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eh. London, December 14, 1927. ITALIAN FTABILIZATION Meeting at Bank of England, December 13, 1927 - 11:a) a.m. For Bank of England: Governor Norman Mr. Siepmann For Federal Reserve Bank: Governor Strong For Bank of Italy: Governor Stringher £gr. Deneduce Dr. Nathn. Governor Stringher stated that, certain important preliminary steps having been successfully concluded, he was now of the opinion that de .lure stabilization of the lira should be promptly effected, if an agreement could be reached as to the necessary arrangements. These important steps included the consolidation of the entire floating debt of Italy into long-time obligations, the balancing of the budget with a substantial surplus, the consolidh.tion in the Bank of Italy of the note issues of the three banks of issue, and the retirement of small denomination notes heretofore issued by the Italian Government; all of which had been or would shortly be successfully concluded. He thought it desirable to discuss the general background for stabilization before undertaking the discussion of details which would appear to imply commitments. Governor Norman stated that Governor Strong desired to ask certain questions in behalf of both, of us in regard to the position, which he thought should be disposed of before undertaking a discussion of plans for stabilization. The questions addressed to Governor Stringher and a paraphrase of the answers follow: 2 As to the Itzdirm Budget. (1) What effect has deflation had on the receipts? Deflation has been felt in the revenues, which have been somewhat reduced, but the integrity of the budget has not been impaired, nor is it endangered for the future. The period of test had been sufficient to satisfy him completely that the strain upon the budget resulting from the enhancement in the value of the lira from about 40 to about 5 1/20 had been successfully resisted. (2) Moat effect has deflation had on expenditures? Mr. Beneduce stated that the surplus of the budget prior to deflation had been large and afforded ample protection against impairment of receipts below expenditures. Certain reductionh in expenditures had been ef- fected, however, which were principally: (a) Those which automatically occurred in certain State expenditures due to the revaluation of the lira itself and the decline in prices which resulted; (b) cost of living indemnity allowed to employes of the State had been either entirely discontinued or greatly reduced; (c) expenditures for public works had been reduced. Be is convinced that no difficulty need be anticipated in maintaining a budget surplus. (3) :;hat effect has deflation had on salaries and wages? The above answers this question. (4) hat effect has deflation h/id on exports and imports? Figures are to be supplied answering this. question, but in general, while there had been some reduction in exports, there had been a greater reduc http://fraser.stlouisfed.org/ tion in Federal Reserve Bank of St. Louis imports, and the figures for exports of the last few months show a de- 3 cided improvement. The progress of deflation bad in fact made the balance of trade and the balance of payments more favorable. (5) Will the surplus permit regular repayment of 500 million lire to the Bank? The plan for stabilizing the lira will result in the complete extinguishment of the debt of the State to the Bank. Consequently the item of 500 million lire to be paid each year in reduction of the State's debt will disappear from the budget, which will to that extent benefit by stabilization. (6) Will any further repayment be made? There will be no further payments by the Government to the Bank of Italy, as the debt will be extinguished. (7) It was brought out that the plan of stabilization contemplates that the Government will purchase from the Bank its present stock of silver coins and pay in gold for the silver. As to the Government Debt. (1) Is all floating debt refunded? All of the floating debt of the Government has now been by the consolidation loan. funded The first maturity of Government obligations oc- curs in 1961. (2) May the Government borrow short money from the market? The Government still has the right to borrow short-time money in the market, but it is not anticipated that there will be any need to do so, except for short periods in anticipation of tax receipts, as is done by the American Treasury. from the (3) May the Government borrow short money from the Bank? The Government after stabilization will be authorized to borrow Bank only within the statutory limit( which, as I recall, is 360 4 5 ex change. As to the Bank of Italy. (1) How will the profit on revaluing gold be disposed? The entire profit on the revaluation of gold will be turned over to the State and applied to the extinguishment of the State's debt to the Bank, and it will be sufficient to wipe out the debt entirely. Governor Stringier had given every consideration to the suggestions made when I was in Italy 18 months ago that this profit really belonged to the Bank, but he said other advantages accruing to the bank as a consequence of stabilization would amply compensate for the surrender of this profit. These included the reduction of taxes imposed upon the Bank, the extension of the Bank's charter, the taking over of the valuta reserve, and other important concessions to the Bank. (2) Will the statement be purged? There are no doubtful assets in the Bank requiring writing off. In fact, the Bank has large concealed assets. (3) and What disposition will be made of Consortium assets? (4) Will there by any losses? The Consortium and Independent Section assets are to be liquidated and this department of the Bank's business wound up as promptly as feasible. There will be no loss. Large reserves have been established already, due to the application of the taxes accruing to the State on the note issue from other sources. and The State guarantees the Bank against ultimate loss on the Independent Section assets anyway. (5) What value will be placed on gold held abroad? The gold held abroad, consisting of