LIBRARY OF THE University of California. GIFT OF y^ ..S^3M^...QLtQCumentt. Class 61ST Congress 1 SFNATF ^ Documknt f Docui I No. 2d Sessioti / ^^ ^^^.x. \ No. 575 NATIONAL MONETARY COMMISSION The Banks of Issue in Italy BY TITO CANOVAI, F. S. S. Chief General Secretary of the Bank of Italy WITH AN /^RTICLE BY CARLO F. FERRARIS Professor in the University of Padua The Text of the ItaHan Banking Law Washington : Government Printing Office : 1911 ^ per cent into 4 per cent bonds, and in October, 1905, converted the 4 per cent bonds into 3.75 per cent. The realty credit administration of the bank partici- pated in the founding, in 1886, of the Istituto Italiano di Credito Fondiario, created especially to come more freely to the aid of real property, which was demanding ever increasing assistance. The participation consisted in the payment of 5,000,004.10 lire in cash and in the sur- render of mortgage operations in cash for 9,999,995.90 — that is, a total of 15,000,000 lire. 70 Chapter V. EXCESS OF BUILDING AT ROME — DIFFICULTIES OF FINANCE — EMBARRASSMENTS OF THE BANCA ROMANA. Returning to the general conditions of Italy in 1885 and to those in which the Italian banks of issue were involved, it is seen that the unloading of a part of the banking operations made by the Banca Nazionale in its credit foncier administration did not diminish its discounts; these, contrary to the expectations and intentions of the bank, continued instead to increase considerably, just as those of the other banks of issue increased. Discount operations, which up to December 31, 1885 had advanced to 617,000,000 lire, went up to 673,000,000 lire in 1886 and to 713,000,000 lire in 1887, going down to 674,000,000 lire in 1888 and rising to 743,000,000 lire in 1 889, a total which was not exceeded except on the occasion of the crisis of 1 907. The increase in discount operations of the Italian banks of issue was due largely to the aid given by them to the building associations, which, with the haste that always accompanies work of a prevailingly specula- tive character, had undertaken to build houses in Rome and other Italian cities where a certain lack of buildings had been noticed, a lack which was especially evident in Rome because of the growth of population, due for the most part to the establishing and extending of the public administration in the capital of the kingdom. The plan of procedure of those interested in the building enterprise in Rome and other cities was not imlike that observed before and later in other countries. They began in Italy with the purchase of land, for the purpose of sell- 71 National Monetary Commission ing it again at higher prices; they continued by having recourse to credit, mortgaging the land to obtain the means necessary to build the first story, and so, from story to story, until the completion of the building. This, with interest and incidental expenses incurred in obtaining the capital, represented normally a cost to which the returns could not adequately correspond, in the economic condi- tions of the population, especially in Rome, composed largely of employees. Very soon, therefore, these building associations found themselves surrounded by grave difficulties. They had been organized partly to build dwelling houses directly, partly to furnish capital to private builders who had come in swarms on every hand, but especially from people least provided with capital ; small contractors, and even simple stonemasons, had become imexpectedly and pro- visionally proprietors of great palaces, which the crisis, breaking out before long like a blast of wind, was to carry away from them as if they were built of the same first material — paper — with which the capital had been got together, also of paper. The period that elapsed between 1885 and 1890 was one of the saddest Italy has ever experienced. It was sad because of economic and financial conditions, and was not destined to be surpassed, even in moral seriousness, except by that between 1893 and 1894. The lack of a single powerful bank of issue made itself sharply felt at that time, but instead of the Government's being inspired to an act of salutary and heroic energy, it was persuaded to persist in its error. There was a considerable increase of circulation, which had risen from 900,000,000 lire in 1884 72 The Banks of Issue in Italy to 948,000,000 lire in 1885, to 1,032,000,000 lire in 1886, to 1,075,000,000 lire in 1887 and 1888, and to 1,116,000,000 lire in 1889. This increase in circulation was confronted by a decrease in the percentage of the metallic reserve, which went down from a maximum of 51 per cent in 1883 to a minimum of 34 per cent in 1889; whereas, meanwhile, by the redemption of the association bank notes the State had considerably reduced its metallic gold reserve, which amounted at the end of 1889 to only 160,000,000 lire. The budget had closed with a surplus of 35,000,000 lire in 1884, of 15,000,000 lire in 1885, and of 12,000,000 lire in 1886, but the surplus was soon converted into a deficit of 57,000,000 lire in 1887 and of 230,000,000 lire in 1888. The rupture of commercial relations with France helped to aggravate the situation, because the Paris market, having become hostile to things Italian, began to sell the rentes with such fury as to make them decline from a maximum price of 102.55, reached in 1886, to a minimum of 90.80 in 1889. Consequently, through the return of a considerable part of them into Italy, exchange on Paris, which had gone down again, as we have said, in 1883, after the liquidation of the crisis of the French market, to a minimum rate of 98.75, rose in 1888-89 to more than 102. Just as comfort and easy circumstances, along with tranquillity, lead to thoughtlessness, so difficulties and ad- versity lead to melancholy meditation; people reconsider their past course, and pass in review the causes of present evils. Italy found in this review the reason of the state of economic and financial depression into which it had fallen — it found it in the disorder in which the banking 73 National Monetary Commission regime had been left; in the frantic career of financial extravagance which had swelled beyond all the limits of prudence the national debt, besides exhausting the con- tributing power of the citizens, on whom had been imposed unbearable fiscal burdens. Naturally, in the presence of the grave embarrassments of a situation in which every one in the Government, in Parliament, and in the country had his share of responsi- bihty, the criticism became still more bitter of the work of Minister MagHani, whom they wished to hold solely responsible for the mistakes made by all and for the con- sequences which had resulted from them. Above all, the aboUtion of forced currency, in presence of the reappear- ance of agio, was harshly criticised, and not a single one of the 266 deputies who had voted for it with great enthu- siasm, against only 27, rose to defend the minister, for whom, in remembrance of the great event, a gold medal had been coined. However, whatever the calm technical judgment might be as to the law for the abolition of forced currency, it should have been recognized that many causes foreign to it helped contribute to its failure. The abolition of forced currency would not have miscarried if the State had not recklessly plunged into all sorts of expenses for railroads, for pubHc works, for the African war, and other things; and especially if, as had been foreseen and prom- ised by Magliani himself, energetic measures had been taken to complete the monetary programme by a careful regulation of the banking system. On the contrary, Italy was not wise enough to derive any salutary lesson from the experience it had gone 74 The Banks of Issue in Italy through, particularly in the question of regulating the banks and circulation. It may be said, rather, that the discovery of the abuses then revealed in that quarter led it to persevere and commit new and more serious errors. Under the pressure of the clamors of pubHc opinion, partly perverted by those who had interests in perverting it, not only did the Government not provide promptly for checking and confining to its proper course the stream of paper money that was overflowing its banks in all quarters, but it Hstened rather to the voice of the expan- sionists who were accusing it of stopping the promised revival of the activity of the country by denying the necessary means for the movement of business. Meanwhile, at all the meetings of the councils of the banks of issue, the government commissioners gave warn- ing that they were obhged to state that the circulation, as appeared from the statements presented to the councils themselves, exceeded the legal limit. And the Govern- ment, on the reports of the commissioners, requested the banks to return to the normal limits. On their part, the banks replied that the conditions of the market had rendered necessary an enlargement of circulation, and they promised to return to the legal Hmits. This corre- spondence between the Government and the banks con- tinued for some time, and was one of the humorous sides of the Italian banking question, which had other humorous sides, although in the midst of exceedingly sad ones. On the other hand, at the point things had reached, it was not possible to proceed with very severe methods, because such action would have precipitated the situa- tion and rendered the catastrophe still more serious, just 75 National Monetary Commission as, again, granting the insistent demands of the expan- sionists, although putting off the catastrophe, would have made it more serious. Nor, for the reasons stated, was it possible to apply to the banks all the provisions of the law of 1874, which, as it had not been repealed by the law of 1 88 1, still remained in force. According to this, the increase in circulation recognized as necessary for extraordinary and urgent needs of commerce could be granted by the Government after trying two suc- cessive increases of the discount rate, on condition, how- ever, that the excess of notes should not exceed 40 per cent of the capital of the banks; that the increase was not to last for a period of more than three months, and that the profits cleared on the operations should accrue entirely to the treasury. And it was even less possible to apply the statute under which the bank should be obliged to pay the State, by way of penalty, a sum equal to the total of the excess of circulation beyond the legal limit or the deficiency of the metallic reserve. This statute, under the terms of the established regula- tion, was to be applied, after reporting the transgression to the Court, by the application of the penalty; it was seen in practice how ludicrously this extreme severity was eluded. This was the case not only because it was a question of provisions of exaggerated severity, but because of the man- ner in which the transgressions of the law had come about. On account of the situation which these transgressions had created in the country, and more especially because of the share the Government had had in them it could not condemn the banks without condemning itself. For it was just at this time that the intervention of the 76 The Banks of Issue in Italy Government in the conduct of the banks of issue was most actively and openly manifest, as will be seen later. However, the Government expressed the intention of undertaking to give better regulations to the banks, and presented a bill to Parliament, the third or fourth since the abolition of forced currency, which did not fare differently from those which had gone before it, and aroused violent discussions, polemics, and criticisms. At the same time the Government ordered an inspec- tion of the banks of issue to ascertain their conditions, which, especially in what concerned the Banca Romana, seemed very serious. A first audit of the cash of the Banca Romana seemed to show a deficit of 8,000,000 lire. The audit was suspended to make further examination of accounts, and when it was continued a few days later the cash was found to be correct. However, other irregulari- ties were found in the methods of issuing and destroying bank notes, and in general it was discovered that the finan- cial conditions of the bank were not sound and normal. Once more the Government let slip the opportunity to liquidate the Banca Romana or merge it in the Banca Nazionale, and, with the others, to create a great in- stitution of issue, as was already insistently demanded in various quarters. The bill for the reorganization of the banks of issue failed for the very reason that whereas it favored the inclinations of the ignorant crowd, under the influence of those who were interested in keeping up the existing disorder, it was in too open contrast with public interest and the opinion of the most competent men of the country. It seems that the author of the bill. Minister Miceli, a very commonplace man, absolutely 77 National Monetary Commission without the most elementary economic education, had taken upon himself the burden of coming to the aid of the weak. This bill resembled the statutes of a society for the guardianship of minors and the feeble-minded; the anxiety not for the public interest, but for the defense of small banks, was evident in every part of it, so full was it of provisions intended to defend the minor banks from an imaginary danger of oppression on the part of the larger institutions, and especially on the part of the Banca Nazionale. It was very evident that the Banca Romana, not through the hostility of others, but because of its own difficulties, was not in a position to accomplish the redemption of its notes which had entered the coffers of the other banks, a redemption which had to be made regularly every ten days in conformity with the law and regulations. Not- withstanding this fact, the minister, instead of rendering the provisions on this point more efficacious, so as to make the Banca Romana feel more clearly the necessity of limit- ing its activity and restricting its circulation, proposed that the obligation of redemption of bank notes should be confined to the tenth part of the circulation of each bank. This was equivalent to abolishing the obligation of redemption between banks which, under the system of circulation really at forced currency, represented the sole and only control, the one single check on their currency. It may be well to say that of the six ItaUan banks only the Banca Romana demanded insistently and loudly the provisions relieving it from the burden of the periodical redemption of bank notes; and this began in 1887 — that 78 The Banks of Issue in Italy is, from the time when its situation became particularly unfavorable — when it had difficulty in redeeming the notes that were presented to it in continually increasing num- ber, because of the greater quantity circulating in the country, which tended to return to the coffers quickly. It was then shown that the greater the quantity of bank notes in circulation, at legal or forced currency, the more quickly they are returned to the coffers of the bank. With a limited field of action, for a long time confined to the Province of Rome alone; with a great part of its assets unrealizable or overdue, the Banca Romana did not receive sufficient payments to enable it to redeem its notes which entered in all the greater quantities in the coffers of other banks, because the public, not com- pletely ignorant of the difficulties of the Banca Romana, showed that it did not approve of the notes, and made haste to get rid of them. As a result the bank found itself obliged to resort to costly expedients, such as the sale in the markets of northern Italy of Italian rentes in return for notes of the Banca Nazionale to be presented to the latter in redemption of its own notes; these rentes it bought back at Rome with its own notes, thus disturbing also the hom.e market of rentes. At the distance of twenty years, when the facts of the situation have either been forgotten or grown confused, what happened then in Italy may well seem incredible. But it must be stated and repeated that the Government believed the very gravity of the situation justified its procedure. Doubtless it seems inexplicable to-day that the Govern- ment should allow an institution of issue to violate the 39781°— II 6 79 National M onet ary Commission articles of the law; that, also, with manifest injury to the other banks of issue, it should prepare to lay before Parliament new laws all to the advantage of the Banca Romana, which was, among them all, least worthy of consideration; but what seems inexplicable to-day had at that time a reason, if not a justification, in the special conditions of the capital of the Kingdom, and in general in the ideas which prevailed in Parliament and the country concerning banking regulations, ideas decidedly and unconditionally in favor of the plurality of banks, the grave defects of which people either did not or would not see. The feverish expansion which the building industry entered upon had flooded Rome with a new popula- tion, composed largely of farmers who abandoned the country, attracted by the seductions of the city and the easier living offered by the work of building. The Banca Romana, hard pressed by its difficulties, and not being able to redeem the notes that were presented to it from other banks, turned to advantage the conditions created in the capital by the great mass of workmen who had swarmed there for the work of building, and declared that if it were forced to redeem its notes, it would be absolutely obliged to suspend operations; it did not fail to depict to the Government all the consequences that would follow the suspension of the work in Rome, and of the idleness of thousands of workmen. And since there were news- papers on hand that obligingly echoed this anxiety of the Banca Romana for the well-being of the working classes, and for the tranquillity of the capital of the Kingdom, the workmen began to grow restless and threatened to make 80 The Banks of Issue in Italy trouble, which naturally exercised a certain influence on the men who were in the Government, at a time when labor disorders, agitations and strikes had not yet become national institutions, as it is now the case. Nor was the conciliatory and benevolent attitude of the Government toward the Banca Romana due to this alone, for the bank managed cleverly to touch and make vibrate other strings of its instrument. It had succeeded the ancient Bank of the Papal States; it was given the monopoly of issue of these same States ; it was in posses- sion of special privileges, so that, as we have seen, the papal government itself had undertaken to guarantee its notes. In view of all these things, the Banca Romana did not let slip the opportunity to bewail the happy time in which it was absolute mistress without rivals and with- out enemies. And it turned to account the parochial sentiment of the population, making it seem that its adversaries were attem.pting to oppose in it the only local financial institution in hatred for the city. Having placed the question on this basis, it was easy for the Banca Romana to find adherents and helpers, and to win over the sympathy of part of the population, all the easier to obtain since the Banca Romana seem^ed to be the victim of the new elements which had come to Rome from other provinces and were fighting in it a Roman institution. Henceforth there were few who were not persuaded that the Banca Romana was a victim and that the Banca Nazionale, which had long cherished the plan of becoming sole bank of issue, was trying to throttle it. And though even after the discovery of the disastrous 8i National Monetary Commission situation of the Banca Romana the beUef in this legend still persisted, just as many people in Italy and elsewhere still beheve it even to-day, nevertheless, as it will be easy to prove, it is nothing but a fiction cleverly foisted on the public; and since the relations existing between the Banca Nazionale and the Banca Romana and the results that came from them are of an interest which transcends historical curiosity and makes clearer one of the vices of the plurality of banks, it does not seem superfluous to reestablish the truth of these things. That Signor Giacomo Grillo had become a decided partisan of the superiority of the unity of issue after the painful experiences caused by plurality is a fact beyond all doubt ; but being a man of exemplary uprightness and loyalty, he wished the desired end to be attained, in the interests of the country, by the common consent of the various banks of issue and the Government, and the approval of Parliament. Consequently, he attempted several times to negotiate a fusion, both with the Banca Nazionale Toscana and the Banca Romana. But the situation of the latter bank, as was shown later in 1893, was an obstacle to any sort of agreement, since consenting to a fusion would have meant reveal- ing the ruinous condition it was in. For the rest, the personal relations of the general director of the Banca Nazionale with the governor of the Banca Romana were marked by the most sincere cordiaUty, and when the Banca Romana began to find itself in difficulties and unable to redeem its notes, the general director of the Banca Nazionale was liberal in making concessions to it. He consented to keep back in the coffers of the Banca 82 The Banks of Issue in Italy Nazionale as much as 4,000,000 lire in bank notes of the Banca Romana without demanding redemption; and since, later, this sum subtracted from the obligation of redemption proved insufficient, the general director will- ingly consented to the recommenda^tions made by the Government to show the greatest consideration for the Banca Romana, and declared that his attitude was con- ciliatory; and on September 24, 1890, he laid the situa- tion before the superior council and proposed to increase from 4,000,000 lire to 6,000,000 lire the fund of notes of the Banca Romana to be held back from redemption, especially as the Government had consented to free from taxation a corresponding sum of notes of the Banca Nazionale. The council, although expressing its anxiety for the responsibility which the Banca Nazionale was assuming, approved the proposal of the general director. October 22 of the same year, after fresh recommendations from the Government, the general director advised increasing to 9,000,000 lire the cash credit opened for the Banca Ro- mana; by this, with the fund held back and the cash credit, the Banca Nazionale had consented to withhold from the obligation of redemption 15,000,000 lire in bank notes of the Banca Romana, which then had a circulation of 74,000,000 lire. But this is not all: as a result in 1894 of the Govern- ment investigation of banks, it was found that in 1888, at the time of the inspection made of the Banca Romana, the general director of the Banca Nazionale, on a simple request from the Governor of the Banca Romana, had consented to pay over to it the sum of 8,000,000 lire, which 83 National Monetary Commission amount was supposed to have been used to fill up the deficit discovered in the first audit of the cash. The discovery of the loan made by the Banca Nazionale to the Banca Romana suggested to Deputy Cavallotti the idea of making an inquiry of the Government as to the relations between the general directors of the two banks. So Signor Grillo, reputed to be a most bitter enemy of the Banca Romana, appeared now as an accomplice in the misdeeds of this bank, for which it was believed he had furnished the means to make up a cash deficit! Deputy Cavallotti, warned of the grave error into which he had fallen in suspecting an understanding between the heads of the two banks, refused to lay his question before the Chamber of Deputies, even though the theme, however absurd, m.ust have seemed attractive, since to attack and fight the Banca Nazionale and its administration had always been and was still a popular and meritorious undertaking. In fact, if the Government, in the difficult moments the country went through, which had made perfectly evident the deficiencies of the banking system, still hesitated to make the timely provisions, it was certainly not because of unjust compromise or for unworthy reasons; but it was on the one hand from the anxiety not to create more serious embarrassments in the country by disturb- ing the state of things which had grown up, and on the other hand, from the persuasion that any bold and radical plan of banking reform vrould fail in the face of the coali- tion of those interested in maintaining the banking system then in force. There is no doubt that a very great ma- jority of the Chamber was in favor of the plurality of banks 84 The Banks of Issue in Italy because of considerations of a regional nature. And, indeed, whether from fear of being suspected interested partisans of the Banca Nazionale, or for other reasons, the fact is that never did a single deputy rise in the Chamber to call to mind its meritorious service or to de- fend its interests, ever one and the same with those of the country, whereas the guardianship of the interests of the minor banks always found strong and zealous champions. In examining in 1893 the banking bill presented by the Government an influential deputy felt obliged to write that the plurality of banks was one of the most precious con- quests and unchanging principles of the former party of the Left of the Italian Parhament. Francesco Crispi, in the presence of the severe criticisms aroused against the bill presented by Minister MiceU, was persuaded of the necessity of a change of direction. Al- though he did not have the clearness of ideas that results from complete knowledge of the subject, he had, however, the broad insight that Italy needed to lay aside a hybrid banking system which had been shown in every respect to be pernicious, and he felt the noble ambition to provide the country with a powerful institution, which, after the exam- ple of France and England and other countries, should be an effectual regulator of the ciurency and a strong pro- tector for State and people in difficult moments. Having set aside the Miceli project, he called to Rome Francesco Ferrara, the glory of economic science, and gave him the task of studying the very serious question and pro- posing for it the solution which best answered the situation of Italy at that moment. This illustrious man, who was the most weighty champion of economic liberty, and who, 85 National Monetary Commission as deputy and minister, had fought every idea of monopoly and had flung himself violently against the close relations which had existed in the past between the State and the Banca Nazionale, was not deaf to the clear call of the situa- tion and ended by recognizing that even Italy would, like other countries, derive marked benefit from the action of a great central bank of issue. But the ministry presided over by Francesco Crispi fell before he had been able to give concrete form to his plan; it fell, it was said, perhaps not without truth, for the very reason that it had expressed the bold intention of creating a sole bank of issue — and the banking confusion continued. The Italian Government, for the reasons stated above, not only did not know how, did not wish to, and could not inter\^ene energetically to reform the currency, but was itself the cause of its growing worse. And yet, however much political animosities, impelled by that instinct of cannibalism which is the principal characteristic of the politician, attempted to shatter the reputations of those who were in the Government at the time of the banking disorders, we must repeat that, save for minor exceptions, the men who came into power gave a lofty example of honesty and rectitude. The intervention of political power in banking affairs may, from certain points of view and with due allowance for the grave difficulties through which Italy passed, be considered untimely and harm- ful; but at the same time it must be acknowledged up- right in the intentions that counseled it, which were always prompted by the desire to spare the country serious disasters. 86 Chapter VI. THE BUILDING CRISIS AND BANKING SUBSIDIES. We have already seen the procedure of the building industry at Rome and how it was based essentially on credit. We should add that when the slender funds were exhausted that the building associations and other banking firms could place at the disposal of the building industry, it was necessary for the builders and manufacturers who were connected with the building movement of Rome and the other cities to discount and rediscount their paper with foreign banks and institutions, especially in France and Switzerland. Now, it was precisely in the years 1887 and 1889 that the close relation that exists between the economic con- ditions of a country and those of public finance was once more made evident; it was manifest how easy it is, some- times unavoidable, for the disorders of the latter to exer- cise an immediate direct effect on the former; just as impaired finance damages the public economy, so the bad conditions of the public economy are reflected unfavor- ably on finance. The unfriendliness of the Paris market at this time, due to misunderstandings that were fortu- nately cleared up later, had, as we have already said, in- flicted considerable losses on Italian rentes and likewise on other Italian securities owned in that and other for- eign markets, with the inevitable effect of the excessive rise in exchange. The principal cause of the decline in Italian securities and the rise in exchange was the unex- pected appearance in the budget of a deficit of 230,000,000 87 National Monetary Commission lire, of which 126,000,000 hre were due to an increase in mihtary expenditures, besides a deficit of 235,000,000 Hre in extraordinary expenditures for building raihoads. The situation seemed disquieting also because specu- lators interfered to aggravate it to their own advantage by manipulating prices downward. It was then that the foreign banks and bankers who had given extensive credit to building associations and builders made it plain that they were not only not disposed to give further discounts to either of them, but also that they would refuse to renew the current operations, of which they were de- manding immediate payment on maturity. From an approximate estimate, inferior to the reality, it appeared that the paper coming from the building industry and discounted abroad amounted to about 350,000,000 lire. The threat, already acted upon here and there, of demand- ing immediate payment of this paper made the situation appear very serious, since it would cause as an inevitable consequence the failure of the building associations and perhaps, too, that of the principal credit institutions whose interests were now closely allied with them. And as the disturbance of the public finances had had a large share in provoking the impending crisis of the market of Italian securities, this crisis w^ould, in its turn, aggravate the financial and monetary crisis. In order to ward off such a great misfortune the Government intervened ener- getically with the banks of issue, and particularly with the Banca Nazionale, asking it to come promptly to the help of the building associations, in order to put them in a position to meet the obligations assumed toward for- eign banks and bankers. The discussions were long and 88 The Banks of Issue in Italy violent. The Banca Nazionale hesitated, and did not fail to measure the possible danger it was about to incur; but it finally acted on the high moral consideration of avoiding a crisis which would make Italy appear a country in dis- graceful bankruptcy. This consideration and the very serious anxiety as to the consequences that would result for the country led the Banca Nazionale to give extensive aid to the building industry threatened with disaster. This happened, too, because in the last analysis the con- viction prevailed that everything would be straightened out without loss. The faith in a prosperous future for the capital of the Kingdom seemed to assure a favorable out- come for these banking and building subsidies at first con- sidered as dangerous. And we must not forget that what helped to overcome the resistance of the bank, and led it to intervene, was the belief that it could save the amounts which had already been involved in the first aid given to the building industry. The most difficult thing in busi- ness is always knowing how to lose a small amount at the proper time in order to avoid losing a larger sum later. And that is exactly why those who are in need of help always ask for a part of what they need to save their situation, calculating that the rest will come later, because a person who has given the first part will not wish to lose it, and to save and secure it will give the rest as well. Another thing, too, that argued in favor of the subsidies was the desire to avoid the losses that would come upon the bank, directly and indirectly, from the ruin of the building and credit companies, all, as we have said, more or less largely involved in the building enterprises of Rome and other cities. 89 National Monetary Commission It may be said, however, that there prevailed at this moment an optimistic opinion concerning the outcome of the operations in favor of the building associations; but such an optimistic opinion was too much like the argu- ments with which one tries to justify a step which it is not possible to retrace, or the necessity of meeting an obhga- tion that is not approved of, but can not be put aside and decHned. The very serious and not unjustified anxiety of this mo- ment took away from the Government and the banks the freedom of choice; it hindered the calm examination of the situation and the exact estimate of the losses which, in comparison with the benefits expected, would result from their intervention. In the report to the shareholders on the operations of the year 1889, the general director of the Banca Nazionale declared : "Meanwhile we have been obliged to witness a greater aggravation of the building crisis, in consequence of the continued withdrawal of foreign capital which had lib- erally subsidized the speculation in building in more than one of our cities and had stimulated its excesses; from this, therefore, arose the banking crisis of Turin, the bad effects of which reacted on other regions. ** And as if all this were not enough, we had the increas- ing distrust on the part of capital, encouraged by the cor- rupt passion for destruction that seizes everything and everybody and grows strong and rejoices in the ruin and disgrace which it creates around itself; distrust also en- couraged by the frenzy of speculators who do not know the bounds of rectitude and honesty, and who recognize 90 The Banks of Issue in Italy no check, not even the consideration of the serious harm they are inflicting on the economy of the country. ''These in broad outlines are the conditions under which business was done during the financial year of which we must speak to you; the difficulties our institution had to encounter during the year are connected with them. This action, you will acknowledge, gentlemen, could not be calm and normal. " It was not possible to limit it to the ordinary subsidies that a bank of issue distributes to merchants and manu- facturers to aid in their development and expansion. We have not neglected the discharge of this function, but we have Hkewise been obliged to listen to the call of other duties and to fulfill them. An institution like ours could not be indifferent to such unusual events and misfortunes as those of this past year. When credit is so violently beset, as was the case especially in the second half year, pri- vate interests placed in jeopardy take such forms, threaten to multiply in so many and such ways, that they assume the character of high public interest, v/hich claims protec- tion by the energetic intervention of the Government and the institutions to whom is intrusted, by the reason of their own character and also for their own protection, the de- fense of the public credit both at home and abroad. And so, gentlemen, when the danger of failure first threatened a well-known credit establishment, which until recently had enjoyed the greatest confidence, the Government, foresee- ing the very disastrous consequences, widespread beyond all measure, that would result from this failure, urged the larger establishments to come to the aid of the situation. The Banca Nazionale consented and, deciding that in the 91 National Monetary Commission market of Turin were concentrated the interests of other regions, helped it Hberally. Then the bank judged advisa- ble to stipulate an agreement with the Government ena- bling it to count on an increase of circulation of 50,000,000, so that the help given in that special direction should not render its available funds insufficient for ordinary operations. " The sum of 50,000,000 was only a part of that already distributed and still remaining to be distributed in order to avoid the catastrophes threatened in every direction, but we did not ask for more, bearing in mind always that an excessive increase of circulation brings evils outweigh- ing the monetary advantages derived from it. On the other hand, we calculated that the contraction of business in general, which was already visible and promised to increase in the near future, would justify us in devoting to that purpose also a part of the ordinary disposable funds. In the agreement which we have just outlined the Government reserved for itself part of the profits on operations made with the 50,000,000 excess of circulation authorized at the rate of i per cent on the excess profits that should result within the limits of 50,000,000. "After this agreement we were able to arrange terms with the Banca Tiberina, key of the situation, for the well-known subsidy of 40,000,000, including in this sum the amount for which we were already involved. The operation was of necessity made and carried through by discounting paper having the forms required by our statutes. Further subsidies were afterwards granted in the same manner to the Compagnia Fondiaria Italiana and others. 