Fiscally troubled governments have often found monetary expedients to their financial difficulties. The result is often trouble. Deficits once financed by issuing bonds willingly bought are thereafter financed by printing money reluctantly accepted. The result is a despotic tax, levied arbitrarily on those unable to secure a ‘real’ income both sufficient and recurring for their needs. Thankfully though, in some cases, the monetary solution is a temporary one, a patch to allow more time for proper reform of the public finances.
After its unification, Italy’s finances were in questionable health. When investors lost confidence, the government announced the corso forzoso, the suspension of Italy’s monetary standard. This allowed for a gradual but steady return to a stable fiscal position. It would not forever solve Italy’s fiscal woes but it was a relatively successful application of an often risky maneuver.
Italy’s financial position in the 1860s was primarily affected by the wars of Italian unification in which the Kingdom of Piedmont-Sardinia fought against the Austrians and neighboring Italian states to create a unified Italy. After the wars, Italy was unified but greatly indebted. State revenues covered only half of expenses in 1861, the product of both military spending and large infrastructure investments funded by public borrowing. The Italian public debt more than doubled between 1862, when it stood at just over 3 billion lire, and 1867, by which point it reached almost 7 billion lire. On this debt, Italy paid a high rate of interest, an average of 7.5%, twice the cost of borrowing by the British government at the same time.
Further, Italy had to construct a new fiscal system to replace the myriad of old tax systems used by the old pre-unification states. This led to some dislocation. For example, the low external tariffs of Piedmont-Sardinia were introduced for the whole country, damaging previously protected local industry. In its infancy, modern Italy was both poorer and more economically unequal than most other Western European countries. Per capita GDP was well under half that of Britain and only just over half that of France.
On the monetary front, the new country adopted a national currency. However, it did not adopt a single central bank. Rather, control over Italy’s money supply was left in the hands of several ‘banks of issue’ that had functioned as the monetary authorities in the various Italian states before unification. Some of these banks were private and others state-owned and each operated in a particular region. The Banca Nazionale nel Regno d’Italia operated in northern Italy, Banca Nazionale Toscana in Tuscany and central Italy, and Banco di Napoli and Banco di Sicilia in the south. These were just four of the six ‘banks of issue’ in post-unification Italy.
In the early 1860s, Italy’s monetary system operated on a bimetallist standard. Italian lira banknotes were convertible into both gold and silver, and silver was convertible into gold, at a fixed rate. This was a model copied from France, a patron of Italian independence and unification and the new country’s most important economic partner. Indeed, Italy joined the Latin Monetary Union in 1865, after having already made coins from Belgium, France, and Switzerland legal tender in the country. The Latin Monetary Union was an experiment in monetary union without a common monetary authority or monetary policy.
Italy’s ‘banks of issue’ printed lira banknotes and redeemed them for precious metals. Again, the fact that the country had several ‘banks of issue’, such as the Banca Nazionale nel Regno d’Italia, reflected the fact that prior to unification, several banks issued currency. However, despite the multitude of issuers, banknotes were not ubiquitous and only made up one-tenth of the circulating money supply in 1865. The average banknote was said to be in circulation for just ten weeks before being presented for redemption at the issuing bank.
From the start, the newly created Italian state had to contend with an array of economic and fiscal challenges. The government ran large budget deficits of around 6% of gross national income in the early-to-mid 1860s and these fiscal shortfalls were usually complemented by trade deficits. Soon after, the end of the American Civil War led to a resumption of American cotton exports that was said to damage Italy’s trade in cotton. Further, and probably far more importantly, there was growing anticipation of yet another war between Italy and Austria, a theater in the larger Austro-Prussian War of 1866.
These events shook investors’ confidence in Italian public finances in 1865 and 1866. The value of Italian bonds trading in Paris fell from 80% of face value to 36% and government borrowing costs surged higher, from 8% in 1865 to 12% in the spring of 1866. Investors were increasingly reluctant to lend to the country.
Meanwhile, back in Italy, people were demanding the redemption of banknotes into gold at an alarming pace, effecting a run on the banks. The country’s banks relied more on banknote issuance than deposits in these days so the run was characterized less by depositors seeking to withdraw their money from the banks so much as holders of banknotes demanding redemption in gold or silver.
On May 1st 1866, the government suspended convertibility of the lira into precious metals for ten years, an effort to arrest the bank run. This event became known as the corso forzoso, or ‘forced circulation’, of paper money. During the corso forzoso, banks had to redeem their notes not in gold or silver, but in banknotes of the Banca Nazionale nel Regno d’Italia. In the early years of the new system, the Banca Nazionale became the leading bank of note issuance in Italy, a kind of central bank in these years before the Banca d’Italia, the future central bank, existed. The notes of the Banca Nazionale were made legal tender nationwide and, as a result, traded at a premium to the notes of other banks.
