promoted the creation of 2 supplier institutes: CREDIOP and ICIPU, managed by the future IRI president A. Beneduce. The two institutions aimed to collect private savings through bonds issuedwith a guarantee – i.e. to state bonds – proceeds devoted to public works (CREDIOP),and to finance firms in the and electricalgeneration industries (ICIPU). This aided finance while Italian savers direct investment of their financial wealth. See F. Bonelli, ‘Alberto Beneduce’, in Dizionario biografico degli italiani (Rome, 1966), p. 460. 9 See the restrictive measures on currency and certificate operations: RDL, 28 Feb. 1925, n. 176 and 9 Apr. 1925, n. 375.

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1919 - i iv vii x 1920 - i iv vii x 1921 - i iv vii x 1922 - i iv vii x 1923 - i iv vii x 1924 - i iv vii x 1925 - i iv vii x 1926 - i iv vi ix xii 1927 - iii vi ix xii 1928 - iii vi ix xii 1929 - iii vi ix xii


Figure 1. Banks of issue. Advance and rediscount operations, total and without Sezione speciale autonoma Note: The Sezione speciale autonoma of the Consorzio sovvenzioni industriali was basically a product of Banca d’Italia. It was created after the First World War to support illiquid commercial banks Source: F. Cotula and P. Garofalo, ‘Appendice statistica’, Tables A6 and A10 in F. Cotula and L. Spaventa (eds), La politica monetaria tra le due guerre. 1919–1935, Collana storica della Banca d’Italia. Documenti, VIII (Rome/Bari, 1993)

setback on the Stock Exchange – solely an Italian crisis – severely affected the larger banks and forced their managements to increase active intervention on the share market. If their earlier actions had been motivated by profit expectations, they now became a strategic necessity to limit losses on the value of the shares that filled bank portfolios. In mid-1925 Banca d’Italia was forced to intervene by extending credit to institutions in the greatest need. The withdrawal of foreign short-term funds led to it supporting Banca Commerciale – L 2,000m. – in order to avoid a rapid decline in the supply of credit.10 This explains the increase in circulation in mid-1925 (Figure 2). However, the situation remained critical and became graver over the following years.11 The increase in share capitals, 1925–30, was larger than had occurred over the previous five years, and there was a parallel growth in capital quoted on the stock exchange. It can be assumed that the mixed banks remained 10 ‘mainly due to deposits withdrawal from abroad, our debt towards Bank of Italy amounted to around 2,000, due to advances and rediscount operations’: A. Confalonieri, Banche miste e grande industria in Italia. 1914–1933, I (Milan, 1994), p. 560. See also F. Cotula and L. Spaventa, ‘Introduzione’, in idem, La politica monetaria tra le due guerre, p. 129 ff. Ciocca and Toniolo, ‘Industry and finance in Italy’, support the view of the domestic crisis. 11 See Baia Curioni, ‘Evoluzione istituzionale della borsa valori in Italia’, p. 200.

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xii

xii

1929 - vi

1928 - vi

xii

1927 - vi

xii

vi

vii

1926 - i

vii

1925 - i

vii

1924 - i

vii

1923 - i

vii

1922 - i

1921 - i


Figure 2. Circulation and advances and discount operations from the banks of issue Source: Cotula and Garofalo, ‘Appendice statistica’, Tables A9 and A10 the main subscribers to shares and supported various majority participations, which effectively made them parent companies. II During the First World War, there had been an outflow of short-term capital of about L 2,000m., but this was more than offset by credits and loans to the Italian government, granted by the British and American governments, which were approximately 13 times greater. Over the postwar recovery period, there was a twofold movement. Short-term loans from abroad, mainly granted to commercial banks, immediately resumed and continued until 1925, constituting part of the expansion of domestic credit supply. However, long-term loans, politically conditioned by the settlement of war debts, were only floated between 1925 and 1927. In 1919–20 Italian banks and residents enjoyed short-term capital inflows associated with the rapid deterioration of the exchange rate and prospects for the stabilisation of the lira.12 Confalonieri gives evidence, from Credito Italiano’s balance sheets, that at least 30 per cent of the funds held by this institution during the period 1923–25 were drawn from abroad. Thereafter, the proportion rapidly declined – to 24 per cent by 1926, and to 21 per cent by 1927.13 Foreign short-term lending was not of great assistance. The dependency of industrial firms upon commercial banks increased, as did that of the banks upon foreign banks, involving in their case liabilities denominated in foreign currencies. This was a very uncertain situation during a turbulent period for the exchanges. 12 See Cotula and Garofalo, ‘Appendice statistica’, Figure A.3, p. 818. 13 See Confalonieri, Banche miste e grande industria in Italia, Table III, p. 741.


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The search for long-term financing abroad proved far more difficult. The first postwar issue of Italian state bonds on the American market was made in February 1920. This was the so-called ‘Attolico loan’, named after the minister who had promoted it, and the flotation proved to be a dramatic failure. Less than 40 per cent of its $25m. bonds were subscribed. Furthermore, when the price of the bonds began to fall on the Stock Exchange, the banking consortium that had undertaken the placement decided to withdraw its support and the loan operation consequently broke down in July 1920.14 The scheme for raising loans abroad had developed from mid-1919, when the British and American authorities ceased providing intergovernmental credits. This raised simultaneously both economic and political problems, which further developed. The link between an agreement over war debts and new loans, formulated by Harding during the American presidential campaign, became operative with the creation of the World War Debt Funding Commission in February 1922. The process of negotiating debt settlements began formally the following month. In the meantime, in June 1921, the American government had approached bankers to ensure that it was kept properly informed about foreign loan issues before the conclusion of any negotiation, a request repeated in March 1922.15 For the governments of Belgium, France, Greece, Italy, Romania and Yugoslavia and, equally, firms based in these countries, this meant that it became impossible to raise loans on the New York market before formal agreements had been concluded, or at least substantial steps had been taken, with the American Treasury over war debts.16 The turning point in the Italian political scene at the end of 1922 brought about 14 The loan consisted of 6.5% bonds, maturing in 5 years, issued at 97.5. It intended to raise $100m., in 4 tranches. The first amounted to $25m.; the other 3 tranches were never issued: see ASBI: Estero, roll 5/frame 574–98, Il prestito italiano in dollari negli Stati Uniti d’America, 26 Jul. 1920; and frame 544–9, Prestito italiano in dollari 6.50%, Relazione supplementare, New York, Mar. 1921. See also M. De Cecco (ed.), L’Italia e il sistema finanziario internazionale. 1919–1936, Collana storica della Banca d’Italia. Documenti, VI (Rome/Bari, 1993), doc. 110, Appunto anonimo sull’emissione del prestito italiano in dollari [An anonymous note on emission of Italian loan in US $], and doc. 111, Lettera di Stringher a Conti Rossini, 29 Feb. 1920. Fixed-interest securities were depreciating on the American market, and neither English nor French loans were successful, together attracting only 50 and 60% of amounts offered. See H. G. Moulton and L. Pasvolsky, War Debts and World Prosperity (New York, 1932), p. 81. The Italian government openly relied upon the patriotism of the Italian community in America, which was not immediately forthcoming: see De Cecco, L’Italia e il sistema finanziario internazionale, doc. 112, Comunicato stampa del Dipartimento di Stato degli Stati Uniti, 3 Mar. 1922. 15 H. Feis, The Diplomacy of the Dollar, 1919–1932 (New York, 1966), pp. 7-20; and ASBI: Estero, 6/946, Dept. of State, Flotation of Foreign Loans, 3 Mar. 1922. 16 The firm attitude taken towards the settlement of war debts before any new loan could be offered was often referred to by the US Secretary of State: see De Cecco, L’Italia e il sistema finanziario internazionale, doc. 78, Lettera del partner della casa J. P. Morgan & Co., Russel C. Leffingwell al partner della stessa Thomas W. Lamont, 20 Jun. 1925. Firms and governments of certain debtor countries circumvented this by both resorting to short-term credits provided by US banks and going into debt with countries that had access to the American market and were thus able to act as intermediaries: see Feis, The Diplomacy, p. 23.

