FEELING THE STRAIN

Wanganui Chronicle, Volume 79, Issue 229, 30 September 1935, Page 11

FEELING THE STRAIN

ITALY’S ECONOMIC POSITION. CREDIT AT A LOW EBB. Italy's financial and economic position shows signs of becoming Hcute, said the Economist of July 27. In recent years her economy has suffered the successive strains of a stabilisation of the currency at too high a level in 1927, a resulting prolonged deflation, a further iuiense deflation following the departure of the pound from gold, an attempt to reflate without devaluation by means of rigid exchange restriction, and finally the prospect of an expensive and protracted war fought on foreign soil. On July 22 it was announced that the statutory requirement of a 40 per cent, metallic cover for the note issue and sight liabilities had been temporarily suspended. Italy’s balance of trade and balance •»f payments, thanks no doubt to the over-valuation of the lira, have been persistently passive for some years. In .1932 and 1933 the import surplus was about 1500 million lire. Tn 1934 it rose tn nearly 2500 million lire, owing to a simultaneous increase in imports and a decline in exports; and for the first six months of 1935 it was 1381 million lire. A simultaneous and steady decline in emigrant!*’ remittances has exerted a further adverse influence, though it. is believed that tourists’ expenditure has recently to some extent recovered. Flight of Capital.

Tflie passive balance of payments oi current account, however, is by nmeans the factor tending to rc duco the Bank of Italy’s gold reserve The chronic Budget deficit, and the re suiting persistent rise in the put'lii debt, has also played an important par in diminishing confidence in the cur rency, and consequently provoking i flight of capital. From 1927 to 1933 according to the last report of th« Bank of Italy, the loss of the Bank’; gold was “mainly due to capital in vestments by Italians in foreign coun tries, and to purchases also by Italians of foreign securities and of Italiai securities issued in foreign coun tries. ...”

This flight of capital was no doub partly duo to the over-valuation of tin lira and, as the Bank suggests, t( Italy’s cheap-money policy. Bilt the Budget deficit has also been an important factor in undermining confidence In the two financial years ending Jun( 30, 1933, the deficit averaged 3500 mil lion to 3800 million lire. In 1933-34 it was considerably over 6000 million lire. Drastic cuts in wages and salaries managed to reduce the deficit in the first six months of the 1934-35 financial year to 1074.7 million lire; and the deficit for 1935-36 was officially estimated at 1657 million lire. Nevertheless, 2000 million lire in 4 per cent, nine-year Treasury bonds had to be raised internally in November. Moreover. since January Italy’s military expenditure must have risen enormously; and, as in the case of Germany, the official figures of expenditure should probably be accepted with some reserve. As n result of the chronic deficit and of Signor Mussolini’s public works policy the national debt has been growing ever since the Fascist regime began. The total of State liabilities was estimated at about 150,000 million lire, compared with about 100,000 million lire in 1922. In May the Italian Fin ance Minister gave the figure of 128,000 million lire for the public debt proper on Juno- 30, 1934, and the increase since 1922 at 32,000 millions. In the new figures now issued by the Treasury the total of State liabilities on June, 30, 1934, is put at 149,927 million lire and the increase since 1922 at 2700 millions. At the same rime the total of State assets is put at ,111.541 millions and the increase since 1922 at 23,289 millions. But by no means all the assets are realisable, in any sense of the word. They include “land, sea and air war material, and other material for State services,” and “ non-disposable scientific and artistic material.” Moreover, the increase in the public debt since 1922 is partly offset by a “reduction in liabilities,” which turns out an examination to consist largely of the contraction in the note circulation due to 10 years of deflation! Gold Reserve Falling. The combined effect of the flight of capital and the tendency to a passive balance of payments has been to reduce the gold reserve by 838 million lire in 1932, 367 million lire in 1933 and 1540 million lire in 1934. In 1934 the import surplus became more important than the flight of capital; for by this time rigid exchange restrictions ha 1 made capital exports practically impossible. At the beginning of 1934 Italy abandoned the orthodox policy of deflating in order to remain on the gold standard; and adopted Germany’s policy of reflating within a wall of import and exchange restrictions. The symptoms of this change of policy are the facts, among others, that since December, .1933, unemployment has been falling, that the import surplus is growing, and that prices are tending to rise. By December, 1934, the bank’s reserve had fallen to 5760 million lire, compared with 7092 millions at the end of December, 1933, and a combined gold and foreign exchange reserve of .10.331 millions in December, 1929. On December 10 last a decree came into force making it compulsory for all Italian individuals or institutions to declare their foreign assets to the Bank of Italy and to sell them if required to do so. As a result, the gold reserve remove ted slightly thrDughout December and January; but it subsequently began to fall once more. Further drastic import restrictions were imposed in Februn ry. The remarkable rise in wholesale prices apparent since January suggests very strongly (hat some form of disguised credit inflation designed to finance military expenditure has been pro reeding throughout the year. At any rale, prices, product ion, employment, rates of interest, the cost of living, and the import surplus have been rising rap idly; while the gold reserve has been falling. On May 21 a decree was published obliging al Italian banks, firms, companies and individuals in Italy to deposit within 20 days at. the Bank of Italy their holdings of foreign stocks and bonds and of Italian bonds issued abroad. From June 10 the gold stock began to fall rapidly, and by July 10 it was as low as 5524 millions. Between June 10 and June 30 the bank’s holdings of foreign bills mid balances rose by about as much ns its gold losses. It .appears, therefore, that the bank had been relinquishing gold to pay for imports, and nt the same time acquiring

the foreign balances accruing to Italiai exporters. Simultaneously with the fall in the gold reserve, Italian wh.olesa.e prices had risen from 85.2 on January 2 to 96.9 on July 3; while French prices had been about stable. And, despite the import and exchange restrictions, the spot exchange rate has tor some time past stood in Paris at a substantial discount. Foreign Liabilities. On Tuesday, July 23, a semi-official statement was isued, which pointed out that this suspension of the 40 per cent, gold ratio did not imply that the nre was being devalued. It admitted that the foreign liabilities of the Italian Government had increased to 500 million lire, but promised payment “within the next few days.” The control exercised over foreign exchange and foreign trade, it was stated, together with the strict application of quotas, made it possible for the Italian Government to ensure the prompt protection If the lira. Tuesday’s official statement has not carried much conviction in the City of London. It is pointed out that Italy is light-heartedly envisaging a war on foreign soil, and that apart from any actual expenditure abroad, the major munitions of war such as steel, nonferous metal, coal and oil all have to be imported- It is impracticable for Italy to expand her exports in proportion, and thus she will be forced back upon her reserves of gold and foreign exchange and upon her ability to borrow in foreign centres. This raises the question of Italy’s credit in every sense of the word, and the trend of Italian sterling and dollar bonds In London and New York is very ominous. Italian credit is at a low ebb. The Great War taught the world that once patriotic enthusiasm has been aroused, most nations will enduro far greater economic and financial internal strain than had generally been supposed. Italy may bo able to enduro such a strain again to-day. Fortitude of this kind, however, will not solve Italy’s real problem, which is how to obtain and pay for essential munitions and materials from abroad. Already British coal exporters are refusing to make further shipments while their outstanding debts arc in arrears; and it is s’gnifivant that the real motive behind the suspension of the gold cover is to release gold with which to discharge ex ternal debts. Italv is also trying to expand her export trade bv means of fresh credits. But all these shifts can only be palliatives. The plain fact is that Italy can onlv finance a prolonged campaign by borrowing in foreign centres. And it is more than doubtful if she pill l>o able to do