Front Page Titles (by Subject) CHAPTER II.: BANKING UNDER THE UNIFICATION OF THE KINGDOM. - A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada)
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CHAPTER II.: BANKING UNDER THE UNIFICATION OF THE KINGDOM. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 3 (France, Italy, Spain, Portugal, Canada) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 3 (France, Italy, Spain, Portugal, Canada).
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BANKING UNDER THE UNIFICATION OF THE KINGDOM.
NATIONAL BANK OF THE KINGDOM OF ITALY.
WE have now arrived at the period of the unification of the Kingdom of Italy. For this period, we take, as our principal sources of information, the work of Signor G. B. Salvioni, the Report on Banking Inspection, and Parliamentary documents.
From the beginning of the unification of Italy, one bank took a commanding position—the Banco Nazionale del Regno d’Italie (National Bank of the Kingdom of Italy). It had its origin in the fusion of two banks created by letters patent of March 16, 1844, and October 18, 1847, at Genoa and Turin. They were chartered for twenty years, and were authorized to operate as banks of issue and to perform discounting transactions, take deposits, and transact current accounts. They had each the same by-laws and regulations. In 1849, they agreed to unite. The Government consented, and the resulting institution took the name of National Bank of the Sardinian States. Its privilege was to run thirty years, and its main office was at Genoa, with a branch at Turin. On July 11, 1852, its capital was raised from 4,000,000 to 32,000,000 lire, and it was empowered to introduce branches in the whole of Sardinia. After the Conquest of Lombardy, in 1859, the Sardinian National Bank was granted authority to extend its business to that country. It opened a branch at Milan and expanded the capital to 40,000,000 lire. Presently, the Duchies of Parma and Modena, and the Papal States, were annexed to the new Kingdom of Italy. In the State of Parma there was in existence a bank of issue of quite modest pretensions, and in the Papal States the Bank of the Four Legations, established in 1857. These two banks readily permitted themselves to be absorbed by the National Bank, which, by a decree of February 24, 1861, had its scope extended to Central Italy. Upon the annexation of the Neapolitan States it opened branches in Naples and Palermo, with the right to start others in the Neapolitan and Sicilian provinces. In 1865, it inaugurated a branch in Florence; but, in spite of all endeavors, it could not persuade the National Bank of Tuscany to join with it. At that time, the National Bank of the Sardinian States, which had changed its name to National Bank of the Kingdom of Italy, had 100,000,000 lire capital. The triumphant war of Prussia against Austria gave Italy possession of Venetia in 1866. The National Bank immediately established itself in Venice, taking over a chartered bank, the Stabilimento Mercantile Veneto, which had existed since 1853. Thus the National Bank reached out for a monopoly; but two credit institutions, the National Bank of Tuscany and the Tuscan Bank of Credit for the Industry and Commerce of Italy, still refused to succumb to it.
THE BANKS OF TUSCANY.
Tuscany was always a hospitable region for the growth of banking. The oldest Tuscan bank of issue at the time of Italy’s unification was the National Bank of Tuscany, founded in 1816 by an act of manu propria of the Grand Duke. Dissolved in 1826, it was replaced by a stock company, which obtained the right of issue for ten years on a tripled capital. The new capital of 1,000,000 Tuscan livres increased later to 1,125,000 livres. The concession was renewed at the end of each ten years until 1858. Besides this Florentine concern, there was a Leghorn Bank, created in 1837, that possessed a capital of 2,000,000 Tuscan livres and had power to issue bank notes for thrice that amount, on the condition that they should not be more than thrice the metallic coin stock. The right of issue was to expire December 31, 1858, at the same time with that of the Bank of Florence, so that the Government might effect a consolidation of the two if it so desired. Less important banks had sprung up—the Bank of Sienna in 1841, Arezzo in 1846, Pisa in 1847, and Lucca in 1850; and at the beginning of 1859 Tuscany consequently had six banks. The Tuscan Government deemed it useful to have a more powerful institution by merging together the Banks of Florence and Leghorn and giving the new bank authority to conduct branches throughout the Duchy. Permission was accorded the other existing banks to become branches of the new establishment, but they were not required to do so. Before this arrangement could take effect, the Grand Duchy was overturned and Tuscany became an Italian province. A decree of the Provisional Government, in 1860, ordered a fusion of the Banks of Florence and Leghorn under the new title of National Bank of Tuscany, and designated the smaller banks as branches. The National Bank of Tuscany did not, however, have the field to itself. On March 12, 1860, a competitor appeared, taking the rather formal name of Tuscan Bank of Credit for the Industry and Commerce of Italy. It nominally had 40,000,000 lire of capital, but really only 5,000,000. The wide range of its by-laws indicated that it purposed engaging in great undertakings, but it had little development and opened no branches. Therefore, at the period of Italian unity there were five banks of issue—the National Bank, the two Tuscan banks, the Bank of Naples, and the Bank of Sicily.
THE BANKS AND THE UNIFICATION DRAMA—FORCED CURRENCY.
The banks were soon to play an important part in the unification drama. On May 1, 1866, a royal decree provided for the forced circulation of the notes of the National Bank of the Kingdom of Italy, and imposed upon the bank obligation to loan the State 250,000,000 lire, to meet the expenses of the impending campaign against Austria. The bank notes, cash certificates, orders, etc., of the other banks of issue were to be received as legal tender by individuals and the public offices, and their redemption was to be accomplished in National Bank paper. As the War of 1866 had given Italy possession of Venetia, so the Franco-Prussian War gave her the residue of the Papal States and terminated the work of unification. In Rome, the Italian Government found in operation a Bank of the Pontifical States, created in 1833, and holding an absolute monopoly of the right of issue and of all banking business. Reorganized in 1850, its capital had been fixed at 1,000,000 Roman écus (5,375,000 francs); but it began business with a subscribed capital of 600,000 écus, in the hope that the remaining 400,000 écus would be taken up later. Its affairs were badly conducted. It did not redeem its paper at sight, and gave only time obligations for it. On November 4, 1866, an investigation demonstrated that the bank’s capital was gone, and that the difference between assets and liabilities was more than 7,000,000. A decree by the Papal Government declaring the bank notes to be under State guaranty became necessary, but repayments were made only at the rate of 6000 écus per day, and no holder of bank notes could receive more than twenty écus. At the end of 1869, the circulation amounted to 30,000,000 and the coin stock 11,000,000. The Italian Government, upon entering Rome, recognized the legal currency of the Papal State Bank’s notes within the province of Rome, reformed the by-laws by decree of December 2, 1870, and gave the institution the name of Roman Bank, which has since acquired such unenviable notoriety.
SYNDICATE OF BANKS OF ISSUE.
For the sake of chronological order, we have interrupted our recital touching the forced currency, in order to explain the appearance of a sixth bank of issue. We now proceed to consider the consequences of the paper money régime.