b22,000,000 due from the British Government to the Italian Government and now appearing in the staterent of the Bank is repayable to the Italian Government over the next 64 years 6 7 short Treasury bills should be issued, and his proposals have always Leen Lccepted. (11) How till the statutes of the Eank be amended? The project has been reduced to writing and a brief summary in Pnglish translation till be delivered. The necessary decrees relating to these matters to be issued under the stabilization law of course await the conclusion of necerx&ry negotiations. (12) that is the amount of the Bank's (a) Gold (b) Valuta (13) Of the Treasury's (a) gold, (b) valuta? Bonk vill be After stabilization, the reserve position of the as follows: Gold rctually held in vaults of the Bank Gold hela at the Treasury and the Mint 1,173,000,000 lire 25,800,000 1,199,400,000 lire Total gold. in the Bank's physical possession Valuta. held by the Bank or by the Institute and to be turned over to the Bank 1,827,400,000 lire Foreign Treasury bills curried by the Bank 235,600,000 TotL,1 z.ssel..z in zolt s:: d:..$ countries accruill to the r,063,=,07:1, lire Bank Silver in :land which willthe converted into gold by be Treasury Total reserve of gold or its equivalent 93 700_,_000 lire 3,356,100,000 lire This is the total of gold tt the old value and of valuta before revaluing, and its expression on the new gold basis wil] be determined by the new coefficient. The liabilities c.s of October 31 upon which the reserve calculation is to be basec vere as follows: Liability for notes of the hank of Italy 18,091,7C0,000 lire Sight demand drafts and similar sight obligations Current accounts (deposits) 632,500,000 " 2,473,500,000 Public deposits (Treasury accounts) .59.9,100,000 Total of liabilities " 7.1,726,800,000 lire. here is the valuta held? (14) All valuta resources a.re geld in gold standard countries, Toinly in New York and London, and a small amount in Switzerland. (15) What control is there of the foreign exchange market? This is answered by a memorandum delivered at the meeting. Governor Norman raised the question as to 'hat legal or moral responsibility the Bank may have for contracts or engagements of any kind or character entered into by the Institute of Foreign Exchange. Governor Stringher and Yr. Beneduce replied briefly cs follows: "The Institute has a capital of 10 million lire, which is entirely owned by the Bank. It has a reserve of 300,000,000 (paper) lire invested in good securities, which is the accumuittion of profits realized by the operations of the Institute. Three-quarters of these profits accrue to the State when the Institute is liquidated, and one-ouarter to the Bank, Which must transfer the profit to its "reserve" or surclu: :- .ccount. The Institute financer 7,urchoer when necessary by borrowing from the bank, tae bank retaining the valuta of valutaias security. This loin ooes not separately appear in the stotemont of the Bank and at times has been o lcrge amount. :bile at the time of Fret activity end speculation in the foreign exchange market the Institute had large 4. engagements in forward exchange, these have nova .ell been liquidated. The Institute has no obligations or commitments outst(nding of any kind other than the amount -hich it is eorrovinc from the Bank of against which the Lank of ItLly holes the vlauts, but the Institute does conduct operations outeide of the mere dealini, in exchnge - that is to say, it is the Agency for the receipt and distribution of German Reparations and acts as the Agent of the Treasury in conductint: its operations in foreign exchange, such as those required to meet the foreign 'debt service. A balance sheet showing the assets,liabilities and obli- gations of the Institute will be delivered." (16) Is there any speculation in lire? Following official statements as to the policy of the Government in the matter of stabilization, there was considerable speculation in the lira During September and October, based upon the theory that the lira would considerably appreciate in value, and that speculation added somewhat to the valuta resources of the Institute. During the last tvo weeks, hovever, follow- ing the publication of the Government's statement that the value of the lira could be maintained at about its present level, there has been some evidence of speculation for a. decline, which has drawn slightly but not seriously upon the valuta resources of the Institute. This is one reason why Governor Stringher desires to negotiate arrangements for stabilization just as promotly as possible, so as to head off any speculative tendency. (17) .here and by whom is the speculation carried on? was similar recently developing The speculation to tIldt of El year or seemed to have its origin in Holland, Germany, Satzerland and of course originating in Italy. Experience seems to slim; that ore a. consistent buyer of the lira and interested in an advance -seller. will the of the Bank be? st will the surplus of the Bank be? 10 The net capital of the rank znd the amount of ita surplus or reserve fund have not been finally settled. It has assets now adequate for capital, and Governor Stringher desires to avoid any spectacular change in the statement which would stimulate speculation in the stock. He hopes to settle the ouestion of capital and reserve between the Government and its interests on the one hand and the shareholders and their interest on the other hand, on an equitable basis. (20) ;hat provision for losses has been made? No provision for losses is needed, a.c everything of this sort has been done and- the statement of the Sank is on a conservative basis, .ith considerable hidden reserves. (21) Lill there be further deflation; Governor Stringher and Mr. Ben educe consider that the principal read- justments imposed upon Italy as a result of the policy of deflation have been completed. This, they feel, includes the influence of deflation upon the coun- try's foreign trade, upon real estate prices and rents, upon the wholesale price level, and very largely upon salaries and wages. salaries and wages