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significant changes. Following his nomination by the King to lead the government, it was Mussolini’s need for political legitimisation, and not just financial considerations, that led him to head the first Italian government to declare officially a willingness to repay war debts.17 At the same time, tax rebates were introduced for firms that had taken out loans abroad.18 Continuing contacts between putative Italian borrowers and American bankers thickened. Representatives of political and business circles created an institution – Istituto per i Finanziamenti Esteri in Italia [Institute for Foreign Capital in Italy] – to attract funds from abroad, particularly for hydroelectricity and land reclamation.19 Parallel initiatives taken by American bankers were less propagandistic or demagogic. American banks were in touch with the authorities of different Italian cities,20 with power utility corporations and directly with the Italian government (involving discussions which also partly concerned electricity firms). Dillons looked favourably upon a government-guaranteed loan for ‘the whole financial program for Italian productive works’, involving capital requirements estimated at about $200m. This, divided into shares, was to be invested in land reclamation, irrigation and hydroelectric works.21 Italian electricity generators were then developing rapidly, while their ‘public utility’ character offered numerous opportunities to foreign investors. Morgans’ initiatives were much more wary. Its partners initially declared themselves ready to provide a loan for the construction of 17 On the hesitation of previous governments and Mussolini’s various motivations, see G. Migone, ‘La politica economica degli Stati Uniti nei confronti dell’Italia’, in idem, Gli Stati Uniti e il fascismo (Milan, 1980), pp. 108–9. 18 RDL, 16 Dec. 1922, n. 1634, integrated by DM, 16 Feb. 1923, and RDL, 22 Jul. 1923, n. 1803, which foresaw exemption from income tax for interest paid on bonds issued abroad provided they were not transformations of previous debt: see G. Borgatta, Appunti di scienza delle finanze e diritto finanziario. Raccolti dalle lezioni del prof. G. Borgatta nell’anno accademico 1933–34. Fascicolo IV (Milan, 1934), p. 161. 19 The president of Istituto per i Finanziamenti Esteri in Italia was the economist Achille Loria. The organising committee planned propaganda and study projects and, in 1923–24, organised several meetings in Italy and missions abroad: see Istituto per i Finanziamenti Esteri in Italia, Programma, organizzazione e chiarimenti (Rome, 1923); NARA, RG. 59, 865.5031/-, L. Dominian to Dept. of State, Proposed Institute for the Financing of Italian Enterprises by Foreign Capital, 24 Apr. 1923, and 865.6463/18, Development and Financial Features of the Italian Hydroelectric Industry, 26 Feb. 1924. See also P. F. Asso, ‘L’Italia e i prestiti internazionali’, in Banca d’ Italia, Collana storica della Banca d’Italia. Contributi, III (Rome/Bari, 1993), p. 91. Mussolini declared to a delegation from the Institute in Jan. 1924: ‘For foreign capitalists the doors are henceforth open. They now have assurance of social calm in Italy and enjoy taxation privileges’: see NARA, RG. 59, 865.50-, L. Dominion to Dept. of State, Italian Views on the Introduction of Foreign Capital in Italy, 22 Jan. 1924. 20 Florence, Milan, Venice and Trieste, as documented by the reports of respective American consuls to Dept. of State (NARA, RG. 59, 865.50). 21 See ASBI: Estero, roll 16, frames 2463–6 and 2467–8; 2429–2432 A, G. Caetani [Italian ambassador in Washington] to A. de’ Stefani, 27 Mar. 1923; and De Cecco, L’Italia e il sistema finanziario internazionale, doc. 118, M. Anderson to G. Fummi [Morgans’ agent in Rome], 1 Mar. 1923; and doc. 119, T. W. Lamont to B. Stringher, 19 May 1923.


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railways, roads and hydroelectric stations. Then T. W. Lamont, a very authoritative Morgan partner and personal friend of B. Stringher, Governor of Banca d’Italia, asked to be officially invited to Rome in order to search for possible investments. This was denied but, in May 1923, he met Italian economic and political leaders – Mussolini, de’ Stefani and Stringher. Although no agreement was reached, Lamont stressed that Morgans were ‘ready to give to Italy their best advice and their active support’ at the appropriate moment.22 In the meantime, Morgans were prepared to grant a short-term facility, or a credit line, in the expectation of far greater involvement than, in fact, followed later.23 The general impression is that American bankers were ‘sitting on the doorsteps’ of possible borrowers.24 Their interest, as far as Italy was concerned, focused on a few possible loans for electric power utilities, the government and local councils. The progressive improvement in the Italian balance of payments during 1923 and 1924 protected the lira from depreciation, and from the speculative attacks that other European currencies experienced, such as that against the French franc between November 1923 and March 1924. Consequently, the Italian monetary authorities never sought foreign support for the lira during this period. Furthermore, the Finance Minister, de’ Stefani, was convinced that a balanced budget would reduce Italian bargaining power in a war debt settlement – the basis for obtaining new loans. This constituted another reason for not rushing ahead. In turn, foreign borrowing was not to precede the lira’s planned stabilisation (in order that new, externally raised loans were serviced with appreciated currency).25 In the equally favourable climate of January 1925, Banca d’Italia officials restricted themselves to obtaining a $5m. revolving credit from Morgans, primarily to initiate ‘closer and more friendly relations ... in the light of possible future operations’.26 As the credit was a private transaction, neither the Federal authorities’ authorisation nor any publicity was required.27 The subsequent lira crisis drastically and almost immediately changed the situation. On the one hand, banks and firms now desperately required new long-term finance from abroad and, consequently, sought new contacts with American financiers. On the other, the monetary authorities were interested in increasing currency reserves both to resolve the lira crisis through 22 See De Cecco, L’Italia e il sistema finanziario internazionale, doc. 119, T. W. Lamont to B. Stringher, 19 May 1923. 23 On Morgans’ political mediation,and on Lamont’s pro-Fascist attitude, see Migone, La politica economica, pp. 103–6; and Asso, ‘L’Italia e i prestiti internazionali’, p. 90. 24 An expression commonly applied to of US bankers: see H. B. Lary, United States in the World Economy. The International Transactions of the United States during the Interwar Period (Washington, DC, 1943), p. 96. During 1923–24, the Italian government and Italian banks took active parts in loans to Austria, Germany, Hungary and Poland: see Asso, ‘L’Italia e i prestiti internazionali’, p. 174. 25 See De Cecco, L’Italia e il sistema finanziario internazionale, p. 113, Lettera [from de’ Stefani] a Pirelli, 3 Jan. 1923. 26 See ASBI: Estero, 6/844, B. Stringher to A. de’ Stefani, 28 Jan. 1925; and 816–17, 835–6 and 860–1. 27 See ASBI: Estero, 6/828–829B, Stringher to Morgan & Co., 31 Jan. 1925; and NARA, RG. 59, 865.51/436, Morgan & Co. to C. E. Hughes, 4 Feb. 1925.