By the decree of May 1, 1866, a peculiar and favored position was made for the National Bank of the Kingdom of Italy, since the other banks had to redeem their notes with the notes of the National Bank. This arrangement was oppressive for the other establishments, because the National Bank was not bound to redeem its own paper in coin, and acrimonious reflections were called forth, especially on the part of the Bank of Naples. Conditions remained on that basis for eight years, until modified by the law of April 30, 1874. The Government, which had borrowed 300,000,000 lire in notes from the National Bank on April 19, 1872, sought, in 1874, to borrow an additional amount of 1,000,000,000 lire. Not being able to raise such a sum from the National Bank alone, it organized a syndicate of banks of issue, composed of the National Bank of the Kingdom of Italy, National Bank of Tuscany, Tuscan Bank of Credit, Roman Bank, Bank of Naples, and Bank of Sicily. The six banks were to put at the disposal of the Treasury 1,000,000,000 lire in syndicate bank notes, which should have forced currency, be printed on white ground, and be of the denominations of ½, 1, 2, 5, 10, 20, 100, 250 and 1000 lire. The syndicate banks were to be jointly responsible for the total of the syndicate bank notes, and individually in proportion to their capital and patrimoine. The State was to give the banks a sufficient amount in registered consols to guarantee the syndicate bank notes. Independently of the syndicate paper, each bank could issue its own notes to an amount not exceeding thrice its metallic coin stock, or thrice its capital. The separate notes of each bank were to be legal tender in the provinces where the bank, its branches, and its exchange bureaus were located. Redemption had to be made either in specie or syndicate notes. With regard to the notes of other banks held by each bank, they were to be settled by exchange and clearings (Riscon strata). For this purpose, on every Thursday all the banks, their branches, and their agencies remitted to one another the bank notes, cleared them, and made good the balances in syndicate paper, or acknowledged them by receipts in duplicate. The exchange vouchers and one of the originals of each receipt were sent to Rome, so as to arrive there on Monday, or Rome was advised by telegraph. By this process, the agents of the banks in Rome were kept informed of the condition of each establishment. After verifications and clearings, the balances were made good on Monday, with four days’ interest, or by means of seven days’ orders, bearing interest from the previous Thursday, the interest being figured in each case at the discount rate of the creditor bank. If, accidentally, there should be an accumulation of notes, the debtor bank could make special arrangements for clearance.
The forced currency of the notes was to endure two years, expiring May 22, 1876. But on March 18, 1876, Signor Depretis and Signor Majorana Calatabiano proposed to Parliament an extension to 1877; and further postponements were made up to June 30, 1881.
DISSOLUTION OF THE SYNDICATE.
The law of April 7, 1881, which provided for abolishing the forced currency after June 30th, dissolved the bank syndicate. The syndicate notes in circulation were considered a Government debt and remained legal tender in the whole kingdom, but were redeemable in coin on presentation. Such notes as reached the public offices were canceled, excepting the five-lire scrip, which were withdrawn only to the amount of 105,400,000 lire, and the ten-lire, which were kept in circulation. The excepted notes were to be redeemed from the surplus of the budgets. In order to compass the re-establishment of free currency, the Government contracted a loan of 644,000,000 lire, of which 400,000,000 lire at least was payable in gold. Of this amount 340,000,000 lire was deposited with the Department of Deposits and Consignments to guarantee the State’s paper. The Act of April 7, 1881, specified December 31, 1889, as the date of expiration of the privilege of issue, and retained the legal-tender quality, which lasted until the expiration of the charters.
A NEW SOURCE OF TROUBLE.
We now come to an unfortunate period in the history of the Italian banks. The rupture of the commercial treaty with France and the settlements for Italian securities held in great quantities in France gave Italy much embarrassment. Up to that time, the balances of her exports into France had permitted her to settle without remittances of cash for the coupons of her bonds held in that country. But after the French holders had disposed of the Italian bonds (which were largely bought up in Germany), and the two countries had enacted prohibitive customs tariffs against each other, Italy could no longer adjust her debts by such methods. Profiting by the stipulations of the Latin Monetary Union, she sent to the French bankers five-franc pieces and drew bills of exchange on them, which she forwarded to the German creditors. These bills of exchange were drafts on Germany, or gold drafts. As long as Italy had five-franc pieces she suffered no serious difficulties; but this resource was finally exhausted, whereupon her fractional coins disappeared into France. In the course of time, therefore, the Italian circulation was deprived entirely of metallic money, even of ordinary coin needed for every-day trade. Italy found herself reduced to the necessity of buying back and paying in gold for the coin that had gone to her monetary allies. At the same time, when Italy was distressed by these various troubles arising from unfavorable foreign balances, she had to pass through one of the worst of crises, the consequences of which still burden her severely.
A BUILDING CRISIS.
The Government, anxious to cultivate a high estimate of the country’s vitality, had given marked encouragement to building operations in Naples, Rome, and other cities that were being rehabilitated. Several important associations had been set on foot for real-estate enterprises. The National Bank of the Kingdom had added to its ordinary business the real-estate mortgage service, which was also practised by other banks, particularly those of Naples and Sicily. These undertakings had appealed extensively to foreign capital. As matters grew more involved, and Italian credit became a subject of criticism, lenders became apprehensive and withdrew their money. A conspicuous Roman real-estate association, the Squilino Enterprise, found itself, by the end of 1887, in threatening circumstances. Its obligations, to the amount of 37,500,000 lire, were in the portfolios of public and private banks. Perceiving itself on the verge of ruin, it applied to its creditors, who, under the auspices of the Bank of Naples, formed a syndicate to supply it for one year with a sum equivalent to its indebtedness. The National Bank, as a creditor of the Enterprise for 4,000,000 lire, agreed, at the urgent solicitation of the Government, to loan an additional 10,000,000 lire. After the Squilino Enterprise had been saved, the National Bank had to come to the relief of the Tiber Bank, whose assets and liabilities it took in charge for liquidation under pressure from the Government. This was in 1889. The advances aggregated more than 59,000,000 lire. Next it went to the rescue of the Italian Mortgage Bank Society with an advance of 28,000,000 lire, the Naples Building Association, which consumed 16,000,000 lire more, and some other concerns of lesser consequence. The equivalents given for these various advances consisted chiefly of houses that were hard to sell or even to rent, and, at the present time, the indebtedness owing to the former National Bank, which has passed to the Bank of Italy, is far from settlement. Finally, as a further example of how little the Government cared for sparing the resources of the banks, Signor Crispi forced the National Bank to make a loan of 4,000,000 lire to the Negus of Abyssinia on the simple signature of his envoy, Makonen. A single statistical instance will suffice to illustrate the great gravity of the situation of the banks: On January 10, 1893, the amount of their outstanding doubtful debts reached 60,000,000 lire.
EXTENSIONS OF THE BANKS’ CONCESSIONS.
According to the Act of April 7, 1881, the concessions of all the banks were to expire on December 31, 1889. The Government was disinclined to attract attention to the subject—the more so because Italy was still practically under the forced currency system, disguised by the euphemism of legal tender. It permitted the privileges to run out, and extended the legal tender until the close of 1889; then, December 25, 1889, another law made a further extension to the end of 1891, impliedly involving prolongation of the bank charters for the same period.
Meanwhile Signor Crispi elaborated a plan of bank reorganization, which was given to committee in the Chamber on May 28, 1890, without being debated upon. Notwithstanding the rumors that began to spread as to serious irregularities in the conduct of the Roman Bank, which led to a Government inquiry, whose findings have never been made public, the concessions of the banks were renewed for 1892.
INVESTIGATION AND STRANGE DISCOVERIES.
On December 20, 1892, the Government proposed another extension for three months. An Opposition Deputy, Signor Colajonni, embraced the occasion to charge the Roman Bank with malfeasance. He declared, specifically, that a bond of 4,000,000 lire had disappeared from the bank’s portfolio; that the bank had a surreptitious circulation of 25,000,000 lire; that the most of the discounted paper was in the form of renewals, and that the administrators of the bank had abused the privileges of their position to obtain for themselves large loans. He concluded by demanding that his accusations be referred to a Parliamentary commission for investigation. The President of the Ministerial Council, Signor Giolitti, remonstrated energetically against the proposal, which he declared was insulting to the Ministry, and promised to have a thorough and searching executive examination made. The Chamber sided with the Ministry by a large majority. On January 10, 1893, the six banks were visited by inspectors. Very damaging disclosures followed. At the Bank of Naples it was discovered that there was a deficit of 2,450,000 lire in the coin stock. The Roman Bank had fraudulently issued bank notes bearing the old series. The report of Senator Finali, president of the inspecting commission, placed the fraudulent circulation of the Roman Bank at 41,000,000 lire, and the amount proved finally to be much more. The management attempted to cover up the frauds by jugglings of the debits and credits of accounts current. Besides the revelations about the Roman Bank, it was shown that all the banks had invested a considerable portion of their resources in mortgages, real estate, and the like. The amounts thus tied up were:
Senator Finali’s report concluded with these words: “Very bad and disastrous is the condition of the Roman Bank. The best of all is the situation of the Tuscan Bank of Credit, which has limited itself to a narrower sphere, although according to the programme of its organization it could, and even should, have branched out through the whole of Italy. The other four institutions—the National Bank of Tuscany, the National Bank of the Kingdom of Italy, the Bank of Sicily, and the Bank of Naples—are more or less affected by immediate needs, tying-up of funds, doubtful debts, and losses.” A feature of Senator Finali’s report that was regarded with general incredulity was the declaration that little or no evidence had been found to connect public men with the interests of the banks. At the session of March 21st, the Chamber voted to appoint an inquiry commission, consisting of seven members, to determine political and moral responsibilities. Prosecutions were begun against the director of the Roman Bank, Tanlongo, and a Deputy, De Zerbi. The latter committed suicide in prison. A storm of indignation was raised by the bank scandals and the accumulated proofs that the foremost men in politics had been corrupted by the banks. At this day, after the lapse of two years, Italy still suffers from the misdeeds of the banking institutions.
