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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:




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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-

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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




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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






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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?



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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:







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(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




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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.
















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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













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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













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