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intervention on the exchange market, and to move directly to currency stabilisation. Public and private interests were consequently closely aligned. Public aims supported private profitability and pushed for a turn to foreign finance. The first step during the crisis was taken by Banca d’Italia, which in June 1925 obtained a $50m. credit from Morgans, guaranteed by a deposit of Italian Treasury bonds.28 Although the American administration authorised the operation, it also took the opportunity of confirming the link between a war debt settlement and possible new financing for the state.29 Not surprisingly, and this was the second step, a few days later, Mussolini authorised the Italian ambassador in Washington to open negotiations for funding the war debt. However, efforts were made during summer 1925 to obtain loans in the United States.30 Yet American officials would not be budged and, consequently, the only option available to the Italian government was to accelerate the pace of the war debt discussions.31 Agreement was reached on 14 November 1925 and, four days later, the Italian government concluded arrangements with Morgans for the issue in America of a 30-year $100m. loan, intended to stabilise the lira. The Treasury transferred part of the so-called ‘Morgan loan’ to Banca d’Italia to strengthen its reserves.32 On 1 December 1925, when the bonds began to be floated on the market, a private Italian firm – Edison – issued its first long-term loan in the United States.33 28 For this credit (like that Jan., a revolving facility), see ASBI: Estero, 6/1023–4 and 989–91, B. Stringher to A. de’ Stefani, 28 May and 2 Jun. 1925. Several documents on this loan are reprinted in De Cecco, L’Italia e il sistema finanziario internazionale, docs 129–34. 29 ibid., doc. 131, Lettera del segretario del dipartimento di Stato degli Stati Uniti d’America, Frank B. Kellog to Lamont, 29 May 1925. On the loan’s heavy service burden, see Asso, ‘L’Italia e i prestiti internazionali’, pp. 235–6. The formal communique´ of the Dept, and the exchange of letters between the Dept and Morgans Bank, did not reflect ‘all the pour-parlers which took place in the situation’. Morgans had to convince the Administration that the operation was a banking one and, through its agent in Rome, sent this message to Italians: ‘Now obviously this is a very important point for the bankers and the government authorities in Rome to bear in mind. It is quite plain from what has happened lately that the American Government is determined that its foreign government creditors should undertake, in the near future, some discussion of their plans for settling their debts to the American Government. As I see it, this does not mean that the American Government is calling upon any foreign government to pay up at once what it owes, principal and interest, but it is stating that the time has arrived to discuss and decide upon ways and means, and terms of payment’: see NARA, RG. 59, 865.51/447, T. W. Lamont to G. Fummi, 12 Jun. 1925. 30 A loan for the railways and for some cities (Milan and Naples), which would have been an indirect loan to the state; and also a loan for the electric firms. See NARA, RG. 59, 865. 51/457, 1-2, G. De Martino to the Secretary of State, Note verbale, 27 Jul. 1925; and 457; 459, 1-2; and 461, notes of the Dept. of State, Jul. and Aug., and F. B. Kellog to H. P. Fletcher [American ambassador in Rome], 21 Aug. 1925. 31 Asso points to Dept. of State’s change in attitude at the beginning of 1925 – from a liberal view to a more strict one – followed by the complete stop in Mar. See Asso, ‘L’Italia e i prestiti internazionali’, p. 73. 32 See De Cecco, L’Italia e il sistema finanziario internazionale, doc., Telegramma di Stringher al delegato della Banca d’Italia a New York Luigi Podesta`, and doc. 139, Promemoria relativo all’apertura del credito Morgan. 33 See Asso, ‘L’Italia e i prestiti internazionali’, p. 248.


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The United States concluded 15 war debt settlements with European countries and that with Italy involved the greatest ‘forgiveness’ on the debt prior to its funding. The extent of writing-down was more than 75 per cent (at the current parity).34 Italy had favourable economic expectations and political security, and the Americans subsequently capitalised upon this. However, although the Washington Administration was prepared to make concessions over war debts, it was not ready to alter its principles, even with regard to Italy. The American government therefore continued to reject any connection between war debts and the reparations that Italy would collect from Germany, just as it had subordinated new financing to the composition of the old debts. III The inauguration of Quota novanta proved consistent with general trends that had been apparent during 1925–26 within both Italy and the international economy. At home deflation served to establish the government’s command over national economic and social interests, even while it extended new controls over the structure and organisation of industry to the most powerful firms and associations. In the international context Quota novanta constituted Italy’s contribution to the overall deflationary thrust of the late 1920s, and Anglo-American attempts to establish the gold exchange standard in Europe.35 Italy adopted the gold exchange standard in December 1927, with the lira stabilised at L90 to sterling (i.e. at Quota 90). This rate revalued the currency with respect to the average of levels that had pertained, 1922–26. The government had been motivated by reasons of prestige when establishing the stabilised rate, while Mussolini himself had threatened an even lower level. Economic considerations had had a secondary importance and a fierce deflation ensued. Quota novanta prevented too close an identification of Fascism with the business elite but, in a long-term perspective, the divergence with industry was secondary. Although business leaders quarrelled with Fascism, they gained important behindthe-scenes victories, just as large landowners had benefited the previous year from new duties on wheat. The war against organised labour was undertaken on all fronts. Regardless of Fascism’s ostensibly favourable attitude to labour,36 real wages, 34 For 7 countries (Estonia,Finland, Hungary, Latvia, Lithuania, Poland and UK),the reduction was about 20%; for Czechoslovakia and Romania it was approximately 25%; for Belgium and France about 53%; for Greece about 67%; and for Austria and Yugoslavia about 70%: see Moulton and Pasvolsky, War Debts, p. 102. In Jan. 1926 Italy settled war debts with UK less favourably, only a reduction of 55%. See Banca Commerciale Italiana, Movimento economico dell’Italia. Quadri statistici per gli anni 1921–1925 (Milan,1927), p. 194 and De Cecco, L’Italia e il sistema finanziario internazionale, p. 87, Memoria anonima. 35 See Maier, Recasting Bourgeois Europe, p. 587. 36 As Minister Guarneri put it: ‘the new corporate structures were of platonic value. What counted was the return to the ‘‘normal’’ output of labour and the end of the post-War ‘‘wave of laziness’’ ’: quoted in ibid., p. 571.

