Mario Draghi: The culture of monetary stability from unification to the
present day
Address by Mr Mario Draghi, Governor of the Bank of Italy and Chairman of the Financial
Stability Board, at the inauguration of the exhibition "The currency of united Italy: from lira to
euro", Palazzo delle Esposizioni, Rome, 4 April 2011.
* * *
The Bank of Italy is making a twofold contribution to the 150th anniversary of the Unification
of Italy. With the collaboration of numerous experts from Italy and abroad, it is sponsoring a
vast research project - entitled Italy and the World Economy, 1861-2011 - on the Italian
economy's response to the major changes in the international scenario that have taken place
from the birth of the unified State to the present day. The results of this research will be
presented at a conference in Rome on 13, 14 and 15 October.
For the wider public, and particularly for young people, we are inaugurating today the
exhibition on The currency of united Italy: from lira to euro.
The thread that runs through the 150 years of Italian monetary history since unification draws
together two fundamental events: the country's monetary unification, which the newly formed
Italy undertook in order to strengthen the foundations of its political unity; and, closer to our
time, Italy's participation in European monetary unification, achieved despite the lack of
political unity.
This story, from the lira to the euro, illustrates a central point for all of us today - the
importance of monetary stability and of a political and economic culture that recognizes its
value.
Guido Carli suggested a logical path to take. "If international competition", he wrote in 1961,
"is indeed the most powerful incentive towards our country's economic development, there
can be no doubt that, in turn, its strongest pillar is monetary stability. This, too, is a lesson
handed down to us through a century of Italy's - sometimes painful - experiences as a
nation state."1
The concept of monetary stability changes with time, alongside the technological and
institutional conditions that determine it. Between the 19th and 20th centuries, Italy, too,
switched from a system in which money was made of, or could be converted into, precious
metal to one based on purely fiat money. In the first system, monetary stability is ensured by
maintaining the gold convertibility of the currency at a fixed parity. By and large, Italy
managed to do this: on the eve of the First World War, despite some periods of
inconvertibility, the price index was at the same level as in 1861. This stability was regarded
as the natural state of things.
With the ascendancy of paper money, a radical institutional overhaul took place in the
monetary field. The modern central bank came into being, and standards, rules and
organizations were established to manage a currency whose value was no longer anchored
to that of a metal, but instead based entirely on trust.
As early as 1839 Carlo Cattaneo warned, in his review Il Politecnico, that "paper money must
not be issued except on behalf of the State, and that, with all the rigorousness and all the
solemnity of laws and fundamental orders, its quantity must be made proportionate to needs,
that is, to the volume of transactions."2
It was not until 1893 that the Bank of Italy was founded, with the main task of centralizing the
function of note issuance, which until then had been distributed among six local banks. It
immediately took on the broad role of guarantor of monetary stability and centre of the
financial system. In the words of Marco Fanno, it becomes "the central institution around
which the banking structure gravitates and on which it is hinged, ...the body regulating the
market, ... the last line of defence to activate at times of grave difficulty."3
The suspension of the gold convertibility of banknotes during the First World War drew the
attention of economists and economic policy makers directly to inflation, not in the old sense
of increase in the stock of banknotes but in the modern sense of rise in the general price
level. The value of money lies in its purchasing power and therefore inflation means
devaluation of the currency. Keeping prices down - although still instrumental to the lira's
external convertibility - became the objective of economic policy under the new system of
the gold exchange standard that prevailed after the War.
Right after the Second World War the lira fell to a thirtieth of its pre-war value as a result of a
flare-up of inflation, extinguished by the monetary stabilization engineered by Einaudi and
Menichella. Einaudi called for a concerted effort to avert "monetary unity's destruction".4 The
laborious task of rebuilding confidence in the currency, and thus of reconstituting savings,
was pursued with courageous determination, in the belief that the defence of the currency
would create a solid basis for the country's economic recovery.
The path of international integration was followed by joining the Bretton Woods monetary
system. In the 1950s Italy enjoyed a period of unprecedented monetary stability and
economic growth. The exchange rate with the dollar was stable, and remained so until 1971;
for the first time the rate of inflation in Italy was in line with, if not lower than, that of the other
leading European countries.
The end of the Bretton Woods system at the beginning of the 1970s concluded the transition
from commodity money to fiat money. Troubled times ensued: international economic
relations were affected by deep shocks, such as the oil crises. During this passage Italy paid
a high price in terms of loss of value of the lira: double-figure inflation eroded households'
purchasing power and periodical devaluations gave only temporary relief to a productive
system labouring to restore its efficiency and competitiveness.
In the following decade the decision was taken to advance the construction of the European
Community through the completion of the single market and, eventually, the Economic and
Monetary Union and the euro. Italy took a leading role, responding to the widespread
aspiration of the nation. These prophetic words were pronounced by Carli at the beginning of
the 1970s: "During Italy's Risorgimento the European ideal was deeply engrained in the effort
to achieve national unity, so that the two ideals were not seen as contradictory but as phases
of a single process moving towards the expression of a culturally homogeneous community.
Events in the last decades have given a sense of urgency to what might have seemed a
utopian vision during the last century, so that the accomplishment of European unification is
considered an indispensable development for the very survival of the values embodied in
national ideals."5
Today, there is reason to believe that the stability of the currency and of prices depends on
the expectations of economic agents. These expectations are formed on the basis of such
elements as the clarity and certainty of the rules of money creation and the reliability and
credibility of the institutions managing it. The establishment of a culture of monetary stability
is crucial for this to become a virtuous circle.
Luigi Einaudi believed that money was a contract between economic agents and that its
stability had to be built by educating them. As a young economist, in 1905 he undertook the
translation into Italian of Walter Bagehot's Lombard Street,6 the classic Anglo-Saxon text on
monetary stability, certain that it would be effective also in forming public opinion. As
Governor he invented the medium of the Concluding Remarks to speak to the Italians, not
just to the experts. Faced with the pernicious inflation route, in 1947 he claimed it was the
right and the duty of the senior management of the Bank of Italy to issue "a cry of warning",
while at the same time loudly avowing that "it is a road we shall not take."7
In the last half century the Bank of Italy has indeed maintained this commitment to educate
and inform with the publication of research papers by the Economic Research Department,
public talks by senior management, and not infrequent contacts with universities and with the
new generations. Tommaso Padoa-Schioppa explained, sixteen years ago, that a central
bank contributes to monetary stability also through "a constant effort of information,
education, and clarification that is part and parcel of defending the value of the currency."8
Nowadays, the central banks know that effective communication and widespread
understanding of monetary matters are essential for the success of their monetary policy
strategy. The Eurosystem is committed to informing the markets and the public about how it
thinks, decides and acts. This is also a way of keeping price expectations stable over the
medium-to-long term.
Now that monetary stability no longer hinges on the amount of precious metal available in the
system, it relies on the credibility and technical expertise of the central banks. But the latter
are powerless if the value of stability is not firmly ingrained in the collective consciousness.
The objective of the exhibition we inaugurate today, and of the permanent museum that will
later take its place, is to help entrench this value, which is a common, founding legacy of
European citizenship.