The Banca Nazionale may have been favored by the new monetary system but this came at a price. The government also demanded that the bank make a 250 million lire loan to the state to fund its impending war against Austria. The combination of state borrowing from a central bank accompanying a suspension of convertibility was present during Britain’s abandonment of the gold standard in 1797. However, in Britain, the government borrowing from the central bank preceded the suspension and was restricted thereafter, having been identified as a source of the Bank of England’s ailments. In Italy, the de-facto central bank became a larger creditor to the state after the suspension.
Indeed, the corso forzoso gave the Kingdom of Italy fiscal breathing room. In its transactions with the Banca Nazionale, the state was essentially using the issuance of paper notes by the bank to finance state deficits. Public debt to GDP reached a maximum of 93% in 1871 before beginning to fall. New loans were nonetheless arranged in 1872 and 1874. The latter involved a syndicate of six banks and correspondingly came at the expense of the Banca Nazionale’s favored treatment. In exchange for the larger syndicate’s participation, their banknotes were made legal tender as well.
The new monetary system did not bring about great instability. True, during the corso forzoso, banknotes circulation, which made up just 10% of circulating money under the old standard, eclipsed the circulation of metal coins. However, the emission of paper banknotes did not cause prices to rise meaningfully in Italy. It helped that the law required that banks of issue still keep gold and silver reserves to back one-third of their note issuance, limiting the growth in the money supply. Further, an 1868 law limited the total stock of Banca Nazionale notes to 740 million lire. Gold traded at a 20% premium to banknotes after the end of convertibility but that was the maximum reached in the whole period.
The suspension of the bimetallic standard allowed for the creation of more credit and wider acceptance of banknotes. This helped launch a new wave of bank formation, with several Italian banks being founded in the 1870s. Just one of these was the Banca di Genova which, after some transformations, went on to form part of today’s Italian megabank UniCredit. The system was working well enough that the corso forzoso was extended in 1876.
The extension was not enacted to indefinitely prolong government largesse. In fact, more-or-less balanced budgets in the 1870s quickly paved the way back to the old monetary standard at the end of the decade. On international foreign exchange markets, the lira fell in value but it was a manageable slide. The drop in the lira may have supported Italian industry and helped return the country to a healthy balance of payments, a welcomed development. The balanced government budgets of the 1870s limited the need for new borrowing or liberal banknote issuance and the lira subsequently recovered. The return of convertibility was approved by the Italian parliament in 1881 and implemented in 1883, ending the corso forzoso.
That said, from this point, budget deficits grew once again, caused by new rounds of military and infrastructure spending insufficiently supported by revenues. In the early 1890s, the lira was again decoupled from gold and silver. Thereafter, expansion of the money supply led to monetary problems that would be addressed by the eventual creation of the Banca d’Italia and another official suspension of convertibility.
While the relief it offered was temporary, the experiment with paper money went relatively well in Italy, all things considered. The corso forzoso did not cause the money supply to overflow the banks of thoughtful safeguards, cascading towards worthlessness, as past and future fiscally-induced monetary reforms have. Whatever the reasons, which must be political as much as financial, its success supported the development of a new Italian financial system for a new Italy.
More from the Tontine Coffee-House
Learn about the Latin Monetary Union, the international monetary system of which Italy was a part. Also, read about other elements of Italian fiscal-financial history, from Genoa’s Banco di San Giorgio to Venice’s fiscal restructurings.
1. Allen, Larry. “Corso Forzoso (Italy).” The Encyclopedia of Money, 2nd ed., ABC-CLIO, 2009, pp. 89–90.
2. Bartoletto, Silvana, et al. “The Sustainability of Fiscal Policy in Italy: A Long-Term Perspective,” CESifo Working Paper Series 3812, CESifo, 2012.
3. Fratianni , Michele & Spinelli, Franco. “Italy in the Gold Standard Period, 1861-1914,” NBER Chapters, in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 405-454, National Bureau of Economic Research, Inc., 1984.
4. Kindleberger, Charles P. A Financial History of Western Europe. George Allen & Unwin, 1984.
5. Banca d’Italia. “Origins.” History, Bank of Italy.
6. Sumner, William Graham, et al. A History of Banking in All the Leading Nations. Vol. 3, Journal of Commerce and Commercial Bulletin, 1896.