must be effected. Some further readjustment of As retail prices and the cost of living have not yet been fully reduced corresponding to the enhanced value of the lira, some further readjustments will be necessary, and they believe that salaries and t.sLes will come down just as rapidly as the reduction in living costs warrants. (22) How will the bank manage any return floe. of capital, such as France ex2erienced? Governor Stringher anticipates that there may be some flow of capital to Italy - not only a repatriation of exported capital, but foreign money seeking employment in Italy. Long-time loans will be controlled. If there is any considerable flow of capital to Italy following stabilization, it must be principally met by the following methods: 11 12 13 14 (a) The checks might not be adecuately safeguarded against imitation; (b) They might stay in circulation too long; (c) Competition between the banks might result in this having a wide extension, resulting in large surrenders of notes of the bank of Italy, in substitution for which these circulating checks would be issued; (d) It might develop bad banking habits and impinge upon the prestige and authority of the Bank of Italy. Both Governor Stringher and Mr. Beneduce explained that this matter had already been receiving earnest attention. Governor Stringher was not con- tent with the development, even though these checks were payable to order and were subject to the usual stamp tax and drawn against actual cash in bank. He had accordingly arranged with the Government to have all the Italian laws relating to instruments of payment carefully examined and overhauled, and necessary measures taken to impose such restrictions, conditions and restraints upon this development as would assure that no unsound practices grew out of it. Was struck by the fact that he had already undertaken just such measures as seemed to be desirable to deal tith the situation. I GREECE POINTS _ARISIITG OUT OF THE ALERICAE GOVERMENT LOAIT It is assumed that, in accordance with what Lonsieur Cafandaris has always stated, the will be reduced pro tanto. million Loan In other words, the greater part of the -.2,3 millions which was contem-olated for Refugees will come from American Government sources. Question 1. Is it the intention of the American Government that their advance should be administered by the Refugee Commission, of which Mr.Eddy is Chairman, and subject to the safeguards and trusts embodied in the statutes of the Commission? It is most desirable that this should be so in the interests of coordination and of the proper use of the money to obtain the best results. (The Secretary of the Treasury's announcement of 5th December seems satisfactory on this point.) question 2. Can the American Government advance be regarded as part of the .-29 million Loan? If so, no difficulty will arise about security and about the control of the Assigned. Revenues by the International Commission for these matters would already be covered by the decisions on the 51,9 million scheme. All that would be required would be a statement on the prospectus that Tranche "A", A2 million had been advanced on certain terms by the American Government and a offered for public subscription, [or something to the effect that a U.S.Government Loan of X ranks pari passu with this loan for purposes of security, &c.j - 2 - 4 FRANCE We learn of nothing new. As to all of the above countries, I think we might start the ./ assembling of some information, just in case need arises to use it. 4 - 5 - Italy and there was not the slightest possibility of any change. There was a little human touch to the conversation, starting with just such misunderstanding as served to bring out the real facts much better than if it had been more bluntly and accurately expressed. I think it is safe to say that before the meeting was over we all developed not only great confidence in Stringher but a great deal of affection for him. His honesty is too obvious to escape attention. Signor Beneduce, I would estimate, is about 43 to 45 years of age, possibly a little older, rather a lawyer type and unquestionably one of the really able men of Italy. He is a strong anti-Fascisti, but enjoys such complete confidence from Mussolini that he is employed by the Dictator on various difficult and delicate matters with entire confidence, and Beneduce is willing to accept such employment, although unwilling to accept any office, because of his patriotism. I was told that he could have had a Cabinet position at any time, had he been willing to accept it. For something like 16 years he has been in one capacity or another as special adviser to Stringher, and Stringher has great confidence in his judgment. He speaks very little English, but understands it somewhat. Stringher O -10- that could be done towards"giving a tot of brandy", as Norman expressed it, and that he was not only meeting the views of the Government but also expressing his own mature judgment after long study and reflection, that 9* and 19 were the best and safest rates to establish. We then agreed on that point, making it perfectly clear in the record that we were doing so upon their responsibility and as a result of their representations. The telegrams from Rome had authorized Stringher to request us to submit a project for a private bank credit to Morgans. We therefore sent for Whigham at once and outlined the situation to him, without dis- closing the proposed rate. As I had expected, a telegram he sent to New York brought the reply instantly from Leffingwell referring to my conver- sation with him before sailing, in which I had stated that I thought any Italian Government financing in connection with stabilization was out of the question. The 0100,000,000 issue,which the prospectus stated was for stabilization purposes, would be discredited. When it was fully explained to Whigham and by him cabled to Leffingwell that this credit would not have that effect, I think they were all quite satisfied. It developed, however, that it was necessary for them to take Hambros, Barings and Rothschilds - 13 - -15- - 16 -