REORGANIZATION OF THE BANKS.
The Roman Bank, as soon as its frauds were disclosed, was put into liquidation and the Government assumed responsibility for its bank notes. The legal-tender function of the paper was extended to June 30th, and afterward to December 31, 1893, and a plan of thorough reorganization for the banks was prepared, which was adopted on March 22, 1893. This plan directed that there should be a consolidation of the National Bank of the Kingdom, the National Bank of Tuscany, and the Tuscan Bank of Credit, and that the new establishment should be designated the Bank of Italy.
The Bank of Italy was to take over all the liabilities of the Roman Bank as established by the inspection of January 10th, and also profit by all the assets. The privilege of issue was granted to the Bank of Italy and the Banks of Naples and of Sicily for a term of twenty years, to date from the promulgation of the act. The notes of the Bank of Italy and the Bank of Sicily were to be legal tender in the provinces where these institutions had offices; the notes of the Bank of Naples enjoying only private currency. The banks were required to dispose, within ten years, of all their existing real estate and mortgage loans, at the rate of one-fifth every two years. If they should be unable to effect the conversion of such assets into cash as provided, they were to apply resources to the purpose as follows: the Banks of Naples and of Sicily all their profits, and the Bank of Italy the non-called-in portion of its capital. The Bank of Italy was to annually set apart from its profits 2,500,000 lire as a sinking fund to settle the losses occasioned by the liquidation of the Roman Bank. These losses, estimated at 50,000,000 lire, were covered by a deposit of consols. Each year the Bank had to diminish the 50,000,000 lire total by the application of 2,500,000 lire from its profits.
Signor Cocco Ortà reported to the Chamber on June 20, 1893, upon the project. He approved the plans of the Government. The report said: “Although your committee has among its members men who are partisans of the free-banking idea and also men who believe in the principle of a single privileged and carefully controlled bank, and although the proposed solution does not conform to the ideal of either side, the committee nevertheless, by a large majority, recognizes the expediency and advantage of respecting accomplished facts and modifying as little as possible, and only in a manner compatible with the general interest, the existing status. The prevailing motive of the bill being thus approved, it remains only to fix upon such improvements as may be necessary or possible. It must be borne in mind, however, that any improvements are to make their way slowly and gradually, like all progress; and while it is never difficult to benefit definitely by experience, it is not always given to legislators to put into practice scientific theories.”
The debate was protracted, tempestuous, and rather confused. Numerous amendments to the bill were offered, some of which were adopted and others rejected.
THE CONSOLIDATED “BANK OF ITALY”
Finally, August 10, 1893, the bill was passed and became law. We present an analysis of the provisions of the act.
The National Bank of the Kingdom of Italy, the National Bank of Tuscany, and the Tuscan Bank of Credit were consolidated under the name of “The Bank of Italy,” which was to preserve all the offices of the old establishments as branches. The authorized capital of the Bank of Italy was limited to 300,000,000 lire, divided into 300,000 shares of a face value of 1000 lire. The paid-up capital of the three banks, 176,000,000 lire, was to be raised to 210,000,000 lire within six months after the taking effect of the law. The right to issue bank notes was granted to the Bank of Italy, and also the Banks of Naples and of Sicily, for a period of twenty years from the taking effect of the law.
The maximum circulations were to be:
Each year the circulation was to be proportionately reduced so as to bring it down in fourteen years to 864,000,000, thus distributed:
Any bank having, at the end of fourteen years, a circulation in excess of its legal limitation, was required to reduce it to the proper limit within three months thereafter. The circulation might, however, surpass the prescribed limit if represented by metallic values in gold bullion and advances made to the State. The notes were to be redeemable at sight in Rome and certain other named cities. They were to be legal tender for five years in provinces having bureaus charged with their redemption. Throughout the legal-tender period, the rate of discount was to be the same at all the banks, not to be changed without authority from the Government. The banks were permitted to do discounting at one per cent below the official rate on all paper presented by the popular banks, discount banks, and mortgage banks; but these specially favored discounts were not to exceed—
70,000,000 lire in the Bank of Italy.
21,000,000 lire in the Bank of Naples.
4,500,000 lire in the Bank of Sicily.
The banks were obliged to mutually receive in payment their several bank notes. The metallic reserve of the banks was to be brought up to 40 per cent. of the circulation, 33 per cent. of the reserve was to be in metallic money, and the balance in bills of exchange on foreign countries bearing first-class signatures; at least three-fourths of the metallic part of the reserve was to be in gold. The State was to print the bank notes, and the banks were to sign them, so that neither the State nor the banks could produce a completed bill. The circulation tax was fixed at one per cent., calculated on the average sum by which the circulation should exceed the reserve. At the end of two years it was to be adjusted at one-fifth the discount rate, but in no case was to go above one per cent. The excess of bills above the fixed limit or the prescribed proportion was then to be liable to a tax of double the rate of discount. The liabilities of the banks, represented by bills to order, cheques, letters of credit, etc., were to be secured by a special reserve of forty per cent of their total, to be constituted the same as the reserve securing the circulation. The transactions of the banks were confined to discounts and advances on securities, precious metals, silks, and warrants on liquors in storage. The Bank of Naples was authorized to operate as a Mont de Piété (doing a pawn business).
They were authorized to buy and sell, for cash, commercial paper on foreign countries, and to open current accounts at interest or without interest; but the interest-bearing accounts were not to exceed 130,000,000 lire at the Bank of Italy, 40,000,000 lire at the Bank of Naples, 12,000,000 lire at the Bank of Sicily.
The rate of interest allowed on deposited funds was not to be more than half the discount rate. The banks could undertake the provincial collections of the direct tax. They were obliged to make to the Treasury ordinary and extraordinary advances in the same manner as the old institutions. The Bank of Italy, Bank of Naples, and Bank of Sicily were bound to settle within ten years, at the rate of one-fifth yearly, the various accounts of absorbed banks. Transactions balanced by the reserves were considered as settled. The Banks of Naples and of Sicily were to keep all their reserves for this liquidation, except a sum not to exceed ten per cent. of the profits, which was to be applied to works of charity. As for the Bank of Italy, if at the end of two years the settlements should not have been according to the required proportion, it was to call on its shareholders for funds sufficient to make up the necessary amount of settlement; but the increase of capital was not to give rise to an increase of circulation. Any establishment not accomplishing settlements on the specified basis was to lose in circulation four times the sum not settled.
LIQUIDATION OF THE ROMAN BANK.
