Adverse clearings in a monetary system with multiple note issuers: the case of Italy (1861-1893)

We study the regime of multiple note issuers that characterized the Italian monetary system from the unification of Italy in 1861 to the creation of the Bank of Italy in 1893. We describe how the system evolved and we analyze how it functioned by studying the clearing of notes among banks. Since by law banknotes had to be redeemed at par, we focus on the ability of banks to keep notes in circulation before redemption. We estimate adverse clearings of notes issued by the dominant bank [Banca Nazionale degli Stati Sardi (BNS)] in the provinces where this bank had branches and we find that the entry of a smaller issuer limited the BNS’s capacity to keep its notes in circulation at the local level. We take this as evidence that competition in note issuance worked as an effective discipline device. Our results are consistent with the analysis of Pareto (Journal des économistes 3–28, 1893) who maintained that the fall of the Italian system was not due to the failure of the competitive mechanism, but rather to the altering of the rules of the game by the government.