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Table 2. Average annual percentage changes in prices, 1920–25 and 1926–29

Period 1920–25 1926–29

Textiles %

Electricity and gas %

Railways, tramways %

Wheat %

1.30 -5.11

13.51 9.34

15.34 -1.85

19.07 -10.52

Note: Indices are weighted averages of the components. The are estimates, drawn from G. Rey (ed.), I conti economici dell’Italia, 2, Una stima del valore aggiunto per il 1911, Collana storica della Banca d’Italia. Statistiche (Rome/Bari, 1992). Source: Istat, Sommario di statistiche storiche italiane, 1861–1955 (Rome, 1958).

which had remained constant throughout the early 1920s, declined from 1926 until the crisis.37 The new evidence available on relative prices, displayed in Table 2, sheds fresh light on the struggle for power within, and amongst, economic groups. Textile prices fell and charges for railways, tramways and the mail were kept low after earlier rapid increases, but those for electricity and public utilities surged dramatically. Disputes with electrical generators over prices during 1925 and 1926 had revealed antagonistic interests, although this clash had been more apparent than real.38 The price of electricity, as well as value added, increased continuously during the subsequent deflationary period. Industrialists were partially compensated by tariff increases that began in 1926 and which, in the cases of chemicals (rubber and pharmaceuticals), steel and vehicles, developed into highly effective protective rates.39 Lower profit margins hurt small producers more than major undertakings. In June 1927 the government introduced legislation offering tax advantages for mergers, which precipitated a surge in take-overs. Foreign lenders quickly comprehended the resultant reshaping of industrial power and the search for a new political hegemony. The majority of loans from the United States were provided to electricity generators and local authorities. Higher electricity prices, on the one hand, led to greater demand for loans and, on the other, offered prospects of substantial gains, so being well accepted abroad. The 1927–28 deflation, following the lira’s revaluation and concomitant with a decline in domestic prices, caused a debt crisis. The fall in demand was accentuated by deflationary policies pursued in parallel on Italy’s main European export markets. The general price fall entailed, to varying degrees, declines in the value of various 37 Maier emphasises that ‘identification as proletarian or bourgeois was becoming less compelling than interest group affiliation’ and correctly marks the evolution of Fascism in Italy ( p. 584), but this was after the defeat of the working class had already been accomplished: see ibid. 38 Storaci and Tattara, ‘The external financing of Italian electric companies in the interwar years’, European Review of Economic History, 3 (1998), p. 351. 39 See G. Tattara, ‘Protezione effettiva e sviluppo di alcuni settori dell’industria manifatturiera italiana dal 1921 al 1930’, Studi economici, 11 (1980), Table 5, p. 98.


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types of property: shares, securities, real estate and many manufactured products. The decrease in real asset prices was so rapid and so severe that it undermined collateral values. This drove the banks to introduce further restrictions on loans that, in turn, contributed to feeding deflation. Furthermore, the slump in commodity prices affected export prices (agricultural and light industrial products) far more than those for domestic goods, thus paving the way for a fall in the terms of trade and, in turn, a negative distribution effect at the international level as the terms of trade deteriorated.40 The fall in quoted share prices, provoked by the 1929 crisis, reduced the value of assets held by the main banks (Banca Commerciale Italiana, Banco di Roma and Credito Italiano). These institutions had majority interests in the respective industrial firms that they had financed, in some cases consequently controlling them. In attempts to stabilise their portfolios, their respective managements directly supported share issues that their banks had made. The situation resembled that of five or six years earlier and, consequently, the ratio between investments in private shares and the commercial portfolios of the big commercial banks attained peaks in both 1923–24 and 1929–30. IV Immediately following the 1925 Morgan loan, the government introduced legislative measures to regulate the inflow of foreign capital. The Ministry of Finance controlled foreign borrowing over the ensuing year.41 As Giuseppe Volpi stressed both with the Americans and in the Italian Senate, the aim was twofold. First, it was to avoid foreign capital provoking inflation and, to this end, its inflow was to be graduated over time. Second, regulation was to discriminate in favour of loans related to production, so limiting the indebtedness of provinces, municipalities and other public institutions.42 The introduction of controls over foreign loans had been preceded by further tax rebates, to go alongside those of 1922.43 It might have been expected that the numerous contacts between American bankers and Italian firms would rapidly produce concrete results. However, this failed to occur. The Morgan loan was not a great success and, with the dissolution of the underwriting syndicate in April 1926, its market price depreciated by six per cent over the ensuing three months. Another potentially prestigious operation, 40 See G. Tattara, ‘External trade in Italy 1922–38’, Rivista di storia economica, 5 (1988). 41 RDL 10 Dec. 1925, n. 2162. There are fragmentary data on loans for less than a year (which were sometimes preliminary operations to placing long-term loans). According to a list in ASBI: Beneduce, 1/1513–1516, by Jul. 1927, when the peak in the capital inflow had passed, short-term loans for $21m. had been contracted. 42 See NARA, RG. 59, 865.51/469 and 481, Dept. of State, Italy’s Need for Foreign Capital, Memorandum, 6 Nov. 1925, and L. Dominian to Dept. of State, Italian Government Policy regarding Foreign Industrial Loans, 9 Dec. 1925. 43 RDL 11 Sep. 1925, n. 1635.

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Figure 3. M1, M2 and M3 in relation to the Italian Gross National Product Sources: M1 and M3: R. De Mattia, Storia delle operazioni degli istituti di emissione italiani dal 1845 al 1936 attraverso i dati dei loro bilanci (Rome, 1990), Tables 56.1 and 56.2. M1 is defined as paper and metallic circulation; M3, besides M1, includes bank deposits and post deposits. Italian Gross National Product: G. M. Rey, I conti economici dell’Italia. Una sintesi delle fonti uYciali 1890–1970, Collana Storica della Banca d’Italia. Statistiche (Rome/Bari, 1991), Table 5.01

ICIPU, the first public financial intermediary to issue bonds, was also not a great triumph.44 The reason for these particular market responses, and also for the slow general take-off of Italian issues abroad, lies in the lira’s instability over the first half of 1926. The government had taken the first steps for currency stabilisation by utilising part of the Morgan loan, an attempt that failed in spring 1926. Thereafter, between April and August, the lira depreciated by 23 per cent against the dollar through the Italian currency being linked once again with the French franc (from which it had been detached for a few months). During the first half of 1926, only five foreign loans were issued, whilst conditions upon the domestic capital market worsened and the position of the major banks became increasingly difficult (Figure 3). The leading banks both intervened individually to sustain Stock Exchange prices and joined forces in order to purchase shares on the market, 44 See Public Record Office, London: FO /11387-7395, A. J. Pack to Foreign Office, Memorandum by Commercial Secretary, New York, regarding Italian Loans on the New York Market, 25 Mar. 1926; and ASBC, ST, 52/1, Banca Commerciale Italiana (New York Agency) to G. Toeplitz, 9 Feb. and 4 Mar. 1926.

