During the years between 1861 and 1893 six banks were authorized
to issue notes redeemable in gold or silver — though with
frequent episodes of suspension — and accepted at par in Italy. Because
of the existence of several issuing banks the Italian experience
was often referred to as an example of competition in money
issuance; as a result, the regime of competition was blamed for the
financial crisis which took place at the end of the period. This article
challenges the idea that note issuance in Italy was carried out
under competition. The theoretical framework used to analyse the
Italian experience from the viewpoint of competition is free-banking;
the theory provides a model to analyse competition between
notes issued by unrestricted banks which are changed at par and
redeemable in some standard good on a fractional reserve basis.
Although the Italian case cannot be considered an example of freebanking,
this framework can help explain whether — and under
which circumstances — note issuance conditions in Italy came
close to a situation of competition. According to the model, redeemability
and the absence of any role by Government are essential
conditions for competition between currencies to take place.
Judged on these basis, Italian experience has been on the whole a
far cry from competition, not only because of the frequent suspensions
of redeemability but because Government interventions
distorted competitive decision-making by banks and on some occasions
prevented the clearing process to take place. In addition to
the direct support granted to single banks — in exchange for loans
or for political purposes — and to several forms of regulation on
the issuing activities, competition was hampered by the willingness
of Government to suspend redeemability in time of crises. On several
occasions banks were given the opportunity to be exempted
from the rules of competition instead of maximizing their profit
subject to those constraints [Cod. JEL: E42, E51, N13].