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Adverse clearings in a monetary system with multiple note issuers: the case of Italy (1861–1893)

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Abstract

We study the regime of multiple note issuers that characterized the Italian monetary system from the unification of Italy in 1861 to the creation of the Bank of Italy in 1893. We describe how the system evolved and we analyze how it functioned by studying the clearing of notes among banks. Since by law banknotes had to be redeemed at par, we focus on the ability of banks to keep notes in circulation before redemption. We estimate adverse clearings of notes issued by the dominant bank [Banca Nazionale degli Stati Sardi (BNS)] in the provinces where this bank had branches and we find that the entry of a smaller issuer limited the BNS’s capacity to keep its notes in circulation at the local level. We take this as evidence that competition in note issuance worked as an effective discipline device. Our results are consistent with the analysis of Pareto (Journal des économistes 3–28, 1893) who maintained that the fall of the Italian system was not due to the failure of the competitive mechanism, but rather to the altering of the rules of the game by the government.

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Notes

  1. Banknotes discounts were instead typical of the US monetary system before the Civil War. See, among others, Rolnik and Weber (1988) and Weber (2003).

  2. See, for example, Selgin (1994) and Selgin and White (1994).

  3. The Banca Romana was the successor of the bank of issue in the former Papal States.

  4. As will be better explained below, the crisis originated from the building and the farming sectors and soon spread to the banking sector, due to the bad loans accumulated by banks.

  5. For an in-depth analysis of the economic performance of Italy after unification and before World War I, see Fenoaltea (2011).

  6. There were other issuing banks in the pre-unification states, but only these banks survived unification.

  7. On the project pursued by the government to create a monopoly of note issue, see also Sannucci (1989).

  8. See Fratianni and Spinelli (1991) and Di Nardi (1953).

  9. Some of them had to resort to the discounting of bonds on foreign markets. That was the case, for example, of the Tuscan Banks: see Supino (1929) for more details.

  10. Changing the plafond was not the only measure taken to favor the bank: in 1872, for example, the BNS was authorized to double her capital.

  11. Gold export was favored by the fact that Italy was part of the Latin Monetary Union, set up in 1865 by Italy, France, Switzerland and Belgium.

  12. See, for example, Ferrara (1868).

  13. Under the same Act, the obligation to request government authorization to modify discount the rate was removed; however, it was reintroduced four years later by the 28th June 1885 Act.

  14. One example is the attempt to bail out the Banca Tiberina in 1889; on that occasion, BNS obtained the authorization to increase its circulation by 50 million liras without the backing of reserves.

  15. In particular, the Act imposed a 10-day limit for notes clearing activity and limited convertibility to the amount of notes the issuing bank could redeem.

  16. For a reconstruction of the debate on the responsibility of the Government in the crisis of BR, see also Canovai (1911).

  17. The inspection also uncovered irregularities by the other issuing banks, such as exceeding circulation, making long-term loans and making bad loans. The other banks’ activities were not as serious as those of BR, which was found guilty of criminal conduct.

  18. Even in the USA during the Free Banking Era (1838–1860), such requirement existed in many free-banking states. More recently, the European Central Bank (1998) has established a policy on electronic money for the Eurosystem that stipulates several minimum requirements of electronic money issuers, including par redemption.

  19. For the theory of private money issuance in a par redemption regime, see Selgin (1994) and Selgin and White (1994).

  20. For an analysis of the role played by consumers brand preferences in the stability of the unrestricted issuance system, see Selgin (1998).

  21. In particular, the role played by the frequency of the “baratto” was well known to Italian economists. For example, Supino (1929) reports the fact that in 1861–1862 BNS notes returned to the bank for redemption from five to five and a half times in a year implied that BNS had to carry out costly operations in order to cope with adverse clearings (page 18). Also, he reports the case of BTC which, having rapidly expanded its circulation from 1872 to 1874, found it difficult to have its notes accepted by consumers; as a result, Supino continues, BTC notes returned to the bank for redemption every 60 or 70 days, so that the bank had to face high clearing costs.

  22. For an analysis of the competitive environment during the period under study, see Gianfreda and Janson (2001).

  23. BTC was created in 1861.

  24. However, notes were convertible and the reserve (capital)/circulation ratio was usually established by the banks bylaws and usually set at 1/3. Also, Italian pre-unification states had different monetary systems. Northern Italy—as well as France—was in a gold standard regime while the silver standard prevailed in the South. Bimetallism was adopted for the whole territory in 1862 at an official 1:15.5 gold/silver exchange rate, with a caveat: in order to prevent the Gresham law to operate, the silver coins had a higher nominal value than the value of the silver content and a limited redeeming power than gold coins.