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Table 3. Italian loans and shares oVered abroad at par value in US$s, 1925–31

Year

Loans with maturities of over 10 years (1)

1925 1926 1927 1928 1929 1930 1931 Total

110,000,000 55,190,076 144,610,395 19,245,353 5,000,000 15,643,007 6,280,168 355,973,999

Loans with maturities under 10 years (2) 9,447,207 24,272,511 13,078,857 1,185,960

47,984,535

Total loans (3) = (1)+(2) 110,000,000 64,637,283 168,887,906 32,324,210 6,185,960 15,643,007 6,280,168 403,958,534

Italian stocks publicly oVered on the American market (4) 9,600,000

9,062.000 5,650,000

24,312,000

Sources: (1) and (2) Borgatta, ‘Bilancia dei pagamenti-cambio’, in C. Gini, Trattato elementare di statistica (Milan, 1933), p. 88. Issues were almost exclusively placed in New York. Some minor issues on European markets have been included. (4) R. A. Young, Handbook on American Underwriting of Foreign Securities, US Department of Commerce Trade Promotion series, n. 104 (Washington, DC, 1930), Appendix A. The companies are: Snia Viscosa (1925); Banca Commerciale Italiana (1928); and Pirelli, UNES and Isotta Fraschini (1929).

employing finance from the central bank.45 The situation only opened up once the definitive lira stabilisation plan was launched. It is estimated that the total increase in Italian gross foreign indebtedness, 1925–31, amounted to $404m. (at par values). Most of the loans contracted had maturities of over ten years; 84 per cent of the total amount was accounted for by 32 public loans, issued between December 1925 and April 1930, almost exclusively on the American market, where a small number of shares were also placed (Table 3).46 Operators on other markets occasionally purchased some Italian dollar bonds. Amongst European countries that became indebted to the United States, Italy was second only to Germany and the debt marked the larger increment from 1924 45 In Mar. 1926, the 4 main banks (Banca Commerciale Italiana, Credito Italiano, Banca Nazionale di Credito and Banco di Roma) formed Societa’ Finanziamento Titoli (Softit) which, with a credit of L500m. from Banca d’Italia, began to purchase shares on the market. By Apr. and May ‘to avoid the complete collapse of the market, the measures had to be very drastic’ – ASBC, CpT, vol. 49, 465, G. Toeplitz to B. Stringher, 7 Aug. 1926. By Aug., the financing obtained from the central bank was exhausted and, consequently, Softit suspended its measures to brake the fall in prices, which was continued solely by the banks. That the market was in particularly difficult conditions can be seen by the fact that Softit was forced to purchase securities of prime importance – Montecatini, SIP and UNES. See ASBC, ST, 55/1.2-3, B. Stringher to G. Toeplitz, 4 Aug. 1926. 46 Based on the list published by Banca Commerciale Italiana, Movimento economico (Milan, 1932), pp. 110–15; and Banca Nazionale di Credito (ed.), I valori italiani a reddito fisso (Milan, 1929), pp. 398–404. 3 loans were placed on the London market and 1 in Switzerland.

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Table 4. Italian public and private loans oVered abroad, 1925–1931. Par value in US$m. Public debt Kingdom of Italy1 City councils2 Public Utilities Corp3 Total

Private debt 100 60 40 200

Electricity corporations Others

104 64

Total

168

Notes 1 The so-called ‘Morgan Loan’ 2 Cities of Milan and Rome 3 Istituto di credito per le imprese di pubblica utilita` (ICIPU) and Istituto di credito per le opere pubbliche (CREDIOP). Source: Banca Commerciale Italiana, Movimento economico. Raccolta di notizie statistiche per l’anno 1931 (Milan, 1932), pp. 110–15; official values of monthly issues converted into US$ at the average monthly rate of exchange.

to 1929:47 long-term Italian gross stock of foreign debt was roughly 5.6 per cent of GNP, compared to 18 per cent in the case of Germany and, accordingly, interest payments were much smaller for Italy.48 In the case of 18 loans, it is possible to give an approximate indication of the cost, on the basis of the purchase prices stipulated by the respective bank that originally undertook the issues and then, in turn, transferred the bonds in question to other intermediaries, following the ‘cascade’ procedure that generally operated on the American market.49 The cost of financing in New York was a couple of points lower, compared with the home market through commercial banks50 – the unique source of domestic financing. In any case, domestic finance was hardly available because the commercial banks were too committed to firms, as has already been observed. More than half of the foreign indebtedness incurred arose from issues made on behalf of public institutions (Table 4). These include the ICIPU issue, mentioned above, and CREDIOP. These two institutions had been established on the initiative of Alberto Beneduce. His aim was to widen the bond market by attracting private investors through giving the securities a state guarantee, thus making them similar in character to government bonds. The institutions issued these bonds abroad for private power generators (ICIPU) and shipping lines (CREDIOP). More than 60 per cent of the funds raised by ICIPU issues went to SIP, one of the electricity 47 See Asso, ‘L’Italia e i prestiti internazionali’, p. 79. 48 Both countries in 1931. German data are Statistiches Handbuch von Deutschland. 1928–1944 (Munich, 1949), Table XVI.3, and from B. R. Mitchell, European Historical Statistics (London, 1975), Table K1. Of course, Germany had a very high short-term foreign debt, much larger than Italy. Italian long-term credits were c. one-third of the country’s long-term debts: see F. Guarneri, Battaglie economiche, I (Milan, 1953), p. 171. 49 See Storaci and Tattara, ‘The external financing of Italian electric companies’, p. 354. 50 Commercial bank rates are given Ciocca and Toniolo, ‘Industry and finance in Italy’, p. 124.


