Paper money but a gold debt: Italy on the gold standard
During the 52 years between the Unification of the Kingdom of Italy and World War 1, the lira was legally convertible into metal for a limited period of time. Although not formally committed to gold, the lira exchange towards the gold standard countries proved remarkably stable, \223shadowing\224 gold. It is widely claimed that being one of the successful members of the gold standard circle entailed a number of advantages. If the lira was closely linked to gold, suggesting that there was only a small cost connected to adopting the gold standard, then why did Italy not make all possible efforts to resume as soon as possible and adhere more strictly to the gold standard? Italy had a large foreign debt that was basically the result of Unification. This debt was denominated in lira, but foreign holders could convert their coupons into gold at the official rate in Paris. Italy could exploit its domestic bondholders by allowing the lira to depreciate, while insisting that domestic holders of the debt accept lira. But there were limits to this process because Italians could take the coupons to Paris have them paid in gold and because payments abroad, in gold, became more expensive following depreciation. The paper explores the various measures the Italian government used to prevent arbitrage, and the strategies bondholders used to circumvent them. In the end, however, it was clear that if devaluation went too far, most of the coupons would be presented in Paris, the debt would de facto became a gold debt, and the Italian Treasury would suffer a substantial loss of gold. Hence the convenience of letting the lira float downward and exploit seignorage any time domestic conditions became more critical. At the same time it was necessary to keep depreciation within a certain range, \223shadowing\224 the lira par value.
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