92 The Banks of Issue in Italy ''This large assistance given for the purpose of saving the country from widespread and inevitable ruin, the extent and consequences of which it was not and is not possible to measure, received comments of various kinds; but we do not deem it necessary to go into them deeply with you. We will only say that, before and after, we were more sensible to those who blamed us than to those who praised. If we had decided not to yield there is good reason to believe that the censures would have been much more severe on the day when the Banca Nazionale, on which everybody's eyes were fastened, allowed ruin to pile upon ruin, showing for the first time an impas- sivity in contrast with its not inglorious past, and with the aims which must always be present to the adminis- tration. "We have used every means to protect your interests from being compromised by the special operations which were concluded, and we venture to believe that, within a period the duration of which we can not up to the pres- ent moment foresee, these operations will fulfill our ex- pectations and give a proper compensation to our efforts and your rightful interests." In the very grave anxieties set forth with so much efficiency the general director of the Banca Nazionale was unwilling to take into account that the building crisis, henceforth inevitable and on the point of breaking out with great violence, was due to the excess of production of a commodity which could not be sent to another mar- ket to be disposed of, but would be obliged to wait on the very place of production for the purchaser who would come only tardily through the natural but slow increase 93 National Monetary Commission of population ; that consequently capital would remain a long time without interest and would diminish auto- matically. Kven less did anyone think of studying the number of vacant apartments and the annual in- crease of the population, in order to get at least an approximate idea of the time that would elapse before the houses would be inhabited and the capital involved receive a return. Neither did they consider that, in any case, investments such as those solicited, even if they had been solidly and abundantly secured, were neither suitable nor advisable for banks authorized to issue notes, for these banks would thus tie up a large part of their avail- able cash, with the certain reaction upon conditions of circulation and credit in general. The seriousness of the situation, the terror because of the imminent peril, and the urgent need of relief made imperative, seemingly, the intervention which the Govern- ment not only urged on, but also cooperated in; for, although it was anxious about the already abnormal conditions of the circulation of the Banca Nazionale, it consented to arrange with it the agreement men- tioned in the report of the general director, and, besides, put at the disposal of the bank a sum of 15,000,000 lire in silver to cover a like sum of bank notes, on condition of having 40 per cent of the profits of the operations the bank carried on with it. The plan for the State's sharing in the profits of these extraordinary operations is the proof of the prevailing optimism, spontaneous or reflected. People talked and made arrangements about profits, not foreseeing, even distantly, losses; since the worst that was feared could happen to the banks 94 The Banks of Issue in Italy was to be obliged to wait too long for realizing on their credit. What is more, the smaller banks all expressed their resentment at being excluded from such a mag- nificent banquet, served up by that contract to the single, privileged Banca Nazionale, and a chorus of many voices united in upholding the complaints of these institutions. This incident is recorded here because, in the presence of the tardy, bitter censures against the Government and the Banca Nazionale which arose after people had been able to ascertain the futility of subsidizing the building industry and the institutions that were interested in it, and the gravity of the losses which the bank and the cur- rency of the country suffered from it, it is well, for the sake of historic accuracy, to state that the Government was prompted, and even incited, by public opinion that demanded the avoidance of the impending ruin. It is enough to reread what was written in the news- papers of the time to get an exact idea of the status of Italian public sentiment on this question. A few isolated voices were raised then to give warning that bank notes were not made for the use to which they had been put, and that it was a grievous mistake to throw the good money of the banks after the bad money of a wild specu- lation already condemned to fall beneath the weight of the errors it had committed; but these voices were drowned in the clamors of the crowd, and they were attributed to Cassandras, predicting the ruin of the country, or to bear operators who selfishly desired that ruin and were waiting to speculate on it. Whatever judgment may be passed now on the help given at that time by the Italian banks, by direct inter- 39781°— II 7 95 National Monetary Commission vention, and that too with the participation of the Gov- ernment, help which constituted, again, through the consequences that grew out of it, one of the most note- worthy episodes in the history of ItaUan banking, it must in all truth be acknowledged that the Govern- ment itself was moved by the praiseworthy intention of avoiding a crisis that would have jarred to the foun- dations the whole financial and economic edifice of the country, and that the banks which seconded it were inspired by the same patriotic desire for the public good. Chapter VII. CONDITIONS OF CURRENCY IN 1890 — MUTUAL REDEMPTION OE NOTES AMONG THE BANKS OF ISSUE — SCHEMES FOR BANKING REFORM. There is no doubt meanwhile that as a result of the ex- traordinary operations concluded by the banks in favor of the building industry, the conditions of the currency were growing worse. On December 31, 1890 the notes amounted to 1,126,000,000 lire, while the metallic reserve was 358,000,000 lire, with a diminution of 26,000,000 lire in comparison with the end of 1889. The proportion between the reserve and the notes in circulation had gone down from year to year from 34 per cent to 32 per cent, a minimum never reached until then. On the other hand, an amelioration was noted that year in the State finances and even in economic con- ditions in general. The budget had gone from a deficit of 230,000,000 lire in 1888 to a surplus of 23,000,000 lire in 1889 and of 46,000,000 lire in 1890. The commercial movement, which had reached the maximum in 1887 of 2,610,000,000 lire in the aggregate, including imports and exports, had fallen in 1888 to 2,066,000,000 lire rising again to 2,341,000,000 lire in 1889 and falling to 2,214,000,000 lire in 1890. It may be well to add that these differences were due for the greater part to the vicissitudes of the building industry, which swelled the total of imports in 1885 to 1,460,000,000 lire, to 1,458,000,000 lire in 1886, and to 1,605,000,000 lire in 1887, as a result of buying abroad materials needed for building. In 1888 the im- ports fell from 1,605,000,000 lire to 1,174,000,000 lire. 97 National Monetary Commission But the keenest scrutinizers of the labyrinth of the budget did not indulge in any vain illusions ; they knew very well that the surplus had been obtained in part by disposing of treasury money and by various expedients of the treasury, while the increase of certain returns was derived from new tortures imposed on the citizens whose tax-paying power would soon be exhausted. Indeed, the least hopeful forecasts were confirmed by the facts in the following year in which reappeared a deficit of 48,000,000 lire, and the commercial movement showed in comparison with 1889 a loss of 212,000,000 lire; rentes at Paris went down from 95.50 to 87 and exchange rose from 100.65 to 103.80. The currency remained unchanged in spite of the decrease of 100,000,000 lire in the discounts of the banks, because the treasury, to provide for its needs, had received from them 123,000,000 lire of statutory loans. To meet the deficit ascertained in the State budget, the minister of the treasury, Grimaldi, a clever and very fluent talker, but without sound economic and financial educa- tion, had proposed a series of provisions suitable to assure an equalization, among which was another bill on the banks of issue which would have given the treasury an added income of 4,000,000 lire. At that point came the already mentioned downfall of the ministry presided over by Francesco Crispi, which was succeeded by the Rudini Ministry, whose minister of the treasury was Signor Luzzatti. Being a profound analyst and acute observer of the mysterious Isis of the budget, possessed of a broad knowledge of economics, Signor Luzzatti, who enjoyed deservedly a great and undisputed authority in Parliament, seemed to be the man best fitted 98 The Banks of Issue in Italy to dominate the difficult situation. Therefore the belief that he would be able to think out the plans for giving a stable reorganization to finance and currency was fully- justified . But at the end of June of this same year of 1891 there came to an end not only the legal currency of bank notes, which, prolonged by the law of April 7, 1881 through 1883, had necessarily, by the needs of the situation, been con- tinued from year to year; but another thing came to an end also — and this was the privilege granted to the banks of issuing notes. But while on the one hand a favorable occasion presented itself for taking up once for all the weighty problem of banking reorganization, which the failure of all the schemes presented through the deter- mined opposition they had encountered had now caused to be regarded in the light of one of those electrical machines that are ''dangerous to touch," on the other hand, the distress of the times and the many duties with which the new minister of the treasury was obliged to occupy himself, made it impossible to apply anything but temporary remedies. In fact, on May 28, 1891, Signor IvUzzatti presented to Parliament a bill to prolong the privilege of issue of bank notes and their legal currency to the end of December 31, 1892. The well-known dis- orders of the circulation, which exceeded by more than 170,000,000 lire the limit fixed by the law, demanded, likewise, some precaution calculated at least to pre- vent it from being still further inflated. The new law stipulated that the circulation of each bank should not exceed the average reached in the year 1890, except when it remained less than four times the paid-up capital, in 99 National M on et ar y C ommis s to n which case it could reach this limit. The tax on circula- tion was fixed at 1.20 per cent besides the two-tenths — that is, 1 .44 per cent. For the excess beyond the legal limit, or for the deficit of metallic reserve, which was to cover in the proportion of one-third both the bank notes and sight liabilities, the bank should pay a tax equal to double the discount rate. The law stipulated that, within six months of its pro- mulgation, each bank should present to the minister of agriculture, industry, and commerce a detailed statement of the situation of discount operations of diflftcult and un- ready realization or overdue and unpaid, and of real estate undertakings and credit of all kinds secured by mortgage guaranty. The limit of six months was extended by the committee of the Chamber to one year; but the ministry did not consent to the modification, so that the shorter limit of six months remained which the ministry had fixed, evidently with the determination of knowing without delay the situation of the banks of issue, in order to have stand- ards to refer to in framing an organic law. Each bank was to accept in payment the bank notes of the others. The Government reserved the right to establish within two months, after conferring with directors of banks, the rules to regulate the mutual re- demption of the respective bank notes. On the lump sum of 171,683,152.24 lire, which was the maximum amount of the loans the banks were to make to the treasury , including a loan extraordinary of 68,183,152.24 lire, the banks were to receive 2% per cent interest and pay the circulation tax of i per cent. 100 The Banks of Issue in Italy The regulations above mentioned, and especially the one which obliged the banks to present within six months a statement of the operations not paid on maturity or of unready realization and such as were secured by mortgages, were intended to check the activity of the banks and to reveal their condition. This law, framed under pressing necessity, was, however, the prelude to a more organic law that the Government promised to present in the interval between July i, 1891 and December 31, 1892, the term of the prolongation of the privilege granted to the banks to issue bank notes and of the legal currency of these notes, as indeed the same ministers had declared in their report on the bill. In conformity with the promise made, the ministry presented on April i, 1892 an organic bill of which it will be well to give an outline, because it showed how, in spite of the well-known inferiority of the plurality of banks, in spite of the proof of the grave losses it had caused to Italy, it was not possible to reach the unity of issue notwithstanding that, as it appeared through the tendencies of the bill, the Government seemed to be in principle favorable to it. But before proceeding to the examination of the bank- ing bill, it will be well to consider an episode which gave rise later to bitter censure against the minister of the treasury and the minister of agriculture, industry, and commerce. As we have seen, an article of the act of June 30, 1 89 1, authorized these ministers to establish within two months, by royal decree, the rules relating to the mutual redemption of notes among the banks of issue, after conferring with the various general directors. lOI National Monetary Commission Now, it happened that at the expiration of the estabHshed term the ministry announced the intention of pubHshing the royal decree by which it was stipulated that the obliga- tion of redemption of bank notes should be limited to the total of the notes issued by the creditor bank possessed by the debtor bank. The creditor bank, therefore, was to take over any excess and employ it in its own opera- tions; all this in accordance with the established agree- ments. The director general of the Banca Nazionale objected that according to the agreements it had been stipulated that the experiment was to be made for a sufficient time to make it possible to see if, as he maintained, the proposed method would give rise to inconveniences. But, since the Banca Romana, supported by other banks insisted, declaring again that the obligation of redemption of its notes would reduce it to the condition of suspending operations, the decree was published. After the failure of the Banca Romana in 1893, with the revelation of its very grave irregularities, bitter dis- cussions aroused as to its relations with the Government. Politicians and the press, in trying to place the responsi- bility, called to mind the decree of 1891 on the mutual redemption of notes and reproved the ministers who had complied with the urgent request of the Banca Romana, whose bad situation they must have known. Those who expressed this opinion had evidently forgotten that, more than the ministers who made the proposal, the committee of the Chamber, the faithful interpreter as it considered and called itself of the opinion of the Chamber, had been favorable to the lightening of the obligation of the mutual The Banks of Issue in Italy redemption of notes. The spokesman of the committee of the Chamber had complained that in the report on the bill for the abolition of forced cm-rency, similar relief had been planned and promised in the matter of the mutual redemption of notes, and said: " This promise still remains unfulfilled, and the committee is distressed because the Government has not seized the opportunity, in presenting this bill, to propose frankly the solution of the problem, lyacking this the committee itself would not have hesitated to frame a definite resolution if the idea had not pre- vailed, shared also by the proposing ministers who had come into its midst, that it would still be better to try a solution based on an agreement among the banks." "In every way the committee approves the standards set forth in the legislative provisions to that effect pro- posed by the Government ; and therefore it accepts arti- cle 4 of the ministerial act, proposing furthermore that the royal decree shall be issued within two months from the publication of the law, and this in order to assure attain- ment of the desired end, and to prevent further delays which the past has given reason to fear." Since the Banca Romana was relieved, first through the Government's interposition and the considerateness of the Banca Nazionale, then by laws and royal decree, of the obligation of redeeming its notes, and since this relief was the cause of its being able to violate the law anew more freely and more recklessly, until it reduced itself to a disastrous condition, the inquiry into the responsibility on this most important point appears fully justified. Now, from the words of the spokesman of the committee quoted here, it is seen very clearly that the ministry had 103 National Monetary Commission not, in its somewhat hesitating procedure, entirely satis- fied the desire of the committee and the Chamber; the committee was distressed because the ministry had not dared to solve the problem more quickly; to be more specific, it wished to insert a modification, approved by the Chamber, by which the Government was obliged to present the royal decree within two months of the publi- cation of the law. All this confirms, in an eloquent way, all that we have said about the surrounding conditions of the Italian Parliament with regard to the banking problem in general and the relations among the various banks of issue in particular. The solicitude of the Gov- ernment for the minor banks, which has been pointed out in connection with the bill presented in 1888, was nothing but acquiescence in the sentiment prevailing, for reasons and considerations of a regional nature, in the Italian Parliament. And, in particular, as for the accusation made against Signor Luzzatti of not having opposed the pubhcation of the decree which effectively abolished the mutual redemption of notes, when he certainly must have known the ruinous conditions of the Banca Romana, it must be stated that he was absolutely ignorant of those condi- tions. Nevertheless, Signor Luzzatti, not being per- fectly tranquil about it, had intended to arrange for an unexpected examination of the Banca Romana before presenting the bill of 1891 and consenting to the publica- tion of the decree on the mutual redemption of bank notes ; and he had mentioned this plan of his to the general director of the Banca Nazionale and the general director 104 The Banks of Issue in Italy of the treasury, Signer Carlo Cantoni; these men, of one accord and insistently, advised the minister against making the inspection. Signor Grillo, supposed to be such a bitter enemy of the Banca Romana and its gov- ernor, declared to Signor Luzzatti that it was his firm conviction that the Banca Romana was in perfect order; and judging its governor too shrewd to have fallen again into past errors, concluded by advising the minister against making a fruitless inspection which would "raise an uproar in the camp" and disturb the market, which was already getting out of control. Besides, it is well to call to mind that, as it was ascertained in the year 1893 by the parliamentary committee of inquiry on the banks of issue, the minister of agriculture, industry, and commerce had also maintained that an unexpected exami- nation of the Banca Romana would be neither useful nor opportune. In the meantime the Government had published the decree that in execution of the law recorded June 30, 1 89 1, fixed in the following figures the maximum amount of notes the banks could keep in circulation at the ratio of four times the paid-up capital for banks that have shareholders, and of four times the free capital possessed by the two banks at Naples and Sicily: Lire. Banca Nazionale nel Regno 600, 000, 000 Banco di Napoli 242, 160, 600 Banca Nazionale Tuscana 84, 299, 900 Banca Romana 70, 019, 500 Banco di Sicilia 48, 000, 000 Banca Toscana di Credito 20, 000, 000 1,064, 480, 000 105 National Monetary Commission an excess of 308,750,000 lire beyond the amount granted by the law of April 30, 1874, an excess which thus became legalized. This situtation, however, being considered abnormal, the Government, as we have seen, had decided upon presenting an organic bill on the institutions of issue. Meanwhile the abides of the law of June 30, 1 891, by the penalties to be applied in case of an excess of circulation, and by the necessity of the metallic reserve of one-third as a cover for the circulation, had helped slightly to improve the situation. From June 30, 1891 to February 29, 1892, the circulation was diminished from 1,139,000,000 lire to 1,030,000,000 lire; the reserve was increased from 425,000,000 lire to 435,000,000 lire. The bill for the regulation of the currency, presented by the Government April i, 1892, deserves to be examined specially, as we have said, in the part which reveals its intimate beUef in the superiority of the unity of issue. This end the Government did not, however, expect to attain, because, as it declared in the learned report which preceded it, it intended to * ' insure more fully the observ- ance of the articles of the law, to reenforce notably the banking regulations, and to make up for the lack of unity of direction of the institutions, not wishing to organize a big institution on the ruins of these minor ones as has been done elsewhere, in order not to offend public interests, customs, and venerable traditions." The bill proposed the forming of an association between the banks of issue which should serve to establish and maintain constant relations among them, and in certain 106 The Banks of Issue in Italy matters, especially in fixing the discount rate, to give a unity of direction to their action. To the association was also intrusted, under the surveillance of the Gov- ernment, whatever concerned the manufacture of bank notes and their distribution among the banks, and like- wise the treasury service of the State. The bill contained various other wise provisions which it is not necessary to mention, because, with the unluc'ky fate that had always pursued the numerous bills for Italian banking reform, this one also fell through with the downfall of the Rudini Ministry, whose minister of the treasury, as we have said, was Signor Luzzatti. But, for the reason stated, it seemed useful to mention the proposal relating to instituting the association, because it represents almost a middle term between the unity of issue, the value of which was henceforth recog- nized, and pluraHty, which ''venerable customs and tradi- tions made it impossible to abolish." 107 Chapter VIII. THE FAILURE OF THE BANCA ROMANA AND THE CRISIS OF 1893- To the Rudini Ministry succeeded the ministry presided over by Signor Giovanni GioUtti, whose minister of agri- culture, industry, and commerce was Signor Pietro Lacava, and of the treasury was Signor Bernardino Grimaldi, who had already held the same office in preceding ministries. These were the two ministers to whom, in conformity with the law then in force, was entrusted the vigilance over the banks of issue and whose concern it was to propose the modifications of the banking law. But before the ministry could reduce its studies to con- crete terms and present its proposals to Parliament, pub- lic opinion began to show itself anxious and uneasy about the situation of the banks of issue in general, and that of the Banca Romana in particular. Having been freed from all further check or restraint by the royal decree of August I, 1 89 1, which absolved it from the obligation of redeeming its notes, the Banca Romana, which was already in a disastrous state, went headlong on the road to ruin. Its circulation, which amounted to 72,000,000 lire in 1891, rose to 112,000,000 lire in 1892 and to 137,- 000,000 lire in January, 1893, going down to 129,000,000 lire on July 31 of that year. The bank, in order to main- tain in circulation the notes which the public rejected, had tried to open an office at Milan and branches in other cities of upper Italy, but without any success. The notes of the Banca Romana, which had not succeeded in pene- 108 The Banks of Issue in Italy trating to the rest of the Kingdom were flooding the Roman Province. The situation of that bank gave rise to discussion in the Itahan press, and abroad also a few cries of alarm were uttered. It was supposed that Minister Grimaldi, who was bound by ties of friendship to the governor of the Banca Romana, would propose not to modify the banking system, and to make this bank the concessions that it was asking for, by increasing its capital and priv- ilege of issue. It was then that someone advised Minister Grimaldi to reject every proposal of this kind, and to take steps, instead, for liquidating the Banca Romana and merging it with another bank. The minister was warned in a friendly way that if he intended to continue the privilege of issue for a bank which was in a disastrous financial and moral condition, the whole report of the inspection made of the Banca Romana in 1889 would be brought to the knowledge of the public. This report Minister Miceli had not even communicated to the council of ministers, before which he had confined himself to say- ing that he had provided for eliminating a few unimpor- tant irregularities,, as a result of the inspection of the bank. But Grimaldi, who had meantime determined to pre- sent a bill for continuing the existing state of things for six years, not only paid no attention to the warning, but continued, in sheer bravado, to the point of supporting the governor of the Banca Romana in the ministerial council and obtaining his nomination for senator. This was the spark that started the conflagration. Maffeo Pantaleoni, the illustrious economist who is an honor to Italy, and 109 National Monetary Commission who had sent to Minister Grimaldi, by a common friend, the warning mentioned above, could no longer restrain himself in the face of what he considered a challenge. Being in possession of a copy of the report on the inspec- tion of the Banca Romana, he selected two deputies of opposing parties in the Chamber, Signor Colajanni from the Left and Signor Gavazzi from the Right, and, advising them of the very damaging facts charged against the Banca Romana, persuaded them to carry the ques- tion to the Chamber; this duty, in the interests of pub- lic credit and morality, they accepted willingly. The impression produced in the Chamber by the revelations of the two deputies was enormous; it was a distressing impression because of its moral seriousness and alarming because of the revelation of a most disastrous state of things, which would cause serious injury to Italian credit. Signor Giolitti, president of the ministerial council, who in the most stormy moments of his long political career has fortunately been assisted and supported by a calm and well-balanced mind, did not wish in the midst of the furious outburst of political passions excited by the revela- tion of the sad state of the Banca Romana, to grant the proposal of nominating a parliamentary committee of in- quiry, and advised instead proceeding first of all and im- mediately to the nomination of an administrative com- mittee for the purpose of requiring an inspection of all the banks of issue, in order to find out their condition. This did not succeed, however, in quieting the excitement; because even if the announcement of the nomination of that com- mittee was at once sufficient to satisfy the legitimate The Banks of Issue in Italy desire for enlightenment of all the men who were work- ing quietly for the public good, it was not enough for the politicians, who had suddenly scented, in the sad rottenness of the Banca Romana, a most excellent excuse for giving free play to the cannibal instinct that distin- guishes them from the rest of the human race. How- ever that may be, it was quite impossible to prevent the opposition from choosing the propitious occasion of the very grievous disorder that reigned in Parliament to try to bring about the downfall of the ministry. Without entering now into the political side of the situa- tion, it should be stated that the ministry, abandoning the scheme for prolonging the existing state of things for six years, suddenly set to work energetically, as the grav- ity and urgency of the situation demanded, to provide for bestowing better regulations upon the banking system; for this there was no need to await the final result of the inspection of the institutions of issue. What was already known was sufficient to give a clear, if not complete, idea of the situation of the banks and the currency; in the gravity of this were seen reflected all the effects of the errors committed, and principally of that greatest error of having allowed to subsist for so many years a hybrid system of banking plurahty in a country which, by its peculiar conditions, needed more than any other the valuable support and the vaUd, efficacious working of a single strong and respected institution of issue. The plurality of banks had excited rivalry between the institutions, and, in the midst of the struggle, they had lost the sense of prudence and measure; instead of being the supreme regulators of the circulation and credit, they 39781°— II 8 III National Monetary Commission had become facile distributors of bank notes, encouraging all sorts of irregular and immoderate undertakings. The abuse of credit resulting from the conduct of the Itahan banks of issue had in fact promoted many un- dertakings of a speculative nature, without foundations, and sometim.es without honesty; it had piled up an edi- fice, which, superficially considered, might give the illusion of solidity and prosperity, but which was doomed instead to fall at the first touch, at the first breath of wind. The bank note considered as capital had been devoted to all kinds of uses, even those least adapted to its nature and involving the grea.test risk. And yet, if we consider that no undertaking succeeds, especially in our own time, unless it is moved and ani- mated by the violent puffing of speculation; if we con- sider that even in countries more solidly and longer organized, and more seasoned to economic struggles, the same thing has happened that happened in Italy, it would appear that, although deploring the moral disorders and the great waste of economic energy, some sort of expla- nation ought to be found, which, if it does not justify the work of all those who, from top to bottom, were the cause of grave and lengthy banking crises, may at least lessen their responsibility (leaving aside, of course, those who were dishonest) ; for while the course pursued by these men resulted in harm on the one hand, on the other hand somiething good remains. There remains the building renovation of the capital of the Kingdom; there rem^ain the magnificent works of the sanitation of Naples; there remains the network of railroads, and the whole mass of public works completed in a quarter of a century. The Banks of Issue in Italy And there remains above all a notable inheritance of experience which offers sufficient guaranty that Italy- will proceed from now on in the right path in all that concerns the government regulation of banks of issue and paper currency. The situation of the banks had also made plain the disadvantages resulting from the intervention of the Government and politics in general in banking affairs, even if this intervention might seem justified by praise- worthy intentions and the desire for the public good. In this regard bitter were the criticisms directed against the men in the Government who had interfered in banking matters and against the administrations of banks which had not resisted their pressure and had consented to give subsidies, useless for the building industry and injurious to the banks. The same thing happened now that had happened at the time of the abolition of forced currency. All those who in Parlia- ment and the press had not only approved the subsidies, but insistently demanded them, now became the most violent accusers of the Government and the banks. Nor was this change of opinion confined to those who had neither discernment, ability, nor learning to ex- press an intelligent opinion on the question, since it was evident also in men who because of their education and social and political position were rightly considered capable of expressing thoughtful and weighty opinions. An influential member of Parliament at the time of the subsidizing of the building industry wrote: "The inter- vention of the Banca Nazionale was not only legiti- mate and praiseworthy, but right. This is the true "3 National Monetary Commission function of the great institutions of issue— to collect and concentrate their own resources in order to be able to support credit in difficult moments." He then attacked bitterly the basis of the banking project of the Government, because he saw in it the "continuation of the baneful system of banking subsidies, which, begin- ning with the Esquiline undertaking and followed by the Banca Tiberina, was the cause of Italy's greatest calamities." Verv rightly the general director of the Banca Na- zionale in the report to the shareholders for the year 1893, the last year of the existence of the bank, could assert in summing up the vicissitudes of the institution: *' It has often been said that the bank should have looked on with indifference at the disasters that were piling up around it, but I have the right to record that these tardy reproofs came to us principally from the very people who had most loudly requested or demanded the aid and help of the bank." Another severe lesson coming from the discovery of the conditions of the Italian banks was the admonition to consider that the first and strongest guaranty of bank notes in circulation is metallic money. 114 Chapter IX. EXAMINATION OF THE BANKING ACT OF AUGUST TO, 1 893. Given the three points stated above — that is, the disad- vantages of the plurahty of banks of issue, the interven- tion of the Government and pohtics in banking affairs, and the necessity of large metaUic reserves as a guar- anty for paper currency — it would seem that the course to be followed was clearly indicated by the examination of the situation and the causes that had created it. The logical solution of the banking problem, unsolved for some twenty years, which was indicated and almost demanded by experience and the situation, seemed to consist necessarily in the organization of a single great bank of issue, protected by precise legal enactment from all political influence and provided with a large me- tallic reserve for the greater guaranty of the notes in circulation. With regard to the first point, the solution was for- warded by an agreement promptly arranged between the Banca Nazionale nel Regno and the two Tuscan banks. By this, leaving out the Banca Romana, the banks of issue, organized under the form of a joint stock company, were reduced from four to one. There remained the ar- ranging for a fusion of the Bank of Naples and that of Sicily, or for their transformation into local institutions of agricultural or land credit, of which southern Italy was in great need ; but no attempt of this kind was possible. This is certainly a point in the history of Italian banking that will doubtless seem inexplicable to one who examines it "5 National Monetai^y Commission at a distance in time, in and by itself, independently of the surroundings and the conditions of the moment. As we have seen from the brief historic note on the origins of the two banks of Naples and Sicily, they were considered institutions of southern Italy, for which the population of the south cherished the kind of affection that is inspired by national glory. To make an attack upon the integrity of these two banks was to offend the local sentiment of that population and like- wise arouse against the ministry the violent opposition of the Neapolitan and Sicilian deputies, united and firm in demanding that the two banks be preserved with absolute autonomy and complete independence. Among the few who were an exception to the rule V\re should record, by way of praise. Deputy Saporito, a Sicilian, who in a speech to the electors had the courage to pro- claim the necessity of creating in Italy a single great bank of issue. If we consider what were then the surrounding par- liamentary conditions, agitated by the raging of violent passions, and what nmst have been in consequence the position of the ministry, it will be easy to understand how the ministry could not even distantly hope to be able to win the great battle in favor of a single bank, since it would have been inexorably overthrown if it had even expressed such an intention. The Government, therefore, was obliged to limit itself to proposing the ratification of the fusion of the three banks, the Banca Nazionale nel Regno, the Banca Na- zionale Toscana, and the Banca Toscana di Credito, and the creation of the Bank of Italy ; to continue the privi- The Banks of Issue in Italy lege of issue for the banks of Naples and Sicily and erect on this foundation the new legislative structure on the currency. Before proceeding to the examination of the articles of the new law, we should state that very violent opposi- tion was raised against the plan of the Government, in so far as it tended to keep in operation the existing insti- tutions, some merged, others autonomous. Deputy Sid- ney Sonnino, one of the raost cultivated and influential members of the Italian Parliament, now president of the ministerial council, published a note in which, after making a careful examination of the conditions of the three banks which were to constitute the Bank of Italy, he showed that this institution could not be organized on a successful basis, and in concluding his study expressed the opinion that the better plan would be to liquidate the six banks of issue and create out of them a single entirely new bank. Although the opinion of Signor Sonnino on the situation, and especially on the conditions in which the projected Bank of Italy would be placed, was considered exceedingly gloomy, the facts were destined to show that he had been, instead, too optimistic. In- deed, whereas he had calculated that the Bank of Italy, provided it did not suffer other losses, would not be able to give the shareholders a dividend of more than 4.50 per cent on the paid-up capital, the dividend was 15 lire for the first year of 1894, 17 lire in 1895, and in various succeeding years, until 1905, 18 lire, equal to about 2}^ per cent. This is sufficient proof that the true situation of the Italian banks of issue had not yet been grasped in all its gravity, even by the keenest inquirers. How- 117 National Monetary Commission ever, the calculation made by Signer Sonnino made a great impression because it signified that the shares of the Banca Nazionale, at i,ooo lire nominally, with 750 lire paid up, which had been quoted at about 1,285 lire, would have to decline to about 1,000 lire. Even this calculation was extravagantly optimistic, since the shares of the new Bank of Italy from a nominal value of i ,000 lire with 700 lire paid up, declined in December, 1894, to a minimum quotation of 750 lire. Two very distinct programmes mean'vvhile were under discussion. First, the plan supported by Signor Sonnino, in which few others acquiesced, consisting as we have seen, in the liquidation of all the existing banks and the building from the foundations of a new banking regime with a unified system; second, the plan to which adhered both the partisans of a unified system and the partisans of a system of plurality, which took definite shape in the preservation of the three banks, subjected to a rigid dis- cipline which would make possible the gradual liquidation of the operations not in liquid form or otherwise not suit- able for banks authorized to issue notes. If the proscribed programme of Signor Sonnino did not, with few exceptions, have the support of the par- tisans of unity, it was because it seemed extremely dan- gerous to decree the Hquidation of the six banks of issue during the very serious crisis from which Italy was suffer- ing. It seemed to the majority that the better plan would be to proceed cautiously and by degrees, beginning by restoring a little order to the great banking chaos, and by providing, through rigid and severe rules, to prepare the way for the gradual reform of the situation, and prevent X18 The Banks of Issue in Italy the repetition of past errors. Besides, the programme of Signor Sonnino could not in any case have been approved, because of the very decided opposition of the southern deputies who, for the reasons stated, wished the two banks to be continued. It was for this reason that in spite of the hvely opposi- tion manifested in the long and not always calm discussion, the president of the ministerial council, vSignor Giolitti, gave proof of extraordinary energy and great competency, and succeeded in getting the new banking law passed. This law at the very difficult moment in which it was discussed and ratified, because of the violent dissen- sion that raged in the Chamber, and because of the abnormal conditions of the banks, could neither be made perfect nor final. It was necessarily a transitional law, of a kind to make possible the understanding of the programme for bringing about the gradual reform of the currency and the banks of issue, a plan which had been judged more practically attainable. The new law, promulgated under the date of August lo, 1893, authorized the fusion of the Banca Nazionale nel Regno with the Banca Nazionale Toscana and the Banca Toscana di Credito, and the creation of a new bank which assumed the title of the " Bank of Italy." The capital was placed at the sum of 300,000,000 lire, divided into 300,000 registered shares of 1,000 lire each, with payment of 700 lire. The paid-up capital was thus raised from 1 76,000,000 to 210,000,000, and the shares were distributed among the shareholders of the three banks as follows: To the share- holders of the Banca Nazionale 214,289 shares in exchange 119 National Monetary Commission for the old ones; to the same shareholders, at option, 48,718 shares; to the shareholders of the Banca Nazionale Toscana 30,000 shares; to the shareholders of the Banca Toscana di Credito 8,000 shares. The maximum amount of notes that the Bank of Italy and the two banks of Naples and Sicily could keep in circulation was fixed, for four years, at the sum of 1,097,000,000 lire, divided as follows: Lire. Bank of Italy 800, 000, 000 Bank of Naples 242, 000, 000 Bank of Sicily 55. 000, 000 After four years the circulation was to be gradually diminished by a graded yearly quota, so that when fourteen years had elapsed after the promulgation of the law it should be reduced to the following proportions: Lire. Bank of Italy 630, 000, 000 Bank of Naples iQO, 000, 000 Bank of Sicily 44. 