The principal question for solution was the liquidation of the Roman Bank. It was manifest that the Government was under very serious responsibility to the holders of the bank notes and the other creditors of that institution. The public knew that there had been a Government inspection of the bank, whose findings had never been published, and that the Government had appointed Senator Tanlongo as its director, notwithstanding information about his conduct. Added to this moral responsibility, was an actual responsibility. It was, of course, impossible to impose a loss of 60,000,000 lire upon the holders of the Roman Bank’s fraudulent paper, and it was imperative that this loss should be borne by others than the people, who, under the legal-tender law, had been obliged to take the paper without having any means of assuring themselves as to its value. The Government, unwilling to take the burden upon itself, conceived the idea of shifting it to the new Bank of Italy. Although the State undertook the liquidation of the Roman Bank, the work was delegated to the Bank of Italy, which was charged with the duty of retiring the Roman Bank’s paper and substituting its own. The Treasury deposited 40,000,000 lire of bonds to cover the circulation which the Bank of Italy would have to issue for the redemption of the notes of the Roman Bank. These bonds from the Treasury were by no means a guaranty for the Bank, but they served to circumvent the law fixing the amount of circulation with reference to the reserve. The Bank of Italy was required to appropriate from its profits yearly 2,000,000 lire to go toward the liquidation of the Roman Bank in order to wipe out gradually the losses. If the yearly quota of 2,000,000 lire should make up a total larger than the amount of the losses, the surplus (which the State at first designed to enjoy for itself) was to be added to the reserve fund of the Bank.
THE BANKS SINCE THE CONSOLIDATION.
The act which we have analyzed was very severely criticised in Italy. In their picturesque language, the people said that the Government had bound the Bank of Italy to the corpse of the Roman Bank, and that the dead would poison the living. Up to the present, these pessimistic opinions have not been justified. Yet it cannot be said that the financial situation has really improved. The restrictions placed on paper circulation were unable to survive the first effort for their removal. On January 23, 1894, Signor Sonnino, Minister of the Treasury, in a report to the King, said that the legislators, in fixing a limit for the circulation and imposing severe penalties upon the banks overstepping it, did not take into consideration that, in times of panic among the depositors of savings-banks, those establishments, holders of first-class securities, would be unable to find any help at the banks of issue, since the latter would have their hands tied by the prohibitions of the law. The Minister added that it was needful to repeal the provisions of the law limiting interest-bearing deposits and circulation. He therefore proposed that the section of the act indicating the legal relation between the metallic reserve and the circulation should be changed so as to allow an increased circulation of 90,000,000 lire for the Bank of Italy, 28,000,000 lire for the Bank of Naples, and 7,000,000 lire for the Bank of Sicily. The section obligating the banks to reduce their circulation by three-fourths of the interest-bearing current accounts in excess of 136,000,000 lire for the Bank of Italy, 40,000,000 for the Bank of Naples, and 12,000,000 for the Bank of Sicily, should be repealed. The extraordinary tax levied on banks of issue should be reduced, as well as the normal tax of two-thirds the discount rate for the bank notes above the limits fixed by law. The proposals of Signor Sonnino were sanctioned by a royal decree issued January 23, 1894. It thus happened that less than a month after the taking effect of a law which had been in course of evolution for seven years, it became necessary to modify it in one of its most essential points—i. e., to enlarge the maximum of circulation, for the restriction of which such strenuous efforts had been made. Circumstances naturally brought about other alterations in a measure which had been adopted without adequate regard for fundamentals. The requirement that the banks should dispose of their real-estate investments at the rate of one-fifth every two years was ruinous in its practical workings; for these investments consisted, for the most part, of houses and lots that would have suffered in price if precipitately sold. Accordingly, the Minister sought to render this feature less troublesome by prolonging the term of settlement from ten to fifteen years. He entered into a contract with the Bank of Italy which, as communicated to the King on October 30, 1894, provided as follows: “The Bank of Italy has engaged itself to set aside from its profits a sufficient sum each year—4,000,000 lire in 1894, 5,000,000 lire in 1895, and 6,000,000 lire each year thereafter—to provide, by the compound interest on these sums, for the settlement of real-estate investments and the liquidation of the Roman Bank. It has agreed not to distribute any dividend higher than 40 lire per year, and all profits above the dividend shall go to the reserve. It has also engaged to call on the shareholders for an assessment of 100 lire per share, and to write off 30,000,000 lire of the paid-up capital, in order to provide for eventual losses and for the taking out of an amount corresponding to the aggregate of real estate and to the transactions not in conformity with the law of 1893.”
To these requirements, so very onerous for the Bank, but quite justifiable and tending to good management, was added another heavy obligation. The Bank of Italy was charged with the task of conducting the complete liquidation of the Roman Bank at its own risk and peril. “This liquidation,” said Signor Sonnino, “must of necessity leave a loss of some 10,000,000 lire, which would fall, directly or indirectly, on the State if the Bank of Italy were not charged therewith.” By way of compensation for this burden, the Minister undertook to give to the Bank special advantages. “The Government,” said he, “considers that a recompense for the Bank would be provided, and at the same time an organic reform of great importance would be accomplished, by committing to the Bank of Italy the service of the Treasury in the provinces. The transfer of that service to our great credit institution, and the consequent extension of its organization through all the provinces, would not only lend it larger strength and procure for it sure profits, but would also save for the State 1,200,000 lire; which is not to be lost sight of in the present position of our finances.” It is rather difficult to understand how the provincial revenue service done to-day gratuitously for the State by the Bank of Italy, whose management formerly cost the State 1,200,000 lire a year, can be advantageous to the Bank; and, taking everything into account, it appears to be but a price paid, and paid dearly, for the right of issue.
The embarrassments of Italy in 1893 and 1894 were considerable. They were especially due to the rise in exchange, which, after the disappearance of the five-franc pieces, had caused the drainage of the small coin. Italy had to buy back her fractional coins from France, Switzerland, and Belgium, lock them in the Treasury vaults, and issue upon their security scrip of small denominations. This transaction will be referred to again in another place.
THE STATE AGAIN EMBARRASSES THE BANKS.
Signor Sonnino, Minister of the Treasury, reported to the King on February 24, 1894, that the monetary situation was getting worse; that the exchange of notes at the banks had almost entirely ceased; that the Treasury exchanged very few; and that it was requisite to effect a reorganization of the circulation. For that purpose, he advocated a new issue of scrip to the amount of 600,000,000 lire in denominations of five, ten, and twenty-five lire. As security, 200,000,000 lire of gold, belonging to the banks, was placed at the State’s disposal, and held in the vaults as reserve. The 200,000,000 thus taken from the banks was replaced by State notes. The State notes were to be reckoned in the cash stock of the banks the same as metallic funds; and the banks were permitted to issue the same amount of notes as before. Again, the State was debtor to the banks for a sum of 68,000,000 lire, loaned at the time of the creation of the tobacco monopoly to enable it to buy up the merchandise. The State paid interest on this 68,000,000. For returning to the Bank its own scrip in exchange for this advance, the State claimed the right to cease paying interest on this account. The banks were required by the Minister to furnish 22,500,000 of gold to provide for the advance of 68,000,000. The foregoing extremely complicated plan will be understood from the following explanations. It is the rule in Italy that the circulation shall not exceed thrice the gold on hand. Therefore, if the Government takes 200,000,000 lire in gold out of the banks, it can issue 600,000,000 of paper, and remain within the rule. But it goes entirely outside the rule when it authorizes the banks to count the State’s scrip as metallic value. The State’s paper, in the latter case, represents one-third the amount in gold; and the banks’ notes stand for one-third the value of the State’s notes: consequently, the notes of the banks are worth only their ninth part in gold. Signor Sonnino, the author of this combination, has had the courage to tell the truth, and to plainly proclaim the forced currency of the State’s scrip. “In view of the considerations that I have pointed out,” said he, “it is incumbent on us to dismiss fiction for truth. It cannot but be permitted that the Treasury administration shall be exposed to protests because of non-observance of the law relating to the exchange of bank notes.” And he formally asked for the suppression of the redemption requirement so far as State paper was concerned.