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holdings that had the largest short-term debt to the banks. This was part of a wider project developed by Beneduce for electricity utilities.51 Apart from the proceeds of the ICIPU loan, 63 per cent of private indebtedness incurred by foreign borrowing arose from issues for electricity generation.52 In August 1926, Mussolini publicly announced the decision to proceed with monetary reform, and hinted at what was to be the lira’s stabilised level – ‘quota 90’. In September, the government introduced a restrictive policy that caused the banks problems,53 and provoked the repatriation of funds invested abroad by firms.54 Italian monetary policy was dominated by the need to control its external component. The most important difficulty – strengthening the international reserves – was initially resolved by transferring the proceeds of Morgan loan from the state to the central bank, as has already been observed. However, a far greater increase in the reserves was due to loans arranged abroad by public institutions and private firms. Their proceeds were collected by the state through the so-called exchange guarantee. In November 1926, the Treasury was given the right to purchase foreign currency collected abroad (limited to a ceiling of $100m.), at an exchange rate fixed from time to time with borrowers. At the same time, the Treasury also shouldered the burden of paying the foreign currency required to service foreign loans at the exchange rate agreed upon.55 As a result, the Treasury acquired a total of $140m., a sum greater than the legally stipulated total.56 51 ICIPU should have placed a series of loans abroad, rather than just 1. 1 of the putative projects involved founding a US company (after the loan issues), with half Italian and half American capital. The Italian component was to be a combination of public (ICIPU) and private (the 4 major commercial banks) capital: see ASBC: ST, 50/3.3, memorandum, 19 Aug. 1925. 52 Storaci and Tattara, ‘External financing of Italian electric companies’, p. 356. 53 In those circles, contrary to the revaluation-deflation objective, it was noted that the mere announcement that the circulation should remain within a certain limit ‘would have the unavoidable effect of forcing everyone, both banks and private institutions, to immediately secure the largest possible part of the limited margin available. That this took place can be seen in the fact that the private institutions have hidden considerable amounts of lire in Italy over the past few months and this has been worsened by the slowing down of the circulation of money’: see ASBC, CpT, V. LI, 437–8, Appunti sulla situazione monetaria, Milan, 14 Nov. 1926 [probably by Professor G. Del Vecchio]. 54 According to the American consul in Rome, ‘Italian companies having funds on deposit abroad in foreign undepreciated currencies, had been constrained to recall such funds to Italy. To obtain the return of these funds, I am told that credits were denied by the banks in Italy ... This procedure, it is stated, had the approval of the Italian Government’: see NARA, RG. 59, 865.51/546, L. Dominian to the Secretary of State, 26 Jan. 1927. 55 RDL 14 Nov. 1926, n. 1932. The state guarantee of the exchange had first been granted in Feb. 1926 to ICIPU. The Treasury then needed currency because it was involved in the first attempt to stabilise the lira. Thereafter the problem was raised by FIAT, which issued a loan in the US in May. According to Giovanni Agnelli, its role in the international mechanical, steel production and exports meant that FIAT was ‘in fact of public interest’, which justified the extension to FIAT of the opportunity offered by ICIPU – State Central Archive: Presidenza Consiglio, Gabinetto, Atti Amm. 18/3/8-49, G. Agnelli to B. Mussolini, 12 Oct. 1926. The Nov. decree set out the general outline of the subject. FIAT’s request was granted, and similar agreements were drawn up with other private firms (Adamello, Isarco, SADE, SME, Isotta Fraschini, Italgas, Istituto di credito fondiario delle Tre Venezie) and with public debtors (the cities of Rome and Milan and CREDIOP). 56 See Istituto Nazionale per i Cambi con l’Estero, Bilancio dell’esercizio 1927 (Rome, 1928), p. 35.

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However, during 1927, the state exchange rate guarantee was employed in an initially unforeseen way. It now served to disconnect the link between foreign indebtedness and the money supply, which became increasingly important during the lira’s revaluation process. In fact, over 1927, it became clear that the government’s intention to revalue might well succeed. International bull speculation developed, which forced the Italian monetary authorities to buy considerable quantities of dollars and sterling. Foreign capital and speculation mutually reinforced each other since it was well known that proceeds from foreign loans largely flowed into the Italian reserves. Both tended to increase the circulation of notes, a possibility that the monetary authorities perceived as a danger that had to be avoided. When speculation over the lira proved uncontrollable, the monetary authorities turned to foreign indebtedness and decided to sterilise a sizeable proportion of the foreign currencies gradually being acquired through the exchange rate guarantee. This eventually involved 72 per cent of the foreign currencies collected by the Treasury, and was brought about in two ways. First, domestic importers of funds were encouraged to employ the proceeds of such issues in redeeming debts with public and private financial intermediaries, which were thereby able to decrease their own debts to the central bank.57 Second, four public debtors paid the funds that they had raised abroad into a fixed current account, upon which they drew very gradually. Consequently, this account was only closed in 1931.58 The government was careful to publicise within financial circles the fact that foreign indebtedness had limited effects upon liquidity, thus rendering the revaluation policy credible.59 However, in mid-1927 the problem became more complex because of the extent of the bull speculation for the lira. It was clear that, if the flow of currency arising from foreign debt issues was added to international ‘hot money’, it would be difficult to restrict the lira’s revaluation to ‘quota 90’. Consequently, the government decided to suspend the raising of loans abroad.60 This embargo, warmly 57 It would seem that foreign bankers were not unaware of these ‘compensations’, as they were called, which strengthened the financial position of their debtors. In the case of SME, a part of the 1927 American loan served to extinguish financing received from public bodies and savings banks, 1923–26, and the president of 1 of the public bodies formally certified this to the American bankers. See ASBC, UF 15/5, P. Meldolaghi [general manager of Cassa Nazionale per le Assicurazioni Sociali] to Chase National Bank, 9 Mar. 1928. 58 For the details of these 2, see Istituto Nazionale per i Cambi con l’Estero, Bilancio dell’ esercizio 1927, pp. 35–40 and following balances. 59 When the loans of the cities of Rome and Milan were taken out, the Treasury issued a statement in which it was stated that the cities, which had transferred their currencies to the Treasury, would withdraw the equivalent in lire over several years; and that ‘also for the next industrial loan [Societa` Meridionale di Elettricita`, Pirelli, etc.] the Treasury will purchase and keep the dollars, handing them out as the industries must pay for the new plants ... With the system adopted ... the foreign transactions will help to increase the reserves of currency without weighing on the circulation’: see G. Falco and M. Storaci, ‘Il ritorno all’oro in Belgio, Francia, e Italia: stabilizzazione sociale e politiche monetarie (1926–1928)’, Italia Contemporanea, 1–3 (1977), p. 38. 60 See ASBI, Beneduce, 1/1455-56, Piano d’azione, Jun. 1927; De Cecco, L’Italia e il sistema finanziario internazionale, doc. 25, B. Mussolini to G. Volpi, Jun. 1927; and M. Storaci, ‘Il gold exchange standard in Italia: 1927–1931’, Rivista di storia economica, 3 (1989), pp. 297–8.