000, 000 The total circulation thus amounted to 864,000,000 lire, corresponding, for the Bank of Italy exactly, and for the two banks of Naples and Sicily approximately, to three times the paid-up capital of the one and the free capital possessed by the others. The reduction of the maximum of circulation was justified by the gradual liquidation of operations non- liquid in form or not allowed under the new law, a Hqui- dation which would automatically reduce the mass of bank notes in circulation. The banks which, at the end of fourteen years, should not possess a capital correspond- ing to a third part of the circulation allowed them would be obliged within three months to reduce this circulation 120 The Banks of Issue in Italy by the amount in excess of three times their paid up or free capital. The circulation taken away from one bank was to be granted to such others as should possess or pay up the capital corresponding to and available for the triple issue. The auditing of the paid up or free capital was intrusted to a commission composed of seven members, two to be chosen from the Senate, two from the Chamber, and three to be nominated by royal decree. The above limits did not include bank notes that the banks could issue, without restriction as to amount, pro- vided they were entirely secured by legal metallic money or by gold bars deposited in the coffers, and the notes issued for ordinary or extraordinary loans to the State treasury. The holders of notes had the right to demand their redemption in metallic money in the cities of Rome, Bari, Bologna, Cagliari, Catania, Florence, Genoa, I^eg- horn, Messina, Naples, Palermo, Turin, Verona, and Venice. This article, which was already included in the preceding laws, could not, however, be enforced, since enforcing it would have led to the exhaustion and expor- tation of the metallic reserves of the banks of issue, because of the dearness of exchange. The new law confirmed for five years the legal currency of the notes of the three banks in the provinces in which they had their own estabUshments and representatives. It is to be stated that the legal currency was destined to be successively confirmed from year to year and is still in force. During the legal currency the discount rate was to be the same for the three banks and could not be changed without the permission of the Government. National Monetary Commission They could, however, discount at a rate i per cent below the official rate paper presented by people's banks and institutions of discount and agricultural credit, organized to serve as intermediaries between the small trade and the banks of issue, and for the discount of warrants of general warehousing and consignments free of taxation (franchi de- positi) . The discount at special rates was to be limited — Lire. For the Bank of Italy 70, 000, 000 For the Bank of Naples 21, 000, 000 For the Bank of Sicily 4, 500, 000 Each bank was obliged to accept through the operations of any kind the notes of the other banks in the cities in which they had legal currency. The rules for the mutual redemption of notes among the banks were to be established by royal decree and presented to Parliament within the year 1893, to be con- verted into a law. The metallic reserve was to be increased within a year from 33 per cent to 40 per cent of the notes in circula- tion, 33 per cent of which w^as to be composed of Italian specie, of foreign coin admitted to legal currency in the Kingdom, and in bullion in the ratio of at least three- quarters in gold and one-quarter partly in silver coin; and as for the remaining 7 per cent, it could also be com- posed of foreign bills of exchange on firms of the first order, recognized as such by the Minister of the treasury. A like reserve of 40 per cent was established as a guar- anty of the debt of the banks represented by promissory notes, checks, bank transfers, and other paper payable at sight, and without exception all paper payable to bearer. The Banks of Issue in Italy The article that authorized the banks to include in the metallic reserve foreign bills of exchange was successively ampHfied as for the quantity and character of the obhga- tions so as to permit adding thereto treasury bonds of foreign states with a normal metallic circulation, and also certificates of deposits of money with foreign banks and bankers who were correspondents of the Italian treasury. The above provision wa s framed for two different reasons : The one, of utility to the banks of issue, a part of whose reserve it rendered fruitful, with the advantage of the reconstruction of their free capital; the other, of mone- tary utility, since it allowed the banks to have a part of their funds in foreign countries, which might serve as a powerful protection in case of monetary disturbances and high rates of exchange. From this point of view, Italy introduced into its banking legislation a provision already tried to advantage in other countries, such as Germany, Austria- Hungary, Russia, Switzerland, Holland, Belgium, and Spain. By article 9 of the law it was stipulated that the manu- facture of bank notes should take place, in conformity with special regulations, under the cooperation of the State and the banks. The tax on circulation was fixed at 1 per cent of the average total of bank notes, after deducting the metallic reserve. The banks would pay, therefore, beside the tax of i per cent, an extraordinary tax corresponding to double the discount rate on the excess of circulation and the deficit of metallic reserve. 123 National Monet ar^y Commission Article 1 2 was particularly interesting ; in this were in- dicated the operations that the banks could carry on, that is, discount of bills of exchange having not more than four months to run and bearing the signatures of two or more persons known to be solvent ; of treasury bonds ; of war- rants issued by societies of general warehousing and con- signments free of taxation (franchi depositi) ; of coupons of securities admitted in loan operations. Loans, for not more than six months, on government securities or those guaranteed by the State; on mortgage certificates issued by realty credit institutions; on gold bonds issued or guaranteed by foreign states; on gold and silver coin, na- tional or foreign, at legal currency, and gold bars; on silk raw and in organzine or woven, and on silver bars esti- mated at not m.ore than two-thirds of their value; on cer- tificates of warehousing and consignments free of taxation (franchi depositi) ; on orders in merchandise or sulphur, not over two-thirds of the value; on certificates of con- signments of spirits and cognac, placed in the warehouses legally estabUshed, for not more than half the value. Cash purchases and sales on account of the banks themselves of foreign drafts and checks and foreign bills of exchange of not more than three months' currency, payable in gold, bearing two or more signatures known to be solvent. These operations could not, during the legal currency, without the permission of the minister of the treasury, exceed the limit necessary for refurnishing the metallic reserve or satisfying the needs of the treasury. The banks were to liquidate in two years securities, cer- tificates, and goods held in payment of or as guaranty for their credit, and within three years the mortgages or real estate obtained for overdue credits. 124 The Banks of Issue in Italy The banks could hold a quota of ItaHan government stock for a value not exceeding : Lire. For the Bank of Italy • . . . 70, 000, 000 For the Bank of Naples 21, 000, 000 For the Bank of Sicily 4, 000, 000 The banks of issue could receive deposits on interest- bearing accounts current; in case, however, the total of accounts current exceeded : Lire. For the Bank of Italy 130, 000, 000 For the Bank of Naples 40, 000, 000 For the Bank of Sicily 12, 000, 000 the bank was obliged to reduce the circulation by three- quarters of the excess. The interest on accounts current could not exceed half the discount rate during the first three years and one-third in the following years. R-ealty credit operations were forbidden. The banks could continue winding up the operations which had been proposed until July i, 1893. All uncovered operations in accounts current were forbidden. The Bank of Naples was authorized to continue its pawn operations. The banks vvere allowed to assume the office of provincial receivers of the direct taxes. The Bank of Italy, the Bank of Naples, and the Bank of Sicily were obliged to liquidate in ten years, at the rate of one-fifth every two years, operations other than those permitted by the new law. Obligations settled with the statutory reser\^e could be considered liquidated. In case of not completing in each two years the liquidation of a fifth of the operations, the Bank of Italy would have to ask the stockholders, within the limits of the nominal capital, for the payment of the sum needed to complete the obligatory liquidation. The Banks of Naples and of Sicily were to 125 National Monetary Commission devote all profits to the completion of the obligatory liquidation. For banks which had not conformed to the above provisions of the law the privilege of issuing bank notes would be suspended for a sum four times the amount needed to complete the obligatory liquidation. The banks which had carried on operations forbidden by the law would be liable for a tax equal to three times the discount rate, calculated on the whole duration of the operations. To prevent the banks from being induced by their own initiative or by pressure from the Government to carry on operations of special character having in their form only the appearance of legality, the general directors and the councils of the three banks were not allowed to conclude discount operations, and it was stipu. lated that no bill of exchange should be admitted to discount without the sanction of the discount commis- sion of the establishment or branch to which it had been tendered. At the end of each fiscal year the amount of the bills overdue and unpaid was to be charged to loss; that of the bills subsequently recovered was to be added to the profits of the year in which the bills were paid. The law granted the reduction of three-quarters of the registration fee of deeds of sale or purchase of real estate, and releases of credits made for the liquidation of opera- tions not admitted by the said law. The law authorized, moreover, the banks of issue to intrust, in whole or in part, the liquidation of operations not in liquid form to an institution which should be created with a capital of no less than 40,000,000 lire, to 126 The Banks of Issue in Italy which the Government could make special concessions. But the banks did not need to avail themselves of this faculty. There followed in the law the stipulations concerning the organization of the government inspection of the banks and severe penalties for fraudulent infractions of the law; next came provisions as to the liquidation of the Banca Romana, which had been assumed by the State, and by it delegated to the Bank of Italy, which was to pay on account of the liquidation 2,000,000 lire a year during ten years. An article of the law stipulated that members of Par- liament could not fill any office, with or without remu- neration, in the banks of issue. As we have seen, the new law corresponded in its general outline to the programme that had been chosen as the one that appeared best adapted to the conditions of the moment, consisting in assuring the gradual liqui- dation of the burdensome inheritance left by the stormy vicissitudes of the past to the Italian banks, and in provid- ing at the same time for surrounding the further action of the said banks with timely precautions, subjecting them to salutary checks rendered efficacious by severe penalties so as to avoid new mistakes and disorders. With the exception of a few details of small impor- tance arising from the different character of the three banks, the law subjected them all to the same regulations, and the severe regulation of the government supervision insured that the action of the three banks in observing the said law should be uniform, as if there were in fact one single bank of issue. 39781°— II — 9 l2^ National Monetary Commission And while in this way were obviated the dangers of the pluraHty of banks, of which Italy had made a very dismal trial, or at least the disadvantages of the system were diminished, provision was made by increasing the metallic reserve for removing the other cause, already stated, of the inferiority of the Italian paper currency. As for the meddling of politics in the management of the banks of issue, it was supposed to be provided for by the law stipulating that senators and deputies could not hold ofhce in the banks. This provision, which was rightly said to savor of Jaco- binical distrust, was not included in the bill presented by the Government and was added during the discussion in the Chamber. It was not, however, in any way justified, since it had not appeared, and did not appear later from the parliamentary inquiry that there had been in Parlia- ment members of the council of banks of issue, who, abus- ing their function as senators and deputies, had harmed the banks or had in any way whatsoever in their double capacity as politicians and as administrators of the banks of issue committed dishonest acts such as would justify the incompatibility established. The effect of that provision of the law was, meanwhile, to deprive the banks of men of great authority and unquestioned uprightness, such as Senator Tittoni, aftenvards foreign minister; Senators Balestra, Lancia di Brolo, Ridolfi, Chiara- monte Bordonaro, and Deputy Giuseppe Pavoncelli, later minister of public works. Besides, this law forbade and still forbids the King to confer the dignity of senator on men who in the administration of the banks of issue render themselves worthy of public honor. 128 Chapter X. THE PARIvIAMENTARY COMMITTEE OF INQUIRY — AGGRAVA- TION OF THE FINANCIAL AND ECONOMIC SITUATION — FINANCIAL AND BANKING PROVISIONS OF MINISTER SONNINO AND THEIR EFFECT. The law of 1893, although not perfectly successful, neces- sarily, perhaps, because of the condition of things and the general anxiety, was none the less of a kind to quiet uneasi- ness and to cause a revival of confidence in a gradual amelioration of the circulation and the banks, but it did not succeed in accomplishing the desired result. Political passions, instead of calming down, grew more inflamed, while at the same time the results of the inspection of banks showed that their situation Vv^as much more serious than had been supposed in the beginning. The Government now recognized the necessity of allowing the nomination of a parliamentary committee of inquiry, charged with ascertaining any incorrect relations of poli- ticians and the public departments with the banks of issue. Although the committee of inquiry was composed of honorable and authoritative men, it did not succeed in entirely escaping the influences of the surrounding parliamentary agitation and was not always conducted with calm impartiality. Thus, when it ascertained the loan mentioned above of 8,000,000 lire made by the Banca Nazionale to the Banca Romana, the committee bitterly reproached the Banca Nazionale, declaring it did not seem credible that it should have been ignorant of the condi- 129 National Monetary Commission tions of the Banca Romana, as if insinuating that, ahhough knowing them, it had consented to help hide them. To this insinuation, which had suggested to Deputy Cavallotti ^aying before the government the before-mentioned inquiry, the general director of the Banca Nazionale replied scorn- fully and haughtily in a letter published in the newspapers. The presentation to Parliament of the report of the committee of inquiry unloosed a furious tempest, in the presence of which the ministry resigned. It may well be suspected that the ministry was violently attacked in some quarters also for having dared to probe to the bottom the affairs of the Banca Romana, to the point of allowing the legal authorities to proceed to the arrest of the governor and the head cashier of the bank and other supposed accomplices. Even if the attacks against the president of the council were apparently justified by an unfriendly judgment expressed in his regard by the committee of inquiry, in reality the united oppo- sition which could not in good faith ignore his personal integrity, had found itself agreed upon the aim of ruining the ministry. And that w^as neither the first nor the last time in which a ministerial crisis was produced in Italy as the result of an event for which the ministry was not at all responsible. The inordinate clamor which political passion had raised over the fall of the Banca Romana and the excessive exaggeration of accusations and charges seemed to justify the suspicion that all the poHtical, economical, and banking life of Italy was corrupt. Naturally all this could not fail to produce harmful effects on the public credit. And in truth the period between the middle of 1893 and the middle 130 The Banks of Issue in Italy of 1894 ^ay be considered in every respect one of the darkest and most distressing through which new Italy has passed. Government rentes went down on the Paris market from a maximum quotation of 93.50 to a minimum of 72, due hkewise to the distinct resumption of hostihties by the French market as a resuh of the painful conflict started at Aigues Mortes between Italian and French workmen, which helped to aggravate the situation in Italy. As a necessary consequence of the fall in rentes, exchange went up from the rate of 102.30, the maximum point touched in 1892, to the maximum of 115.95, a rate never reached before that time. But whether as a coincidence or reflex of the banking crisis, not only did the conditions of credit in general and national economy appear grave, but also those of the public finances. The budget which had closed with a surplus of more than 9,000,000 lire for the financial year 1 892-1 893, now showed a great deficit, without taking into account the increase of debts incurred under various forms and the expedients which were resorted to in order to provide for the ever increasing needs of the treasury. The Giolitti Ministry was succeeded by a new Crispi Ministry, in which Signor Sidney Sonnino accepted the treasury portfolio. His first effort was devoted to making an accurate, profound analysis of the actual con- ditions of finance in relation not only to the account of revenues and ordinary expenditures, but also to the situation of the treasury and the amounts extraordinary for building railroads and many other needs of the State. The result of his conscientious study was the discovery of 131 National Monetary Commission a situation which the minister did not hesitate to declare very serious, which he summed up: In a deficit of 155,000,000 in the ordinary expenditures; in a treasury debt of 565,000,000, which needed systematizing; in the abnormal conditions of circulation; in the uneasiness that, as a result of an economic derangement felt by every- one, was spreading over the country. And, making a brief analysis of the causes that had led Italy into the sad condition ascertained, he did not hesitate to declare that these causes must be found in the waste made of money amounting to millions and billions, borrowed without due forethought and used in unproductive or unnecessary ex- penditures. He bitterly reproved Parliament for delud- ing itself and the public during fifteen years as to the real condition of the public finances, and, in conclusion, made a lively appeal for energetic and virile action to save the country from the financial and economic ruin that threatened it. The stubborn optimists tried to reprove Signor Sonnino for depicting the situation in such very dark colors; but they did not succeed in lessening the great impression produced by the courageous exposal made by the min- ister of the actual conditions of the country and finance. Signor Sonnino was, therefore, as will be seen later, as energetic in the cure of the trouble and fortunate in its issue as he was merciless in its diagnosis. But even before he had arranged in concrete form the provisions aiming at the systematizing of the treasury and restoring finance, he was obliged to intervene speedily in order to avoid the aggravation of the monetary and economic situation of the country. 132 The Banks of Issue in Italy The considerable decline of the Italian rentes in Paris provoked a grave crisis on the Italian stock exchanges, a crisis that overwhelmed the two biggest credit insti- tutions then existing, the Credito Mobiliare Italiano and the Banca Generale, one with a paid-up capital of 60,000,000 lire, the other with a paid-up capital of 30,000,000 lire. The failure of these institutions was the chief cause of the aggravation of the situation. Securities continued to decline sharply in a way never before wit- nessed, and the panic seized even depositors, who crowded to the doors of the banks and savings institutions in order to obtain immediate payment of deposits. The situa- tion then appeared terrifying and threatening. The minister of the treasury, Signor Sonnino, and the min- ister of agriculture, industry, and commerce, Signor Boselli, to save the country from the most serious con- sequences, were ready to provide, through royal decree of the date of January 23, 1894, for placing the banks of issue in a condition to come to the aid of the very grave situation. The royal decree authorized the banks to issue notes beyond the normal limits up to the amount: Lire. For the Bank of Italy 90, 000, 000 For the Bank of Naples 28, 000, 000 For the Bank of Sicily 7, 000, 000 on condition of the payment of a tax equal to two-thirds of the discount rate, instead of double the discount rate as stipulated in the law of August lo, 1893. The notes were to have the required metallic reserve. The same royal decree suspended the provision of the law by which the banks were obliged to reduce the circulation by three- quarters of the amount of the deposits in accounts current, 133 National M on et ar y Commission in addition to the sums indicated. So, twenty-three days after that banking law had gone into force, it was necessary to provide for modifying it temporarily. The effect of the royal decree was salutary, because it succeeded in stopping the run of depositors on the banks and savings institu- tions by the influence of that phenomenon of a psycho- logical nature which is always evident in similar cases. Viewed as a whole, the very grave banking crisis that Italy suffered from at that time may be considered as the inevitable result of the failure to keep in mind the rules that must always guide the management of the banks of issue and the institutions of credit. The banks of issue, for reasons already stated, were impelled and forced to disregard the principles that must govern the activity of banks authorized to issue paper money; the institu- tions of credit, because of a mistaken estimate of the economic conditions of the country, forgot that institu- tions that operate in large part with the money of depos- itors must use the greatest care to avoid t3dng up the capital, which may be, as it was then, as it had been before in other countries, as it will doubtless be in the future, a cause of economic crises and of inevitable ruin for these institutions. In the face of the painful results of experience discussions then arose in Italy that were to arise in 1907 in Germany and Italy with regard to the perils that may be incurred by institutions of credit which employ too large a part of the depositors' money in direct participation in industrial undertakings and in affairs of a speculative nature. The Banca Generale and the Credito Mobiliare went into a forced liquidation, the result of which showed that 134 The Banks of Issue in Italy the first would have been strong enough to Hve on a basis of its own if it had not been overturned by the fury of the blast that made it impossible to examine its situation calmly and shut out the aid that could have been afforded by suitable and relatively Hmited means. The Government then showed the desire to know with greater exactness the conditions of the banks of issue in order to see whether it was possible for them to conform to the stipulations of the law of 1893, and a ministerial decree of February 15 arranged for a complete new in- spection of these banks in order to ascertain the solidity of their financial situation and the amount of operations not in conformity with the law, likewise the situation of the cash and circulation. The work of the ministry in the matter of finance and circulation entered then upon a period of truly feverish activity. By royal decree of February 21, 1894, con- verted into a law July 22, 1894, the treasury was author- ized to increase the circulation of state notes to 600,000,000 lire, comprising in that sum 200,000,000 lire which the treasury was to furnish the banks of issue in exchange for the same amount in gold that they had been forced to set aside at the disposal of the treasury, to be dis- tributed as follows: Lire. Bank of Italy 145, 000, 000 Bank of Naples 45, 000, 000 Bank of Sicily 10, 000, 000 The state notes were as a matter of fact declared at forced currency, since their exchange into metallic money was suspended and there had passed into full possession and disposal of the treasury certificates of public debt for 13s National Monetary Commission the amount of 367,750,700 lire, which were deposited as a guaranty for the said notes. In such a way the state notes which had been thus created originally in 1881 for the sum of 340,000,000 lire, with a guaranty of 234,000,000 lire in rentes, and had risen by June 30, 1893, to 367,- 000,000; these notes which had been intended to be with- drawn and cancelled annually by the surplus of the budget were increased to 600,000,000 lire and deprived of all guaranty. The amount of 600,000,000 in state bank notes, authorized by the law of June 22, 1894, was never reached, for, including 558,000,000 lire in cash orders of I and 2 lire, created by royal decree August 4, 1893, and February 21, 1894, and 45,000,000 hre issued for the Bank of Naples, as will be shown presently, they reached a maximum total of 556,000,000 lire on June 30, 1898, and were reduced on June 30, 1899 to 434,500,000 lire, includ- ing 23,000,000 lire left over from the 45,000,000 lire issued on the account of the Bank of Naples, with a guaranty of gold specie to the amount of 176,700,000 lire. The existence in circulation of state notes has often given rise to discussions in Italy, and it has been proposed several times to withdraw these notes. And, indeed, it does seem strange that the Government, which has rightly been concerned with the absolute necessity of reforming the banking currency, not only has never given a thought to reforming its own currency, but has, instead, made it worse. However, granting that the suppression of state notes would be useful to the country from the monetary point of view, it should be remembered, nevertheless, that most of the state notes issued do not burden the country, but are very willingly accepted for their great 136 The Banks of Issue in Italy convenience in small transactions and are preferred to 5-lire silver pieces. In fact, a great part of the state notes are sought for by Italian emigrants abroad, who prefer them to checks for sending small sums of money to Italy. And although in actual figures they show an increase from 1881 until to-day, yet, considered in relation to the increase of population and trade, and in relation to the total amount of the cur- rency, they show, instead, a decrease. In 1889 having redeemed in specie nearly the whole of the association notes debited to the State, there were in circulation 1,116,000,000 Hre in notes of the banks, compared to 334,000,000 lire state notes of 5, 10, and 25 lire. The pro- portion between the state notes and those of the banks was about 30 per cent, while at the end of 1908 the state notes amounted to 468,000,000 lire and represented 25 per cent of the total notes in circulation. Although there are in circulation silver coins for i and 2 lire and, in smaller proportions, 5-lire pieces, yet the fractional cur- rency is shown to be rather deficient, especially in mo- ments of greater need, determined by the silk market and the harvest of the principal agricultural products. It must be understood, in any case, that the forced cur- rency of the state notes was a provision of an absolutely extraordinary nature, made at a moment when it was important to regulate a most difiicult and threatening situation, in which the conditions of the foreign market with respect to Italy and even more those of the home market, would not have permitted making an appeal to credit. It can not be said, indeed, that Signor Sonnino lacked the courage to act with energy, since, after taking 137 National Monetary Commission exact account of the gravity of the situation, he con- sidered all the means fitted to cope with it, not even stop- ping at the unpopular ones of increasing the existing taxes, and imposing new taxes, and the one, judged dangerous to Italian credit, of increasing from 13.20 per cent to 20 per cent the tax on personal property in government rentes. This is not the place to examine all the provisions proposed by Signor Sonnino and approved by Parlia- ment in order to relieve the conditions of the public finances and put new life into the depressed economic situation of the country; let it suflice to note here that the desired effect was quickly reached, since the budget of 1894-95 closed with a surplus of about half a miUion; Italian rentes in spite of the increase of the tax advanced on the Paris market to 91, and commercial activity, which had suffered a falling off, began to increase again. We must return, however, to the banking provisions that Signor Sonnino, in agreement with Minister Boselli, proposed at the same time with the financial ones. A royal decree, carrying out the law of August 10, 1893, provided for regulating the method of the mutual redemp- tion of bank notes among the banks of issue, so as to render it efficacious. The decree stipulated that the redemption should be effected without limitation and that on the sums remaining to the debit of a bank, interest should be reckoned in favor of the creditor institution. The law of July 22, 1894 modified the provisions made under pressing necessity in January of the same year, relating to the excess of circulation of bank notes over 138 The Banks of Issue in Italy the normal limits, establishing that the institutions could issue, respectively: Lire. Bank of Italy 45 , 000, 000 Bank of Naples 14, 000, 000 Bank of Sicily 3, 500, 000 on condition of paying a tax equal to two-thirds of the discount rate, and could further exceed the circulation by a like amount, on condition of paying a tax equal to the discount rate. The above-mentioned excess of cir- culation, however, was to be guaranteed by the prescribed metallic reserve in the ratio of 40 per cent. As for the obligation to reduce the circulation by three- quarters of the excess of deposits in accounts current beyond the sums indicated, it was stipulated that this reduction should be limited to one-third. The amount of statutory loans that the banks of issue were obliged to make the Government was fixed at 125,000,000 lire, distributed as follows: Lire. Bank of Italy 90, 000, 000 Bank of Naples 28, 000, 000 Bank of Sicily 7, 000, 000 After settling that import duties were to be paid in metallic money, this law stipulated that for those not exceeding 200 lire state notes or bank notes should be accepted, with the addition of exchange. It further established that the banks of issue should provide certificates useful for the payment of import duties, by receiving a like amount in bank and state notes, without limitation as to amount, with the addition of exchange. In a special account current the banks were to be debited with the sums deposited for the issue of certificates and 139 National Monetary Commission credited with sums paid abroad on account of the treasury. The differences resulting in profit or loss from this service were to be evenly divided between the treasury and the banks. As long as the redemption of state notes in specie re- mained suspended, bank notes could be changed into state notes or into specie with the addition of exchange. By royal decree of October 12, 1894, the government supervision of banks of issue, and the liquidation of the Banca Romana, undertaken first by both the minister of agriculture, industry, and commerce and the minister of the treasury, was intrusted exclusively to the latter. Having provided by this and other provisions of minor note for regulating the various urgent questions concern- ing the currency and the treasury. Minister Sonnino made the banking law of August 10, 1893, the subject of careful study, in relation to the situation of the banks, which was henceforth more clearly defined because of the new inspection that had been applied to these banks. Opera- tions that were not in a liquid form or not allowed by the new law were found on February 20, 1894, to amount to 638,366,685 lire — that is to say: Lire. For the Bank of Italy 449, 420, 000 For the Bank of Naples 169, 613, 316 For the Bank of Sicily 19, 333, 369 However, more than half of the banking currency was represented by operations of difficult or tardy liquidation, or not suitable for banks of issue; operations among which noteworthy losses were concealed. Now that he was more directly informed of the actual facts, Signer Sonnino, minister of the treasury, who had returned 140 The Banks of Issue in Italy to the ideas expressed at the moment of the failure of the Banca Romana, and had even rejected proposals that were made to him by foreign capitalists for the creation of a new bank of issue, could not neglect giving his atten- tion to the conditions revealed in the Bank of Italy, and stipulated with it an agreement dated October 30, 1894, of which the principal points were as follows: The assuming on the part of the Bank of Italy at its own entire risk and peril of the liquidation of the Banca Romana, relieving the State of whatever losses might result beyond the sums to be paid by the Bank of Italy at the rate of 2,000,000 lire a year. The bank itself engaged to deduct from net earnings and to set aside 4,000,000 lire in the year 1894, 5,000,000 hre in 1895, ^'^^ 6,000,000 lire in 1896 and the following years, until the end of 1903. These sums were to be invested in State securities or securities guaranteed by the State, to be used, together with the relative com- pound interest, for securing within ten years the liquida- tion of operations not realized on or not in conformity to the law, and to compensate for losses resulting from the liquidation of the Banca Romana over and above the annual payment of 2,000,000 lire. The agreement, evidently anticipating provisions that Minister Sonnino already had in mind, which were as a matter of fact afterwards proposed and carried out, stipu- lated that if the time fixed at ten years for the liquidation of operations not in a liquid form or forbidden by the law should be prolonged, and consequently the two-year periods extended, the bank should continue for the longer time granted the setting aside of 6,000,000 lire of its 141 National Monetary Commission profits. The Bank of Italy was obliged to continue the deduction of profits for the increase of the ordinary reserve and could not distribute to shareholders a dividend greater than 40 lire, being obliged to deposit in the reserve every- thing in excess of this amount. The Bank of Italy agreed to ask the stockholders^ for a payment of 100 lire a share and to deduct a correspond- ing sum of 30,000,000 lire from the valuation of its own capital, which was thus reduced to 270,000,000 lire nomi- nal capital, divided into 300,000 shares of 900 lire each, nominally, with 700 lire paid up; that is to say, with a paid-up capital of 210,000,000 lire. The 30,000,000 lire paid by the stockholders and not computed in the increase of paid-up capital was destined to cancel a like sum of overdue and unpaid operations included in the operations of difficult or tardy liquidation. The Bank of Italy assumed the treasury service of the state in all the provinces of the Kingdom from February I, 1895, until December 31, 191 2. It was to receive pay- ments of amounts on account of the state and the various departments connected with it, and was to exact payments in favor of creditors of both. In guaranty for this service the bank was to furnish an initial surety of 50,000,000 lire in state securities, or securities guaranteed by the state, to be increased to 90,000,000 lire within six years. The amount of statutor}^ loans to be made by the bank to the treasury was increased from 90,000,000 to 100,000,000 lire. The state left with the bank a permanent cash fund of 30,000,000 lire solely for the needs of the ordinary treas- ury service, except for the necessary provision for extraor- dinary payments. When the cash fund rose to more than 142 The Banks of Issue in Italy 40,000,000 lire, the bank was to pay the state a net inter- est of 1.50 per cent; when, on the other hand, it fell below 10,000,000 lire, the state was to pay the bank a like interest. The cash fund, however, was always to be brought up to a total of 30,000,000 lire in the course of every ten days, so that on the evening of the loth, the 20th, and the last day of the month (dates on which the bank statements were to be published) the fund should amount to 30,000,000 lire. In the agreement it was stipulated that during the legal currency, and as long as the Bank of Italy carried on the treasury service of the state, it could not ask the Bank of Naples and the Bank of Sicity for the redemption of their notes which had entered its coffers until a like amount of the outstanding notes of the bank, at the end of ten days, should be in the coffers of the two banks. This stipulation, by which was weakened anew the principle of the obliga- tion of mutual redemption of notes among the banks, was justified by the consideration that in the course of the treasury service the Bank of Italy would collect, especially in southern Italy, a great quantity of the notes of the two banks which they would have difficulty in redeeming. On this point it may be objected that the cash trans- actions of the treasury being accounted separately from those of the bank and being controlled by the offi- cers delegated by the treasiury, the anticipated incon- venience might have been avoided by excluding from redemption such notes of the two banks as had entered into the bank through treasury operations. These could have been spent by the Bank of Italy in the operations themselves or in those of the bank, leaving the principle of the mutual redemption of notes in full force for the re- 39781°— II 10 143 National Monetary Commission maining notes. It must be stated, however, that no incon- venience has been feh as a result of this provision, since the relations among the three banks, even in regard to the redemption of notes, have been perfectly correct, and their circulation has not suffered from the above-mentioned stipulation. This agreement was approved by royal decree of Decem- ber ID, 1894, which was converted into a law August 9, 1895. Although the agreement laid fresh burdens upon the Bank of Italy, such as the liquidation, at its own risk, of the Banca Romana and all the expense of the treasury service, it produced, nevertheless, a good impression, because notwithstanding the difficulties, now well known, in which the bank was involved, the Government by intrusting to it the treasury service showed that it had the greatest confidence in the solidity of its framework, whereas the payment by the shareholders of 30,000,000 lire assigned to cancel losses, and the obligation of the annual setting aside of profits facilitated the gradual building up of the capital of the bank and the improve- ment of its circulation. In the law that ratified the agreement between the Government and the Bank of Italy other provisions were made concerning the banks of issue, among which was the increase of the amounts they were permitted to invest in rentes: Bank of Italy, from 70,000,000 to 75,000,000 lire; Bank of Naples, from 21,000,000 to 30,000,000 lire; Bank of Sicily, from 4,000,000 to 8,000,000 lire. The amount of deposits in accounts current beyond which the circulation was to be reduced, in the ratio of 144 The Banks of Issue in Italy one-third, was increased: For the Bank of Naples, from 40,000,000 to 50,000,000 Hre; for the Bank of Sicily, from 12,000,000 to 15,000,000 lire. The Government was authorized to establish by royal decree the conditions under which the banks could dis- count bills at a rate inferior to normal. This pro- vision expressed in a general way was defined by royal decree of October 25, 1895, which stipulated that the banks of issue, independently of the faculty of discounting at a rate of i per cent below normal the paper of the people's banks and other intermediary institutions, should be allowed also to discount at a rate below normal, bills of not more than three months' currency, presented and guaranteed b}^ banking and commercial firms of the first order. This faculty was subject to the condition of keep- ing the circulation within the normal limit. The minimum rate of discount was to be fixed ever}^ three months by the decree of the minister of the treasury and could not go below 3K per cent. This provision which added another distinction in the rate of discount of Italian banks has seemed an Italian novelty and has been discussed and criticized in various ways as a proof of a lack of unified standards and action in the delicate instrument of the rate of discount. It will be timely, therefore, to make clear, first of all, that it is not in the least a question of an Italian novelty, since other foreign banks of issue, including the Imperial Bank of Germany and the Bank of England, are in the habit of dis- counting or buying (a difference in form which does not change the substance) bills of exchange at a rate different from the normal or official one. In what particularly 145 National Monetary Commission concerns Italy it must be remembered that the variation in the value of money from region to region is more notice- able than in other countries; hence the official rate of 5 per cent, which represents an average price of money in the greater part of southern Italy, a region less fully provided with available capital, proves in normal times high in central Italy and even higher in northern Italy. Besides, in Italy as in other countries, there may be in one single province, and even in one single city, a difference in the value of the bills of exchange tendered and worthy of being admitted to discount, a difference which justifies a diversity in treatment. But the provisions mentioned above with regard to the rate of discount were in a special way justified at the time when they were decided on by the conditions of the discount operations of the banks of issue, since it would not have been reasonable to treat in the same way clients who presented real commercial paper, payable on ma- turity, and those to whom it was necessary to grant de- lays and renewals for the payment of their debts. Another important modification of the law of August 10, 1893, was made by the law of August 8, 1895, with regard to the time assigned the banks for the liquidation of operations not in liquid form or contrary to the law, which was increased from ten to fifteen years. In con- sequence it remained established that in each three years the banks would have to liquidate a fifth of the opera- tions; and it was correspondingly stipulated that the ex- traordinary inspection of these banks should be made every three years. 