  25. Note circulation increased during whole period under study from 233 million liras in 1861 to 1.5 billion liras in 1893. In what follows data on total note and coin circulation are drawn from De Mattia (1967); data on the single issuing banks are drawn from the banks' balance sheets except for BR circulation, which are taken from Di Nardi (1953); data on M1 are drawn from Fratianni and Spinelli (1991); the remaining data are taken from Istat, the Italian Institute of Statistics.

  26. A sharp increase in BNS circulation occurred just before unification, from 1858 to 1861; it is worth recalling that the redemption of BNS notes was suspended in 1859–1860. BNS circulation is discussed below.

  27. Adunanza Generale degli Azionisti, editions from “anno dodicesimo” to “anno sedicesimo” and from “anno vigesimo sesto” to “anno quarantunesimo.”

  28. The data are found, respectively, in the “introito di biglietti dal cambio” and “esito di biglietti della Banca dal cambio” columns in the BNS balance sheets.

  29. The towns were the following: Firenze, Genova, Milano, Napoli, Palermo, Roma, Torino, Venezia, Alessandria, Ancona, Aquila, Arezzo, Ascoli, Asti, Avellino, Bari, Barletta, Belluno, Benevento, Bergamo, Bologna, Brescia, Cagliari, Caltanissetta, Campobasso, Carrara, Caserta, Castellammare, Catania, Catanzaro, Chieti, Como, Cosenza, Cremona, Cuneo, Ferrara, Foggia, Forlì, Agrigento, Lecce, Livorno, Lodi, Lucca, Macerata, Mantova, Messina, Modena, Monteleone, Novara, Padova, Parma, Pavia, Perugia, Pesaro, Piacenza, Pisa, Porto Maurizio, Potenza, Ravenna, Reggio Calabria, Reggio Emilia, Rovigo, Salerno, Sassari, Savona, Siena, Sircacusa, Sondrio, Sora, Spezia, Taranto, Teramo, Terni, Trapani, Treviso, Udine, Vercelli, Verona, Vicenza and Vigevano.

  30. Alessandria, Aquila, Ascoli Piceno, Asti, Barletta, Belluno, Benevento, Bergamo, Brescia, Castellammare, Como, Cremona, Cuneo, Ferrara, Forlì, Lodi, Macerata, Mantova, Modena, Monteleone, Novara, Parma, Pavia, Perugia, Pesaro, Piacenza, Porto Maurizio, Ravenna, Reggio Emilia, Rovigo, Sassari, Savona, Sondrio, Sora, Spezia, Taranto, Teramo, Terni, Treviso, Udine, Vercelli, Verona, Vicenza and Vigevano.

  31. The BNS towns where the bank started to operate when another issuing bank was already present were: Arezzo, Bari, Firenze, Livorno, Lucca, Messina, Napoli, Palermo and Pisa. The BNS towns where the bank opened a branch in the same year or time interval (the 66-74 interruption) than another issuing bank were: Avellino, Caltanissetta, Agrigento, Roma, Salerno and Trapani.

  32. The annual series of the BNS circulation and cash outflow are indeed strongly correlated. Figure 12 in the “Appendix” shows the two series for the time period covered by our estimations.

  33. We attributed the price of the consols prevailing in each of the above-mentioned Stock Exchange to the provinces in the same area, assuming that a bank located say near Milan or within the border of the pre-unitarian State having its capital in Milan would belong to the same market as Milan.

  34. For an example of difference-in-difference estimation where the treatment has also a time dimension, see Cappellari et al. (2012).

  35. The results of the estimations are in the “Appendix”.

  36. See Brambor, Clark and Golder (2006).

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Acknowledgments

We thank Dario Antiseri, Nathalie Janson, Giovanna Vallanti and two anonymous referees for their helpful comments. We also thank the P. Baffi Library of the Bank of Italy for the support in collecting the data.

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Authors and Affiliations

  1. Università della Tuscia, Via San Carlo 32, 01100, Viterbo, Italy

    Giuseppina Gianfreda

  2. Università di Roma “Tor Vergata”, Via Columbia 2, 00133, Rome, Italy

    Fabrizio Mattesini

Authors
  1. Giuseppina Gianfreda
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  2. Fabrizio Mattesini
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Correspondence to Giuseppina Gianfreda.

Appendix

Appendix

See Fig. 12 and Table 3.

Fig. 12
figure 12

BNS annual note circulation and outflow (thousand liras)

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Table 3 Results of the multiplicative interaction model according to specification 2
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Gianfreda, G., Mattesini, F. Adverse clearings in a monetary system with multiple note issuers: the case of Italy (1861–1893). Cliometrica 9, 1–25 (2015). https://doi.org/10.1007/s11698-014-0106-x

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