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supported by Banca d Italia61 and introduced when the lira was at 84–86, blocked operations that should have generated a foreign currency contribution of $117m., nominal,62 equivalent to 69 per cent of total indebtedness incurred during 1927.63 Banca d’Italia claimed that it was following a ‘reasonable deflationary plan’.64 Its balance sheets for 1926 and 1927 showed an unchanging circulation level, while, in terms of profit, the increase in foreign reserves was balanced by a decline of credit both to private bodies and the Treasury.65 Investment declined and unemployment mounted. Nonetheless, in real terms, monetary policy appeared less orthodox. In fact, during 1927 the price fall was violent (-25 per cent), so circulation (M1) and total liquidity available to the economy (M3) increased both in real terms and in relation to income up to mid-year (see Figure 3). In fact, while at the Banca d’Italia-level active operations were declining, at the system-level over the second half of 1927 they grew in real terms. Deflation determined the redistribution of credit amongst investors. Larger enterprises had the credit they required for proceeding towards productive and financial restructuring, based upon the acquisition of smaller firms. The chemical and electricity sectors were able to increase production but were, in fact, the only ones able to do so.66 V With the successful stabilisation of the lira in December 1927, Banca d’Italia eased its strict control over the money supply and repeatedly reduced the discount rate. The foreign loan embargo was suspended in January 1928, and the raising of capital abroad was reorganised on a clearer basis.67 61 See De Cecco, L’Italia e il sistema finanziario internazionale, doc. 149, Lettera di B. Stringher a G. Volpi, 5 Apr. 1927. 62 See ASBI, Op. fin., 25/280-6, Elenco dei mutui rimasti in sospeso in seguito all’ embargo, 3 Jan. 1928. 63 The Americans greeted it favourably because, then, the security market was going through a critical period. Between Jun. 1926 and Jun. 1927, issues of domestic and foreign securities reached the exceptional figure of $4b., $1b. more than the previous period. However, some securities remained in the hands of intermediaries and quotations displayed signs of weakening, including those for Italian bonds. ‘The pause of a few months – in Lamont’s opinion – will permit the absorption of the floating bonds by the savers’. See ASBI, Beneduce, 1/1432-3, note dated 6 Jul. 1927; and also L. Conte, ‘I prestiti esteri’, in L. De Rosa (ed.), Storia dell’industria elettrica in Italia. Il potenziamento tecnico e finanziario. 1914–1925 (Rome/Bari, 1993), pp. 668–9. 64 Banca d’Italia, Adunanza generale ordinaria degli azionisti. 31 marzo 1927 (Rome,1927), p. 22. 65 Credit to the Treasury was put to zero – but the result of a bookkeeping operation. In fact, central bank reserves were entered in the balance sheet at the prewar convertible rate – L25: £1. With ‘quota 90’, they increased by 3.6 and the state’s debt to the bank was reduced by a parallel amount. But notes, corresponding to ‘advances to the Treasury’, stayed in circulation. 66 G. Toniolo, L’economia dell’Italia fascista (Bari, 1980), Table 3.2, p. 129. See the ground-breaking contribution by P. Grifone, Il capitale finanziario in Italia (Turin, 1945), ch. V. 67 RDL 5 Jan. 1928, n.1. The most important change was that the Governor of Banca d’Italia became a member of the government committee in charge of authorising new loans. This meant that new demands were to be scrutinised more closely, especially with regard to the benefits in terms of reserves.

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As has been shown, the volume of loans affected by the embargo was considerable. The American market continued to be generally open and over the first half of 1928 further Italian demands for loans arose. However, despite expectations held by firms for the embargo’s suspension, the Italian authorities failed to approve most requests. Instead, when considering the new balance of payments situation, the authorities decided not to increase the level of indebtedness for the time being. With such a high exchange rate, exports were less competitive, while imports increased to replenish stocks. The proceeds of favourable items (tourist expenditures and remittances) were also diminished by the high rate of exchange. In addition, fears over the balance of payments arose from adverse capital flows,68 and approaches to Morgans for a new state loan failed repeatedly.69 Consequently, the authorities were extremely selective when authorising new foreign loans for private firms and, consequently, only three were issued during 1928. In fact, many firms that had obtained loans abroad thought it more convenient to redeem their foreign debts. Prices of Italian bonds on the New York market were lowered by the Depression, while there were fears of a lira devaluation, which would increase debt service costs. In this situation, Azzolini, Director of the Treasury and a future Governor of Banca d’Italia, warned against a freed foreign exchange market, a common practice adopted amongst the countries that had returned to gold. Therefore, the binding regulation, introduced in 1925 and 1926, was maintained.70 The repatriation of bonds gained momentum after the Wall Street Crash. Nevertheless, in March 1930, controls over the foreign exchanges were relinquished, which legalised the redemption of bonds on foreign markets. Azzolini, Governor of Banca d’Italia, had opposed this liberalising measure,71 but pressure from Mussolini led to its introduction by the Finance Minister, Mosconi.72 It was linked to a decree that deferred until 1933 the fiscal benefits granted to firms issuing debt on foreign markets. The most plausible explanation seems to be that the Italian authorities erroneously thought in spring 1930 that the domestic crisis following Quota 90 had ended, and that the world crisis would be a short-lived event. Only one Italian company, SIP, issued a loan – in April, partly in New York, partly in Zu¨ rich. 68 See De Cecco, L’Italia e il sistema finanziario internazionale, doc. 211, Lettera di B. Stringher a B. Mussolini, 3 Oct. 1928. 69 Part of the correspondence is collected in ibid., docs. 153–5 (autumn 1928–spring 1929). 70 ASBI, Op. fin., 81/774-5, V. Azzolini to G. Volpi, 7 Jul. 1928. Mention of repurchases during this year can also be found in official sources, such as Banca d’Italia, Adunanza generale ordinaria degli azionisti. 28 marzo 1929 (Rome, 1929), p. 22. See also Borgatta, ‘Bilancia dei pagamenti, p. 91; and Asso, ‘L’Italia e i prestiti internazionali’, p. 292. The law stipulated foreign currencies were allowed only when supported by documented requests for goods, services, interest, redemption for regularly issued debts and to re-export legally-declared capital imported by foreigners. 71 See de Cecco, L’Italia e il sistema finanziario internazionale, doc. 221, Lettera di V. Azzolini a A. Mosconi, 7 Mar. 1932. 72 See ibid., doc. 222, Lettera di A. Mosconi a V. Azzolini, 28 Mar. 1932.