Such peculiar arrangements show how extremely difficult are the economic conditions in which Italy is placed—conditions that improve but slowly. The exchange remains high, and public distrust of the banks of issue has by no means been extinguished. It is fair to add, however, that up to date, the Government has not put into practice the plan of levying upon the coin stock of the banks.
ORGANIZATION OF THE BANK OF ITALY.
The Bank of Italy is a stock company founded entirely with capital furnished by stockholders. The Banks of Naples and of Sicily have a capital that they style “patrimony”; that is, the property of nobody. It is a unique fact in the world’s economy that there exist two establishments which play an important part in the country which they serve, and yet are res nullius.
The present organization of the Bank of Italy is derived from the by-laws of December 19, 1893. The objects of the institution are to transact banking business and to issue bank notes under conditions prescribed by law. The main office is at Rome. There are branches in all the chief places of the provinces. The duration of the company is for twenty years, running from January 1, 1894. The stock capital, as previously explained, is 300,000,000 lire, in shares 300,000 in number, and of 1000 lire par value, of which 700 lire have been paid in. In reality, 800 lire per share have been called; but the capital is undervalued by 30,000,000 lire, as already explained, 100 lire per share having been devoted to make up for losses. The shares are registered. Ownership is acquired by transfer upon the books of the Bank. The Bank recognizes but one owner for each share. The shareholders, in general, are represented by the owners of twenty shares, who have possessed them for upwards of three months. Shareholders have one vote for every twenty shares up to 200; above 200 an additional vote is allowed for every fifty. No single shareholder can have or accumulate more than twenty votes. The members of the Bank Assembly may be represented by proxies. The Assembly meets annually, in the month of March. Extraordinary sessions may be called by resolution of the Superior Council or at the demand of the Comptrollers or shareholders. Shareholders demanding the calling of the Assembly must own, in the aggregate, at least 20,000 shares. The Assembly receives the report of the year’s transactions, and appoints the Comptrollers (of whom we shall speak farther on), the administrators of the branches (who are called Regents), and the Censors (who are intrusted with the supervision).
The Regents elect the Superior Council, and each district seat annually delegates for that purpose three of its Regents. The Superior Council chooses its officers, consisting of a President, Vice-President, and Secretary. It holds its meetings at least once a month, in Rome. All matters affecting the Bank are submitted to this Council, especially those appertaining to the issue and withdrawal of bank notes, the fixing of the rate for discounts and loans, the declaring of dividends, the verification of balance-sheets, appointments and dismissals of employees, etc. The Superior Council selects a committee of six members, which, in co-operation with the President of the Council and the Director-General, exercises a more direct supervision over the Bank’s business, particularly touching subjects of dispute and extraordinary discounts.
The Comptrollers, designated by the Assembly of Shareholders, exercise, either directly or through the Censors, control over the administration, with a view to having the rules and regulations faithfully observed. They examine the balance-sheets and give their advice as to the amount of the dividends. The Censors supervise the district seats, and exact from the Directors such information as they deem useful for the discharge of their duties. They enter the results of their observations in a special book and communicate to the Censors a report upon their supervision. The General Management is thus constituted: One Director-General, two Vice-Directors-General, one Secretary. All are appointed by the Superior Council, but the nominations of the Director-General and Vice-Directors-General must be approved by the Government. The Director and the two Vice-Directors form a Directing Committee, which considers all concerns. The Director sits in the Superior Council and has a consulting vote in that body. He has the management of the Bank’s affairs subject to the authority of the Superior Council.
The administration of the District Seats has great importance in the Bank of Italy, as these establishments supply the members of the Superior Council. Each district seat is managed by a council of at least eight Regents, and at most twelve Censors, with a Director in executive control. The Regents and Censors are appointed by the General Assembly of Shareholders for a term of six years. Half the number is renewed each three years. The Regents’ Council has charge of the administration of the seat, and sees that the orders of the Superior Council are carried out. For the examination of commercial paper it employs the assistance of a Discount Council of ten or twenty members, chosen from a double list presented by the Director. Those branches that are less important than the district seats are administered each by a Director and supervised by five Censors. A Discount Council gives advice regarding the paper to be admitted at the branch.
The Bank, besides, has Correspondents, who undertake to transmit to the nearest office paper presented for discount, and to attend to the collection of matured paper.
ORGANIZATION OF THE BANK OF NAPLES.
The organization of the Banks of Naples and of Sicily differs widely from that of the Bank of Italy. Often remodeled, it was changed to its present form by a decree of October 15, 1895, whereby the new by-laws were confirmed. As these establishments have no shareholders, but only creditors, it was necessary, in each instance, to intrust their interests to a combination of local elements. We append a brief statement of the constitution of the Bank of Naples:
The administration of the Bank of Naples is under the management of a Director-General and a Council of Administration, subject to the supervision of the General Council.
The Director-General is appointed by royal decree, upon the nomination of the Minister of the Treasury, who advises with the Ministerial Council. He represents the Bank in dealings with third parties, and sees to the carrying out of the rules and decisions of the General Council and the Council of Administration. He has a consulting vote in these councils. He manages the general affairs of the Bank; proposes to the Council of Administration the appointment and discharge of the employees and representatives of the Bank; examines and approves the Bank’s accounts; signs the correspondence and cheques; indorses commercial paper, and proposes all measures that he deems useful for the welfare of the institution. In general, he performs all the duties of current administration that are not expressly reserved for the General Council and the Council of Administration. He is, however, formally prohibited from granting discounts or advances.
The General Council consists of the Syndic (Mayor) of Naples, the President of the Provincial Council of Naples, the President of the Chamber of Commerce of Naples, and of three delegates, one selected by the Commercial Council, one by the Provincial Council, and one by the Chamber of Commerce of Naples. Besides, there are two delegates from Bari (one representing the Chamber of Commerce and one the Provincial Council), delegates from each of the Provincial Councils of the Neapolitan provinces to the number of fourteen, and delegates from the chambers of commerce of all the provinces where the Bank has offices.
Two Councillors of Administration are appointed by the King. The elective members of the General Council are renewed each two years. Members of the General Council receive no pay, excepting allowance for actual expenses.
The General Council meets at Naples annually, some time during the first three months. The session cannot last longer than fifteen days, but on the request of eight members it may be prolonged ten days. It may be summoned in extraordinary session by the Minister of the Treasury, or in compliance with a demand addressed to the Minister of the Treasury by the Council of Administration, or by the President of the General Council, with the approval of eight members of that body. This Council has supervision over the Bank’s management. It examines and passes upon the accounts of the preceding business year, upon the report of the two auditors chosen from among the members of the Council. It discusses and passes upon the report as to the Bank’s transactions, votes on questions regarding the establishment or abolition of branches, approves the office regulations, and deliberates upon operations and upon the sale or exchange of the patrimonial possessions of the Bank. It votes on proposed applications to the Government for modifications of the by-laws. Annually, it selects from its membership three delegates and one alternate to sit in the Council of Administration.
The Council of Administration is made up of the Director-General, who presides; the three elected delegates and their alternates, and two Councillors of Administration appointed by the King. The latter receive a fixed salary of 6000 lire. The delegates from the General Council hold office for one year, and may be re-elected. They are paid traveling expenses and a daily recompense of twenty lire. This Council meets weekly in regular session. It deliberates as to the notes and cheques of the Bank, determines the conditions under which transactions shall be conducted, and fixes the rate of discount and of interest on loans, subject to Government approval. It regulates the employment of ready funds and the investment of the reserve, and decides about the open credits at each office and their use in the various branches of the business. It prepares the matters to be submitted to the Government in keeping with the resolutions of the General Council. It proposes to the latter the regulations of the service, amounts of salary to be paid employees, appoints and discharges these, and determines upon the creation or abandonment of branches. It approves contracts and authorizes the various transactions in the patrimonial property, provided the sales do not exceed 30,000 lire; others being referred to the General Council, except in urgent cases, when the Council of Administration may decide by unanimous action, subject to subsequent approval by the General Council.