146 The Banks of Issue in Italy This important and substantial modification of the law of August lo, 1893, was made advisable by the necessity of not placing the banks of issue in a condition of mani- fest inferiority in comparison with the market, which might be able to dictate its own conditions to the banks, profiting by the peremptory necessity they were under of liquidating an enormous mass of intricate operations not in conformity to the law. With regard particularly to the liquidation of operations where it was necessary to sell the real property that stood as guaranty, the period of ten years seemed too short, especially as the real estate market still remained inactive and did not attract capital- ists desirous of getting a suitable return for their money, which could not be had from houses, as they were still more plentiful than necessary. And it was also considered that in offering the market a great quantity of real estate the conditions of real prop- erty, already depressed, would be still more aggravated, causing by reflex a disorder of the public economy, espe- cially in the capital of the Kingdom and in other cities in which the building crisis had assumed a somewhat serious character. It was necessary, therefore, to give a longer time to allow the banks to free themselves gradually from real estate, without yielding to the exaggerated, usurious de- mands of the capitahsts, who wanted to buy for half price, or even less. And it was greatly to the credit of Signor Sonnino, a long-time partisan of the energetic and violent cure of the banking evil from which the country was suf- fering, that he recognized, in the face of the true situation 147 National Monetary Commission and its inseparable exigencies, the advisability of a gradual remedy, which ended, as we shall see, by giving unhoped- for results. By the same law of August 8, 1895, were granted vari- ous diminutions of fees for registration of deeds in buying and selling real estate, conveyances of mortgage loans, and other operations of liquidation, for the purpose of facili- tating realization on the intricate operations of the banks ; and it was stipulated besides, to facilitate the liquidation of the realty credit branches of the banks and to straighten out the relations between the two. In consequence of the substantial changes made in the law of August 10, 1893, the statutes of the banks of Italy, Naples, and Sicily were also modified. 148 Chapter XI. THE MILITARY DISASTER IN AFRICA AND ITS CONSEQUENCES — THE RUDINI MINISTRY — NEW BANKING ACT PROPOSED BY MINISTER IvUZZATTl. The military disaster of Adowa, in which the ItaHan forces were wiped out after being surrounded and van- quished by the whole Ab3^ssinian army, was the occasion on March i, 1896, of the downfall of the Crispi Ministry, which was succeeded by a new Rudini Ministry, whose minister of the treasury was Signor Colombo. The lat- ter recognized at the very outset the urgent necessity of a loan to meet the expenses of the African war, a loan which was issued for 132,000,000 lire. Meanwhile the African disaster arrested the improvement that the work of Minister Sonnino had brought about in the financial and economic situation of Italy. Italian rentes declined at Paris from a maxinmm quotation of 97.33 to a minimum of 86.25 and exchange went up from 104.50 to 11 2.62. This turn for the worse made clear once more that the exchange rate, especially in debtor countries with abnormal finances, does not depend simply upon the conditions of the paper currency. In fact, the currency, by the gradual liquidation of heavy operations, was continually decreas- ing in quantity and growing better in quality; the cur- rency was also growing better by the increase of the metalHc reserve which amounted in 1896 to 47 per cent of the notes against 32 per cent in 1893 and exerted a favorable influence on exchange which had gone down from 116 to 104. In spite of this, a military incident 149 National Monetary Commission entirely foreign to the conditions of the banks and the cir- culation was sufficient to make exchange go up again to 112.62, through the decline of Italian rentes abroad and their return to Italy. Meanwhile a grave dissension which had broken out in the Rudini Ministry with regard to military expenditures occasioned the resignation of the minister of the treasury, Colombo, and others. Signor Luzzatti returned then to the direction of the treasury and took up afresh the ex- amination of the problem of the currency and the banks, in whose situation various points were gradually being cleared up that had not been carefully observed in the official inspection of these institutions. In regard especially to the Bank of Naples, the situation had proved so grave and tlireatening. Minister Luzzatti was obhged to declare, as to require urgent extraordinary pro- visions. Signor Luzzatti was also led to resume the examina- tion of the banking problem by the consideration of the grave responsibility assumed by the State in the matter of the paper currency on which he had conferred legal currency, thus obliging the citizens to accept the notes of the banks. The case of the Banca Romana was too recent and too serious for this problem not to demand profound consideration and the suggestion of provisions directed toward guarding both the pubHc interest and that of the State. But besides saving the Bank of Naples from imminent ruin and assuring the guaranty of the bank notes, the min- ister of the treasury aimed at making possible a more 150 The Banks of Issue in Italy speedy liquidation of old operations not realized on or con- trary to the law. Guided by these standards and keeping in view the pur- poses mentioned above, the minister of the treasury pre- sented resolutions which because of urgency were issued by royal decree, and afterwards approved in a provisional way by the law of January 17, 1897, and definitely sanc- tioned by the law of March 3, 1898, by which were modi- fied and adapted several of the articles contained in the royal decrees and in the law of provisional application. Passing over the articles in detail, several of which it was not considered necessary to put into effect, it will be help- ful to examine the more important ones which caused a noticeable modification of the regime established by the preceding laws. To make sure of the full guaranty of notes the law pro- vided that the banks of issue should put aside, subject to the inspection and control of the ministry of the treasury, a metallic reserve, comprising in this the part employed in discounts of foreign bills of exchange and foreign treas- ury bonds, and in foreign credits for the minimum amount, irreducible, of 300,000,000 lire for the Bank of Italy, 90,500,000 lire for the Bank of Naples, and 21,000,000 lire for the Bank of Sicily. The metallic reserve could not be diminished even in case it should happen, as a result of the reduction of the circulation, that it represented more than 40 per cent of the circulation, and was to rest as guaranty for a corre- sponding amount of notes. For the part of circulation not covered by the aforesaid reserves, the holders of notes had 151 National Monetary Commission a claim on the other gold and silver specie belonging to the banks, having deducted their part to be left as a guaranty for sight liabilities to the amount of 40 per cent ; on Italian treasury bonds or other Italian state securities or secur- ities guaranteed by the state, including for the Bank of Italy, the sums set aside for the liquidation of the Banca Romaiia; on foreign bills of exchange not included in the discounts available for the metallic reserve; on loans on collateral ; on domestic liquid discounts. For the Bank of Naples were included also the state securities comprised in the metallic reserv^e, of which we shall speak later, and temporarily the amount of the credit of the bank to its own credit foncier administration. For the further pro- tection of holders of bank notes the banks were forbidden to engage in granting sureties. As a result of this provision, there were tied up 411,500,000 lire of metallic reserve, or its equivalent, representing 48 per cent of the minimum total of 864,000,000 lire, the amount to which the banking cur- rency was required gradual!)' to decrease, according to the law. At the same time the law was abrogated with re- gard to the tying up of 200,000,000 lire of metallic reserve, in exchange for which the State could issue an equal amount of its own notes. The maximum total of these notes was limited to 600,000,000 lire, and the total remained fixed at 125,000,000 lire of loans that the Bank of Italy and the Bank of Sicily were to make the treasury, 1 15,000,000 and 10,000,000 lire, respectively, the Bank of Naples being excluded from the necessity of making loans to the treasury. 15^ The Banks of Issue in Italy With regard to the provisions intended to hasten the Uquidation of operations not in hquid form or not in conformity to the law, it was further stipulated that the gradual diminution of the normal circulation guaranteed by the reserve of 40 per cent should be anticipated, so that the Bank of Italy, which was to reduce it by 34,000,000 lire in 1897, should reach the minimum limit of 630,000,000 lire in 1905 instead of 1908; the Bank of Naples would reach that of 190,000,000 lire in 1906 and the Bank of Sicily that of 44,000,000 lire in the same year. To facilitate and hasten the liquidation of old oper- ations, Signor Luzzatti, although leaving unchanged the provisions of the preceding law in as far as they set forth the obligation of the banks concerning the length of time in which the said liquidation was to be accomplished, evolved a plan based on the idea of the intervention of the State in favor of such banks as should give more active and successful attention to attaining the desired end. And since among the operations to be liquidated there were several guaranteed also by public securities not admitted by law, he proposed that these operations should be considered liquidated whenever the bank had sold the securities and invested the proceeds in state securities or securities guaranteed by the State. For the other operations to be liquidated, provision was made to compensate such banks as had suc- ceeded at given times in liquidating certain sums beyond the required amount, by giving them the privilege of investing in treasury notes up to a stated limit, or em- ploying abroad a part of the metallic reserve in addition to the amount permitted by the preexisting lavv^, the pro- 153 National Monetary Commission portion being increased from 7 per cent to 1 1 per cent ; or in case the minister of the treasury should not think best, for considerations of a monetary nature, to allow further em.ployment of the metallic reserve, the banks were rewarded by a discount up to a fixed amount of the tax on circulation; and finally, by being allowed a gradual reduction of the said tax on circulation from i lira to 50, 25, and 10 centesimi per cent. Beginning with the year in which the tax was reduced to this last rate, the State was to share the profits of the banks of issue, at the ratio of one-third of the profits between 5 and 6 per cent on the paid-up capital, for the Bank of Italy, and the free capital and ordinary statutory reserve for the Bank of Naples and the Bank of Sicily, and one-half of the profits in excess of 6 per cent for the three banks. Other provisions granted for a longer period the reduc- tion of taxes and supertaxes on conveyances of property, purchases afnd sales real estate, transfers of credits and conveyances at the banks of issue of the real estate adjudged to their respective credit foncier departments. These provisions, intended to facilitate and hasten the liquidation of the burdensome inheritance of the past, were, like the others contained in the preceding laws, in- spired by a lofty sentiment of justice, inasmuch as the Government wished to acknowledge by them that the State had had its share of responsibility in the banking ruin. The fact is that this very banking ruin saved the country, at a most difficult moment, even greater disasters. 154 The Banks of Issue in Italy But in order to make easier the attainment of the ends at which the Government was aiming, it was needful to provide again to regulate the relations of the banks of issue with their respective realty credit branches in liquida- tion, clearly separating the two administrations. It has already been seen that the credit of the realty branch of the Bank of Italy amounted to more than 49,000,000 lire; and we have briefly outlined the provisions taken for the systematization of this account current and the satisfactory results obtained. We should add here that the Bank of Naples and the Bank of Sicily had, respect- ively, accounts of 46,000,000 lire and of 2,500,000 lire against their realty credit branches. There were in all about 98,000,000 lire of credit foncier deficits in liquida- tion which were burdening the institutions of issue and the circulation, and for which it was necessary to provide to prevent the situation from getting worse in this particular respect. As for the Bank of Italy, it was agreed that it should deduct 30,000,000 lire from the valuation of its own capital, reducing it to 240,000,000 lire nominal with 180,000,000 lire paid up; and that, having closed the account current by the transfer to the bank of property and securities belonging to its realty credit branch, the bank could make loans to it on State securities or on securities guaranteed by the State at an interest not lower than 3.50 per cent. The faculty was given to the credit foncier to maintain a constant circulation of realty bonds to the maximum amount of 220,000,000 lire, with the creation of new issues of bonds exclusively on the real estate holdings 155 National Monetary Commission of the bank; the bank in turn could obtain loans on its property also from other credit foncier institutions. The surplus of the credit foncier was to be maintained in the constant ratio of one-tenth of the effective circu- lation of the realty bonds. The bank could liquidate on account of the credit foncier the excess of the surplus beyond the tenth of the total realty bonds outstand- ing. But the bank never availed itself of this power and left the fund invariably at the sum of 30,000,000 lire, which at the end of 1908 exceeded by about 19,000,000 lire the amount required by the ratio of 10 per cent of the realty bonds in circulation, which amounted to 111,081,500 lire. Besides the ordinary surplus prescribed by the law, the credit foncier of the bank was obliged to deduct from the annual profits 300,000 lire to constitute, together with the interest accrued, an extraordinary surplus to be in vested in State securities or securities guaranteed b}^ the State. By the law of July 7, 1905, concerning provisions in favor of borrowers of the credit foncier of the former Banca Nazionale and the Bank of Sicily, the requirement of keeping the above surplus, which was recognized as unnecessary, was removed. And since the Bank of Italy, along with the obligations imposed b}^ the law, also had the rights that came to it from the agreement established in the treaty with the Government on October 30, 1894, which had put upon it the burden of the liquidation of the Banca Romana, a new agreement between the Government and the bank was needed to modify the provisions then in force, also because among the new provisions there was, as we have i.=i6 The Banks of Issue in Italy seen, the reduction of the capital, for which was needed the approval of the meeting of the shareholders. The provisions as a whole were, however, granted in an agree- ment made November 28 of the year 1896, which was approved by the law of March 3, 1898, and ratified, as to the matter of the reduction of capital, by the shareholders' meeting held March 28, 1899, in which the statutes of the bank were accordingly modified. For the Bank of Sicily provisions were made almost analogous to those for the Bank of Italy, aiming at closing the account current with its realty credit branch. To this effect it was stipulated that 2,000,000 lire should be deducted from the ordinary reserve of the bank and charged to loss by unrealizable real estate operations. The situation that presented itself in the matter of the Bank of Naples was more difficult, considering the gravity of the condition of its realty credit branch, which was a serious menace to the bank, itself already in a sufficiently precarious condition. The Government, anxious as to the consequences that would follow the failure of this ancient institution, especially in southern Italy, decided to take exceptional provisions, and to cause the State to intervene directly under the form of suretyship and fiscal reliefs. With regard to the credit foncier it was in fact stipu- lated that its certificates, which bore interest at the rate of 5 per cent gross, should be withdrawn and replaced by others bearing 3.50 per cent net of any taxation. The State guaranteed the payment of interest on the certificates and their amortizement. The debt repre- sented by the realty bonds outstanding would be 157 National Monetary Commission amortized in fifty years, through a constant annual pay- ment, including the interest at the rate of 3.50 per cent. The realty bonds were to be cancelled according to the conditions established beforehand, except for the fa- cilities granted by the prolongation of the terms, in con- formity to the law. The bonds of the credit foncier should be accepted in payment of loans at a value to be determined every six months, on the basis of the average price for the preceding six months in the principal stock exchanges of the country, increased by 50 lire. This was to avoid artificial speculation in prices on the part of bor- rowers. If the average value ascertained should be over 450 lire, the bonds would be accepted at par. The ex- cess resulting between the payments made by borrowers in reduction of the capital debt of the loan, and the quota of amortization included in the constant annuity to be used for cancelling the bonds in fifty years, v/as to be invested, up to the time of total cancelling of the bonds, in State securities or securities guaranteed by the State, and set aside in a special fund destined for the payment of the interest and reimbursing such bonds as still remained in circulation after the cancellation of the corresponding operations. In the law we are now examining, additional provisions were made regarding the closing of the account current of the bank of Naples with its credit foncier and the reim- bursing of the credit of the bank through the conveyance of 5,000,000 lire worth of real estate or mortgages, and by payment to the bank on the part of the credit foncier of the total of the personal property tax on the interest of the realty bonds and the tax on the circulation of these 158 The Banks of Issue in Italy bonds which were made good by the State in favor of the bank. The sums paid over to the bank were to be in- vested in state secm-ities or securities guaranteed by the State to form, with the accrued interest, a fimd to serve as guaranty of the credit of the bank to its own credit foncier. For the remainder stipulations were made similar to the ones established for the Bank of Italy and the Bank of Sicily to f acihtate the loans to be made to the credit fon- cier departments. But the bank of Naples itself needed special, urgent provisions directed to reconstruct, within not too long a time, its free capital. To this end it was stipulated that the Bank of Naples should invest a sum of 45,000,000 lire of its metallic reserve in state securities or securities guar- anteed by the State; but to avoid the ahenation of the metal it was arranged that the said sum should be de- posited in the coffers of the state treasury, which should become owner of it, and pay, in exchange a like sum to the bank in state notes, that the bank should invest in state securities or securities guaranteed by the State. However, in order not to lessen the guaranty of the hold- ers of bank notes the state securities were converted into registered certificates with a lien in their favor. The in- terest on the state securities was to be used, from half year to half year, in restocking the metallic reserve with gold specie, through a gradual restitution of notes to the treasury, in order to redeem and withdraw a corresponding sum in metalHc money. The operation, begun in 1897, for the entire sum of 45,000,000 lire was reduced on June 30, 1909, to the sum of 23,277,555 lire, with which the Bank of Naples had 39781^—11 II 159 National Monetary Commission obtained, as a result of the above law, a reconstruction of capital amounting to 21,722,445 lire. Meanwhile the Government, in order to assure the exact, efficacious application of the exceptional provisions made in favor of the bank of Naples named as its general director Signor Nicola Miraglia, who was then deputy to Parliament, and general director to the ministry of agri- culture, industry, and commerce; a man of broad culture and great energy, who entirely fulfilled the expectations of the Government. 160 Chapter XII. DISORDERS OE 1 898 — THE COMMERCIAL AGREEMENT WITH FRANCE — EXCESS OF SPECULATION — NEW IDEAS IN THE MANAGEMENT OF THE BANK OF ITALY — NOTEWORTHY IMPROVEMENT IN THE FINANCIAL SITUATION. The series of provisions intended to facilitate the re- construction of the capital of the Italian banks of issue and to reform the currency by the liquidation of old operations not easily realized on produced an excellent impression, but it could not give immediate results, partly because in the year 1898 there appeared insurrectional movements in various parts of Italy, particularly at Milan and Apulia. These movements reacted injuriously on the financial and economic conditions of the country. Italian rentes, which had risen gradually again in Paris from the minimum quotation of 78, to which they had fallen in 1896 as a result of the military disaster in Africa, to the maximum quotation of 96.65, fell again to 87.45, and exchange which in 1897 had reached the minimum rate of 104.35 ^^^^ to 109.60. The significant features of the situation at that period bring clearly into evidence the damage that may be caused a country by political agitations and excessive speculation. The latter, in fact, after a brief period of inactivity following the decline in prices which came in 161 National Monetary Commission 1897, as a result of the disaster at Adowa, and in the be- ginning of 1898 because of insurrectional movements, seemed to gain fresh vigor and set to work with the in- tention of making a prosperous campaign to advance prices, being encouraged in a particular way by the com- mercial agreement with France obtained by the Rudini ministry. This agreement produced an excellent im- pression in the country, not only because it revived trade, to the advantage of both countries and especially Italy, making due allowance for Italy's condition of inferiority to France, but also because it cancelled an ugly page of ill feeling and misunderstanding between the two sister nations that other pages, glorious and fraternal, had inscribed together on the battlefield. Meanwhile, however, the Rudini ministry, weakened by events that took place in the country and vigorously attacked by the constitutional opposition which had found an alhed opponent in the extreme left, enraged as it was by the violently energetic measures with which the inin- istry had conquered the revolt and restored order, handed in its resignation without even waiting for a vote of the Chamber. The excessive impetus given to affairs of a speculative nature caused great harm, thus retarding the benefits of the commercial Franco-Italian agreement, which became then very evident in the field of industry. The commercial movement of Italy, which had been represented in the year 1897 by a sum of 2,383,000,000 lire, exports and imports together, rose to 2,617,000,000 lire 162 The Banks of Issue in Italy in 1898 and to 2,938,cxx),ooo lire in 1899. The excessive activity of speculation is clearly shown by the following variations in the prices of the principal securities: Banca d'ltalia Banca Commerciale . . . . Credito Italiano Ferrovie Meridionali " . . Ferrovie Mediterranee ^ Acciaierie Terni c Raffineria Lig. Lomb. «* Edison Co 1898. 1899. 1.084 782 650 826 508 717 712 789 512 613 419 1. 815 320 486 390 4SO Differ- ence. 302 176 209 77 lOI + 1,396 -f 166 ■f 60 + a Southern railroads. i» Mediterranean railroads. c Temi Steel Works. ^ Ligurian and Lombardian refinery. With regard to the currency it is to be said that the progressive improvement which had been started by legis- lative provisions not only suffered a check, but even showed a backward movement. The many needs created by greater activity, united to those of speculation, made an increase in the paper of the banks, loans and discounts together, from 369,000,000 Hre in 1897 to 538,000,000 lire in 1889. The increase from 50,000,000 lire to 116,000,000 lire in loan operations clearly indicates the intervention of the speculative factor. Corresponding to the increase of operations, the circu- lation advanced from 1,086,000,000 lire to 1,180,000,000 lire, while the metallic reserve to cover the notes fell off 22,000,000 lire, declining from 538,000,000 lire to 516,- 000,000 lire so that the proportion between the reserve and the notes went down from 49 per cent to 43 per cent. 163 National Monetary Commission In Parliament and the press a lively debate was started on the condition of the market and the inefficacious action of the banks of issue in the face of it, to say noth- ing of the encouragement speculation had received from the promptness with which these institutions had fur- nished it superabundant aid. The Government inter- vened in the question, and having subjected the paper of the Bank of Italy to an examination, expressed the opin- ion that certain operations carried on by it under the form of discount of bills not having a commercial origin and guaranteed by securities were not in accordance with the law and requested that all such operations be eliminated. The bank provided, therefore, for liquidating the con- tested operations or for transferring them into others, which should answer in substance and form to the require- ments of the law. The loans of the three institutions fell in 1900 from 116,000,000 to 71,000,000 lire. The events of this period showed that rigid and severe provisions by law, statute, or regulation are not always enough to give a sound direction to the institutions of issue. In the year 1900 the general director of the Bank of Italy, Signor Giuseppe Marchiori, died. In 1894 ^^^ ^^.d succeeded the general director of the Banca Nazionale in the direction of the new Bank of Italy, to which he had rendered useful service. By unanimous consent of the superior council, approved by the Government, Prof. Bonaldo Stringher, a deputy to Parliament and under- secretary of State at the treastiry, was elected general director. 164 The Banks of Issue in Italy Since a change of method then took place in the gov- ernment of the Bank of Italy, it seems a fitting moment to examine the conditions of this bank and of the two others at this time with regard specially to the liquidation of old operations difficult to realize on. And it must be noted here that these operations amounted to much larger sums than those discovered by the inspection made in 1894. Those of the Bank of Italy, placed by the inspectors at the sum of 449,420,000 lire, rose to 519,665,000 through a new audit made by agreement between the minister of the treasury and the bank, by putting in order the account current of the credit foncier as to expenses, pur- chases of credits, and improvements on real estate. At the end of 1900 the operations remaining to be liquidated amounted to 245,000,000 lire; therefore 274,400,000 lire were already liquidated, composed of 56,700,000 lire in payments on bills of exchange, 96,300,000 lire in payments on various credits, 36,000,000 lire in transfers of securi- ties not admitted by law into others admitted by law, and 19,300,000 lire in sales of real estate, making in all 209,000,000 lire. To complete the sum of 274,400,000 lire payment of 30,000,000 lire was arranged for, to be made by the shareholders in conformity to the agreement of 1894; 30,000,000 lire was deducted from the capital established by the agreement of 1896, and 5,300,000 lire were raised on a loan stipulated with the Istituto Italiano di Credito Fondiario. It was then remarked that the effective liquidation was represented by 172,000,000 lire collected in payment of bills of exchange and credits i6s National Monetary Commission for a total of 153,000,000 lire, and of only 19,300,000 lire collected for the sale of real estate; it was said that this result was attained with comparative ease, because the bank had been able to liquidate the part of its assets that was easiest to realize on. It was therefore concluded that the greatest effort was already made and that the bank would not succeed in freeing itself from the heavier burden that still remained. It should be said that such a conclusion was not sin- cerely felt and impartially expressed. It was intended to impress public opinion and to exert pressure on the Gov- ernment and the bank to make the latter sell off in a block its real estate, giving it at a low price to a company that was to be organized. Taken as a whole, the operations not realized on of the three institutions amounted at the end of 1900 to 373,261,839 lire. With the year 1900 there began in Italy a period of financial solidity and economic progress. The ponderous obstacles against excessive expenditures raised by the Honorables GioHtti, Sonnino, and Luzzatti; the determina- tion already made by Sonnino and energetically continued by Luzzatti to cease making any issues of bonds so that through the proposal of Signor Luzzatti, there were in- cluded in ordinary expenditures the expenses for the construction of railroads, for which provision had been made until then by issuing bonds; the vigorous im- pulse given to the industrial movement; and the right administration of the banks and currency — all these things produced a salutary effect throughout the country. 166 The Banks of Issue in Italy The budget closed in the years named with surpluses as follows : Lire. 1 899 5 , 000, 000 19CX) 41, 000, 000 1901 32, 000, 000 1902 69, 000, 000 1903 34, 000, 000 1904 48, 000, 000 1905 63, 000, 000 The commercial movement expanded prosperously. From 2,938,000,000 lire in 1899 it rose gradually to 3,795,000,000 lire in 1905. Exchange, which still remained at 108.50 in 1899, went down gradually until it reached in 1902 the rate of 98.89, fluctuating a little above or a little below par in spite of the fact that Italy was redeeming from abroad large sums in government rentes and other securities. All this showed clearly that Italy had now become a creditor country. The relatively small quantity of Italian securities still owned abroad were in the hands of capitalists who kept them as permanent investments, and no longer constituted an uncertain element of disturbance for the monetary economy of the country. The Paris Bourse, on which the whole Italian market had depended in the past, indicated and still indicates to-day, on a few days of the week only, the price of Italian government stock, henceforth entirely unspeculative. It had advanced on the Paris market from 96.75, the maximum price of 1899, to 106.60, the maximum price of 1905. As a result of this new situation, Italy, which was once obliged to provide for payments to be made abroad, J67 National Monetary Commission on account of the State and the country, by shipments of metal or a continual stream of new bond issues, began instead to receive annually important sums of gold and sil- ver that flowed into the coffers of the banks of issue, which gave bank notes in exchange. Their metallic reserve, which amounted to 600,000,000 lire, of which 61,000,000 lire were a cover for sight liabilities, went up at the end of 1905 to 1,076,000,000 lire, of which 78,000,000 lire were a cover for sight liabilities. The circulation increased from 1,180,000,000 lire in 1899 to 1,406,000,000 lire in 1905, and the ratio between the metallic reserve and the notes, which had fallen in 1899 to 43 per cent, went up gradually to 70 per cent, while at the same time the ledger of discounts and loans of the banks of issue, which was now purified, aiding and seconding the economic earnings of the country, increased from 318,000,000 lire in 1897 to 589,000,000 lire in 1905. Meanwhile the work of improvement of the banks of issue was progressing. These institutions were continu- ing to liquidate operations not realized on, and were pro- viding in conformity with the law to reconstitute their capital. The activity of the Bank of Italy in 1900 was, in this respect, energetic and profitable. Having pro- vided for systematizing its relations with its credit foncier in liquidation, the Bank, as we have seen before, operated to good advantage the conversion of its realty bonds. Because of the importance it had for public interest, as well as for the Bank of Italy and the Bank of Naples, mention should be made here of the agreement entered into between the Government and the two banks in order 168 The Banks of Issue in Italy to assure the completion of the work of the sanitation of the city of Naples, an undertaking which had been decided upon after the outbreak of cholera, which plunged that beautiful city into mourning in the year 1884. The Bank of Italy and the Bank of Naples, which were largely in- volved in the '' Societa per il Risanamento di Napoli," con- sented to contribute the sum of 8,000,000 lire, of which 7,200,000 lire was furnished by the former and 800,000 lire by the latter, while the State participated with 7,000,000 lire. The sum to be used for this purpose was to be taken from the guaranty funds of the respective realty credit department, to which it should be restored at the charge of the banking administrations, by annual quotas, during a period of twenty-five years, until the liquidation and realization of the credits of the two banks should have permitted the integral reimbursement of the sum still due the realty credit department. To these, meanwhile, the banks themselves ceded for their respective amounts the mortgages already made out in their favor on the property of the Societa per il Risanamento di Napoli. The Bank of Italy and the Bank of Naples were further authorized to make the Societa del Risanamento loans for fixed sums at an interest of 3.50 per cent. As a result of the financial assistance given toward the completing of the sanitation of Naples, the Bank of Italy and the Bank of Naples were authorized to deduct from the amount of operations not realized on that must be liquidated within 1908, the respective credits not liqui- dated against the Societk del Risanamento. Meanwhile, along with the improvement of the financial conditions of the State and the national economy, improve- S69 National Monetary Commission ment likewise began to be evident in the real-estate market, whether as a result of the gradual increase of the popula- tion in Rome and other centers, or through a spontaneous return to these values of the capital which, owing to the high price of transferable securities and the expectation of a conversion of the pubHc debt, now considered ripe, was less disposed to investment in these securities. It was then that with a happy insight into the situation which was taking shape the general director of the Bank of Italy con- ceived the plan of making a more rapid and convenient transfer of the real estate that was serving as a guaranty for the operations not reaUzed on, through conveyances of property to building or construction companies. The bank had now got beyond the period in which the narrow limits of the law on the one hand and the depression of real- estate values on the other placed it in a position of infe- riority toward the market. The fortunate results obtained from the patient attention given to its own building up and the favorable situation in general had now placed the bank in a position to treat on a basis of equitable condi- tions. Of the final result of the operations carried through by the Bank of Italy from 1900 we shall speak later. It is enough to state here that the plan conceived by its general director was not long in giving good results, since at the end of the year 1905 real estate sales made to building and construction companies already amounted to about 45,000,000 lire and operations not realized on still to be liquidated amounted to 84,369,400 lire, about 87,000,000 lire having been made good with the fund put aside by the amounts deducted from the annual profits. fjo Chapter XIII. THE CONVERSION OF ITALIAN RENTES AND ITS EFFECT ON THE MONEY MARKET — THE CRISIS OF 1907 — MODIFICA- TIONS OF THE BANKING ACT. As we have already seen, public opinion in Italy now considered the market prepared to make a conversion of Italian rentes 5 per cent gross (4 per cent net) , especially as a former conversion of domestic 4^2 per cents to 3 J^ per cents net had been successful. And, indeed, with a finan- cial situation like that in Italy, the strength of which was daily increasing through an uninterrupted series of rela- tively notable surpluses, the belief did not appear un- founded that Italy could reduce the burden of interest on the great body of its public debt by means of an honorable operation in conversions. Already various negotiations made with this purpose in view had had to be suspended, because of numerous difficulties of a monetary or political nature arising in the international market. The war be- tween Russia and Japan kept the conversion from being carried out in 1 905 ; but in the following year under the ministry presided over by Signor Giolitti, in which Signor Giuseppe Majorana was minister of the treasury, the great operation, with the help of Signor Luzzatti and of the general director of the Bank of Italy, was accomplished in a most fortunate manner, thanks especially to the prompt cooperation of French high finance, which wished to give Italy a mark of special sympathy. The conversion was made by the reduction of the inter- est from 4 per cent net to 3^ per cent net, with a further 171 National Monetary Commission reduction to 3K per cent after five years. The result of the operation may be summed up as follows: Out of a sum of 8,100,434,840 lire the reimbursement at par was asked for 4,689,700 lire, of which 1,661,900 lire were domestic and 3,027,800 lire foreign. It may indeed be asserted that never in any country has an operation of conversion of this importance had such a brilliant success. But the legitimate satisfaction of Italy in this auspicious event, which crowned a long series of sacrifices and of sound and fruitful activity and economy, was to be in a short time, partly because of this very event, tempered by the arrival of a speculative crisis which produced a serious disturbance of the money market, with an inevitable reflex action on the general conditions of the economic structure. Already, beginning with 1905, the improved financial conditions of the State and the eco- nomic conditions of the country had provoked a speculation for the rise of all securities, which was pointed out by a few unheeded observers as extremely exaggerated and dangerous. The price reached by the aggregate of Italian securities represented a 70 per cent increase over their nominal value, without, of course, any justification for this increase by a corresponding increase in prosperity in banking, industrial, and commercial undertakings, and by larger dividends. On the contrary the securities that rose the highest in price were precisely those of companies recently created, which had not yet distributed any dividends, and also those of companies which had distributed dividends corre- sponding to 2 or 3 per cent of the current price of the shares. The watchword, faithfully passed on by the body 172 The Banks of Issue in Italy of speculators, was that they must discount in good season a brilliant future of economic prosperity. In the autumn of this same year of 1905 there was a brief pause that occasioned a decline in prices; however, speculation for the rise was not abashed, but on the con- trary showed the inclination to resume with greater eager- ness its place in the fight, being encouraged still more to continue in its work by the negotiations already mentioned for the conversion of government stock, which was regarded as imminent and which would cause new currents of capital to converge on banking, industrial, and commercial secu- rities. The quotation on the stock exchange of these securities, which amounted in 1904 to 2,420,000,000 