Corso Forzoso (Italy)

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The famous Corso Forzoso, meaning “forced circulation,” refers to the suspension of convertibility of Italy’s paper lira from 1866 to 1881, which put Italy on a paper standard inconvertible into a precious metal. Before the Corso Forzoso Italy was on a gold and silver bimetallic standard, and holders of Italian bank notes could redeem notes in gold and silver specie.

The origin of the Corso Forzoso can be traced to costly wars waged to unify Italy, disorderly public finances arising from consolidation of budgets and taxation systems of separate Italian governments, and heavy public works expenditures in the name of industrialization. Between 1 January 1862 and 1 January 1867 the public debt grew from 3,131 million lire to 6,929 million lire. The debt was financed by short-term treasury bonds, a third of which were held by foreign investors sensitive to crises of confidence, and expecting bond redemption in gold and silver. The end of the American Civil War, bringing cancellation of war contracts, demobilization, and renewed competition from cheap American cotton, sent the economic tremors that pushed Italy over the monetary precipice. The price of Italian bonds on the Paris Bourse tumbled from 80 percent to 36.44 percent of par value and Italian bondholders and Italian correspondents of foreign bondholders asked for redemption in gold, causing a shortage of gold, and a crisis of confidence in the banking system. A run on the banks forced the government’s hand and on 1 May 1866 the government, with prior approval from the legislature, decreed the inconvertibility of bank notes—the Corso Forzoso.

Notwithstanding the Corso Forzoso, the National Bank of Italy avoided the runaway issuance of bank notes that brought to ruin many past experiments with paper money. The index of wholesale prices rose modestly from 0.897 in 1866 to 1.051 in 1873. The gold price index rose from 1.046 to 1.137 over the same time period.

Defenders of the policy of Corzo Forzoso argue that the consequent depreciation of the lira in foreign exchange markets made Italian exports cheaper in foreign markets, and foreign goods expensive in Italian markets, together acting as a powerful boost to Italian industry. Also the Corzo Forzoso accustomed the Italian people to the acceptance of bank notes. In 1865 only one-tenth of the circulating money had consisted of bank notes. Critics of the policy point to the fear that Corzo Forzoso struck in the minds of potential foreign investors at a time when Italy badly needed foreign capital.

After achieving a balance budget early in the 1870s the Italian government began taking steps to restore convertibility of the lira. As the government paid off its debts to the National Bank of Italy in gold, the bank was able to restore convertibility, and on 7 April 1881 the Corzo Forzoso came to an end.

The Corso Forzoso ranks among the more successful early efforts to circulate fiat money, or money not supported by precious metals or other commodities. During the Napoleonic Wars England maintained control over its monetary affairs despite the adoption of an inconvertible paper standard. Before the Corso Forzoso, however, the more normal consequence of inconvertible paper money had been a whirlwind of inflation. France lamented two disastrous experiences with inconvertible paper, John Law’s paper money, and the French Revolution’s assignats, both of which caused runaway or hyperinflation.