The Director-General is assisted by a Secretary-General named by the Minister of the Treasury, upon the recommendation of the Council of Administration. The Secretary-General is specially charged with the office management.
Each Branch Office of the Bank has a Discount Council, consisting of eight members at least and twelve at most, who are named by the Council of Administration upon recommendation by the local Directors. Two of the Discount Councillors, acting with the Director, form a Discount Committee, which decides as to the admission of proffered paper, and is also intrusted with the duty of opening and closing the vaults.
Members of the Chamber of Deputies and Senate are forbidden to occupy any office in connection with the Bank, either salaried or unsalaried.
The District Branches of the Bank are opened or abolished by royal decree, rendered at the instance of the Minister of the Treasury, after deliberation by the Council of Administration and approval by the General Council. They are managed by Directors under the supervision of the central administration. The Directors of the District Branches receive their appointments from the Minister of the Treasury, upon nomination by the Council of Administration. The Directors of the Minor Branches are appointed by the Council of Administration. The Directors represent their bureaus in transactions with third parties, sign the correspondence and cheques, and execute the instructions of the general management so far as the sums placed at their disposal are concerned. They hold the keys to the vaults and exercise supervision over the cash and commercial paper, rendering accounts concerning the same to the general management. They also control the employees.
The administrative organization of the Bank of Sicily is entirely similar to that of the Bank of Naples. As a matter of course, the delegates from the councils and chambers of commerce of the Sicilian provinces have functions analogous to those of the Neapolitan provincial delegates at the Bank of Naples. The only differences between the two banks are in their respective transactions.
TRANSACTIONS OF THE ISSUE BANKS.
The transactions of the Italian banks of issue were narrowly regulated by the Act of August 10, 1893. Aside from certain special transactions reserved for the Banks of Naples and of Sicily, the chief departments of business are identical in the three establishments. The present regulations for the banks of issue have been in effect only since January 1, 1894. So far as the matter is of pertinent interest, we shall give the statistics for the last ten years of the old banks and the 1894 statistics of the Bank of Italy, Bank of Naples, and Bank of Sicily.
Discounts.—The banks are authorized to discount paper having no longer than four months to run, as follows: (a) Bills of exchange and drafts to order bearing at least two signatures of persons of well-known solvency; (b) Treasury bonds; (c) merchandise warrants issued by general warehouse companies legally incorporated; (d) coupons of securities that have been taken as guaranty for advances.
In 1894 the discounts amounted—
As the Italian banks do not redeem their notes in metallic values, they are at no pains to protect their coin stock by raising the discount rate. They require only to keep an eye on their circulation, and see that it does not go above the legal limit. The rate of discount is not so high as might be looked for in view of the bad state of exchange. It is remarkably stable—as will be seen from the following comparisons—and is uniform for all the banks:
We have seen that by the Act of August 10, 1893, the banks may make discounts at one per cent. below the official rate—provided the yearly total shall not exceed 95,500,000 lire—on paper presented by the popular banks and the mortgage banks, and also on warehouse certificates. A decree issued in the beginning of November, 1895, authorized banks whose circulation did not surpass the legal limit to discount, at one and one-half per cent. below the official figure, paper having no longer than three months to run, on condition that these transactions shall not embrace renewals. Such paper must be kept on separate account.
Advances.—The banks have the right to make advances, for six months at most: (a) On Italian consols and Treasury bonds, and on securities guaranteed by the State; (b) on bonds of the mortgage banks; (c) on securities, payable in gold, issued or guaranteed by foreign governments. Advances on consols and Treasury bonds at long maturity may be made up to four-fifths of their current market value. Treasury bonds at short maturity may be taken at their face value. The advances on other securities cannot exceed three-fourths of their value on ’change, and in no case three-fourths of their face value. In addition, the following may be accepted as collateral for advances: (a) National and foreign gold and silver moneys for their legal value, and gold bullion; silver bars for two-thirds of their current price; (b) raw and worked silk in twist and woof; warehouse warrants on sulphur and other merchandise for two-thirds the value; (c) warrants on liquors for half their value.
In 1894 the advances amounted to the following:
The Bank of Naples is privileged to operate as a Mont de Piété and to loan on gold and silver bullion, diamonds, precious stones and pearls, metals, and articles of merchandise for which the Council of Administration makes up a list each year. The acknowledgments are made to bearer, even if a name or any other indication of ownership appears. The rate of advances on securities is generally the same as the discount rate. The rate of advances on silk is rather changeable and depends on the amount of the yield. In general the Bank of Sicily charges a higher interest than the Bank of Italy. The Bank of Naples makes few advances on silk. The rate for other advances is the same, or one-half to one per cent. above the discount rate.
Current Accounts.—The banks open current accounts. Some are interest-bearing, others are not. If the interest-bearing accounts exceed 130,000,000 lire for the Bank of Italy, 40,000,000 lire for the Bank of Naples, and 12,000,000 lire for the Bank of Sicily, the bank note circulation must be reduced three-fourths of the excess, although, as we have shown, the limit has been enlarged by the decree of January 23, 1894. The maximum of interest allowable on current accounts is half the discount rate. From January 1, 1897, the maximum will be lowered to one-third the rate of discount. Independently of current accounts, the southern banks continue the old apodissary service and issue against security orders and certificates thus designated: (1) Vaglia cambiari and assegni bancari, transferable by indorsement, and used principally to make transfers of funds from one place to another; (2) fédi di credito, receipts for sums above 50 lire, transferable by indorsement; (3) polizzini, receipts for sums under 50 lire, transferable by indorsement; (4) polizze notatc, receipts which by successive payments have become current accounts (madre fédi); (5) lastly, drafts on foreign countries to the order of third parties.
The Bank of Naples maintains a savings-bank, which has a patrimony of its own, distinct from that of the Bank, which the creditors of the Bank have no claim to. The entire patrimony of the Bank is a guaranty of the obligations of the savings institution to third parties. The sums deposited are invested in securities of the State or guaranteed by the State, but the savings-bank can invest one-fifth of its funds on interest-bearing accounts current, upon condition that the rate of such interest be no lower than half of the rate allowed the depositors of the savings-bank.
The movement of current accounts without interest was, in 1894:
The Bank of Italy does not furnish statistics of current accounts at interest. The following are the statistics of such accounts for the Banks of Naples and of Sicily:
The apodissary service of the Banks of Naples and of Sicily, as just pointed out, consists in the issue of registered receipts, which are transferable by indorsement, and constitute a special circulation. The statement below shows the issues and payments of these orders:
Exchange Operations.—The banks buy and sell for cash, and for their own account, drafts, bills of exchange, and cheques on foreign countries; and they undertake for third parties the collection of commercial paper where they have offices or correspondents. The Bank of Sicily, in addition, conducts an accident insurance business.
On December 31, 1894, the free deposits amounted—
In 1894, the Bank of Italy sent abroad 330,800,000 lire, and drew on foreign countries for 326,500,000 lire. The banks accept on trust voluntary deposits of securities and documents, bullion, gold and silver money, jewels, and other valuables.
MANAGEMENT OF CIRCULATION AND COIN.
Italy was under a forced currency régime from May 1, 1866, to April 7, 1881, which, indeed, has never been really abandoned, as there has never been any redemption, in specie over the counters, of either the bank or the State note issues. This compulsory feature of the currency is cloaked under the disguise of legal tender, but it operates to-day as actively as ever.
The Act of August 10, 1893, intended as a preventive of frauds like those perpetrated by the Roman Bank, subjected the circulation of the banks to most stringent regulations. The note issues cannot exceed thrice the capital, and must be protected by a metallic reserve of forty per cent. whereof three-fourths must be in gold.