lire had risen in 1905 to 3,280,000,000 lire and in 1906 to 3,720,000,000 lire, with an increase in the three years of 1,300,000,000 lire, or about 58 per cent, while the paid-up capital of the joint-stock companies had increased merely for the greater part by the formation of new companies by 753,000,000 lire, advancing from 1,585,000,000 lire to 2,338,000,000 lire. These figures alone are enough to give a clear idea of the degree of speculative inflation which the Italian market had reached and to show how amply justified was the fore- sight that the edifice artificially reared and without any solid foundation must inevitably collapse. And, indeed, it would have collapsed in a short time even without the crisis that seized at this moment the American market and those of several European countries. As it had always happened in Italy in like cases, as soon as a certain stringency in the money supply made itself felt, as soon as the higher contango made speculators 173 National Monetary Commission feel tardily all the gravity of the situation into which they had recklessly plunged, and gave an inkUng of imminent danger of disaster, on all sides the Govern- ment and the banks of issue were called on to intervene. With heedless boldness an increase of bank circulation was called for, under the pretext that the needs of industry and commerce required a larger money supply. But the Government and the general director of the Bank of Italy, in agreement with the general directors of the two other banks, decided that frenzied and heed- less speculation ought not to be subsidized, and that in- stead it was desirable to liquidate a dangerous and unten- able situation, using at the same time all due precaution to prevent the evil from spreading to sound parts of the country and attacking the living sources of industry. Thus, as soon as the grave difficulties were known in which the Societa Bancaria Italiana was involved, because of the tying up of a large part of its capital and serious and irreparable losses; as soon as the panic spread in the country because of the apprehension that, through the swift contagion of terror it might be communicated to other institutions, the general director of the Bank of Italy was ready to intervene to avoid the disaster that was threatening. He consented to put at the disposal of the Societk Bancaria ItaHana the capital needed to meet the pressing necessities of the situation, and obtained also to this end the contribution of banks and bankers who consented to furnish a part, though not an important part, of the amount needed. The general director of the Bank of Italy asked, however, that the administrators of the company should make themselves personally liable; 174 The Banks of Issue in Italy that the capital of the company should be reduced from 50,000,000 lire to 20,000,000 lire and should then be restored by a new payment of 20,000,000 lire; in this way the capital was to be reduced to 40,000,000 lire. The immediate arrangement of the position of the Societa Bancaria, which as a result of this energetic action found itself in a most solid situation, put an end to the alarm in the country. The Bank of Italy had giA^en the vSocieta a total credit of 42,000,000 lire. At the end of May, 1909, the credit was reduced to about 5,000,000 lire through discount of commercial bills and loans on securities. This assistance, very different from the forms of aid that had been afforded twenty years before, showed how effective a safeguard for a country is the existence of a great bank of issue in moments of difficulty and dis- turbance; and it showed further that the most difficult ordeals can be surmounted and the most severe disasters avoided by comparatively insignificant means, when there is no lack of precise perception of the situation and promptness in meeting it. The same thing, which has been observed on other occa- sions, appeared contemporaneously in even more impress- ive form in the prodigious effect produced on the interna- tional market by the prompt intervention of the Bank of France, which succeeded in arresting the panic and dimin- ishing the intensity of the crisis in the United States, in England, and, together with the more direct aid of the Bank of Austria- Hungary, even in Germany, by putting at the disposal of the Bank of England not more than 82,000,000 lire. 39781°— II 12 T75 National M o n et ai^ y Commission It must necessarily seem inexplicable that the markets of colossally rich countries should find themselves exposed to profound disorders and grave disasters because of the lack of less than a hundred miUion lire. The reason is that crises are considerably aggravated by fear, which causes the disappearance from the market of a great part of the capital at the very moment when there is greatest need of it. This psychological cause of the aggravation and prolonging of crises is instantly removed when it is known that the great institutions are disposed to intervene, be- cause this is sufficient to restore confidence and bring timid capital out of its hiding places. But in addition to this, it must be stated that in moments of crisis it is always a relatively limited amount that is needed to meet the differences in operations which in the great body are arranged by mutual compensations. The examples afforded by the history^ of crises and repeated in 1907, show once more not only the great use- fulness of the existence of powerful banking institutions but also the absolute necessity that their supreme direction should be intrusted to men of great ability who under- stand the vast problems of credit and monetary econ- omy in which are summed up, as in a synthesis, all the problems that touch the economic life of a country. For it is not enough that the person in supreme con- trol of a great institution of issue should have an ordinary business sense such as must be possessed by a manufacturer, a merchant, or the director of a credit institution, if his affairs are to be well managed. It is undoubtedly imperative that a bank of issue shall accept for discount only bills of exchange that represent valid T76 The Banks of Issue in Italy transactions, promptly payable on maturity. But the efficient cooperation of all the directors provides for that, especially as they are assisted by a large staff of dis- count advisers. Together with the duty of watching closely the quality of the operations concluded by the establish- ments, a higher function is incumbent upon the general director of a great bank of issue ; he should have a mind capable of understanding the grave problems of monetary economy that miay suddenly force themselves on his attention and that he must be able to solve without hesi- tation or uncertainty, with practiced speed, in order to ward off a convulsion from tlie country or, by prompt intervention, to lessen its disastrous results. Therefore, a great institution of issue, while it is able in tranquil and normal times, by a wise distribution of credit and a correct regulation of the currency to give vital aid to every sound form of activity* and to be a valuable element of economic well-being, can then perform the important functions of healing and effacing the consequences of any misfortune that falls upon the country. Nor in order to perform properly this very lofty function is it ahvays enough to study assiduously the economic and monetary conditions of one's own country; since a disturbance may also be determined by the reflex of a crisis that breaks out in other countries for political, monetary, or specu- lative reasons. Meanwhile, though the after effects of the crisis are not entirely done away with, even yet, especially in the harm done to certain industries, the situation was no longer acute, and Signor Carcano, minister of the treasury, was able to turn his attention to several timely modifications 177 National Monetary Commission in the banking law. Although firmly convinced that the base and limits of the paper currency ought not to be substantially modified he recognized that the recent experience had shown that it lacked the necessary elas- ticity to enable the banks of issue to adapt their work- ings to the changing needs of the market, especially in case of monetary stringency. The resolution presented by Minister Carcano w^as ratified by Parliament and became a law December 29, 1907. He proposed a slight increase of the circulation, as follows : For the Bank of Italy from 630,000,000 to 660,000,000 lire; for the Bank of Naples from 190,000,000 to 200,000,000 lire; for the Bank of Sicily from 44,000,000 to 48,000,000 Hre. The irreducible metallic reserve to be left as guaranty for holders of notes was, however, to be increased : For the Bank of Italy from 300,000,000 to 400,000,000 lire; for the Bank of Naples from 90,500,000 to 1 20,000,000 lire ; for the Bank of Sicily from 21 ,000,000 to 28,000,000 lire. The Bank of Sicily continued to enjoy the privilege already granted by the laws of 1906 and 1907 of an increase of 10,000,000 lire in bank notes, to be used exclusively for loan and discount operations in favor of the sulphur industry. Minister Carcano proposed further, along with other stipulations of minor importance, that the limits of the issue of bank notes beyond the normal circulation and the relative taxes on circulation should be modified in the following manner: For the Bank of Italy from 45,000,000 to 50,000,000 lire; for the Bank of Naples from 14,000,000 to 15,000,000 hre; for the Bank of Sicily from 3,500,000 to 178 The Banks of Issue in Italy 4,000,000 lire, with the payment of a tax equal to one- third of the discount rate. In addition to the above sums, and up to double their amount, it should be modified by a tax equal to two-thirds of the discount rate. For subsequent issues, and up to the amount of: Lire. For the Bank of Italy 150, 000, 000 For the Bank of Naples 45, 000, 000 For the Bank of Sicily 12, 000, 000 by a tax equal to the discount rate. Further increases of circulation or deficiencies of metal- lic reserve were to pay a tax of 7.50 per cent. Discount operations at a rate lower than normal in favor of people's banks and other intermediary institu- tions were increased : For the Bank of Italy from 70,000,000 to 100,000,000 Hre; for the Bank of Naples from 21,000,000 to 30,000,000 hre; for the Bank of Sicily from 6,000,000 to 9,000,000 lire. By this law was also approved an agreement entered into between the Government and the Bank of Italy to decide jointly certain questions that had arisen regarding the payment of the tax on circulation, and it was estabHshed that the bank was to pay under this head fixed sums; on the other hand, it should be authorized to comprise among the profits to be distributed to shareholders, for the years 1907 and 1908, a part of the income of the fund set aside to meet the losses resulting from the liquidation of old operations difficult to realize on. 179 Chapter XIV. THE RESTORATION OF THE BANKS OF ISSUE. With the year 190S, according to the provisions of the law, was completed the laborious work of restoration of the Italian banks of issue, and it was completed under more satisfactory conditions than there had been reason to foresee. The Bank of Italy in the period of eight years succeeded in liquidating operations for 245,000,000 lire, of which more than 108,000,000 lire were represented by real estate which had come into the hands of the bank for various credit accounts. We should state that the Bank of Italy not only did not profit by the statutory reserve to wipe out unreaUzable operations, as the law would have permitted, but increased extraordinarily this reserv^e, carrying it by December 31, 1909, to the maximum total of 48,000,000 lire. The sales of real estate gave returns of more than 11 6,000,000 lire, of which 82,500,000 lire helped the liquidation of old operations, while the remainder was taken up by mortgages that encumbered the property sold. To complete the carrying out of the scheme for selling real estate in lots, about 14,000,000 lire in rural property, of which 10,865,000 lire were included in the account of operations not in liquid form, had been sold in 1907 to the Istituto di Fondi Rustici. The general director of the Bank of Italy, at the general meeting of shareholders held March 29, 1909, in summing up the work accomplished by the bank during fifteen 180 The Banks of Issue in Italy years, certified in conclusion a surplus fund of 32,000,000, in addition to the surplus which already resulted in the credit foncier in liquidation. This fund would serve to make up the deficit of the liquidation of the Banca Romana, for which the Bank of Italy must continue setting aside annually 2,000,000 lire until the end of 19 13. Considering that to make up for the losses of the liqui- dation of operations not in liquid form or not allowed by law, the shareholders contributed out of the annual profits a sum which together with the accumulated interest amounted to 1 13,000,000 lire, and also 60,000,000 lire capi- tal, of which 30,000,000 lire was paid up without increase of capitalization and 30,000,000 lire deducted from val- uation of capitalization — that is, 173,000,000 lire — it is seen that the total loss was, in round numbers, 140,000,000 lire. The surplus of 32,000,000 lire, remaining as a final result of the liquidation of old operations, gave rise to the question as to the use to be made of it, taking into consideration the stipulations contained in the agreement made with the Government in 1894, which, foreseeing precisely this contingency of a surplus, authorized the bank to pay back gradually to stockholders the 30,000,000 lire capital paid by assessment that year. The Bank of Italy considering that the cash fund for pensioning employees needed replenishing, since it had been almost used up in the pension service, inasmuch as the conditions of the cash balance of the bank did not permit making annual assignments of the sums needed for this service, and considering, moreover, the opportunity of con- tributing a special reserve to meet any contingency, 181 National Monetary Commission decided to arrange with the Government an agreement in which it engaged, in substance, not to restore to the share- holders the 30,000,000 hre capital paid by assessment and to employ for the above ends the surplus of 32,000,- 000 lire and any other surpluses that might result from disposing of extraordinary assets. It is worth while reproducing here from the report of the general director of the Bank of Italy the following table, which shows the situation of the bank at the end of the years 1894. 1900, and 1908: (Expressed in million lire.] Gold Silver Domestic discounts Loans Securities Foreign discounts. . Foreign credits . . . December 3 : [894. LIABILITIES- Circulation Demand liabilities and accounts current 826.4 210.3 292 7 300. 67 8 46. 184 2 258 27 7 35 71 8 175 23 I 72 10 5 20 [908. Ratio between the reserve (deducting that for demand | liabilities) and circulation per cent . . i 43 39 820. 4 190. 5 48.27 932 no 388 77 164 70 26 389.1 195-7 77-46 However, by December 31, 1908, the Bank of Italy had liquidated more than half a billion in operations of difficult realization and of a nature different from operations which banks of issue, in every well-regulated banking system, should undertake ; the bank succeeded in doing this after 1S2 The Banks of Issue in Italy providing to meet and make up a loss of 140,000,000 lire resulting from, the liquidation of these operations, after bringing up the statutory reserve to the sum of 48,000,000 lire with an increase, after 1894, of 5,500,000 lire, holding besides among special reserves more than 5,000,000 lire to provide for a possible decline in the price of State securities owned by it, and for other purposes, with more than 16,000,000 lire of extraordinary reserve, already realized to the am^ount of 10,000,000 lire, the remainder still to be reaUzed. So, in all, the bank has a reserve of about 70,000,000 lire. This much is given from the point of view of the capital and surplus. From the economic point of view, the bank appears on December 31, 1908, with an increase of 682,000,000 lire in the metallic reserve — from 360,000,000 lire to 1,042,000,000 lire — of which 640,000,000 lire were in gold; with an increase, besides, from 33,000,000 lire to 97,000,000 lire in the discounts and foreign credits pay- able in metallic money; with an increase of 563,000,000 lire in the circulation, which had advanced from 826,- 000,000 to 1,389,000,000 lire and with an increase from 43-39 per cent to 77.46 per cent in the ratio between the metallic reserve and the notes in circulation. 183 National Monetary Commission The three Italian banks of issue show in the aggregate, from December 31, 1894, to December 31, 1908, the dif- ferences indicated in the following table : [Expressed in million lire.] Gold Silver Foreign discounts. . Domestic discounts Loans Securities Foreign credits LIABILITIES. Circulation Demand liabilities and accounts current Ratio between the reserve (deducting that for demand liabilities) and the circulation per cent . December 3 : 1908. Differ- ences. 433 i 80 \ 23 ■ 310 67 116 \ "\ 126 ' 179 132 124 550 117 259 32 862 325 + 746 + 52 + 101 + 240 + so + 143 + 20 +736 + 18 + 32 As may be seen, the metallic reserve, including the part represented by foreign credits and foreign treasury bonds, has increased from 479,000,000 lire to 1,391,000,000 lire, and, without taking into account the part that is to guar- antee sight liabilities at the ratio of 40 per cent, has gone from 42 to 74 per cent of the notes in circulation, which have increased from 1,126,000,000 lire to 1,862,000,000 lire. The discount operations of the banks, which amounted in 1894 ^o 310,000,000 lire (in which were still included, for large sums, operations not easily realizable, which were later accounted separately), are increased to 550,000,000 lire, and, as has been shown by the accurate audits 184 The Banks of Issue in Italy carried out, represent commercial paper surely payable on maturity; whereas, in the meantime, there has disap- peared from the bank statements with the liquidation of the old operations every trace of. the heavy inheritance from a melancholy past, a result that is really gratifying. The circulation of the Italian banks of issue now answers in its entirety to the most severe standards of banking technique, since in addition to commercial paper and State securities and securities guaranteed by the State, it is protected by a very large metallic reserve and represents, for a noteworthy part, true and proper certificates of coin. For this reason, and also as a result of the withdrawal from abroad of an enormous body of Italian securities, the disturbing element of the money market has been removed and exchange remains nearly at par and is subjected only at intervals to the fluctuations, in the vicissitudes of inter- national trade, to which is subject even the exchange of countries possessing the firmest monetary basis. And, indeed, considering that after an adverse trade balance of 1,184,000,000 lire in 1908, there was one of 1,245,000,000 lire in 1909, in which is included a greater importation of grain to the amount of about 116,000,- 000 lire, in comparison with 1908; considering that the remittances of ItaHan emigrants in the United States were considerably less, and that likewise, because of the crisis of 1907 and the earthquake of last year, the number of tourists coming to Italy was greatly dimin- ished; considering that credits made to Italy by discount of bills of exchange have not been renewed by several 135 National Mo n et ar y C om m is s i o n foreign markets since the advance in the price of money at London and BerUn and elsewhere; and finally, consid- ering that the State has been obliged to make payments of large sums abroad for railroad materials, one cannot fail to recognize that Italian exchange, which has not risen above 100.60, has stood the test of fire. In this connection it is really interesting to note that while in 1882, notwithstanding the recent abolition of forced currency, effected through the importation of 644,000,000 lire in gold, Italian exchange advanced sud- denly from 99.32 to 104.22 because of the reflex of the speculative crisis that seized upon the French market in that year, in 1907, on the other hand, exchange fluctu- ated only between the two extreme points of 99.65 and 100.24, in spite of the fact that the crisis of the home mar- ket was aggravated by that of the foreign market. It would be impossible to demonstrate in a more elo- quent manner the difference between the situation of Italy at the two dates mentioned and the difference that exists with regard to exchange, between the conditions of debtor countries, with disordered finances and currency, and those of countries that are in the respects just men- tioned in a norm^al condition. There is no doubt that if the domestic and foreign crisis of 1907 had found Italy in the same condition as in 1882 and 1893, exchange would have had a sudden and considerable advance. 186 Chapter XV. THE PROGRESS OF ITALY FROM 1 894 TO 1908 IN COM- PARISON WITH ENGLAND, FRANCE, GERMANY, AUSTRIA- HUNGARY, SPAIN, AND BELGIUM. And yet, the mere statement of the progress made by Italy in the last fifteen years can not give in the figures in which it is expressed sufficient elements to permit a just estimate of its importance, since the degree of progress or retrogression of a country can not be considered in and by itself, but must, in a proper and right judgment, be compared with the progress or retrogression of other countries in general, and in particular of those with which it finds itself in more immediate contact and in closer and more frequent business relations. A country that has advanced in a given period, in a given proportion, can not consider itself stronger, if, in the same period, other countries have advanced in much greater proportion, because it will find itself, in relation to these countries, in a position of relative inferiority. It is therefore timely to make a comparison between the principal financial, economic, and monetary indices of Italy and those of other countries from 1894 to 1908, in order to gain a clearer and more precise idea of the progress made by Italy. 187 National Monetary Commission The circulation of the principal European banks of issue has had, from 1894 to 1908, the following variations: tExpressed in million lire. Bank of England Bank of France Imperial Bank of Germany Bank of Austria-Hungary . Bank of Spain Bank of Belgium Italian banks t894. 646 3.481 I. 295 1,066 909 446 1,126 t9o8. 747 5 ■ 225 2. 370 2, 218 I, 645 800 1.862 ! D iffer- ence. 744 07s 152 732 253 736 Per cent. IS 50 83 107 80 79 6S The Italian banks of issue occupy the fourth place, in the increase, in absolute figures of the circulation, coming after the Bank of England, the Bank of Belgium, and the Bank of Spain; and they occupy the third place after the Bank of England and the Bank of France in the per cent of increase of the circulation itself. The metallic reserve has had the following variations : [Expressed in million lire.] Bank of England Bank of France Imperial Bank of Germany Bank of Austria-Hungary . Bank of Spain Bank of Belgium Italian banks 1894. 1908. Differ- : ence. 1 1 1 ^'" 772 1 45 3. 311 4,371 -rl , o6o I, 256 I. 176 - 8o| «644 h I. 612 + 968 •^533 d 1,282 + 749 e 229 /343 + 114 536 1,477 + 941 o Of which 26,000,000 are in foreign paper. ^ Of which 63,000,000 are in foreign paper. c Of which 275,000,000 are in silver and 57,000,000 in foreign paper. d Of which 810,000,000 are in foreign paper. « Of which 99,000.000 are in foreign paper. / Of which 184,000,000 are in foreign paper. Of which 141,000,000 are in foreign paper. Per cent. - 5 + 33, - 6 + 150 + 140 + 50 + 175 188 The Banks of Issue t n Italy The figures relating to the metalHc reserve of the Bank of Spain can not rightly be compared with those of the other banks because of the unduly large amount of silver included in them, which far exceeds the ratio of 25 per cent allowed but not reached by the Italian banks. In order to reduce the metallic reserve of the Bank of Spain to a monetary value approximately comparable to that of the other banks, it seems just, therefore, to add to the amount of gold an amount of silver representing 25 per cent of the total, and to consider the surplus silver at its market value, according to the proposal made by the former Spanish minister of finance, Senor Besada, The reserve of the Bank of vSpain thus made up would be: [Expressed in million lire.] 1894. iyo8. Differ- ence. Per cent. Gold. . 257 64 127 472 157 271 1 + 215 -^ 8j + 93 + 144 + 145 + 113 Silver at commercial valvic . . . Total 448 900 + 452 It appears, therefore, that w^hile Italy occupies, with a slight difference, the third place after France and Austria- Hungary in the increase, in the absolute figures, of the metallic reserve of the banks of issue, it occupies, on the other hand, the first place, at a considerable distance from the other countries, in the proportional increase of the reserve itself from 1894 to 1908, an increase equal to 175 per cent. 189 National Monetary Commission This increase has a greater importance if one considers that gold enters into it in greater proportions than in the other countries, as appears from the following data: [Expressed in million lire] CrOLIX Bank of England Bank of France Imperial Bank of Germany Italian banks Bank of Austria-Hungary Bank of Spain Bank of Belgium SILVER Bank of England Bank f>f France Imperial Bank of Germany .... Italian banks Bank of Austria-Hungar>' Bank of Spain Bank of Belgium [894. 817 2, 070 799 433 326 200 00 I, 242 469 80 29 276 41 [908. Differ- ence. 768 488 919 179 241 I 127 I 883 306 132 308 811 32 - 49 + 1,418 + 120 + 746 + 915 + 272 + 39 359 163 52 279 535 9 Percentage of silver to the total reserve. 1894. 1908. Per cent. Per cent. 00 00 37 20 37 25 15 10 8 19 57 63 32 20 Differ- ence. Bank of England Bank of France Imperial Bank of Germany Italian banks Bank of Austria-Hungary . Bank of Spain Bank of Belgium Per cent. 00 12 - 5 + 11 + 6 — 12 As may be seen, silver forms only 10 per cent of the reserve of the Italian banks. 190 Th Banks of Issue in Italy The ratio between the reserve and the notes in circula- tion has had in the fifteen years the following variations : 1908. Difference from 1894. Bank of England Per cent. 103 83 49 74 .72 55 42 Per cent. -23 Bank of France Imperial Bank of Germany -48 +32 + 12 + 6 - 9 Italian banks Bank of Austria-Hungary Bank of Spain Bank of Belgium In this regard also the Italian banks occupy the first place with an increase of 32 per cent of the ratio between the metallic reserve and the notes. In consequence of the movement which took place in the paper currency and the metallic reserve of the same banks in the period from 1894 to 1908 the total of bank notes not covered by reserve has varied as follows : [Expressed in million lire.] Bank of France Imperial Bank of Germany Italian banks Bank of Austria-Hungary . Bank of Spain Bank of Belgium 1894- 170 39 590 422 461 1908. 8S4 194 38s 606 741 457 Differ- ence. + 684 + 1. 15s - 20s + 184 + 280 + 239 Per cent. + 402 + 2963 - 34 + 43 + 60 + 109 The uncovered circulation alone of the Italian banks has diminished by 205,000,000 lire, at the ratio of 34 per cent. It should be explained here that in the comparisons between the circulation and the metallic reserve of foreign 39781' ■13 191 National Monetary Commission banks and Italian banks no account has been taken with regard to the latter of the part of the reserve which by legal provision was to be held as guaranty for the sight liabilities at the ratio of 40 per cent, and the whole reserve has been placed over against the total of the notes in circulation. It is a question here of an article of the Italian law which has no parallel in the banking laws of other countries, and which there is no occasion to con- sider in the comparative study of the metallic reserves and the circulation, because otherwise the terms of the comparison would need to be altered to the loss of Italy, and this would destroy the homogeneity necessary for an exact comparison. It is a question, in fact, of a legislative provision which can not alter the state of things which should be considered with a unified standard. Nor is it a valid objection that the sight HabiUties of the Italian institutions for which the law requires a reserve of 40 per cent has no parallel in the foreign bank of issue, since they are composed almost wholly of negotiable paper of a kind that does not exist outside of Italy. To raise such an objection would be to conceal a question of substance behind a question of form. Now, the question of substance is that the foreign banks have, like the ItaHan ones, under the form of trans- fers or accounts current, debts that must be considered as a virtual supplementary circulation, which, on the demand of creditors, may increase the real circulation. If, therefore, a reserve is considered necessary against the sight liabilities of the Italian banks, a reserve should also be considered necessary against the other debts of 192 The Banks of Issue tn Italy the same banks and of foreign ones; or at least, since the Italian law is more severe on this point, it would be necessary in a comparative study, to leave out of account the terms of the law, or else extend, through analogy and homogeneity, the informing concept of it to foreign banks also. Given this standard, this is what the relation would be between the metallic reserves and the total of the active circulation, demand liabilities, and deposits in accounts current : [Expressed in million lire.] Bank of France Imperial Bank of Germany Bank of Austria-Hungary . Bank of England Bank of Belgium Bank of Spain Italian banks [894. Circula- tion, de- mand lia- bilities, deposits. Metallic reserve. 4.039. 7 1.894.6 1.095.4 I. 471-3 490. 4 I. I9I-5 1.468.8 Total. 3. 311 I. 256 644 817 228 0448 535 Per cent. 1908. Circula- tion, de- mand lia- bilities, deposits. 5. 3.158. 2.369. 2.09S- 877. 2,094. 2, 187. Metallic reserve. Total. ° 4.371 4 I. 176 2 I, 612 ° 772 ' 343 7 0900 1.477 Per cent. oThe amounts of the metalic reserve for the Bank of Spain have been calculated according to Senor Besada's scheme referred to above. The Italian banks which figure in the last rank in 1894, with a percentage of 36, advance in 1908 to the third rank with a percentage of 67, against 74 for France and 68 for Austria-Hungary. Now that we are on the point of concluding fortunately with the picture of an auspicious ending, the exposition of the perilous vicissitudes of the banks of issue in Italy, and of completing this sketch with a brief outline of the 193 National Monetary Commission principal points of the financial and economical progress of Italy during the fifteen years, in comparison with those of other countries, it should be stated that this outline is all the more necessary in that the new elements to be passed in revicAv can not be considered foreign to those we have just examined; so close and intimate are the ties and so frequent the relations between all of these elements that it is very often hard to distinguish which of them are to be considered as causes and which as effects in the economic and financial vicissitudes of the country. And indeed, as for the increase of the metallic reserves of the banks, through which their note circulation has come to be increased in quantity and improved in quality, is it not due in part to the work of reconstruction of the banks, giving value to their notes, and in part to the greater and more profitable industrial and commercial activity of the country, enabling it to free itself in a monetary way from foreign markets ? And has not this same greater industrial and commercial expansion of the country been promoted or at least effectively helped by the banks of issue ? The industrial and commercial advancement of Italy is clearly shown by the table on page 195, in which is indi- cated the total of the international commercial imports and exports in each of the years from 1894 to 1908, in compari- son with that of other countries. 194 The Banks of Issue in Italy [Expressed in million lire.] Year. 1894 189s 1896 1897 1898 1899 1900 1901 1902 22, 082 1903 ! 20, 975 1904 21, 428 1905 22, 509 1906 22, 585 1907 26, 961 1908 I 24.395 Eng- land. Ger- many. France. 15.693 9, 200 6.928 16, 171 9.398 7.086 18.561 9.846 7. 241 18,737 9. 960 7.67s 18.787 11.375 7.879 Aus- tria. Bel- gium. 20.397 21,956 21, 906 Difference between 1908 and 1894 — per cent . . + 55 1.576 2.46s 2.851 2,862 3. 763 4.457 5.933 7.900 9.325 8.695 + 103 116 486 981 652 818 012 646 894 219 363 3. 139 3.087 3. 179 3, 221 3.417 3. 610 3,820 3. 770 3.818 4. 207 4.320 4. 609 4.791 5. 208 5. 100 2,50s 3.06s 3. 244 3. 262 3.580 3.880 3.917 4.033 4. 133 4. 414 4.676 5. 102 5. 566 6.243 5.958 Italy, Spain. 2, 121 2. 225 2, 232 2.283 2. 617 2.938 3.038 3.903 3.248 3.379 3,473 3. 721 4.420 4,829 4.889 + 64 + 137 I, 292 1.347 I, 606 1,718 1.456 I. 661 1,586 1.539 1.563 I, 646 1, 718 2, 058 I. 912 1.889 1.878 + 45 Italy, as it is seen, comes directly after Belgium, with an increase of 130 per cent in the general movement of its commerce in comparison with 1894. The budget also presents satisfactory data during the fifteen years in spite of the ups and downs passed through by Italian finance. The table on page 196 sums up as a whole the aggregate results of the budgets and the movements of the public debts of the principal countries during the fifteen years. 195 National Monetary Commission Period from i8g4 to igo8. [Expressed in million lire.] Expenditures. Public debt. Surplus ( — ) or Total Deficit (+). from 1 Amount to — Difference. 1894 to j i -OS. ; -rota,. 1 ,^-. ! 1 1894. 1908. Total. Per cent. Italv . ... 28,000 — 630 —2.50 12. 4<;^ I 12,648 + 195 17. 872 +1,122 05.318 +2,875 32, 990 + I, 990 16,403 + 2,930 + 1.56 England German Empire . . . 55,500 +3.500 +6.00 16.750 37,000 — 114 - .30 ; 12.443 54.000 — 390 — . 70 t 31,000 ^^•r ' '°° I--48 X3.473 19, 800 — 334 j + 6.69 + 117.68 + 6. 42 Hungary . . + 21.74 a This is the debt of the German Empire. It one adds to this the aggregate of the debts of the various German states, it appears that the total German debt has increased from 12.183 million lire, in 1894. to 21,218 million lire in 1908. or an increase of 74.16 per cent. It is apparent from these figures that Italy has had a total increase in the budget amounting to 630,000,000 lire, equal to 2.50 per cent of the aggregate expenditure, having also included in the ordinary expenditures more than 300,000,000 lire in expenditures on railroads, whereas the public debt has increased by only 195,000,000 lire, equal to 1.56 per cent. The absolute increase may therefore be considered 435,000,000 lire; to this, in order to give the terms of the comparison the necessary homogeneity, should be added the 300,000,000 lire expended on railroads; and thus, in comparison with the other countries, Italy presents an increase of 735,000,000 lire, without any addition to the debt. 196 The Banks of Issue in Italy Proceeding with the same method of rectification in respect to the other countries, bearing in mind that the increase of debts is generally due to the need of making up for financial expenditures, we shall have the following table: Actual defi- cit in the fifteen years (millions). Per cent of debt to 1894. 1, 122 2, 761 1,600 2, 196 6.69 German Empire 113. 01 Prance 5. 16 Austria-Hungary 16. 29 All this confirms in a sufficiently eloquent manner the fact that Italy, even in regard to State finances, has ob- tained during the fifteen years results that seemed beyond all hope and that place it in the first rank for the impor- tance of the increase of returns and the small increase in the debt. One must consider, of course, with a compara- tive and proportioned standard the progress made in the fifteen years by the various countries, keeping in mind the different degree of economic and financial power of each of them and the possibility of richer countries being able to face financial deficits and bear the burden of an increased debt without its weighing too heavily upon their economic conditions. This, considering the degree of the pressure of taxation in relation to private wealth, and considering the weight of the burden of the debt, would be very difficult, if not entirely impossible, in Italy. 197 National Monetary Commission Therefore Italy should be given credit for the great merit of having grasped the gravity of the situation and its inherent dangers and of having avoided these dangers by improving the situation, thanks to intelligent, ener- getic, and enlightened action. As we have said above, the successive measures taken by the Honorables Sonnino and Luzzatti contributed to put Italian finance on the right road, and particularly the determination to cease from all issues of public securities, including those for building railroads, which are provided for by the ordinary resources of the budget. This determi- nation was called extreme and may still seem so to-day, unless one considers that Italy had abused debts beyond all measure of prudence and proportion, and the burden of these debts far surpassed that of other countries, taking into account the relative private wealth. Here is a state- ment of the situation in this regard in 1897: Sum total and cost of the public debt. Total (millions). Per cent of private wealth. Cost (millions). Per cent of private wealth. Italy 13,000 31, 090 16, 019 15.767 13.972 2.328 24. 07 13-80 6.38 7.17 16. 25 6.8s 703 I, 020 625 637 653 113 1 . 30 England • 25 Austria- Hungary 76 Belgium. . . • 33 It will be helpful now to see what has happened since then in the matter of loans in Italy and the other coun- tries. The following table gives the total amount of obli- gations issued for the past eleven years, distinguishing those of the Government, the provinces, and the com- 198 The Banks of Issue in Italy munes and those of the banking, industrial, and railroad companies : Italy France England Germany Austria-Hungary Belgium Spain Total issues (millions). State, pro- vincial, and communal issues. Per cent. I. 195 13 12.047 18 34.309 35 31.647 37 2,509 47 3.873 44 3. 550 58 ■ Banking, industrial, and railroad issues. Per cent. As may be seen, Italy during the past eleven years is the country that has had recourse to loans for relatively the smallest sum in comparison with other countries, and has had occasion to borrow only 155,300,000 lire on government, provincial, and communal obligations, and 1,039,600,000 lire for issues of stocks and bonds for banking, industrial, commercial, and railroad companies. If one considers the small amount of the issues for the State and for companies, together with the regulation accom- plished of public finances and the economic progress of the country, eloquently proved by the figures of the move- ment of trade, it will be seen that Italy has been able to find within itself the strength to rise from the slough into which it had fallen, and has, by faithful and fruitful work, multiplied the productive capacity of its available capital. From the comparison of the progress of the various countries in the last fifteen years all the relative value of the progress of Italy does not appear, a value that can not fail to attain much greater importance if we consider that Italy was in 1894 in a very serious economic, financial, and 199 National M o-n e t ar y Commission monetary condition, and was obliged from that time to devote a great part of its activity to curing the ills by which it was afflicted before being able to carry on the work of economic reconstruction; whereas, with the exception of Spain and England, which had to bear the expense of the wars in Cuba and the Transvaal, the other countries were able to continue quietly devoting themselves to their economic activity. 