Banca d'Italia's three lives

Banca d'Italia will celebrate the 130th anniversary since its foundation on 10 August. It is one of the few Italian public institutions worthy of this name, due to its ability to train and select civil servants who know how to contribute to producing a public asset. In the case of a central bank, the governors change – on Via Nazionale, the eleventh governor in its history, Fabio Panetta, has just been appointed – but the public asset remains the same: the value of money. The lifecycle of an advanced country's central bank can, from this point of view, be marked by three separate moments: classic, traditional and modern. In each of these moments, relations with other subjects become vital: on the one hand the State, on the other the banks. These three different lives can be identified for Banca d'Italia.

The first thing to remember is that two different types of money are produced and circulate in a market economy: public and private. Public money is issued by the State; private money is issued by private enterprises – the banks, who gather together the amounts deposited by individuals – and features a promise of convertibility: at any one time, the bank guarantees individuals that it can transform the deposited amounts into public money. The origins of this joint presence lies in centuries past. As Italians, we like to remember the case of the Republic of Venice, where there were two banks issuing public paper money as far back as the sixteenth century. At the time the public money was also covered by a promise of convertibility: at any time, the public bank guaranteed that any bearer of paper money could exchange it with silver or gold coins, at a pre-determined fixed price.

So if both public and private money are circulating in a given country, what role does the central bank adopt to protect its value? Historically speaking, a central bank's initial life involves two functions: guaranteeing the convertibility of public paper money into metallic money, as the Venetian banks did, and more exactly gold coins. It protects the convertibility of private money, preventing the struggles of one bank from turning into a general crisis of the people's trust in the entire banking system, and thus a banking crisis. In its first lifecycle, therefore, a central bank is basically a bank that supervises: having guaranteed the convertibility of gold, the central bank monitors private banks on a daily basis, ready to loan them public money in emergency situations. In the case of Banca d'Italia, its very foundation in 1893 – the start of a path that would lead to consolidating the power to issue the Lira as currency in 1926 – was the result of the need to address the banking crisis triggered by Banca Romana's bankruptcy.

The second life of a central bank begins when stable gold convertibility ceases. If a central bank can change the price at which gold currency is exchanged for paper money, it means that it can change the total amount of public money, and consequently also the total amount of money. This is how monetary policy begins. A central bank, which we will call traditional, progressively looks like a bank of issue, which becomes a protagonist on two fronts. It continues to supervise banks, but also progressively takes on a macroeconomic dimension, as changing the availability of money can influence economic growth, employment and inflation. We can consider that this stage began at Banca d'Italia in 1936, when the country decided to abandon the gold standard: the progressive devaluation of the Lira had an expansionary effect on monetary circulation, that was linked to economic recovery, but also to inflation. A new bank law was passed in the same year, which strengthened Banca d'Italia's role as a banking system controller in an institutional context where the State's presence in the country's economics was systematic.

Over time, however, after World War Two, it became all too clear in all advanced countries that the traditional central bank – which could change the availability of money without the anchor of monetary convertibility – was at risk of being systematically captured by special interests in politics, and/or in the banking system, and of creating too much money, thus resulting in less growth and higher inflation. The traditional central banking system truly entered a crisis during the period of the Great Inflation in the 1970s.

The central banks thus entered their third life, modernity, wherein they gained independence from their governments, to reduce the risk of political pressure and focus more on monetary policy and less on supervision, to decrease banking pressure and concentrate on monetary stability. They were given responsibility for this goal, so that their actions would be seen to be credible. This was a path that Banca d'Italia started along in 1981, with its so-called "divorce" performed by Andreatta and Ciampi, resulting in the central bank's autonomy in monetary policy management. This modern phase well and truly began, however, in 1999, when Italy became a part of the Euro area, and the bank of issue became a part of the central banking system headed up by the ECB: an independent central bank, which does not answer to the national treasuries or to Brussels, separated from fiscal and supervisory policies, and focused on monetary stability. This setup was partly changed in 2014, when the ECB was also assigned supervisory responsibilities. Two important milestones must be added at this stage: from a monetary point of view, the introduction of the digital Euro; and from a supervisory point of view, the completion of the European banking union. Banca d'Italia can play a vital role on both fronts. Happy Anniversary.


To find out more:

Fratianni M., Spinelli F., 2001, Storia Monetaria d'Italia, RCS Libri, Milano.

Hoover K.D., 2023, The Coevolution of Central Banks and the Concept of Monetary Policy, CHOPE Working Papers, no. 04.

Masciandaro D., Romelli D., 2015, "Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics," Financial History Review, Vol. 22, no. 3, 259-289.

Singleton J., 2011, Central Banking in the Twentieth Century, Cambridge University Press, Cambridge.