This latter proviso runs counter to the spirit of the Latin Monetary Union, which was established to secure an equal treatment for gold and silver in the contracting States. Moreover, it is difficult of enforcement; and, at various times, the banks have been obliged to refuse deposits of silver five-franc pieces and fractional coins—which, however, have legal circulation in France—and to accept them only in payment. Like other nations of the Latin Union, Italy has sent into France large amounts of silver of her own coinage, and has felt the embarrassment of the rise in exchange only after the exhaustion of her silver supply. But if the Latin Union was able to delay the rise in exchange, it has equally created difficulties for Italy, in the matter of her fractional coinage, by preventing her from minting according to her needs, and by depriving her of profits that she would have realized by purchasing silver at the market price, and putting it in circulation for double value. At present, by virtue of the decree of February 24, 1894, the banks stand in peril of having but a very scant coin stock, since the Treasury (as before related) has power to lay hands on 200,000,000 of their gold; in the event of which their notes would be secured not by metal but by State scrip.
The Government has, rather fictitiously, redeemed certain loans made to it by the banks, and rid itself of interest obligations on that account. It may, in view of the circumstances, be questioned, whether the bank paper offers any advantages over a system of State scrip, and whether it would not be simpler and more logical for the State to issue the bulk of the paper currency, assuming the responsibility for the mistakes that may be committed, than to shield itself behind the banks, which can offer no resistance. We subjoin statistics relating to the currency issues of the banks.
On December 30, 1894, the coin stock of the banks of issue was:
composed of the following elements:
To this reserve must be added 22,500,000 lire of foreign securities payable in gold, which the Bank of Italy held. But as 200,000,000 lire of these stocks could be tied up by the Treasury, the ready gold stock is reduced to 183,100,000 lire. The circulation is, as we have stated, rigorously limited by law. It was natural that legislation should take the most elaborate precautions to avoid recurrence of the conditions that led to the destruction of the Roman Bank. However, there is great difficulty in undertaking to confine a circulation within arbitrary bounds; since in practice the bounds are not determined by the capital or by the metallic reserve, but by the needs of the public. At first, the Government was compelled to relax the restrictions, whereby it had intended to keep the circulation within control. This was made necessary by the circumstances of the savings-banks, threatened by unforeseen withdrawals. What is of most serious import in this connection is that the State has deemed it proper to decide in principle in favor of an issue of 600,000,000 lire of scrip with forced currency, whereof 200,000,000 lire are to become a substitute for the metallic reserve of the banks, and 400,000,000 lire are to be thrown into circulation—an arrangement which, if carried out, cannot fail to terribly confuse the credit of the banks with the credit of the State. The circulation of the issuing banks, from 1884 to 1893, compares as follows:
On December 31, 1894, the circulation of the three banks was as follows:
In Italy, as well as in the majority of European countries, the 100 and 1000 lire notes (or their equivalents) are in preponderance.
CLEARINGS OF BANK NOTES.
In our historical account of the Italian banks, we have shown how the clearances of the notes of the different banks of issue were effected. The decree of February 27, 1894, modified the former mode of procedure. The clearances of the bank notes and the apodissary notes now take place on the 10th, 20th, and last day of each month. Each office establishes, on those dates, the amount of its holdings of the paper of the other banks, and notifies their representatives accordingly. The notes and other values are exchanged between the offices and correspondents of the different banks. Balance statements are forwarded to the central establishments, and carried on interest-bearing account at a rate which cannot exceed three-fifths of the discount rate. The current accounts are settled on June 30th and December 31st. The balances are paid part in cash or Government scrip and part in commercial paper at fifteen days’ maturity, taken out of the paper held by the debtor banks; or else in Italian consols on the basis of the average quotation of five days following the settlement.
CRÉDIT FONCIER OPERATIONS OF THE BANKS.
The Italian banks did a land loan business up to the enactment of the law of August 10, 1893. An act of December 21, 1884, authorized the Government to grant, by royal decree, to companies or institutions having a paid-in capital of at least 10,000,000 lire the privilege of doing a land loan business. Such companies or institutions had the right to issue, corresponding to loans made, mortgage bonds equal to ten times the capital paid in. The National Bank of the Kingdom laid claim to the benefits of the law, instancing the precedents of the Bank of Austro-Hungary, the Bank of Greece, the Scandinavian banks, and the Banks of Naples and of Sicily, which latter were empowered by the Act of June 14, 1866, confirmed by the Act of December 21, 1884, to carry on transactions in land loans. These transactions were intended to grant loans, repayable gradually, on the security of first mortgages on buildings up to half their value; to acquire by transfer or subrogation mortgages or liens under the same conditions, and to transform them into loans redeemable in installments; to make advances on current account, secured by mortgages on the above-stated terms, and to issue mortgage bonds for an amount corresponding to the sums loaned. The interest of the bonds, or mortgage certificates, was fixed at 4, 4½, or 5 per cent. The direct loans made were in bonds, and the loans for current account were in specie. The redeemable loans could not run for less than ten years or longer than for fifty years. To conduct these crédit foncier operations the National Bank established a special section on the plan of the Bank of Austro-Hungary and assigned to this division a capital of 25,000,000 lire. The Banks of Naples and of Sicily made direct mortgage loans.
No statistics of mortgage loans in force have been issued by the Banks of Naples and Sicily, and the aggregate amounts (180,900,000 and 29,000,000 lire, respectively, on December 31, 1892) were made known only by means of the inspection of 1893. We give below the condition, on December 31st, of the mortgage bonds issued as counterpart of the mortgage loans, for the National Bank and the Bank of Naples. The Bank of Sicily affords no information.
The Act of August 10, 1893, explicitly forbade the banks of issue to continue their mortgage loan dealings, and very wisely; for it always is dangerous to give an establishment whose life depends on the ready availability of its resources temptation to tie them up in long obligations.
The Act of August 10, 1893, besides prohibiting further mortgage loans by the banks, decreed that the unauthorized real-estate transactions and investments should be liquidated within ten years. In the case of the Bank of Italy, the period was extended to fifteen years. The investigation of 1893 showed the investments to have been as follows:
This statement shows the amount of obligations to be realized upon by the banks; and to it must be added the 60,000,000 of fraudulent paper issued by the Roman Bank. It is certain that these figures represent important assets, and that the banks will recover a considerable share of the sums tied up in these items; but it is nevertheless a heavy load they have to carry, which must hamper them greatly. According to the balance-sheet of October 20, 1895, the settlements on immobile accounts still to be made were:
It is difficult to foresee how the banks may come out of this embarrassing situation and what losses they may finally have to suffer. Their capital appears to be seriously compromised.
RELATIONS BETWEEN THE BANKS AND THE STATE.
The Italian banks are under very exacting legal supervision. The State subjects them to both ordinary and extraordinary inspection. By a decree of October 1, 1859, approving the by-laws of the National Bank, that institution was required to put at the disposal of the State 18,000,000 lire, of which 6,000,000 was payable on demand and the remainder after a month. Interest on advances was fixed at three per cent. Upon the increase of the Bank’s capital to 60,000,000 lire, on June 29, 1865, the decree sanctioning the increase directed that the Bank should be prepared to advance to the State the difference between the 18,000,000 lire and two-fifths of the value of the shares issued. In a preceding chapter, it has been related how the National Bank granted a loan of 250,000,000 lire to the State in 1866, when the forced currency was established, and how that loan was raised to 300,000,000 by the agreement of March 4, 1872. It was distributed among the six banks of issue by the formation of the syndicate of 1874. At present the State reserves the right to claim from the three banks advances defined as statutory, which may amount to 125,000,000 lire, at a maximum interest rate of three per cent. per annum. The Bank of Italy must furnish an aggregate of 90,000,000 lire, the Bank of Naples 28,000,000 lire, and the Bank of Sicily 7,000,000. On December 31, 1894, the indebtedness of the State to the banks on account of statutory loans amounted to—
The banks act for the account of the State in the matter of provincial collections. They amass the funds of the tax receivers, issuing receipts to them and to the tax-payers. The local directors or sub-directors represent the banks in this service. The bank representatives cannot permit delays in the payment of dues and taxes. They are required to superintend the bookkeeping. They must proceed peremptorily against receivers in arrear. If a demand for funds remains uncomplied with, the securities of the derelict receiver must be sold within five days after the notification; and if the amount raised does not suffice to cover his debt, the director of the bank must employ against him all the resources provided by the law. The non-compliance with the bank’s demand must be communicated to the prefect, who issues an order of execution, the only formality that is necessary for the bank to observe. The banks receive for the collection service remuneration fixed by the Minister of the Treasury. In 1894, the following amounts of tax funds were handled by the banks:
The Bank of Italy has had charge of the State’s Treasury service since February 1, 1895. In all the provinces, it receives the payments for account of the State and its departments, and makes the payments to its creditors.
