Money Doctoring Italy in the Interwar Years. The Rationale for Central Banking and its Outcomes

The stabilisation of the Italian lira in the mid-1920s represents a good case of money doctoring fostering the adoption of central banking. The monetary stabilisation of Italy largely depended on the financial advice provided by Montagu Norman of the Bank of England and Benjamin Strong of the US Federal Reserve. The chapter focuses on the rationale of the central banking regime and its consequences on the Italian banking system as they entailed a turn in monetary policy eventually affecting the value and size of banking assets investigating whether the shift from a plurality of banks of issue to central banking was in itself a factor of instability or whether it derived from other factors and central banking promoted more stability even though via insulation and deflation as in the 1930s. One of the main findings is that central banking was the result of international pressures accompanying money doctoring and the sway to financial regulation appears induced by the crisis caused by related deflationary policies. The other major finding is that in the 1930s full-fledged central banking reduced the need for robust capital requirements favouring the convergence, in terms of volatility, within the group of intermediaries associated to systemic risks.