200 Chapter XVI. CONCI.USION. The satisfactory results obtained in every field, of which Italy is justly proud, would not, however, have been possible without the accompanying aid of all pro- pitious circumstances; unless, after framing suitable laws, gradually adapted to the modified conditions of the country and the banks, their administration had been scrupulously and profitably carried out; unless, while the banks were bent on improving their own situation, the State had done energetic, active, and vigorous work to establish finance upon a stable and durable footing; and, above all, unless the industriousness of the inhabitants and their powers of sacrifice and economy, reconstruct- ing and increasing the public riches, had efficiently aided the restoration of the banks, circulation, and finance; and indeed, if the Italian people, by the vigorous impulse given to industry, had not opened new avenues of trade; if they had not been aided by the upbuilding and compensatory elements represented by the industrious and economical emigrants who pour into the country plentiful remittances of money, and by the exploitation of the glories of history, art, and nature, that bring under its wonderful sky tourists from all quarters, it would not have been possible to change gradually the position of Italy from a debtor country to a country often creditor ; the wisdom and firmness of states- men and bank directors would not alone have been enough to perform the wonder. National Monetary Commission For it is clue precisely, in great part, to the fruitful industry of the Italian people that Italy, ceasing to be a debtor country, under monetary tribute to foreign coun- tries, has become a creditor country and has seen turned in its favor the economic and monetary balance, even to the point of receiving from abroad large sums of gold which have flowed into the banks of issue in exchange for notes. It is likewise due further to the accumulations of savings of the Italian people that a considerable part of the State securities, which had been owned abroad, has returned to Italy, so as to save the country henceforth, as we have already seen, from the violent and disturbing effect of the sudden return of securities to which debtor countries with abnormal finances and circulation are often exposed whenever the creditor markets are affected by a crisis or pressed by monetary difficulties. And indeed, whereas in the preceding crises of the international market, Italian exchange had to suffer con- siderable disturbances, the crisis of 1907 left it quiet in the neighborhood of par in spite of the fact that the home market, as we have seen, was also, for reasons pecuUar to itself, gravely affected. On the other hand, it must be recognized that the efforts of the Italian people would have given less results if they had not been ably aided in the work of economic recon- struction by the right direction given to the public finance and the regulation of the banks and circulation. As in the preceding period of difficulty and distress, so in the fortunate period of reconstruction it has been pos- sible to see that there is an intimate connection between the finances of a country and its economic conditions. The Banks of Issue in Italy For this reason, in order to give to each in equitable meas- ure the merited share of praise, it should be recognized that all those who in the government and direction of the banks of issue helped to start finance and the circulation in the right path have acquired a high title to the gratitude of the country whose economic reconstruction they have efficiently aided. And among the men who succeeded each other in the Government we should mention with special honor the Honorables Giolitti, Luzzatti, and Son- nino, who in the field of finance and that of circulation have made an ineffaceable impress upon the history of modern Italy. The edifice of finance and credit auspiciously and solidly reconstructed, with such keenness of intellect and so much vigorous effort, must henceforth be considered as a sacred thing, over the safety of which Italy must keep watch with jealous care. This warning can hardly seem superfluous if we consider that although there is reason to suppose that the severity of the law, the abil- ity and unanimity of the men placed in the manage- ment of the banks of issue, and the sad but salutary records of the past, will save Italy new banking crises; there is, on the other hand, reason to fear that the sound structure of finance may be shaken unless efficient and energetic action is brought to bear to repulse all the attacks to which, under every sort of pretext of the pub- lic interest, the Italian budget is exposed. This warning is all the more opportune if one reflects further that the passing of the management of the rail- roads to the State represents an unknown quantity that is not reassuring, and demands, meanwhile, an enormous 203 National Monetary Commission sum that will not be adequately remunerated by the railroad earnings — a sum that must be obtained by issues of special obhgations; and also if one bears in mind that, as we have already seen, the national eco- nomic conditions are still disturbed, especially in the Industrial field, by the errors committed by speculators in 1906 and by the results of the crisis that broke out in 1907. 204 trade zi trade. xports. I 07S I 162 1 131 978 1 022 I 208 934 I 021 I 072 I 104 I i6s I 152 I 186 I 071 95° I 028 I 00s 892 951 896 877 958 964 , 026 ,038 .052 . 092 . 204 .431 .338 .374 .472 .517 .597 .731 .893 ,851 .858 Statistical items on finance, circuiation, credit, and trade in Italy from iS-ji to igo8. Banks of i MovemeO „,,™.e. Exotaose ItoUan ren.es odeet. DiscoimU, Lo.ns. I.<».s,o.h,s,.,e. --'• ,S-. Cirmla- Reserve. Manimum. — Pans. ^L- -— iKSe V»r. WP^ iH^° nss-^ .„.s..,es. .... — — — Surplus. Defiei,. asS^vl. .SSS. M T„.a,. ~ To,.,. Perce.. 399 89 z .46 .65 116 ::i s J8 7« ::::: SOS ■.H5 3« i:i B '9,8 ..iS« S96 1.338 .!S5, ,08.85 106. jj ■0..8, 98.45 .05- OJ 86.60 89 35 90 80 87.30 Si" 106 00 58. .0 58.95 68. 70 .!36, ,.469 ..S8. °"'^75. ■'■' :i" ,8,1... ,879. . 's" ;„ ' ^^ :E: E: ;;' si!- 99-84 89.43 1884-85. 90. .5 .885-86. 56 ,886-8,.. a8. S89 "i \\ ^s. Jmies,^ ".4« ,a.9oj ...6,0 ...«»4 ...SiJ. ,=.648 ,8«- :? '' ,60, ,,,,5 :::: 9.. 60 ,889-)o. ,890^,.- ,89r^3.. 1894-95 :: .897-9S. .89S-99. ,900-, .907-8. . ■~* : '' 888 ..680 ,.788 ..Sja 3.0S6 J.. So 46 " 43 ," ' , ^ • »•» 59 •.5 .895 = i »&a .898 . .9, •u= 190, • ts ,0.88 ■ 90] •■14 190s »iao 39781°—! I . {To (ace page 204. ) The Italian Banks of Issue BY CARLO ¥. FERRARIS Professor in the University of Padua 205 THE ITALIAN BANKS OF ISSUE. [From Conrad's Handworterbuch der Staatswissenschaften, 3d edition] BY CARLO F. FERRARIS University of Padua Part I. — The hanks prior to i8g^. Page. I. The Banca Nazionale 207 II. The extinct banks of issue 209 III. The Bank of Naples and the Bank of Sicily 212 IV. Bank legislation from 1866 to 1892 216 Part II. — The banks since iSgj. V. Causes of the new legislation 221 VI. Character and administration of the banks of issue 225 VII. The system of branch banks 231 VIII. Capital of the banks of issue 233 IX. The issue of bank notes . 234 X. Discounts, loans, deposits. — Drafts, checks, etc. — ^The rate of discount 242 XI. The surplus 248 XII. The banks in their relations to the State 250 XIII. Statistics 254 Part I.— THE BANKS PRIOR TO 1893. I. — The Banca Nazionale. The Sardinian Government in the year 1 844 sanctioned the foundation in Genoa of a discount and deposit bank having the privilege of issuing notes, and a similar insti- tution in Turin was chartered in 1847. Each was to have a capital of 4,000,000 lire. Royal decrees of 1849 and 1850 authorized the consolidation of the two banks into a single institution called the Banca Nazionale, with its seat in Genoa, with a capital of 8,000,000 lire, a monopoly of the issue of bank notes, and a chartered term 39781°— II 14 207 National Monetary Commission of existence of thirty years. In 1852 the capital was increased to 32,000,000 Hre and the bank proceeded to estabUsh branches. In 1859 the institution extended its operations to the newly liberated Lombardy. A new bank act was sanc- tioned by royal decree of October i, 1859, and the capital was increased to 40,000,000 lire. In 1861 two banks of issue, the Banca di Parma « and the Banca di Bologna (or Banca delle Quattro Legazioni)^ were incorporated with it. At the same time new branches and sub- branches were opened in the Neapolitan and Sicilian provinces, and the institution assumed the title of Banca Nazionale nel Regno (National Bank in the Kingdom). In 1865 its capital was increased to 100,000,000 lire. A branch was at this time established in the new capi- tal of Italy, Florence, and later subbranches were opened in other cities of Tuscany. The same thing was done in 1866-7 in the newly liberated Venetian provinces, and the institution absorbed another bank of issue, the Stabili- mento Mercantile Veneto, at Venice. *= Finally, in 1871 headquarters were established at the new capital, Rome, and in 1872 the bank was authorized to increase its capi- tal to 200,000,000 lire, of which only 150,000,000 lire was paid in. Thus the httle Sardinian bank, by the absorption of all other banks of issue in upper Italy and the establishment a The Banca degli Stati Parmensi, at Parma, had a capital of 500,000 lire, of which 300,000 was paid in. bThe Banca delle Quattro Legazioni, at Bologna, had a capital of 200,000 Roman scudi. c This institution had a capital of 2,100,000 florins. It issued bank notes called cash certificates (buoni di cassa), whose average circulation was between i, 200 000 and 1,500,000 florins. 208 The Italian Banks of Issue of branches and subbranches in many important places throughout the country, rose to the position of the lead- ing credit institution in the kingdom. From 1885 it carried on a great mortgage business, a feature of which was the issue of debentures. II. — The Extinct Banks of Issue. BANCA NAZIONALE TOSCANA — BANCA TOSCANA DI CREDITO — BANC A ROM AN A. The grand-ducal government of Tuscany established in 18 16 a public discount bank, the capital of which was advanced by the State and which was invested with the privilege of issuing bank notes. After an existence of only ten years this bank was dissolved and was succeeded by a new discount bank (with its seat at Florence), which had a capital of 1,000,000 Tuscan lire (afterwards increased to 1,250,000 lire) and had the right to issue notes, which were guaranteed by the Government up to three times the amount of the capital. A discount bank (joint-stock company) was established at Leghorn {Livorno) in 1837, with a capital of 2,000,000 Tuscan lire, which was author- ized to issue notes likewise up to three times the amount of its capital. In 1841 the Bank of Siena, a joint-stock bank, with a capital of 150,000 lire, was opened. It could issue notes up to the amount of its capital. In 1846 the Bank of Arezzo, a joint-stock bank, was established, with a capital of 1 20,000 Tuscan lire, up to which amount it had a right to issue notes. Then came the Bank of Pisa (1847), a joint-stock bank of issue, with a capital of 150,000 lire, soon raised to 300,000 lire. Its circulation was restricted in the same way as in the case of the two 209 National Monetary Commission preceding institutions. In 1850 the Bank of Lucca was opened, with a capital of 299,666 Ure. It was authorized to issue notes up to twice the amount of its capital and was allowed to make them of very small denominations. Tuscany had now six banks of issue. There was no legal provision in regard to the mutual redemption of notes. In 1857 the two banks at Florence and Leghorn were consolidated. The new institution, which had a main office in each city, took the name of National Bank of Tuscany {Banca Nazionale Toscana). Its capital was fixed at 8,000,000 Tuscan lire and was to be increased by one-third of this amount every fifth year. The other banks of issue were permitted to change their status and convert themselves into branches of the newly constituted bank, and, in accordance with this provision, the banks of Siena, Pisa, Lucca, and Arezzo were merged in i860 in the Banca Nazionale Toscana. The capital of this institution was now 9,410,000 Tuscan lire and was soon raised to 10,000,000 lire. In 1864 it opened a sub- branch at Pistoja and in 1873 one at Grosseto, and later other subbranches were established. The act of August 18, 1870, prolonging the term of the bank's charter, author- ized the increase of its capital up to a maximum of 50,000,000 lire. The administrative council of the bank, however, fixed the capital at only 30,000,000 lire, of which 21,000,000 lire was paid in. In March, i860, the provisional government in Tus- cany decreed the estabhshment of the Tuscan Credit Bank for the industry and trade of Italy {Banca Tos- cana di Credito per le Industrie e il commercio dTtalia). Its capital was supposed to be fixed at 40,000,000 lire The Italian Banks of Issue but only 5,000,000 lire was paid in. This institution, in addition to all regular banking business, was authorized to issue cash certificates (buoni di cassa) up to three times the amount of the paid-in capital. It began business in 1863. It was located at Florence and had no branches. A bank was established at Rome as early as 1833. After a rather inactive existence it was superseded in pursuance of a papal decree of 1850 by a larger institu- tion, the Bank of the Pontifical States (Banca dello Stato Pontifico), which had branches at Bologna and Ancona. Its capital was to amount to 1,000,000 scudi (5,375,000 Italian lire), but only 600,000 scudi was paid in when it was opened. This institution had the monopoly not merely of the issue of notes (in denominations of i, 10, 20, 50, and 100 scudi), for which a one-third reserve was to be provided, but also of every kind of banking business. Its charter was to terminate in 188 1. The two branches were abolished in 1857 and were superseded by the Bank of the Four Legations (Banca dello Quattro Lagazioni), which was merged in 186 1 in the Banca Nazionale nel Regno. The administration of the Banca dello vStato Pontifico was anything but a model one, so that in 1866 the papal government was compelled to offer its security for the bank notes. At the close of 1869 the circulation v/as 30,700,000 Italian lire and the reserve 10,900,000 lire. When Rome became the capital of the Kingdom of Italy, in 1870, the notes of the bank were declared a legal tender in the province of Rome, and the institution was reconstituted under the name of the Roman Bank {Banca Romano). It renounced its monopoly in consideration 21X National Monetary Commission of a payment of 2,000,000 lire, other banks being per- mitted to establish branches at Rome. In 1874 it was authorized to increase its capital to 15,000,000 lire, which was all paid in. The Government at the same time ceased to guarantee the security of the notes. This bank did not make use of the privilege of establishing branches." III. — The Bank of Naples and the Bank of vSicHvY. From the second half of the sixteenth century there were large pawn banks in the Kingdom of Naples. At the time of the French Revolution the Bourbon Govern- ment seized their property in order to make use of the funds for carrying on the war against France. The French Government sought, by means of a law enacted in 1806, to retain one of the old banks — that of San Gia- como — for the service of the court and the Government and to establish a bank for the business of the people, and in 1808 it proceeded to create a single institution in place of the two — the Bank of the Two Sicilies. The necessary capital, however, was not forthcoming. Noth- ing came of a further attempt in 1809, but the restored Bourbon Government succeeded in bringing into existence, by decree of December 12, 1816, the Bank of the Two Sicilies. This was a dual establishment — a court bank for the service of the Government, and a people's bank, which took deposits and loaned money on pledges. The former was dependent on the minister of finance and the latter was under the supervision of the Government. The employees in both cases were government officials. The scheme included also a discount bank as part of the establishment. This discount bank, which was opened o For later history see sections IV and V. The Italian Banks of Issue in 1818 with capital advanced by the €^overnment, was in reaHty nothing more than a department of the court bank. It was constantly involved in the financiering operations of the royal treasury. Although the Govern- ment acted rather arbitrarily in the matter of fixing the rate of discount, and was not always ready to comply with the provisions determining their status, these institutions enjoyed the confidence of the people in a high degree, and they were extensively utilized, all the more so as they were the only institutions of the kind in the country. A new department of the court bank was opened at Naples in 1824, designed to serve some special branches of governmental and local admin- istration. Private individuals were, however, also al- lowed to avail themselves of it, so that the distinction between the court bank and the people's bank prac- tically ceased to exist. A similar department of the court bank was established much later (1857) at Bari. The characteristic business of the Bank of the Two Sicilies, the feature that made it popular, was the de- posit business {servizio apodissario) . The certificates of credit {fedi di credito) were transferable by indorsement. They might be converted into a certificate for the purpose of making a succession of payments by means of cash orders, called ''polizze," each payment being entered on the certificate, which thus served as a pass book, the deposi- tor having in this way an actual account current with the bank, of which he could avail himself in making payments to third parties. The certificates of credit, cash orders, and the orders for small amounts (polizzini) became a legal tender and were redeemable in coin at the tax offices. 213 National Monetary Commission They, as well as the drafts (Mandati) issued by the bank, served for making remittances, a quality which in those days of defective means of communication was very use- ful and highly appreciated. These instruments were therefore very extensively used in the Kingdom of Naples. The Italian Government reorganized the Bank of the Two Sicilies by a series of decrees between i860 and 1866. The institution, which was renamed the Bank of Naples, was deprived of its character as a state bank and was transformed into an independent credit corporation, hav- ing its own administration under the supervision of the Government. In 1866 the bank began to issue certificates of credit for a specific sum, transferable without indorse- ment and drawn on the cashier, which were in reality nothing else than bank notes. In the same year, the cur- rency in Italy having come down to a paper basis, the certificates of credit and the cash orders were declared a legal tender within the provinces of the former Kingdom of Naples. In the meanwhile the bank proceeded to establish branches, and it has since made extensive use of this privilege. The act of April 30, 1874, conferred upon the Bank of Naples the character of an actual bank of issue, although it carried on the business also of a pawn ofiice, a savings bank, and a mortgage bank. Subsequently an agricultural credit department was added. A royal decree of September 23, 1874, assigned the sum of 48,750,000 lire as a permanent fund for the issue of notes. In 1843 the Neapolitan Government had established a court bank at Palermo and another at Messina. They were dependencies of the Bank of Naples, which, at that time, as we have seen, was styled the Bank of the Two 214 The Italian Banks of Issue Sicilies. The revolution of 1848 severed the connection, and after the restoration of the Bourbon dynasty, in 1849, the separation of the Sicilian court banks from the Bank of the Two Sicilies was consummated. In 1850 the two banks were consolidated into a single institution, styled the Royal Bank of the King's Domain in Sicily {Banco Regio del reali Domini al di Ih del Faro) . The institution was a bank of deposit for the Government and for the people. It had the same arrangements as the Bank of Naples in the matter of certificates of credit and cash orders, which were a legal tender. The banks served the needs of the financial administration of Palermo and Mes- sina. The royal domains in Sicily were mortgaged as security for the deposits. In 1858 two newly established discount banks at Palermo and Messina were affiliated with the Banco Rigio. The events of i860 affected these institu- tions in a most serious manner, a large part of their prop- erty being taken for the purposes of war. The gradual restoration of the funds enabled them to resume banking operations, and in 1867 they were transformed into the existing Bank of Sicily {Banco di Sicilia), which is a public corporation and no longer a state institution. In 1872 the bank was authorized to establish branches. In 1870 the Bank of Sicily began to issue actual bank notes in the shape of certificates of credit for a specific sum, drawn on the cashier and transferable without indorse- ment. The act of April 30, 1874, consummated the con- version of the institution into an actual bank of issue, and in the same year a fund of 12,000,000 lire was assigned to it for its bank-note circulation. In 187 1 the bank instituted a realty credit department and in 1888 an agricultural credit department. 215 National Monetary Commission IV. — Bank Legislation of the Period i 866-1 892. A royal decree of May i, 1866, rendered the notes of the Banca Nazionale nel Regno a forced currency. This institution at the same time made a loan of 250,000,000 lire to the Government for the war that was to be waged against Austria. The other banks of issue (the Bank of Naples, the Bank of Sicily, and the two Tuscan banks) were authorized to continue the issue of certificates of credit, cash orders, cash certificates, and bank notes, and these instruments were to remain a legal tender; that is to say, they were to retain this quality in the provinces in which they had hitherto possessed it. They continued, however, to be redeemable in coin or the notes of the Banca Nazionale. Thus arose in the history of Italian banking the oft-recurring distinction between forced currency and legal-tender currency. The Banca Nazionale nel Regno had thus acquired an exceptional status, which it deserved to have, inasmuch as it had extended its network of branches and sub- branches over the entire Kingdom. At the close of 1873 it had 790,000,000 lire in circulation on account of the Government (the indebtedness of the State to the bank having reached this sum) and 353,300,000 Hre on its own account, and it had in addition loaned 39,500,000 lire to the other institutions, which had immobilized that amount of coin in their vaults. The aggregate amount of outstanding bank notes without forced circulation (including the notes of the Banca Romana, which had been incorporated ^in the Italian banking system in 187 1), certificates of credit, and cash orders was at that time 733.300>ooo lire. 216 The Italian Banks of Issue In spite of the presence of notes of very small denomi- nations (50 centesimi, i lira, 2 lire) up to an aggregate of 101,300,000 lire, there was a considerable volume of legally unauthorized small notes in circulation that had since 1866 been taking the place of the silver fractional currency, which had disappeared. They were issued by friendly societies, communes, charitable institutions, sav- ings banks, people's banks, mercantile houses, and pri- vate individuals, and at the close of 1873 they amounted in the aggregate to 33,300,000 lire. The necessity of doing away with this abuse, a certain hostility in political and banking circles, as well as among business men, to- ward the privileges of the Banca Nazionale, and the need of regulating the issues of the Bank of Naples and of the Bank of Sicily on the same basis as the issues of the other institutions, brought about the legislation of April 30, 1874. 'I'his placed the Banca Nazionale and the five other banks on an equality as regards privileges and duties. All the six institutions were organized into an association (consorzio) , which had to put at the disposal of the Government, in place of the previous advances of the Banca Nazionale, i ,000,000,000 lire in so-called ''associ- ation notes" issued in denominations ranging from 50 centesimi to 1,000 lire. These association notes con- stituted, as irredeemable paper money (forced cur- rency) , the basis of the entire currency. The volume of notes outstanding on account of the State had reached, at the close of 1875, the sum of 940,000,000 lire, which was never exceeded, as the Government did not make full use of its right to an issue of i ,000,000,000 lire. The banks were allowed to issue their own notes, redeemable over the counter in association notes in denominations 217 National Monetary Commission ranging from 50 to 1,000 lire, up to three times their paid-in capital (in the case of the Banca Nazionale and the other three joint-stock banks) or of their fixed property (Bank of Naples and Bank of Sicily) on condition of keeping a one-third cash reserve against circulation in coin and association notes. Their metallic cash might be invested only in securities payable in coin. The bank notes were invested with the quahty of a legal tender under certain restrictions. The issue of notes by private individuals and institutions of any kind was strictly for- bidden, and in a few years this mischievous currency was driven from circulation. The legislation of 188 1, with the provisions discontinu- ing forced currency, dissolved the association of the banks of issue. The coin obtained by means of a loan was used for withdrawing the association notes from circulation. At the same time the issue of 340,000,000 lire of treasury notes was decreed (100,000,000 lire in 5-lire notes and 240,000,000 lire in lo-lire notes). First of all, the small notes of denominations up to 2 lire were replaced by frac- tional silver currency. The privilege of issuing notes was to terminate for all six banks at the close of 1889. The Government was empowered to authorize the banks to issue notes of the denomination of 20 or 25 lire, as it thought most expedient. The denomination was fixed by royal decree in 1883 at 25 lire. The forced currency was discontinued in 1883. The law of 188 1 provided that the reserve against bank note circulation should consist exclusively of coin. In pursu- ance of a royal decree of 1883 at least two-thirds of it had to be in gold. As a matter of fact, the treasury notes were 218 The Italian Banks of Issue placed on a par with gold and silver, as they were redeem- able in coin at any time on presentation at the main treasury of the Kingdom. The continuance of the legal- tender quality of the notes of the six banks of issue was extended by numerous successive enactments. The priv- ilege of issuing notes which, as we have seen, was to ter- minate at the close of 1889, was prolonged by a law of 189 1 to the close of 1892. 219 PART II.— THE BANKS SINCE 1893. V. — Causes of the New Legislation. All who had been observing without political or doc- trinaire bias the course of government action in Italy with respect to the banks of issue had urged the necessity of thoroughgoing reform. The Italian system of banks of issue was a curious mixture of monopoly and plurality, which had all the disadvantages and none of the advan- tages of these systems. The competition of the six banks that had the exclusive privilege of issuing notes — institu- tions representing every grade of economic capacity — had led to an excessive issue of paper currency for the promo- tion of building speculation in the large cities (especially in the capital and in Naples) , for the support of industrial undertakings of an artificial nature and necessarily doomed to failure, as well as of ill-managed credit institu- tions, and for the purpose of influencing legislation by the lavish use of money. The institution which was economic- ally and morally most corrupt was the Banca Romana, which, ill conducted under the papal administration, had not had a sound existence under the national Government, and was the veritable poison of Italian credit. Its rotten- ness was fully revealed at the beginning of 1893 by an inquiry instituted at the instance of the Chamber of Depu- ties. Its suppression was inevitable, and as the condition of the other institutions was not a favorable one, Parlia- ment had to make up its mind to the discussion of a rather National Monetary Commission radical reform, which was embodied in the act of August lo, 1893. This act provided for the fusion of the Banca Nazionale Toscana and the Banca Toscana di credito with the Banca Nazionale. The institution thus constituted took the name of the Bank of Italy. The affairs of the Banca Romana were to be wound up, and so there were left but three banks of issue — the Bank of Italy, the Bank of Naples, and the Bank of Sicily. The laws of 1894 ^-^d 1895 de- clared the two latter banks to be public autonomous credit institutions under the supervision of the Govern- ment, intrusted the liquidation of the affairs of the Banca Romana to the Bank of Italy, and amended the law of 1893 in important respects. In spite, however, of further statutory enactments (1895-96), the banks were unable to improve their condition materially. Their troubles were mainly due to two causes. A large amount of paper, which had been discounted for individuals and concerns ruined or temporarily embarrassed, re- mained unpaid, and the banks were obliged to take in place of what was due them a large quantity of securities and real estate. Furthermore, as they were not merely banks of issue, but also mortgage banks, they were com- pelled, by reason of the continuous and severe agricultural depression and the crisis in the building trade in some of the large cities (in particular, Rome), to dispossess many owners of lands and buildings, and thus to burden them- selves with a fresh mass of parcels of ground and houses. The mortgage business had indeed been delegated, in the case of each of these institutions, to an officially distinct 222 The Italian Banks of Issue administrative branch, but the regular banking depart- ment was constantly making fresh advances to this sepa- rate administrative branch on current account, and as these mortgage operations had been continually swal- lowing up new capital, the aggregate of the amounts thus advanced constituted a large sum to the credit of the banking department, on which it could not easily realize. In the case of the Bank of Naples, for example, an amount of money nearly equal to its entire free capital (patrimo- nio) had been gradually absorbed by the realty credit department, which, nevertheless, was on the verge of bank- ruptcy. These two categories of bad assets constituted in the balance sheets of the banks the so-called " immobilized assets" {partite immohilizzate) , and to this were added the legally no-longer-permissible assets acquired previous to the law of 1893. The principal aim of the fresh legislation of 1897 and 1898 was to remove the dangerous conse- quences of this untenable condition and to remedy it as fast and as far as possible. The previously initiated liquidation of the mortgage institutions connected with the three banks of issue was definitively sanctioned, and arrange- ments were made for effecting it with the least possible loss to the banks and the creditors. Every faciHty was afforded, also, for the Hquidation, or, as it was termed, "mobiliza- tion," of the "immobilized assets" that figured on the balance sheets, especially in the way of accommodations on the part of the fiscal administration and extensions in the matter of payments. In order to secure and facilitate the application of the new legislative injunctions, energetic men were placed at 39781°— II 13 223 National Monetary Commission the head of the institutions. The Government undertook the task of codifying most of the laws relating to the banks of issue, and the result was the legal code bearing the date of October 9, 1900. The duration of the legal-tender quality of the bank notes was extended year by year, and the lawmaker made constant use of the opportunities thus afforded in order to furnish fresh facilities to the banks for healing the wounds of the past. In the years 1 899-1 903 further improvements were made in the statutes of the Bank of Italy and the provisions relating to the other two banks. The extraordinary development of industry, especially in upper and middle Italy, the strides made by commerce, and the progress in agriculture have in the last few years added greatly to the riches of the country. Emigration, although it has shown an unexpected and almost pathological in- crease, has afforded to the Italians permanently or tempo- rarily settled abroad the means of sending or bringing home large sums of money, while the expenditure of the ever-increasing number of foreigners visiting Italy has con- tributed an important item on the credit side in the inter- national balance of payments. In spite of the increased expenditure, the financial condition of the Kingdom has been considerably improved. The better credit of the State made it possible in 1906 to reduce the rate of interest on the public debt. This improvement in the economic and financial state of the Kingdom has naturally meant for the banks of issue a progressive development of their busi- ness and has afforded them the means of making a sounder selection in their transactions and of effecting more readily 324 The Italian Banks of Issue the liquidation of their immobiUzed assets. Great credit is due to the men at the head of these institutions, and we may point especially to the splendid manner in which the Bank of Italy weathered the financial crisis of 1907. In spite of the progress thus made, the moment had not yet arrived, in the opinion of our legislators, for removing the forced currency of the bank notes, and by the act of December 29, 1907, its duration was extended to the close of 1908. On the occasion of the enactment of this law important measures were framed (among them one raising the normal maximum of bank-note circulation) in order to make the legal provisions conform more closely to the present condition of the banks of issue and the economic and financial state of the country. These measures were embodied in the act of December 31, 1907. By the act of December 24, 1908, the duration of the forced currency of the bank notes was extended to the close of 1909, and by the act of December 26, 1909, to the close of 1910. A fresh revision of the statutes of the banks took place in 1908 and 1909; the act of July 15, 1909, embodied pro- visions regarding interest-bearing deposits, and finally all the laws on the banks of issue (with exception of the act of August 8, 1895, Appendix Q, T.) were codified by the act of February 3, 19 10. VI. — Character and Administration of the Banks OF Issue. THE BANK OF ITALY. The Bank of Italy is a joint-stock company. The shares, which are registered, are nominally of 800 Hre. Their nominal value was originally 1,000 lire, but they were 225 National Monetary Commission reduced in 1894 to 900 lire and in 1897 to 800 lire. The amount actually paid in was 700 lire, but, as will be ex- plained later on, the paid-in capital is put down as having been only 600 lire per share. The central offices are at Rome. There are numerous branches, subbranches, "agencies," etc. At the head of the administration is the director-gen- eral, who is assisted by the vice-director-general. They are elected and retired by the superior council of the bank, but they have to be confirmed by the Government. The superior council {consiglio superiore) is elected in the following manner : The administrative council of each branch {sede) appoints two councillors from its midst. Five additional councillors are chosen by the general assembly of the shareholders from the midst of the remain- ing members of the administrative councils of the main offices or branches. The director-general is a member of the superior council. The vice-director-general may attend the meetings, but he has no vote unless he takes the place of the director-general when the latter happens to be absent. The superior coun- cil, among other important functions, appoints the employees of the bank on the initiative of the director- general. The directory (director-general and vice-director-gen- eral) and superior council carry on the general administra- tion of the bank. Their management is supervised by the syndics (sindaci) , who are chosen annually by the general assembly of the shareholders to the number of five. The regular meeting of the shareholders is held annually at Rome, and extraordinary meetings are held whenever 226 The Italian Banks of Issue it appears necessary, in conformity with certain statutory provisions. Each branch has a director, appointed by the superior council at the instance of the director -general, and an administrative council {consiglio di reggenza)^ com- posed of from seven to twelve (in exceptional cases, four- teen) councillors and of not more than four censors. The precise number of councillors and censors is fixed by the superior council. The councillors and censors are elected for a term of six years by the general assembly of the shareholders, which meets for that purpose at the various main offices. One- half retire every three years, the general assembly of the shareholders being therefore required to meet every third year at each of the main offices. Each branch has from eight to fifteen discount councillors (the precise nimiber being fixed by the superior council) elected for a term of two years, one-half retiring annually. They are chosen by the administrative council of the main office from a double list, indorsed by the director-general. The discount commission is composed of the director, two ad- ministrative councillors, and one discount councillor. Each subbranch (succursale) has a director appointed by the superior council at the instance of the director-general, several censors (as many as may be deemed necessary), appointed by the superior council and confirmed by the syndics, and from four to eight discount councillors, elected by the superior council for a term of two years, one-half retiring annually. The discount commission is composed of the director and two discount councillors. 227 National Monetary Commission Each agency {agenzia) is under the management of an agent, appointed by the superior council on the initiative of the director-general. THE BANK OF NAPLES. The Bank of Naples is an autonomous public credit institution under the supervision of the Government, hav- ing its own property or free capital. The central seat of administration is at Naples. It has a peculiarly constituted general council {consiglio generale). This is composed as follows: (a) The Neapolitan representation, consisting of the mayor of Naples, the presiding officer of the Council of the province of Naples, the president of the Neapolitan Chamber of Commerce, a delegate of the municipal Coun- cil of Naples, a delegate of the provincial Council, and a delegate of the Chamber of Commerce. (6) A delegate of the Council of the province of Bari and a delegate of the Chamber of Commerce of the city of Bari. (c) A delegate of the provincial Council of each of the following provinces: Aquila, Avellino, Benevento, Campobasso, Caserta, Catanzaro, Chieti, Cosenza, Foggia, Ivccce, Potenza, Reggio-Calabria, Salerno, and Teramo. (d) A delegate from each of the chambers of commerce in the other provinces of the Kingdom in which the bank has a main office. {e) The director-general and the two administrative councillors appointed by the Government. The delegates are elected for a term of two years. The general council has its regular meeting at Naples once in 228 The Italian Banks of Issue the course of the first three months in each year, and may be convened again later in extraordinary session con- formably to special statutory provisions. Its functions correspond in the main to those of the general assembly of the shareholders of joint-stock banks. The managing body is the administrative council {con- siglio di amministrazione) . This comprises the following members: The director-general, who is appointed by the Government (by royal decree) ; three ordinary delegates and one substituting delegate, who are chosen by the general council from its midst; and two administrative councillors, appointed by royal decree (one retiring each year), who are reeligible. The general secretary of the bank is appointed by the finance minister from a list of three persons submitted by the administrative council. The directors of each of the branches and of the sub- branches are appointed by the administrative council on the initiative of the director-general. Each branch and subbranch has from eight to twelve discount commissioners, appointed by the administrative council (which fixes the number) for one year on the initi- ative of the director-general. The discount commission consists of the director and two commissioners. The bank has a savings institution and a pawn office. THE BANK OF SICIIvY. The Bank of Sicily is an autonomous public credit institution under the supervision of the Government, having its own property or free capital. The central seat of administration is at Palermo. 