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Immediately after sterling was floated in September 1931, the government operated an informal control over the foreign-exchange market. In particular, ‘the purchases of bonds on foreign markets, even if issued by Italy’ was forbidden.73 But this stipulation was ignored. The depreciation of bonds74 and the dollar’s devaluation in 193375 gave greater impetus to repatriation, a practice probably resorted to by many issuers in order to reduce their debt burdens but thereby contributing to a substantial balance-of-payments deficit.76 In the opinion of the Governor of Banca d’Italia, the fall in reserves between 1928 and 1932 and again in 1934 was mainly due to purchases of foreign securities and Italian bonds issued abroad by Italians. The result was ‘the transfer of availabilities (in currencies) from the reserve of Banca d’Italia, where they were held in the interest of the whole nation, to the reserves of a few thousand corporations and individuals’.77 Circles supporting the Fascist regime reversed his emphasis, and claimed that repurchases led to ‘an improvement of the patrimonial situation of the Italian market’.78 However, the repatriation process in 1934 led to the central bank’s reserves being dangerously near to 40 per cent of its sight liabilities, i.e. to the minimal cover ratio established by the 1927 monetary law. The flight of capital together with the worsening of the trade balance in 1934 constitute the main reasons for the reintroduction of exchange control. The aim was to control imports and reverse the flow of exports – to limit greatly the efflux that had occurred over previous years and that was still taking place too rapidly with respect to the state of the balance of payments.79 In 1933, Americans estimated that outstanding securities held outside Italy had decreased by a quarter – in terms of the total original amount of loans in different currencies80 – as a result of retirements and purchases made by Italian institutions. A later estimate, that, perhaps, better reflects the wave of the repurchases after the dollar’s devaluation, refers to 18 loans issued on the American market (Table 5). It indicates a repatriation of about 66 per cent of the outstanding American share by 73 See circular letter from Confederazione Fascista del Credito e della Assicurazione, 27 Sep. 1931, quoted in ASBI, Estero, 34/2346, Credito Italiano, Operazioni in cambi, 2 Oct. 1931. 74 On average, there was a 27% decline in quotations, 1928–32. Calculations refer to 21 Italian bonds, and are based on data from B. Rovere, Le obbligazioni italiane in Dollari (New York, 1935), chs XVIII–XXII. 75 As recalled in ASBI, Beneduce 108/832, telegram to G. Jung, 29 Apr. 1933. 76 According to the figures in ASBI, Azzolini, 59, during the 3-year period, 1931–33, current items within the balance of payment had a surplus of about L1.5b. while reserves of the central bank fell L2.2b. Thus, net capital flight may be estimated at a passive amount of L3.7b. 77 Banca d’Italia, Adunanza generale ordinaria degli azionisti. 30 marzo 1935 (Rome,1935), p. 13. 78 Borgatta, Bilancia dei pagamenti-cambio, p. 101. 79 A. O. Hirschman, Potenza nazionale e commercio estero. Gli anni trenta, l’Italia e la ricostruzione (Bologna, 1987), p. 188. 80 From about $400m. (a figure similar to the estimate in Table 4) to $300m. See NARA, RG. 151, E 14, H. C. McLean [commercial attache´ , American Embassy, Rome], Italy’s Budgetary, Economic and Financial Situation, 6 Jul. 1933. The refunded quota, according to the amortisation plan, can account at the most for 5–7% of the total.

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Table 5. Title of issue, par value outstanding and estimated amount held outside of USA at the end of 1937, US$m.

Title of issue Government of Italy City of Milan City of Rome CREDIOP ICIPU SADE Benigno Crespi Cotton Ernesto Breda Fiat SNIA Isarco Hydroel. Lombarda Elect. SME SIP Terni Ind. and Electric Co. UNES Soc. Gen. It. Edison ‘C’ Soc. Gen. It. Edison ‘E’ Total

Par value outstanding at 31 Dec. 1937 (1)

American share (2)

73,176 20,779 20,445 4,815 13,425 3,586 2,140 2,038 4,116 4,285 3,535 5,930 9,776 7,789 9,287 4,209

73,176 16,831 20,443 4,815 13,425 1,783 929 1,651 4,116 4,285 3,535 5,930 4,370 7,789 9,278 3,998 8,132 8,460 192,946

Estimated amount held outside USA (3)

% quota held outside USA: (3)*100/(2) (4)

54,875 10,098 12,265 2,889 8,055 1,337 650 1,238 3,704

75 60 60 60 60 75 70 75 90

1,414 2,965 2,622 3,894 4,639 1,999 6,505 6,768 125,917

40 50 60 50 50 50 80 80 65

Source: NARA, RG. 151, 620. Italy, from Rome office (M. P. Hooper), to Finance Division, 20 Oct. 1938.

1937, certainly a process that had largely taken place before 1934, i.e. before the introduction of exchange control.81 VI After the First World War, Italian firms looked to the American market, the surging new financial centre, being eager to find a replacement for German, Swiss and Belgian funds that previously had flowed abundantly into the country. However, the opening of the American market to European investors proved to be a long process, delayed by the settlement of war debts with the United States government. Consequently, during the early 1920s, Italian firms had to rely mainly upon the 81 Indirect evidence is also given by the amount of foreign bonds (around $60m.) purchased by Istcambi, 31 Dec. 1935, against special issue of 5% Treasury bills, 1944, according to RDL 8 Dec. 1934, n. 1942. See folder 32, Istcambi, 25 Jan. 1936.


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domestic market. Foreign short-term capital was obtained by the commercial banks, but did not directly finance Italian firms. In the context of a growing economy and a burgeoning stock exchange, financing via the domestic market primarily comprised share issues and the provision of short-term facilities. There was a lack of long-term lending institutions, which caused firms to have to rely upon security flotations or short-term bank credits. Only the most flourishing Italian firms were able to place bonds certificates abroad and raise foreign currency. The success of these particular operations was assured by fiscal incentives and the state guarantee of exchange rate.82 Returning to gold at such a high rate of exchange as Quota 90 necessitated the accumulating and protecting of large reserves, thus foreign loans were welcomed. At the same time, profound contradictions were brought to the fore by the flow of foreign lending, the strong pressure exerted by the United States and Britain for stabilisation, and deflation in borrowing countries that accompanied the establishment of the gold-exchange standard. Foreign funds assisted the lira’s stabilisation, and provided the most important firms (mainly electricity utilities) with much-needed long-term finance. At the macroeconomic level, the sudden increase in the reserves was greater than had been forecast and, by mid-1927, they no longer required any additional inflow of funds. The need to control the domestic price level led to a rigid control of the money supply available to private firms, and an embargo was placed on foreign loans. Currency raised abroad was surrendered to the Treasury with the corresponding domestic funds being made available to private borrowers, although not to full amount and only after delays. Revaluation to such a high level caused the domestic economy to experience a sharp turn. The ratio of firms’ indebtedness to their net worths rose to high levels, while the new deflationary climate restrained private enterprises from undertaking productive investments. In 1929, the economic crisis led to an increasingly complex situation. Share prices fell, and the banks were increasingly involved in their support through adding new shares to those already in their respective portfolios. Recovery required a significant change in the finance of industrial concerns. The repatriation of securities from overseas made clear how short-lived the financial assistance received from abroad had been. The state placed the funds necessary to constrain the losses being experienced by the banks but at the price of acquiring the shares and industrial properties held by the banks, thus becoming directly involved in their management. The closure of foreign capital markets forced the conception of new industrial forms of finance on an entirely domestic basis. The domestic bond market was not able in itself to deal with various firms’ needs. The first attempt to introduce a new form of public intermediation was made with the creation of IMI in 1931. This 82 ASBI, Estero 19/237–243, 458–9. For more general problems see also Bonelli, ‘Alberto Beneduce’, pp. 455–66; and M. De Cecco, ‘La ‘‘protezione’’ del risparmio nelle forme finanziarie fasciste’, Rivista di storia economica, 2 (1986). During the 1920s, Beneduce was president of CREDIOP, ICIPU and Istituto di Credito Navale; in the 1930s he worked towards the creation of IMI and IRI.

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should have reorganised industrial credit through providing medium- and longterm loans, financed though public placements of its own bonds. Private savings should have flowed thereby directly to private industrial concerns through the development of a bond market, based upon securities guaranteed by a public concern. However, the economic crisis prevented IMI from being able to undertake this task successfully. It was replaced by IRI, a more definite and all-pervasive body, which led to its permanent ownership of the shares of the more prominent industrial companies. This allowed the reconstruction of the Italian banking system on the basis of the 1936 Banking Law, which required the separation of banking activity and the financing of industrial concerns.