This service is gratuitous. As a guaranty for its faithfulness, the Bank has deposited a security of 50,000,000 lire in Government bonds, and bonds guaranteed by the Government, which is to be increased to 90,000,000 lire in six years. The State agrees, except in extraordinary cases, to leave in the Bank a permanent balance of 30,000,000 lire. When the balance goes above 40,000,000 lire, the Bank pays interest on the excess at 1½ per cent. If it goes below 10,000,000 lire, the State pays interest on the shortage at the same rate, and the Treasury must furnish the Bank, on the 10th, 20th, or last day of the month, a sum sufficient to make up the 30,000,000 lire. The Bank must hold for the disposal of the Treasury the gold and silver received for the Treasury’s account. No statistics relating to the Treasury service have yet been published. Finally, the banks pay the coupons of the Italian Government debt.
The taxes levied on the banks are very heavy. We give them in detail.
Annually, the Italian banks publish the statements of their operations, going conscientiously into detail, and with accompanying tables that in many cases might well serve as statistical models to other banks. Also, a condensed balance-sheet is published every ten days in the “Gazzetta Ufficial del Regno.” The table on page 192 is a specimen of these ten-day reports.
The explanations we have given of the transactions of the bank facilitate an understanding of the foregoing balance-sheet. Nevertheless, a few additional remarks may be useful. The first item giving the maximum circulation as regulated by the law of August 10, 1893, is simply a matter of record.
Reserve and cash.—The reserve embodies the lawful gold coins except those which are tied up for account of the Treasury; the gold bullion and the gold coins which are not legal tender, always excepting the amounts tied up for account of the Treasury; the State scrip, which represents the gold tied up for the Treasury, commercial paper on foreign countries, payable in gold; five-franc pieces and fractional coin. The cash item includes the State scrip and cash certificates of the State issued against fractional coin, the bank notes and certificates of the other banks, and nickel and copper coin.
Portfolio (bills receivable).—Includes stock of bills of exchange and other commercial paper held by the bank, also coupons of securities which have been admitted to discount.
Advances.—Current loans on securities and merchandise.
Ordinary Treasury advance.—Drafts by the Treasury upon the sums which the banks must hold at its disposal.
Securities.—This item includes the securities owned by the bank; (a) for their reserve fund; (b) for the extraordinary reserve for which the law of August 10, 1893, provides; (c) for the reserve to provide against the final
losses of the Bank of Italy in the liquidation of the Roman Bank and for the losses which all banks will have to incur on the settlement of their tied-up investments; (d) the pension fund for the employees of the bank.
Credits.—Items of regular account current.
Shareholders.—Sums due by the shareholders on their shares.
Immobilizations.—This item comprises all sums which must either be converted into current funds, or paid off according to the terms of the law of August 10, 1893.
Profit and loss for the year.—The law of August 10, 1893, prescribes that doubtful accounts of each six months shall be carried on profit and loss account; they figure there until December 31st of the current year, when they are balanced out of the profits of the year.
Office buildings.—The houses belonging to the banks, and used for their own accommodation.
Miscellaneous accounts.—Various items and the liquidation account of the Roman Bank.
State service—Amounts owed by the State for transfers of funds.
General expenses of the current year.—The two following items represent the current account of the crédit foncier service and open deposits. The banks of issue cannot any longer make mortgage loans, but they have not been in a position to draw out their funds immediately, and therefore this item is carried as a running account on the debit and credit side. The open deposits are carried only as a memorandum on the balance-sheet; they appear for the same figure both in the assets and liabilities.
Among the liabilities we see:
Capital and reserve fund.—This item calls for no comment; the capital of the Bank of Italy has been supplied by shareholders and is their property, while the so-called capital of the Banks of Naples and of Sicily is the product of gifts, alms, and the accumulated profits, and legally belongs to nobody, truly a unique situation in the world of banking.
Circulation.—This item has four subdivisions; circulation for commercial account means the bank notes issued to satisfy discounts, advances on securities, etc., and their amount must not exceed 800 millions. The supplementary circulation authorized by royal decree of January 23, 1894, which became law on July 22, 1894, comes under the same head. The next item comprises the paper money issued for advances to the Treasury, which is exempt from circulation tax by virtue of the law of August 10, 1893. The entirely covered circulation is the issue which the banks are authorized to put out above the legal limitation, on condition that the issue be entirely represented by hard money or gold bullion on hand. The law of August 10, 1893, fixes the relation of the capital and metallic reserve to the circulation, and it taxes the bank notes above the limit at the double of the rate of discount, but as the circulation may surpass one of the two limits, or both, a distinction is made.
Accounts current and Accounts payable at sight.—This item groups the drafts and cheques to order, the “apodissary” documents, and the current accounts at interest and without interest, payable on demand.
Accounts current and Accounts payable on term.—Current accounts at interest and savings accounts payable after notice of withdrawal to the banks.
Miscellaneous accounts.—Minor accounts, containing dividends due, residue of profits of former business years, etc.
Divers services for State account.—This is the current account and other credit accounts of the Treasury; it will be remembered that this account must not fall permanently below 30,000,000 lire.
Fund set aside according to Article 2 of the agreement of October 30, 1894, is the counterpart of the item of securities figuring in the assets, and which provides for losses to arise in the liquidations.
Profits of the current year.—This item shows the profits since the beginning of the half-year up to the date of the balance-sheet.
Finally, we have the two accounts of the mortgage service and deposits, which we commented upon in our allusions to the assets.
The Italian banks of issue have reorganized under the most discouraging circumstances. They have to contend with general distrust. Italy must certainly calculate upon having to encounter most difficult obstacles. She has abused the facilities of the credit establishments to the point of extreme danger, and undoubtedly she would have found it of the greatest advantage to have established a new bank, independent of the State, yet under its strict supervision; instead of leaving the right of issue in the hands of suspected establishments, which bear the brunt of faults of which they are perhaps not entirely guilty, but which they had not the courage to avoid. The very groundwork of the banks shows often a strange lack of understanding of the problems to be treated. The restrictions imposed upon the circulation and the extravagant taxes with which it is burdened weaken the banks and thwart the beneficial effect which they exercise in other countries. The legal-tender quality of the paper money is a mere euphemism, as Italy is under a forced currency rule, which means that the notes are a non-convertible paper money like the scrip of Greece or of the Argentine Republic.
The State has not as yet made use of its prerogative to levy upon the gold of the banks and to give them its own scrip therefor. This State scrip would allow the banks to issue bank notes of their own to triple the sum of the State’s paper; but this license is a very grave one. It is inflation pure and simple; an amplification of paper money issued by banks which, at this day, have neither capital nor reserves left, at least not in readiness to be used or to be realized upon. The banks struggle as best they can against the situation which faces them; but they are overwhelmed by taxes and entangled in the limitations of a too narrow circulation; they have allowed their own credit to be merged with the Government’s credit; and, above all, enfeebled and demoralized by their past, they cannot exercise that regulatory action upon the coin and scrip circulation which is the fundamental mission of banks of issue.