229 National Monetary Commission It has, like the bank of Naples, a general council {con- siglio generate). This body is constituted as follows: (a) The representation of Palermo, consisting of the mayor of the city of Palermo, the presiding officer of the Council of the province of Palermo, the president of the Chamber of Commerce of Palermo, a delegate of the municipal Council of Palermo, a delegate of the provincial Council, and a delegate of the Chamber of Commerce. (6) The mayors of Messina, Catania, and Girgenti, a delegate of the Chamber of Commerce of each of these cities, and a delegate of the Council of each of the prov- inces of Messina, Catania, and Girgenti. (c) A delegate of the Council of each of the provinces of Caltanissetta, Syracuse (Siracusa) , and Trapani. (d) A delegate from the Chamber of Commerce of each of the other provinces of the Kingdom in which the bank has established a main office. (e) The director-general and the two administrative councillors appointed by the Government. The delegates are elected every second year. The general council has its regular meeting at Palermo once in the course of the first three months in each year and may be convened again later in extraordinary session, conformably to special statutory provisions. Its func- tions, as is the case with the Bank of Naples, correspond, in the main, to those of the general assembly of the share- holders of joint-stock banks. With respect to its administrative personnel, the Bank of Sicily is organized in the same manner as the Bank of Naples. It has an agricultural credit department and a savings bank 230 The Italian Banks of Issue VII. — The System of Branch Banks. The banks of issue are permitted to maintain branches, sub-branches, and agencies, to have correspondents, and to make use of banking houses as their representatives in the redemption of their notes. The branches {sedi) are those offices which are located in the principal cities or which have the largest volume of business. These two conditions usually coincide. The banks are obliged to maintain a main office at the capital. The agencies (agenzie) are those offices which have been established by the bank at its own expense and are managed by its own officials, and whose business it is to collect bills, to cash the drafts of the bank and the negotiable paper so-called {vaglia cambiari) , and to redeem its notes. The Bank of Italy is obliged to maintain a branch or a subbranch at the capital of each of the 69 prov- inces. It may establish sub-branches in other cities also, and it has done this to some extent. In the establishment and abolition of branches and subbranches and in the transformation of sub-branches into agencies the action of the bank requires the sanction of the Government, which is given simply in the form of a ministerial order. In the establishment and suppression of the agencies the action of the bank is untrammeled. The Bank of Naples and the Bank of Sicily are at liberty to abolish the existing branches and sub-branches or to estabHsh new ones in the capitals of the provinces, but the establishment and suppression of such branches can be effected onlv bv royal decree, at the instance of the 231 National Monetary Commission administrative council with the consent of the general council. In the case of the agencies an order of the finance minister is required in place of a royal decree. The correspondents are the credit institutions and private banks which collect bills and cash drafts, etc., for account of the banks of issue. These credit institutions and private banks, as well as the savings banks (as a general thing, in the larger cities) , may, on due notice being given to the Government, be charged by the banks of issue with the redemption of their notes. They are invested by the bank of issue with the power of "representation for redemption" (rappre- sentanza pel cambio). This takes place usually in those provinces in which the bank of issue has no offices of its own belonging to any one of the three categories above mentioned. In such cases the bank selects a representa- tive, whose place of business is generally the capital of the province. The bank may, however, have several representatives in the same province. The banks of issue may perform mutual services in respect of the redemption of their notes. The Bank of Naples, for example, repre- sents the Bank of Sicily at a number of places. The following table gives the statistics of the branch offices, etc., of the banks of issue. The figures are for the end of September, 1909. Bank. Branches (sedi). Sub-branches (succursali). Agencies (agenzie). Representa- tives for the redemption of notes (rappresen- tanze pel cambio). Bank of Italy.. II 12 69 IS 4 22 10 21 Bank of Naples. . 35 69 Bank of Sicily 232 The Italian Banks of Issue There are a great many correspondents, each of the banks having hundreds. They are to be found even in very small places, and their number is constantly increasing with the foundation of new cooperative credit associations, regular credit associations, and private banks. VIII. — Capital of the Banks of Issue. The Bank of Italy (joint-stock bank) has a nominal capital of 240,000,000 lire, the paid-in capital being 180,000,000 lire. The Bank of Naples and the Bank of Sicily (public credit institutions) have a fixed property amounting, respectively, to 50,000,000 and 12,000,000 lire. The nominal capital of the Bank of Italy is divided into 300,000 shares. The paid-in capital amounts actually to 210,000,000 lire; that is to say, 700 lire was paid in for each share. But in order to make it possible to devote a larger quota of the net earnings to the improvement of the condi- tion of the bank, which had been seriously compromised by the unsound management to which we have referred, this paid-in capital was reduced on the books by 30,000,000 lire, so as to be reckoned at only 180,000,000 lire; that is to say, the amount paid in for each share is considered to have been 600 lire instead of 700. It was arranged, how- ever, that the bank, after the expiration of an interval of not less than fifteen years, beginning with 1893, if it had fulfilled its legal obligations, would be empowered to restore those 30,000,000 lire to its shareholders in annual quotas not exceeding 6,000,000 lire. But when the time arrived (1909), it was considered best not to turn over the sum that was available to the shareholders but to devote it to an extraordinary reserve fund. (See section XI). 233 National Monetary Commission As the Bank of Naples and the Bank of Sicily had like- wise invested part of their funds in insecure loans and unsafe mortgage operations, and as the figures given above originally represented in part not actually existing property but merely the amount due the banking department by the realty credit department, it was provided that these two banks should for a term of fifteen years, beginning with 1893, add all their net earnings to their free capital except what was required to meet their legal obligations, and this is what was actually done. IX. — The Issue of Bank Notes. The three institutions which we have here described have the exclusive right to issue bank notes, the privilege having been conferred for a period of twenty years, 1893-19 13, with a conditional extension for ten years. The chief function of the banks is to issue notes for the needs of trade. The so-called '' normal maximum limit " of the issue is fixed for the respective institutions as follows : Lire. Bank of Italy 660,000,000 Bank of Naples 200,000,000 Bank of Sicily 48, 000, 000 Total 908, 000, 000 The Bank of Sicily is empowered to issue an additional 10,000,000 lire, which amount, however, has to be devoted to the assistance of the sulphur industry. The cash reserve has to be not less than 40 per cent of the amount of the outstanding notes. The banks are, however, allowed to exceed the normal maximum Umits under the following conditions: 234 The Italian Banks of Issue (a) They may issue up to any amount, provided there is a cash reserve against the full amount of the excess above the normal maximum. (b) They may exceed the normal maximum, provided there is a 40 per cent covering for the entire issue, on condition of the payment of a special tax on circulation, which is levied only on the excess. This tax is one- third of the rate of discount when the excess is not more than 50,000,000 lire in the case of the Bank of Italy, 15,000,000 Hre in that of the Bank of Naples, and 4,000,- 000 lire in that of the Bank of Sicily. It is two-thirds of the rate of discount when the excess is not less than 50,000,000 lire and not more than 100,000,000 lire for the Bank of Italy, between 15,000,000 and 30,000,000 lire for the Bank of Naples, and between 4,000,000 and 8,000,000 lire for the Bank of Sicily. It is equal to the full rate of discount when the excess is, respectively, between 100,000,000 and 150,000,000 lire, between 30,- 000,000 and 45.000,000 lire, and between 8,000,000 and 12,000,000 Hre. When the excess is above 150,000,000, 45,000,000, and 12,000,000 lire, respectively, an extraordinary tax of 7>^ per cent is levied on the additional amount over and above these figures. This extraordinary tax is also im- posed in case the entire 40 per cent cover is not pro- vided, even when the normal maximum limit is not ex- ceeded. It must be borne in mind that so much of the circulation as corresponds to the cash cover is not taxed. It has been sought in this way to maintain the neces- sary elasticity of the bank-note circulation and to prevent 235 National Monetary Commission the danger of an excessive issue for the purposes of spec- ulation. As the banks are under the obhgation to make ad- vances to the State (at the present time, up to the sum of 125,000,000 Hre), the corresponding issue of notes is not included in the normal maximum issue, and a cash cover of only one-third is required. The cash cover, or metallic reserve, must consist, up to at least three-fourths, of gold coin or gold bullion, and the remaining one-fourth must be made up of coins of the Latin League nine-tenths fine and of subsidiary silver currency (this last not to exceed 2 per cent of the total reserve) . In place of metal, however, the following securi- ties, payable in gold or in silver coin of the Latin League (nine-tenths fine) may be partially substituted : Foreign bills of exchange; foreign treasury bills; certificates of sums deposited in current account in foreign banks. The quota of such substituted funds shall not exceed 11 per cent of the total cash reserve in the case of the Bank of Italy, 15 per cent in that of the Bank of Naples, and 15 per cent in that of the Bank of Sicily. It is further provided that the above-mentioned certificates of deposit shall never exceed 3K P^r cent of the legal circulation. The cash cover, or metalHc reserve, must under no circumstances be allowed to fall below the following figures: Lire Bank of Italy 400. 000. 000 Bank of Naples 120,000,000 Bank of Sicily 28,000,000 This metallic reserve must be kept absolutely separate from the other assets of the bank, and the State is to exercise a special supervision over its maintenance. 236 The Italian Banks of Issue This reserve guarantees the bank notes, but inasmuch as the holders of these notes can in no way derive any benefit from it because there can be no redemption out of this reserve, either at present or in future time, as will be explained later on, they have been accorded a preferred claim over the following assets of the bank : The gold coin, gold bullion, and legal silver coin in the possession of the bank not included in the above- mentioned minimum metallic reserve nor set aside as a reserve against sight liabilities; the Italian treasury bills acquired by the banks and other securities issued by the Italian Government or guaranteed by it ; the foreign bills not reckoned as part of the metallic reserve; sums due to the bank on account of loans on collateral and secured by such collateral, including sums due from the Government on account of advances and guaranteed by securities deposited by the Government; domestic bills of exchange as much as may be needed to make up the required sum. The following will serve as an illustration: The Bank of Italy had on September 30, 1909, a total circulation of 1,467,167,300 lire. Up to the sum of 400,000,000 lire these bank notes were secured by this minimum metallic reserve. There remained, therefore, 1,067,167,300 lire. For this there was the following security : Lire. Gold and legal silver coin 689, 194,527 Italian treasury bills and other government obligations or securities guaranteed by the Government 214, 137, 718 Foreign bills of exchange 1,838, 090 Sums due on account of loans 78, 953, 004 Domestic bills of exchange 83, 043, 961 Total 1,067, 167,300 237 National Monetary Commission These 1,067,000,000 lire represent the assets in regard to which the holders of the notes had the above-mentioned preference on September 30, 1909. Of course, as has been seen, the above-mentioned 400,000,000 lire of the metallic reserve are a security for the notes, but it is certain that the actual circulation of the Bank of Italy in peaceful times will never sink below 400,000,000 lire, and consequently these 400,000,000 lire of bank notes will never be presented for redemption, even if there should be a redemption of notes. In case of war the Government will appropriate this metallic reserve and make forced currency out of a corresponding amount of bank notes. The banks are not obliged to redeem their notes so long as the treasury notes are irredeemable. They may, if they choose, redeem them in treasury notes (as is usually done) , or they may, if they so desire, redeem them in coin, making use of the metallic money which they may have on hand over and above the minimum reserve, but in that case they have the right to exact from the holder of the notes the premium on coin set on that day at the nearest exchange. The treasury notes are issued in denominations of 5, 10, and 25 lire, but the 25-lire notes are now being with- drawn from circulation. The total issue is not permitted to exceed the sum of 465 ,000,000 lire. The total of the out- standing notes on September 30, 1909, was 433,61 1,895 lire. This national paper money is irredeemable ; it is a currency with forced circulation. There is, however, a guaranty fund, consisting of a gold reser^^e that may not be touched, which must not be less than 151,250,000 lire. It has ^38 The Italian Banks of Issue recently exceeded this sum, having amounted on Sep- tember 30, 1909, to 175,175,805 lire. The notes of the banks are restricted to the denomina- tions of 50, 100, 500, and 1,000 lire. The aggregate of the outstanding notes of these legal denominations on September 30, 1909, was as follows: Denominations. Lire. Per cent. 1,000 lire 271, 138, 000 307, 888, 000 730, 381, 800 630, 816, 600 13-98 15-87 37-64 32-SI 500 lire - - __ _- 50 lire. Total... 1,940, 224, 400 At the same date the three banks of issue held notes to the aggregate amount of 709,400,000 lire. The form of the notes in each denomination is pre- scribed by an ordinance of the minister of finance, as well as the number of notes that may be turned out at each printing. The manufacture of notes and the destruction of old or mutilated ones are carried on under the constant supervision of the finance minister. The manufacture is so arranged that no bank note can be turned out complete without the participation of the bank of issue and the Government in the operation. The notes that are not placed at the disposal of the banks are kept in a special treasury, and every withdrawal of notes from this treasury for the sake of putting them in circulation, as well as every deposit of notes not required for circulation, must be effected under the supervision of the state inspectors. 39781°— II- ■16 239 National Monetary Commission THE LEGAL-TENDER QUALITY OF THE BANK NOTES AND THEIR MUTUAL REDEMPTION AMONG THE BANKS OF ISSUE. — DURATION OF THE PRIVILEGE OF ISSUE. Bank notes are a legal tender, that is to say, they are a legal tender in those provinces in which the bank has either a branch {sede), a subbranch (succursale) , or an agency (agenzia), or else a representative charged with the redemption of the notes. At the present time the notes of all three banks of issue are a legal tender throughout the whole kingdom. By means of a voluntary agreement, which has to be sanctioned by the Government, each of these institutions may bind itself to put again in circulation the notes of another institution in making its payments. Inasmuch, however, as, in accordance with the law and by reason of the legal-tender quality, each institution is obliged to accept the notes of either of the other institu- tions, and as, in case one institution makes use in its pay- ments of the notes of another, a certain amount of such notes may remain in its treasury, it has been found neces- sary to regulate the mutual redemption of notes (the so-called " riscontrata ") between the banks of issue. This duty was legally reserved for the Government, which has issued the following regulations : On the loth, 20th, and last day of each month one bank informs the other of the amount of the notes and other sight paper (as, for example, drafts) of that other institution it has in its possession. After the lapse of five days from the date of this communication the latter (the debtor bank) has the right to take back its own notes, 240 The Italian Banks of Issue drafts, etc., in exchange for the notes, drafts, etc., of the former (the creditor bank) and other instruments that may legally serve for redemption, as, for example, national paper currency or coin. If it is not in a position to get back all its notes and other sight instruments in this man- ner, part remains in the hands of the creditor bank, which charges the amount to the debtor bank in a special account current, and may demand interest at a rate not exceeding three-fifths of the official rate of discount. The liquida- tion of the account is effected at the end of June and at the end of December of each year. So long as the bank notes continue to be legal tender the debtor bank can not be compelled in the exchange of the notes and the liquidation of the account current to hand in, in addition to the notes of the creditor bank, an amount of other instruments, that may legally serve for redemption, in excess of one-twentieth of its legally per- mitted circulation. The debtor bank is allowed to dis- charge the remainder of its obligations with bills of ex- change having no more than fifteen days to run and with government bonds. But inasmuch as all payments into and from the national treasury throughout the Kingdom are made through the Bank of Italy, and as this institution therefore accumulates a large volume ot notes of the other two banks that have been used in the payment of taxes, a pro- vision has been enacted in favor of these institutions, lim- iting the amount which they may be called upon to take back to the volume of the notes of the Bank of Italy which they happen to have in their possession. 241 National Monetary Commission The duration of the legal-tender quality of the bank notes is to terminate at the close of 1910 but a further prolongation is anticipated. Those of the institutions which at the expiration of the twenty-year privilege of the issue of bank notes (August 10, 1 9 13) will have fully discharged their legal obligations will have the privilege extended to the close of 1923. Two years before the expiration of the present term the con- dition of the banks is to be investigated by a commission, which shall ascertain whether it is such as to satisfy in every way the legal requirements with respect to the pro- longation of the privilege. This commission shall be com- posed of two members chosen by the Senate and two by the Chamber of Deputies and of three members appointed by decree of the Government with the approval of the cabinet. X. — Discounts, Loans, Deposits. — Drafts, Checks, ETC. — The Rate of Discount. In addition to the issuing of notes, the banks of issue are allowed to engage in the following kinds of business: (a) The discounting of bills and checks having no more than four months to run and bearing at least two signatures, treasury bills, warrants of the public ware- houses, and coupons of the securities on which loans may be made. (6) The making of advances for a term not exceed- ing four or six months (according to the nature of the securities furnished as collateral) on government bonds, >42 The Italian Banks of Issue treasury bills, ° and securities guaranteed by the State, on debentures of realty credit banks, securities issued or guaranteed by foreign governments and payable in gold, on gold and silver coin, on silk, on orders for merchandise (obligations to deliver a certain quantity of a particular kind of goods at a specified date), on warrants of the public warehouses, etc. The loans on securities may, according to the nature of the collateral, represent either the full nominal value or a fraction thereof — nine-tenths, four-fifths, three-fourths, two-thirds, or one-half. (c) The purchase and sale of foreign bills and drafts payable in gold with at least two good signatures and having three months to run at the utmost, as well as the issue of drafts on foreign countries. But as such business serves mainly for the accumulation of coin for the reserve and for effecting the monetary transactions of the Government, the banks are permitted to engage in it only to the extent that it is necessary for such pur- poses. In any case the aggregate amount involved in it, as well as in foreign accounts current, is not, as a regular thing, to exceed the twentieth part of the maximum per- missible note circulation. A temporary excess may be authorized or a contraction decreed by the finance min- ister if the note circulation with 40 per cent reserve exceeds the normal maximum circulation or if the state of the foreign exchanges seems to call for it. All other property, immovable as well as movable, es- pecially such as the banks may acquire in the payment a If these have a very long time to run, the term of the loan may be prolonged to as much as two years. fl43 National Monetary Commission of debts, is to be sold within two years. The banks are, however, permitted to invest such of their available re- sources as are not to go to the surplus in government bonds or in securities guaranteed by the State. The amount of such investments shall not exceed 75,000,000 for the Bank of Italy, 30,000,000 for the Bank of Naples, and 8,000,000 for the Bank of Sicily. Some special laws, however, have excluded from this restriction certain gov- ernment securities and the securities of several mortgage and agricultural credit institutions. The banks are not permitted to have any part of their assets in accounts current without security or to make loans on real estate. As was stated above, the affairs of the realty credit institutions connected with the banks of issue are being wound up. The banks are permitted to take current-account de- posits and pay interest on them. When the amount of these deposits exceeds 200,000,000 lire in the case of the Bank of Italy, 80,000,000 in that of the Bank of Naples, and 25,000,000 in that of the Bank of Sicily, the bank-note circulation shall be reduced, the amount of the reduction being one-third of the amount by which the deposits ex- ceed these limits. The rate of interest shall not exceed one-third of the rate of discount. The finance minister may, however, authorize the banks to allow a higher rate, which shall not exceed three-fourths of the rate of interest allowed on deposits in the postal savings banks. The banks also receive simple non-interest-bearing de- posits, and may draw banking assignments on foreign banking institutions for their own account or for account of a third part}^ issue, etc. 244 The Italian Banks of Issue An interesting feature of the business of these institu- tions is the issue of certificates of deposit having the char- acter of negotiable paper (vaglia canibiari), which are extensively used, lending themselves especially to the transfer of sums from one place to another. They are made out for the depositor for any amount he may desire, and are made payable to him or to a third party desig- nated by him. They may be transferred from one holder to another by a simple signature or by indorsement. Such drafts are payable at every branch or subbranch of the bank or at the office of any correspondent and cease to be valid only at the expiration of five years. Mention should be made of the following instruments issued by the Bank of Naples and the Bank of Sicily as certificates of interest-bearing and non-interest-bearing deposits : (a) Certificate of credit. This is handed out to a de- positor on his being credited with a deposit of at least 50 lire and is transferable b}^ signature or indorsement. (b) Small cash order. This is a certificate of credit issued for a sum of less than 50 lire. It is made out by the depositor himself and certified by the bank and is transferable in the same way as the preceding. (c) Cash order noted in jede. If the depositor wishes to make use of the sum certified in the certificate of credit for making several successive payments, the document is converted into one that is not transferable, a madre-fede, which assumes the character of a pass book. The instru- ment which the depositor makes out in order to dispose of part of his credit balance is presented with the madre-fede 245 National Monetary Commission and certified by the bank and is known as a cash order noted in fede because of the entry that has to be made on the madre-fede. The cash order (polizza) is transfer- able in the same way as the certificate of credit. The Bank of Naples has authorized its correspondents to draw banking assignments upon it up to an aggregate sum previously agreed upon, for which security is fur- nished. They are payable at every branch and sub- branch of the bank, but must be presented for payment within fifteen days. This shorter term distinguishes this instrument from the above-mentioned negotiable paper. The Bank of Italy has also authorized its correspond- ents under like conditions to make out such banking assignments, but they are to be drawn only upon a speci- fied branch or subbranch and they must be presented within a specified short time. This instrument is there- fore distinguished from the above-mentioned draft in a double manner — by being made payable at a specified place and within a short time. All demand liabilities are to be covered by a cash reserve amounting to 40 per cent of their aggregate amount. The composition of this reserve shall be the same as that of the reserve against bank-note circulation. In order to prevent the abuses of former times the Gov- ernment was empowered to make agreements with the three institutions and to prescribe uniform norms for the compilation of the lists of individuals and firms to whom credit is granted (the maximum amount being entered), for the mutual exchange of these lists or the partial com- munication of their contents, for the choice of corre- spondents, etc. 246 The Italian Banks of Issue The institutions receive for safekeeping (or in trust) securities, objects made of the precious metals, and money for account of the Government, individuals, and stock companies (first installment of the capital paid in at the organization) . The institutions may, conformably with the norms prescribed by royal decree, establish and operate clearing houses (stanze di compensazione) . This has been done in some of the large cities (Florence, Genoa, Milan, Na- ples, Rome, Turin). So long as the bank notes are legal tender, the normal rate of discount, as well as the rate of interest on loans, must be the same for all the banks of issue, and they can not be altered without the sanction of the Govern- ment. The Government is empowered to institute a change simultaneously for all three institutions. These are permitted, however, in certain cases to lower the rate of discount, although by not more than i per cent. They may do so in the case of loans to people's banks, agricultural loan institutions, banks established for the promotion of the mining industry, and discount banks that fulfill certain legal requirements, such as the promo- tion of the retail trade and the discounting of the war- rants of the public warehouses. They are empowered to do the same in the discounting of warrants issued by the public warehouses against deposits of silk, sulphur, and lemons and oranges and preparations made from them. This discount is termed *' sconto di favore " or pref- erential rate. The aggregate sum applicable to such transactions is limited to 100,000,000 lire for the Bank of Italy, 30,000,000 for the Bank of Naples, and 9,000,000 for the Bank of Sicily. 247 National Monetary Commission In addition to this, when the aggregate circulation of notes is below the normal maximum, the banks of issue are allowed to discount below the normal rate the prom- issory notes of mercantile firms and banking houses of the first rank which have not over three months to run. This is termed sconto a saggio ridotto or reduced rate dis- count. It is not permitted to fall below 3 per cent. Changes in the rate are to be made according to the state of the market on the appHcation of the banks by decree of the minister of finance. This reduced rate can not be legally obtained in the case of the renewal of promissory notes in whole or in part, or in the case of promissory notes put forth for the Hquidation of debts created by previous notes. The decisions of the discount commission in regard to these promissory notes must be by an abso- lute majority of the members, and a special bookkeeping has to be provided for this business. The notes thus discounted must be kept in a special portfolio, so that they shall be absolutely apart not only from the notes discounted at the normal rate, but also from the "pref- erence" notes of the people's banks, agricultural loan institutions, etc., in order that they may be under the special supervision of the Government. There are thus three rates of discount — the normal or official rate, the preferential rate {sconto di javore) and the reduced rate {sconto a saggio ridotto) . XL— The Surplus (Fondo di Riskrva, Massa di RiSPETTO) . In the case of the Bank of Italy the surplus is to be equal to one-fifth of the nominal capital. It is consti- tuted by setting aside one-twentieth of the yearly net 248 The Italian Banks of Issue earnings. When the yearly net earnings exceed 5 per cent of the paid-in capital, 20 per cent of such excess is taken and assigned to the surplus. When the amount of the surplus shall in this manner have attained to the legal requirement, the general assem- bly of the shareholders may resolve that an additional part of the net earnings shall be set aside for the accumu- lation of special surplus funds for particular purposes. The funds thus constituted (a part of the surplus is still set aside as security for the operations of the mortgage depart- ment, now in process of liquidation) are invested in gov- ernment obligations or in securities guaranteed by the Government. An ' ' extraordinary surplus ' ' {riserva straor dinar ia) was constituted out of the profits realized in the liquidation of the '* immobilized assets " and the sums that had been set aside for the purpose of covering any incidental losses that might be incurred in such liquidation. A part of the interest on this surplus for the ten years 19 14-1923 is to be turned over to the shareholders as an indemnity for the lowering of the paid-in capital mentioned above. The Bank of Naples and the Bank of Sicily have no shareholders, and the yearly net earnings are, therefore, devoted to some extent to public purposes and mainly to the creation of a surplus, which has already attained to a very respectable sum. In the case of these two institu- tions, inasmuch as they have no shareholders but own their capital outright, the distinction between the property which constitutes their regular capital and the surplus is of minor importance. In their case the surplus is in reality merely a distinct part of their property in their bookkeeping. 249 National Monetary Commission XII.— The Banks of Issue in their Relations to THE State. — Taxes. — The Government's Share in THE Profits. — Statements. The banks of issue are obliged to advance money to the Government at the rate of interest of i}i per cent net, government bonds and treasury bills being deposited with them as security. The maximum amount of these advances is fixed at 115,000,000 lire for the Bank of Italy and 10,000,000 lire for the Bank of Sicily. On account of its former unfavorable condition, the Bank of Naples was freed from this obligation. The Bank of Italy is furthermore obliged, on the demand of the minister of finance, to advance to the National De- posit and lyoan Institution {Cassa dei Depositi e Prestiti) cash sums up to 50,000,000 lire at a rate of interest not exceeding 3 per cent, government bonds or other obligations guaranteed by the Government being given as security. The receiving and disbursing of the public moneys throughout the whole extent of the Kingdom has been intrusted to the Bank of Italy since February i, 1895. The bank furnished as security government bonds to the value of 90,000,000 lire. The supervision over the banks of issue rests with the ministry of finance. For this purpose the ministry maintains a central bureau under an inspector-general and a permanent commission. The former discharges the actual duties of supervision. An inspector is dele- gated by the Government to attend the meetings of the general assembly of the shareholders and the superior council of the Bank of Italy and of the general and ad- 250 The Italian Banks of Issue ministrative councils of the Bank of Naples and the Bank of Sicily, and is empowered to interpose his veto against any resolution considered by him illegal, a report being submitted by him to the finance minister, with whom the ultimate decision rests. It is his business to report directly concerning all resolutions, even those against which he has not interposed his veto, and on the strength of his report the minister of finance may within five days suspend and finally annul all illegal resolutions irrespective of whether the inspector has interposed his veto or not. The resolutions adopted at the meetings of the mana- ging bodies must be communicated to the minister of finance by the director-general within two days. The finance minister orders periodical (triennial) and ex- traordinary examinations of the cash on hand, the reserve, the circulation, and the stock of bills and promissory notes, in particular the foreign bills and the notes that have been discounted at reduced rate {saggio ridotto). The central bureau exercises a general supervision over the administration and over the nature of the busi- ness transactions with respect to legal requirements. It supevrises the business of the Bank of Italy in the receiving and disbursing of public moneys. The per- manent commission draws up legal opinions for the benefit of the Government concerning important ques- tions relating to the bank laws and their execution and the administration and inspection of the banks. This body consists of four commissioners appointed by the Sen- ate from its midst, four commissioners appointed by the Chamber of Deputies from its midst, and five delegates 251 National Monetary Commission of the Government. The delegates of the Government are: The president or a member of the council of state, the president or a member of the chamber of audit, the director-general of the treasury, the inspector-general of the banks of issue in the ministry of finance, and the director-general of the credit department in the ministry of commerce. The banks are subject to the following taxes and dues: (a) The general personal-property tax. (6) The dues in connection with demand liabilities and loan transactions. (c) An ordinary tax on circulation levied upon the amount of notes outstanding (taking the average for the year) below the normal maximum. Of this amount, how- ever, that portion which corresponds to the sum of the reserve and the advances to the Government is not sub- ject to the tax. In other words, so much is to be de- ducted from the total circulation. With the discharge of their obligations in the matter of the progressive Hquida- tion of their real estate assets and such investments as were no longer permissible, the banks had the benefit of a gradual reduction of this tax on circulation, which at first was i per cent of the average amount of notes outstanding (with the above-mentioned deduction) and which came down in 1909 to the minimum of one- tenth of I per cent, the immobilized assets having ceased to exist. {d) A special and an extraordinary tax on the amount of notes in circulation in excess of the normal maximum (or the amount not covered by the prescribed reserve of ?52 The Italian Banks of Issue 40 per cent) , as described in detail in a preceding section. Here likewise the amount corresponding to the reserve is exempt from the tax. {e) A sort of penal tax on transactions not sanctioned by the law, amounting to three times the rate of discount or of interest involved in the business in question. if) Inspection fees, designed to reimburse the Govern- ment for the expense of supervision. The annual sums paid by the banks are at present as follows: Bank of Italy, 70,000 lire; Bank of Naples, 21,000 lire; Bank of Sicily, 5,000 lire. {g) The Bank of Italy pays the regular transfer tax on its shares when they change hands, and the Bank of Naples and the Bank of Sicily, as permanent institutions owning their own capital, have to pay mortmain dues, or rather, taxes. The State receives furthermore (since January i, 1909), as its share of the profits of the banks of issue, one-third of the yearly net earnings, if these are in excess of 5 per cent and below 6 per cent, and if the net earnings exceed 6 per cent, one-half of such excess in addition. It is to be noted here that the determination of the percentage of the net earnings of the Bank of Italy relatively to the capital is to be made with reference only to the paid-in capital and with deduction of a definite portion assigned to the pen- sion fund in behalf of the employees. In the case of the Bank of Naples and the Bank of Sicily the percentage of the net earnings is reckoned with reference to the aggre- gate amount of their free capital and the surplus, as the latter is merely a separately reckoned part of the former. 253 National Monetary Commission On the tenth, twentieth, and last day of each month the banks have to send to the ministry of finance a detailed statement of their condition. The form of the statement is prescribed by royal decree. The state- ments are all pubUshed succinctly in the official organ of the Government and those that appear at the end of the month are given in full to the public by the ministry of finance in a special bulletin. This bulletin contains also the monthly reports concerning the amount of bank notes issued and redeemed, the volume of the discount and loan transactions at each of the branches, the exchange of notes between the banks, the treasury notes, etc. XI 1 1. — Statistics. Condition of the banks of issue on December ji, iSg", and September jo, igog [In millions of lire.] Date of Bank. ^ >> II 'I 3 CO Deposits and other lia- bilities Reserve against circula- tion and demand lia- bilities.o 1 1 000, 000 When the circulation of notes exceeds these amounts, the tax on the excessive circulation, up to twice these same amounts shall be equal to two-thirds of the rate of discount, provided always the prescribed relation be maintained with the metaUic reserve. On the circulation which exceeds the amounts of 100,000,000 hre and up to 150,000,000 lire for the Bank 274 Law Relating to Banks of Issue of Italy, 30,000,000 lire and up to 45,000,000 lire for the Bank of Naples, and 8,000,000 lire and up to 12,000,000 lire for the Bank of Sicily, provided that the prescribed relation with the metallic reserve be maintained, the tax shall be equal to the whole rate of discount. On further excesses of circulation, or when the pre- scribed relation with the metallic reserve is not main- tained, the institutiofis shall pay to the State an extraor- dinary tax of 7.50 per cent. ARTICLE 22. [Article 10, law of August 10, 1893, No. 449. Article 3, law of July 2, 1896, No. 253.] The circulation tax on notes, and that imposed, as pre- scribed by article 67 of the law (Text) of July 4, 1897, No. 414, on the circulation of sight bills therein described, shall be paid between January 20 and July 20 of each year, at the average rate of the respective circulation ascertained for the six months preceding. ARTICLE 23. [Article 16, agreement before mentioned of November 28, 1896. Article x6, Appendix B to law of January 17, 1897, No. 9. Article 12, Appendix C to law of January 17, 1897, No. 9. Appendix A to law of December 31, 1907, No. 804. Article 5, agreement of November 29, 1908, between the Bank of Italy and the Government and approved by law of December 24, 1908, No. 123.] Beginning with January i, 1909, the State shall par- ticipate in the earnings of the Bank of Italy exceeding 5 per cent per annum on the capital invested, net after making all deductions prescribed in the succeeding article, and in the earnings of the Bank of Naples and the Bank of Sicily exceeding 5 per cent on the total free capital — 275 National Monetary Commission capital and surplus — to be determined at the time this present article goes into effect. The State shall participate to the extent of one-third of the net earnings exceeding 5 per cent when such net earn- ings do not exceed 6 per cent; one-half of the said earn- ings when such earnings exceed 6 per cent. ARTICLE 24. [Article 13, law of August 10, 1893, No. 449. Article 7, Appendix B to law of January- 7, 1897, No. 9. Article i, Appendix C to law of January 17, 1897, No. 9. Article 4, law of December 31, 1907, No. 804. Article 5, aforesaid agreement of November 29, 1908.] In the years 1909 to 1923, inclusive, 5 per cent of the net earnings of the Bank of Italy shall be deducted from the net earnings for the fiscal year for a pension fund, as stipulated by article i of the agreement of November 29, 1908, between the said bank and the Government, and in the years 1914-1923 a constant annuity of 750,000 lire shall be deducted, for the same purpose and from the same earnings, before declaring a dividend. In the year 1923, by agreement between the royal treas- ury and the administration of the bank, the necessary measures shall be taken to assure a pension to such as are on the pay rolls of defunct institutions from 1924 and on; if there shall be a final remainder, it shall go even- tually into the earnings of the institution. The banks of Naples and of Sicily shall be empowered to grant, yearly, to approved purposes of pubhc utility and benefit, a sum which must not exceed one- tenth of the earnings of the previous year. '276 Law Relating to Banks of Issue The Bank of Sicily is authorized to give for agricultural education in Sicily one-tenth of the net earnings of its agrarian credit and two-hundredths of those of the bank- ing business. T1T1.H III. — Advances to the Treasury. ARTICLE 25. [Article 30, law of August 8, 1895, No. 486. Article 11, law of March 3, 1898, No. 47.] The total amount of advances which the banks of issue must make to the treasury is fixed at 125,000,000 lire, divided as follows: Lire. Bank of Italy 115, 000, 000 Bank of Sicily 10, 000, 000 The interest due from the treasury on said advances is made up at the rate of 1.50 per cent free of all taxation. Title IV. — Operations. ARTICLE 26. [Article 12, law of August 10, 1893, No. 449.] The institutions of issue can not carry on operations other than those indicated in the following articles : Section I. — Discounts. ARTICLE 27. [Article 12, law of August 10, 1893, No. 449,] Banks of issue may discount for not more than four months : (a) Bills of exchange bearing the signatures of two or more persons or firms well known to be solvent. (6) Treasury bonds. 277 National Monetary Commission (c) Warrants {note di pegno) issued by public ware- house companies legally constituted and free consignments {franchi depositi) . (d) Stock certificates on which the bank may make advances. ARTICLE 28. [Article 5, law of December 27, 1903, No. 449. Law of December 31, 1907, No. 804 (Appendix A). Article 8, law of July 5, 1908, No. 404.] During the legal currency of notes the normal rate of discount is the same for all the banks and may not vary without the authorization of the minister of the treasury. The minister of the treasury, by a provision apphcable to all three banks simultaneously, may effect changes in the normal rate of discount whenever he may consider that conditions of the market so require. But the banks may discount, at a charge of i per cent or less, bills of exchange presented by people's banks, mining banks,^ and by such institutions of discount and agricultural credit as are organized: 1. To serve as intermediaries between the small trades- men and the banks of issue. 2. To discount warrants of public warehouses and con- signments free taxation {franchi depositi) . The banks of issue are also authorized to discount at i per cent or less, for two-thirds of their value, warrants issued on citrus products, on whose certificates of deposit in the pubHc warehouses the Chamber of Citrus Fruit, established by law of July 5, 1908, No. 404, has made advances, except as per article 1 2 of the same law. a See the royal decree of February 9, 1908, No. 62 (Appendix III). 278 Law Relating to Banks of Issue Said discount at preference rate must not exceed: Lire. For the Bank of Italy loo, ooo, coo For the Bank of Naples 3o> ooo> 0°° For the Bank of Sicily • 9> ooo^ 00° The banks may moreover apply the preferential rate to the direct discount of warrants: (a) Issued by the companies, as per article 2 of the law of July 8, 1903, No. 320, which conduct the public stores for vegetables. {h) On silks deposited in pubHc warehouses legally constituted. (c) On sulphur deposited in public or similar warehouses as per article 13 of the royal decree of July 22, 1906, No. 378. Besides the exceptions considered in this article, the banks of issue may charge discount on bills of exchange, during the period of their legal currency, at a rate lower than the normal, under the circumstances determined by the royal decree of October 25, 1895, No. 639. '^ The said rate, which must in no case be less than 3 per cent, may be varied by decree of the minister of the treasury, with the consent of the banks of issue, whenever the conditions of the market render it advisable. a Appendix II. 279 National Monetary Commission Section II . — Advances.'' ARTICLE 29. [Law of December 31, 1907, No. 804 (Appendix A). Article 19, law of July 12, 1908, No. 444.] The banks may make advances for not more than four months : 1 . On government bonds or treasury bonds. On long- term treasury bonds an advance may be made for as long as two years, under article 3 of the law of April 7, 1892, No. III. 2. On bonds guaranteed by the Government or of which the Government has guaranteed the interest, whether o By virtue of article 5, of the royal decree of July 11, 1904, No. 337, having force of law, the banks of issue are authorized to make advances on the special notes issued by the Autonomous Section of Communal and Pro- vincial Credit in accordance with the law of July 8, 1904, No. 320, and the accompanying decree, under the conditions fixed by the present article of the Text of the banking laws for advances on "government bonds or bonds guaranteed by the State." By article 6 of the law of June 25, 1905, No. 261, the certificates authorized by article 2 of the same law and already issued, or such as shall be issued, under succeeding laws, are equalized for all intents and purposes — and therefore for the purposes of this present Text of law — with ' ' bonds on the public debt of the State or bonds guaranteed by the State." According to article 13 of the agreement of Mar. 26, 1906, between the Government and the Italian Southern Railway Company and approved by law of July 15, 1906, No. 324, the obligations issued up to and including Mar. 26, 1906, by the said company under its statutes are placed on a parity with "bonds directly guaranteed by the State," in the purview of article 12 of the banking law of Aug. 10, 1893, No. 449, and also of articles 29 and 32 of this present text. According to article 3 of the agreement of July 20, 1906, between the Government and the Bank of Italy for a loan in favor of the colony of Eritrea — an agreement approved by royal decree of Aug. 26, 1906, No. 531— the personal certificates of debt given to the said bank in relation to the said operation are considered "for all purposes as government bonds." As such will also be considered the certificates to be issued by the govern- ment of Eritrea to the Bank. of Italy, as per the royal decree of Dec. 6, 1908, No. 755. 280 Law Relating to Banks of Issue directly or by subvention expressly restricted to the payment of said bonds. 3. On notes of realty credit institutions. 4. On notes issued under the law of June 25, 1906, No. 255, by the department temporarily annexed to the Catan- zaro branch of the Agrarian Credit Institution "Vittorio Emmanuele III." 5. On bonds payable in gold, issued or guaranteed by foreign States. On bonds classed under Nos. i, 2, and 3, and on long- term treasury bonds, advances may be made up to nine- tenths of their market value. On bonds under No. 4, up to three-fourths of their current value. On bonds under No. 5, up to four-fifths of their market value. On treasury bonds up to their full value. None of the above-named bonds may be reckoned at more than the nominal value. 6. On gold and silver coins, whether national or foreign, in legal circulation, and on gold bars. 7. On silks, raw and in organzine or woven, reckoned at not more than three-fourths of their current value, and on silver bars reckoned at not more than two- thirds of their current value. 8. On certificates of deposit issued by public ware- houses legally established and on consignments free of taxation (franchi depositi), and on orders of merchandise or sulphur, for not more than two-thirds of the value of the merchandise which they represent. 281 National Monetary Commission 9. On certificates of deposits of spirits and cognac actually on hand in the warehouses estabhshed accord- ing to articles 8 and 9 of the Text of the law on spirits, approved by royal decree of September 16, 1909, No. 704, for not more than one -half of the value of the alcohol and cognac deposited. The banks may, moreover, make advances up to six months. (a) On certificates of deposits of silks, issued by public warehouses legally established. (6) On certificates of deposits of sulphur issued by public warehouses, for which see law of July 15, 1906, No. 333, and on certificates equalized therewith by article 13 of the royal decree of July 22, 1906, No. 378, up to four-fifths of the value of the sulphur represented by the said certificates, net after all deductions, as per the law of June 6, 1907, No. 286. The rate of interest on such advances may be less by not more than i per cent than the normal rate on other advances. (c) On certificates of deposit issued by public ware- houses dealing in citrus fruits and their products, con- ducted by companies as per article 2 of the law of July 8, 1903, No. 320, for not more than two-thirds the value of the merchandise which they represent. (d) On deposits of products of citrus fruits up to two-thirds of their value. {e) On the obligations issued as per article 171 of the Commercial Code; article 3, law of July 9, 1905, No. 415; article 8, law of June 16, 1907, No. 540; articles 282 Law Relating to Banks of Issue 7 and 8, law of July 12, 1908, No. 444, by grantee railway and subsidized extraurban tramway companies, for not more than three-fourths the current value of such obligations. ARTICLE 30. [Article 35, law of August 8, 1895, No. 486. Article 26, Appendix P to same law.] During their legal circulation, the legal interest on advances (see preceding article) is the same for all the banks, and may not vary without the authorization of the Government. The minister of the treasury may change the interest rate on advances whenever he deems that the conditions of the market require it. Section III. — Purchase and sale of hills of exchange, drafts, and assignments on foreign countries. ARTICLE 31. [Article 12, law of August 10, 1893, No. 449. Law of December 31, 1907, No. 804, Appendix A.] The banks of issue may purchase and sell for cash or on time, on their own account, drafts and assignments on foreign countries, and bills of exchange on foreign countries bearing the signatures of two or more firms well known to be solvent, for a term not greater than three months, and payable in gold. Such operations, during their legal currency, may not, without authoriza- tion from the minister of the treasury, be extended further than may be necessary for the said banks to restore their metallic reserve, to convert into deposits 283 National Monetary Commission abroad such personal certificates as may be used for the payment of import duties, or to satisfy possible orders of the treasury. The banks of issue may make investments in foreign bills of exchange and accounts current, not intended for the reserve covering circulation and sight debts, within such limits as may be prescribed by the minister of the treasury, in view of the general conditions of the money market.'' Section IV. — Direct investments. ARTICLE 3 [Article 12, law of August 10, 1893, No. 449. Article 32, law of August 8, 1895, No. 486. Article 14, law of July 7, 1905, No. 349. Article 57, law of June 25, 1906, No. 255.] The banks of issue may bave a working fund in Italian bonds, or other bonds issued or guaranteed directly by the Government, of a current value not to exceed: Lire. For the Bank of Italy 75, 000, 000 For the Bank of Naples 30, 000, 000 For the Bank of Sicily 8, 000, 000 o Royal decree of Sept. 17, 1908, No. 585. & By the terms of article 5 of the royal decree of July 11, 1904, No. 337, "having force of law," the banks of issue are authorized to make use of the special realty bonds (cartelle) issued by the Autonomous Section of Communal and Provincial Credit as per the law of July 8, 1904, No, 320, and the corresponding decree, for the conversion of the loan of the Commune of Rome, for all the purposes and investments for which said banks of issue are authorized to employ government bonds and bonds guaranteed by the States. See note to article 29 regarding the equalization of railway certificates and the obligations of the Italian Southern Railway Companies with govern- ment bonds and bonds guaranteed by the State. By article 3 of the agreement entered into July 20, 1906, between the Government and Bank of Italy for a loan to the colony of Eritrea, which 284 Law Relating to Banks of Issue The banks of issue are also authorized to invest in ItaHan consoHdated bonds or in the aforesaid bonds the free portion of their respective surplus, over and above their working fund, within the limitations above estab- lished, and over and above the investments as per articles 34 and 35, within the limitations therein estab- lished. With the previous authorization of the treasury, the Bank of Italy and the Bank of Sicily may employ in the acquisition of realty bonds 3.75 per cent or less of their respective realty credits: the former up to five and the latter up to two miUions of the surplus. The banks of issue are, moreover, authorized to acquire the realty bonds issued, under article 57, law of June 25, 1906, No. 255, by the department temporarily annexed to the Catanzaro branch of the Agrarian Institution of Credit "Vittorio Emmanuele III." ARTICLE 33. [Article 3, law of June 25, 1905, No. 261.] The state railway bonds, issued to the banks of issue under article 2 of the law of June 25, 1905, No. 261, may be used for two purposes, namely, for new investments of agreement was afterwards approved by royal decree of Aug. 26, 1906, No. 531, the said bank is entitled to make use of the special personal certifi- cates of debt, granted to it as an equivalent, and considered "for all pur- poses as government bonds," in all transactions in bonds made within the limitations and for the ends established by the provisions of the present Text. According to the said article of the agreement, the bank must assign by preference such certificates to cover fixed transactions provided for by the laws in force. For the same purpose it may use the certificates which may be issued to it by the government of Eritrea, as provided by article i of the royal decree of Dec. 6, 1908, No. 755. 285 National Monetary Commission money in bonds, whether said investments are on their own account or for affiUated enterprises, within the Hmi- tations and for the objects specified by the provisions of this present text, and to surrogate bonds of various kinds ah-eady held by them, especially if protected by security. Such surrogation shall take place after a previ- ous agreement, for the protection of the bond market, between the administrations of the banks of issue and the minister of the treasury. ARTICLE 34. [Articles 8 and 9, Appendix C to law of January 17, 1897, No. 9. Article 2, law of March 3, 1898, No. 47.] The Bank of Sicily is authorized to invest in Italian treasury bonds, without time Umit, the sums received up to and including month of December, 1899, from the liquidation of "immobilizations," provided that such sums be not over 2^ million lire. The bonds thus acquired shall go to increase the work- ing fund, for which see article 32. ARTICLE 35- [Article 6, Appendix C to law of January 17, 1897, No. 9.] The Bank of Sicily is authorized to invest in government bonds, besides the ordinary working fund and the bonds appHed to the surplus, a sum equal to that which, as a result of the liquidation of the account cturent with the realty branch {azienda fondiaria) , shall be reahzed from "immobiUzations," less the last grant to the said realty branch of 300,000 lire. 286 Law Relating to Banks of Issue Section V. — Deposits in accounts current. ARTICLE 36. [Article 12, law of August 10, 1893, No. 449. Article 2, Appendix Etc law of July 22, 1894, No. 339. Article 34, law of August 8, 1895, No. 486. Article 7, law of July 2, 1896, No. 253. Law of July 15, 1909, No. 492.] The banks of issue may receive deposits in accounts current bearing interest. When the total of such deposits exceeds : Lire. For the Bank of Italy 200, 000, 000 For the Bank of Naples 80, 000, 000 For the Bank of Sicily 25, 000, 000 the institutions shall reduce their circulation by one-third, except in the case of the Bank of Sicily, for which see article 51. ARTICLE 37. [Article 12, law of August 10, 1893, No. 449. Law of July 15, 1909, No, 492.] The rate of interest on interest-bearing accounts current must not exceed one-third of the rate of discount. The minister of the treasury has the right to authorize the banks of issue to secure to interest-bearing deposits in current account a rate of interest not greater than three-fourths of the rate paid on deposits in the Postal Savings Bank. Section VI. — Issue of customs certificates and provincial revenue service. ARTICLE 38. [Article 7, Appendix I to law of July 22, 1894, No. 339.] Until further notice the banks of issue shall issue per- sonal certificates for the payment of import duties. These certificates are issued upon request against the payment, in state or bank notes, of the amount of the 39781°— II — 19 287 National Monetary Commission certificate required plus the rate of exchange, determined on the base of the average rates for bills on foreign countries in the exchanges of Genoa, Milan, Naples, and Rome on the day previous to that on which the said cer- tificates are issued. The relations between the treasury and the banks of issue, resulting from the provisions of the present article, are regulated by special agreement, approved by royal decree.*^ The custom houses will accept said certificates in pay- ment of import duties instead of metallic currency, pro- vided that they are presented within ten days after their date of issue. ARTICLE 39. [Law of December 31, 1907, No. 804 (Appendix A).] The banks of issue may assume the duties of provincial revenue offices. They are authorized to make advances of overtax to the Provinces for which they have assumed such offices for a sum not greater than the total of two bimonthly payments. The sums thus advanced must be repaid within the maximum term of six months after the date of the loan, and a new advance can not be granted until the expiration of two months after the entire repayment of the original loan. « Royal decree of July 11, 1895, No. 416. 288 Law Relating to Banks of Issue Section VI I. — Provincial service of the Royal Treasury. ARTICLE 40. [Article 9, agreement of October 30, 1894, before mentioned.] The Bank of Italy, up to and including December 31, 191 2, shall act as state treasury in all the Provinces of the Kingdom, subject to fixed rules ^ and regulations. ARTICLE 41- [Article 10, agreement of October 30, 1894, before mentioned.] The guaranty bond for the administration of the treasury is 90,000,000 lire in government bonds or bonds guaranteed by the State, calculated at the market value, less the deduction of one-twentieth of the value thus determined, the difference to be made good in the event of a drop in the market. In this guaranty bond is included the sum set aside by the Bank of Italy under articles 2 and 3 of the agree- ment entered into with the Government on October 30, 1894, and approved by royal decree of December 10, 1894, No. 533, reproduced in Appendix Q to the law of August 8, i8q5, No. 496. ARTICLE 42. [Article 12, agreement of October 30, 1894, before mentioned.] As a fund for the performance of the ordinary treasury service a permanent dotation of 30,000,000 lire is granted to the bank, with suitable provision in cases of extraor- dinary payments. When the fund at the disposition of the treasury for any reason becomes greater than 40,000,000 Hre, or shows o Regulation approved by royal decree of Jan. 15, 1895, No. 16. 289 National Monetary Commission a deficit of 10,000,000 lire, interest on the difference is due to the treasury or the bank, respectively, at a uni- form rate of 1.50 per cent free of all taxation. The permanent dotation made to the bank for the treasury service must be reintegrated every ten days in such a manner that its amount at the close of the loth, the 20th, and the last days of the month shall not be less than 30,000,000 Hre. ARTICLE 43- [Article 13, agreement of October 30, 1894, before mentioned.] As long as the government notes remain inconvertible with metallic currency, and the exchange of notes of the banks of issue is regulated by the provisions of article 8 (second and third paragraphs) of the present text, the moneys deposited in gold and silver in the vaults of the bank on account of the treasury must be kept in the same specie at the disposition of the treasury or as- signed to payments in coin to be designated by the treasury. Section VIII. — Special operations of the Bank of Naples — Savings branch, pawn office, custody of remittances and savings of Italian emigrants abroad. ARTICLE 44. [Article 12, law of August 10, 1893, No. 449. Articles 3 and 12, Appen- dix T to law of August 8, 1895, No. 486. Article i, law of Jul}^ 7, 1901, No. 334.] The Bank of Naples may continue its pawn-office operations. The savings branch of the Bank of Naples has its own separate free capital, distinct from that of the bank and free from all claim by the creditors of the bank. 290 Law Relating to Banks of Issue The bank guarantees with its whole free capital all the obligations of the said branch in favor of all third parties. The branch is administered by the director-general of the bank, making use therefor of the offices and the employees of the bank. The bank m.ay hold in interest-bearing accounts cur- rent, at a rate of interest not less than half the interest paid by the branch to the public, an amount which shall never be more than one-fifth of the total assets of the branch. The branch is authorized to invest gradually two- tenths of its deposits in agrarian credit operations in the southern Provinces and in Sardinia, under the law of July 7, 1 901, No. 334, and in accordance with the regu- lation for the execution of the same,'' and to engage in such other operations as it may by special laws be author- ized to perform. All other assets of the branch must be invested exclu- sively in government bonds or bonds guaranteed by the State. ARTICLE 45- [Article i, law of February i, 1901, No. 24.] The Bank of Naples is authorized to collect, hold, invest, and transmit into the Kingdom the savings of ItaUan emigrants. For such purposes, and with the previous authorization of the treasury, it is empowered to make special agreements with banking houses and with the ministry of posts and telegraphs. « Regulation approved by royal decree of July 21, 1904, No. 536. 291 National Monetary Commission It shall also provide, with the permission of the treas- ury, for the establishment of agencies where the need of such agencies appears. The bank is authorized to assign up to 2,000,000 lire of its surplus, and, if necessary, of its free capital, for the establishment of a dotation fund for this service. The bank is forbidden to perform any operation of discount or subsidy for emigrants or any transactions except those indicated in the first paragraph of this pres- ent article. The regulation "" determines the precautions which the bank must take to protect itself against possible losses resulting from the fluctuation of exchange. AR'JICLE 46. [Article 2, law of February i, 1901, No. 24.] Of the net profits of the service described in the pre- ceding article, one-half shall belong to the Bank of Na- ples, and is especially intended, in time, to bring the dotation fund up to the sum of 2,000,000 lire and reim- burse the surplus or the free capital of the bank for the sum withdrawn. The other half shall belong to the "emigration fund," in conformity with the rules established by the regula- tion. When the 2,000,000 lire shall have been reimbursed to the surplus or the free capital of the bank, two-thirds of the net earnings shall belong to the said "emigration fund." a Regulation approved by royal decree of Dec. 29, 1901, No. 571, and modified by royal decree May 16, 1904, No. 323, and Feb. 22, 1906, No. 46. 292 Law Relating to Banks of Issue ARTICLE 47. [Article 4, law of February i, 1901, No. 24.] The Bank of Naples shall make a yearly report to the minister of the treasury on the conduct of the service described in articles 45 and 46. The report, with the comments of the permanent commission of inspection of banks of issue, shall be presented to Parliament by the minister of the treasury. Section IX. — Agrarian credit and savings branch of the Bank of Sicily. ARTICLE 48. [Articles i and 2, law of March 29, 1906, No. 100.] An agrarian credit branch of the Bank of Sicily is estab- hshed, to be known as "The Agrarian Credit of the Bank of Sicily." The funds necessary for this branch are made up as follows : (a) An initial fund of 3,000,000 lire furnished by the Bank of Sicily, to be withdrawn from the amount of the surplus available for investment. (6) An advance in interest-bearing account current granted by the Central Savings Bank "Vittorio Emman- uele" in Palermo up to the sum of 2,000,000 lire, and in no case exceeding two-tenths of the bank's saving deposits. (c) Three-tenths of the deposits in the savings branch of the Bank of Sicily as per article 49. In the fund described in (a) are included the amounts at present invested in agrarian credit operations transacted by the Bank of Sicily by virtue of the law of January 23, 1887, No. 4276 (third series). 293 National Monetary Commission ARTICLE 49- [Article 4, law of March 29, 1906, No. 100.] The Bank of Sicily is authorized to act as a savings bank in the Sicihan Provinces. The operations of the savings branch are regulated by provisions of the law of March 29, 1906, No. 100, reproduced in the present text, and by the law of July 15, 1888, No. 5546 (third series). ARTICLE 50. [Article 5, law of March 29, 1906, No. 100.] The management of the savings branch shall be sepa- rate from that of the bank itself. Until such time as the savings branch shall have acquired from its annual earn- ings a free capital of its own amounting to at least one- tenth of its deposits, the bank of Sicily guarantees wdth its whole property all the obligations of the savings branch in favor of all third parties. ARTICLE 51. [Article 6, law of March 29, 1906, No. 100. Article 8, law of July 15, 1906, No. 383. Law of July 15, 1909, No. 492.] The Bank of Sicily may invest the initial fund, the advance in account current of the Central Savings Bank "Vittorio Bmmanuele" of Palermo, and not more than three-tenths of the deposits in its savings branch, in agra- rian credit operations as per the terms of the law of March 29, 1906, No. 100, and of the regulation for its execu- tion. " The other assets of the savings branch of the bank shall be invested as follows : (a) Not more than two-tenths in an interest-bearing account current with the Bank of Sicily. « Regulation approved by royal decree of Dec. 23, 1906, No. 731. 2Q4 Law Relating to Banks of Issue (b) The remainder in bonds issued or guaranteed by the State. The sums deposited in account current with the Bank of Sicily are not included in the maximum limit of 25,000,000 Hre, for which see article 36 of the present text. Section X. — Other regulations. ARTICLE 52. [Article 56, law of June 25, 1906, No. 255.] The Bank of Naples shall contribute 4,500,000 lire, payable in thirty annual payments beginning with the fiscal year 1905-6, toward forming the free capital of the temporary department annexed to the Catanzaro branch of the Agrarian Credit Institution "Vittorio Emmanuele III," for which see article 17 of the law of June 25, 1906, No. 255. ARTICLE 53. [Article 18, law of July 15, 1906, No. S33-] The Bank of Sicily shall cooperate in the formation of the capital of the autonomous company for the erection and maintenance of the public warehouses for sulphur, for which see articles 2 and 18 of the law of July 15, 1906, No. 333. The amount of the quota shall be taken by the bank from its surplus. ARTICLE 54. [Articles 2 and 23, law of July 15, 1906, No. 333.] The 2,000,000 hre which the Bank of Sicily has advanced to the obligatory "Association" for the Sicilian sulphur industry, for the formation of the capital of the autono- mous Bank of Mining Credit for Sicily, shall be reimbursed 295 National Monetary Commission by the "Association" to the Bank of vSicily by install- ments within a period not longer than eight years, at the lowest rate of interest. The Bank of Sicily shall have a preferential claim on future profits on the sale of sulphur, as per article 13, No. 2, of the law of July 15, 1906, No. 333, and on all assets of the before-mentioned Bank of Mining Credit. ARTICLE 55. [Article 17, law of July 15, 1906, No. ^-^z?)-] The Bank of Sicily shall act gratuitously as the cashier of the obhgatory "Association" of the Sicilian sulphur industry. Deposits of the "Association" shall bear the same rate of interest as that which the bank pays on savings deposits in interest-bearing accounts current. ARTICLE 56. [Article 3, law of July 15, 1906, No. 441.] The savings branches of the Bank of Naples and the Bank of Sicily are authorized to set aside 5 per cent of their respective annual net earnings to increase their quota of the amortization of land taxes due, respectively, in the continental provinces of the former Kingdom of Naples and in Sicily. ARTICLE 57. [Article 25, law of April 30, 1874, No. 1920. Article 9, before-mentioned agreement of October 30, 1894.] The state treasury, except as under the agreement of October 30, 1894, entered into with the Bank of Italy regarding its treasury service, may deposit any amount 296 Law Relating to Banks of Issue with the branches and subbranches of any institution of credit authorized to issue notes, and may demand pay- ment in full or in part from one or more branches or sub- branches of the same institution. This service shall be rendered to the State free of charge. ARTICLE 58. [Article 12, law of August 10, 1893, No. 449.] Banks of issue are forbidden to engage in new land- credit operations. ARTICLE 59. [Article 12, law of August 10, 1893, No. 449.] Any unsecured operation in account current is for- bidden, whether at the time of opening an account or afterwards. ARTICLE 60. [Article 12, law of August 10, 1893, No. 449.] The bonds, securities, and movable property, which in their nature are different from those described in Title IV, and which have come into the possession of the banks as a result of some of their credits, must be liquidated within two years. The banks may, however, accept mortgages on immovable property for overdue credits, but they must liquidate such operations within the term of three years. ARTICLE 61. [Article 14, law of August 10, 1893, No. 449.] At the end of every fiscal year the new overdue credits must pass to the ''loss" column, and the amounts recov- ered must be credited to the year in which they have been wholly or partly collected. 29; National Monetary Commission ARTICLE 62. [Article 14, law of August 10, 1893, No. 449.] Banks which shall engage in operations not permitted by law are liable to a tax equal to triple the respective rate of discount, reckoned on the total amount of the illegal business transacted, and for the full duration of such operations. Title V. — Mutual Redemption of Notes Among the Several Banks. article 6. [Article 5, law of August 10, 1893, No. 449.] Each bank must accept in payment notes of the other banks wherever these have a branch or a representative. Such notes must be received also for regular operations in Provinces where they have legal circulation. During the legal circulation of notes the rules for their exchange among the banks are established by a royal decree to be presented to Parhament for approval.^ ARTICLE 64. [Article 14, agreement of October 30, 1894, before-mentioned.] During the legal currency of notes, and while the Bank of Italy performs its treasury service, said bank may not demand of the other banks of issue either the exchange or the redemption of their notes except in an amount equal to the amount of the notes of the said Bank of Italy which may be held by the other institutions. o Royal decree of February 27, 1894, No. 58, presented on the same day to the Chamber of Deputies (see acts of Parliament bills No. 318 and 318-a), but not enacted into law. 298 Law Relating to Banks of Issue TiTivE VI . — Liquidation of the Banca Romana. ARTICLE 65. [Article 25, law of August 10, 1893, No. 449. Article 11, before-mentioned agreement of October 30, 1894. Articles 28 and 29, law of August 8, 1895, No. 486.] The liquidation of the Banca Romana is assumed by the Bank of Italy at its own risk and peril. The time for the liquidation of the ''immobilizations" involved in the liquidation of the Banca Romana is twenty years, beginning with January i, 1894, and at the rate of one -fifth of the total every four years. The State is not responsible for losses which may result from such liquidation even if such losses shall exceed the entire amount to be contributed by the Bank of Italy for such liquidation, as per the terms of article 67. ARTICLE 66. [Article 29, law of August 8, 1895, No. 486.] The acts of sale to third parties of real property pos- sessed by the Banca Romana on October i, 1894, and the transference to third parties of credits already existing on November 23, 1893, Hmited to the value of said credits, are subject only to a fixed registration tax of 3.60 lire. Such preference shall be without effect after December 31, 1912. 299 National M o 7t e t ary Commission ARTICLE 67. [Article 29, law of August 10, 1893, No. 449. Article 2, aforesaid agree- ment of October 30, 1894. Article 8, aforesaid agreement of November 28, 1896. Articles i and 2, aforesaid agreement of November 29, 1908.] The Bank of Italy vShall pay each year 2,000,000 lire on account of the liquidation of the Banca Romana to cover losses resulting from the said liquidation. If that shall be insufficient, the deficit shall be provided for from the extraordinary reserve, for which see the aforesaid agreement of November 29, 1908. The advances due from the Bank of Italy for the liqui- dation of the Banca Romana shall not bear interest in favor of the former. ARTICLE 68. [Article 10, law of March 3, 1898, No. 47.] The circulation of notes of the Bank of Italy not covered by metallic reserv^e but representing the debit of the account current of the Banca Romana in liquidation is not subject to tax. Such circulation must never exceed the amount which was registered in said account current on October i, 1896,** and it must be reduced in proportion to the legal Hquida- tion and amounts set aside for that purpose. ARTICLE 69. [Article 30, law of August 10, 1893, No. 449, and articles 28 and 29, law of August 8, 1898, No. 486.] The Bank of Italy shall institute and prosecute at its own expense all actions against the functionaries and ad- ministrators of the Banca Romana, as such, and all others who may be found in any way responsible for the losses of the said Banca Romana. 0^ 720,295.43 lire. 300 Law Relating to Banks of Issue Title VII. — Liquidation of Realty Credits of Banks OF Issue. Section I. — Special regulations for the department of credit foncier or realty credit of the former Banca Nazionale nel Regno and of the Bank of Sicily. ARTICLE 7°- [Article i, law of July 7, 1905, No. 349.] The realty credit departments in liquidation of the former Banca Nazionale nel Regno and of the Bank of Sicily are empowered to convert their actual loans, not only into 3.50 per cent realty bonds, but also by the issue of new realty bonds bearing interest at 3.75 or 3.25, or 3 per cent net, with the retirement of those actually in circulation, saving the obligation on the borrowers of the Bank of Sicily for the payment of contributions fixed by article 95. The loans converted must be extinguished in a period of time not greater than fifty years from the day of the contract or the act of conversion. In no case may the ejxtinction of loans be protracted beyond the year i960. The mortgages already registered to guarantee the loans preserve their validity and their grade, without need of a special reserve, to guarantee the capital, the interest, and incidentals of the loans substituted, including the contributions, for which see article 95. The realty credit administration may have the acts of conversion marked on the margin of mortgage records remaining in effect to guarantee the loans. For the conversion of loans the banks will endeavor, so far as possible, to give preference to those guaranteed by 301 National Monetary Commission farm properties and to those for small sums, always with due regard to the order of applications. ARTICLE 71. [Article 2, law of July 7, 1905, No. 349.] Any difference between the redemption at par of the bonds in actual circulation and the seUing price of the new ones shall be charged to the borrower; but, by a pre- vious special agreement with the said borrower, it may be advanced by the realty credit administration. For such advances the realty credit branches are au- thorized to dispose of the ordinary reserve fund provided for by article 1 1 of the law (text) of February 22, 1885, No. 2922. The realty credit of the former Banca Nazionale nel Regno may, moreover, dispose of the special reserve fund, for which see article 9 of the Appendix A to the law of January 17, 1897, No. 9, modified by article 13 of the law of July 7, 1905, No. 349. ARTICLE 72. [Article 15, law of July 7, 1905, No. 349.] Independently of the conversion of the loans, the realty credit departments in Hquidation of the former Banca Nazionale nel Regno and of the Bank of Sicily may always proceed to the conversion of their bonds, as per the provision of article 38, paragraphs i, 3, and 5, of the law of July 17, 1890, No. 6955 (3d ser.). The conversion may be effected by the issuance of new realty bonds at the rate of 3.75 and 3.50 per cent interest. The reduction of the interest on the corresponding bonds must be effected within a period not longer than one year from the date of the conversion. 302 Law Relating to Banks of Issue Notice of the intended conversion must be published in the Official Gazette of the Kingdom and in all the period- icals for legal announcements, and must be repeated twice ten days apart. After one month from the last publication the bonds in circulation can no longer be presented for redemption, and the interest will be calculated at the rate of the new bonds. While the conversion is being effected, all the provisions contained in the present text in favor of debtors of the realty credit administration will be applicable to the loans, including the right to extend the loans, as per article 70. ARTICLE 73. [Article 6, agreement of November 28, 1896, before cited. Article 5, Appendix C to law of January 17, 1897, No. 9.] For possible monetary needs, the department of realty credits in liquidation of the former Banca Nazionale nel Regno and that of the Bank of Sicily may obtain, respec- tively, from the Bank of Italy and from the Bank of Sicily, advances on deposits of government bonds or bonds guaranteed by the State, according to article 29, at a favorable rate of interest, provided it be not less than 3.50 per cent per annum. For the realty credit department of the former Banca Nazionale nel Regno, the said advances may be made also on bonds of the dotation fund, disposable by the terms of article 76, and up to one-half of their value. 39781°— II 20 303 National Monetary Commission ARTICLE 74. [Article 6, agreement of November 28, 1896, before cited. Article 5, Appendix C to law of January 17, 1897, No. 9.] The banks are not subject to tax on internal advance operations described in the preceding article. ARTICLE 75. [Article 7, agreement of November 28, 1896, before cited. Article 7, Appendix C to law of January 17, 1897, No. 9. Article 12, law of March 3, 1898, No. 47.] The real property actually in the possession of the realty credit branch in liquidation of the former Banca Na- zionale nel Regno and that of the Bank of Sicily, or which may come into their possession by the terms of article 104, computed at balance values, shall pass respec- tively to the Bank of Italy and the Bank of Sicily with exemption from all taxes. ARTICLE 76. [Article 8, agreement of November 28, 1896, before cited.] The dotation fund of the realty credit branch in liqui- dation of the former Banca Nazionale nel Regno shall maintain the constant proportion of one -tenth of the actual circulation of bonds. The Bank of Italy shall liquidate on account of the realty credits the excess of the dotation fund. ARTICLE 77. [Article 3, law of Januar>^ 17, 1897, No. 9.] If the provision of articles 73 and 76 shall not suffice to guarantee the transactions of the realty credit branch in liquidation of the former Banca Nazionale nel Regno and of that of the Bank of Sicily, the deficits shall be charged 304 Law Relating to Banks of Issue to the balances for the corresponding fiscal year of the respective banks. ARTICLE 78. [Article 16, law of July 7, 1905, No. 349.] The rules for carrying out the provisions of the law of July 7, 1905, No. 349, relative to the conversion of loans, are fixed by appropriate regulation.*^ For the application of the other provisions of the same law the rules in force are continued in the regulation of February i, 1891, No. 66. Section II. — Special regulations for the realty credits of the Bank of Naples. ARTICLE 79. [Article i, law of July 7, 1905, No. 350.] For the department of realty credits in liquidation of the Bank of Naples beginning with January i , 1906, the interest on loans is reduced to 3.75 per cent, except for the contribu- tions as per article 95. Power is granted to request and to allow the extension of the amortization for a period of time not greater than fifty years from the date of new contracts, with the benefits and rules of the present law, save as regards the obligations of borrowers for the pay- ment of contributions as per article 95, and the mainte- nance of the existing law relating to the interest, the amortization of the realty bonds, and their guarantees. In no case may the extinction of the loans be extended beyond i960. The mortgages already registered to guarantee the loans shall preserve their validity and their grade, without