Jump to ContentJump to Main Navigation
The Economic Future in Historical Perspective$

Paul A. David and Mark Thomas

Print publication date: 2006

Print ISBN-13: 9780197263471

Published to British Academy Scholarship Online: January 2012

DOI: 10.5871/bacad/9780197263471.001.0001

Show Summary Details

Lessons from Italy’s Monetary Unification (1862–1880) for the Euro and Europe’s Single Market

Lessons from Italy’s Monetary Unification (1862–1880) for the Euro and Europe’s Single Market

(p.314) (p.315) 10. Lessons from Italy’s Monetary Unification (1862–1880) for the Euro and Europe’s Single Market
The Economic Future in Historical Perspective

Leandro Conte

Gianni Toniolo

Giovanni Vecchi

British Academy

Abstract and Keywords

This chapter examines the effects of monetary unification on market integration. It offers a new perspective on the Euro's likely effectiveness in achieving the ‘Single Market’ goal of European economic integration, by examining the impact of a nineteenth-century national currency reform. It looks back at the experience of Italian monetary unification after 1861 and describes how rapidly the prices of the basic factors of production, wages, and interest rates began to converge after the introduction of the national currency.

Keywords:   monetary unification, market integration, Euro, Single Market, economic integration, national currency

Monetary Unions and Market Unification

More than thirty years have passed since the completion of the customs union among the original six signatory countries of the Rome Treaty of 1957, and ten years since the signing of the Single Market Agreement.1 It is, nevertheless, a common observation by Europeans that individual commodities, labour skills, and capital assets do not fetch a single price throughout the union. Volkswagen Passats are priced 25 per cent higher at authorized VW dealerships in Munich than at such dealerships in Copenhagen.2 University professors’ salaries, while almost uniform within individual countries, for given seniority levels, differ to no small extent across the EU. Perhaps more surprisingly still, the closing price of Bayer shares was fixed on 3 June 1999 at euro 37.20 in Frankfurt, and at 37.87 in Milan.3

The Monetary Union, on the other hand, is still in its infancy. Actual euro-denominated banknotes only substituted for individual countries’ currencies in March 2001. The question then remains open as to the effect the single currency will have on the pace of the EU’s (p.316) movement towards the actual realization of a single market in factors of production (labour and capital). In a slightly more technical fashion, the question can be rephrased as follows: under what conditions is the Monetary Union likely to accelerate factor price convergence in the EU?

History, as we all know, is no Magistra Vitae. It does not provide blueprints readily applicable to current situations. It is, however, of great help in framing the relevant questions about the present and the future. As far as monetary unions are concerned, economic history provides at least three types of cases from which ‘lessons’ may be drawn or, rather, sophisticated questions may be asked:

  1. 1. A weak form of monetary union can be found in the so-called classical gold standard (from 1873 to 1914).4 Such scholars as Jeffrey Williamson and his numerous co-authors have contributed to our understanding of price convergence, and of the creation of a large Atlantic, or even ‘global’, market during the classical gold standard.5

  2. 2. A second type of monetary union emerged in the nineteenth century as the result of formal international agreements among sovereign states. Foremost among these are the Austro-German, the Scandinavian and the Latin Monetary Union. Neither the supranational unions nor the gold standard, however, provide satisfactory historical proxies for the EMU. In both cases, individual participant states retained their customs’ sovereignty, and did not create a common central bank. Moreover, membership in the gold standard was not irrevocable—individual countries could, and did, ‘opt out’. And the rules of the game were not always adhered to by members of the monetary unions, a behaviour that led to the de jure or de facto dissolution of all three unions by the early 1900s.

  3. 3. The most relevant ‘lessons’ for the EMU come from monetary unions created soon before, during or in the wake of the creation of new sovereign states. In these cases, a common external tariff existed for all the territories involved in the monetary union, no ‘opt out’ clause could be invoked, and embryo central banks were either planned or created. Particularly interesting in these respects promise to be the German and the Italian cases where monetary union was (p.317) achieved at the same time as steps were taken to fulfill the legal and economic prerequisites for market unification. In this chapter we discuss the relevance to the on-going creation of Europe’s single market of the similar Italian experience in the twenty-odd years following the 1862 legislation for currency unification.

The Monetary Unification of Italy

At the beginning of 1859, Italy was divided into six separate states. Each levied its own customs duties, circulated its own currency, and often chartered its own bank(s) of issue. Additionally, institutions differed considerably between the states in such areas as weights and measures, property rights protection, taxation, and government expenditures. Nevertheless, a slow process of economic unification, due to improved communications and a revival in trade, had been under way during the previous decades. In particular, the 1850s saw Vienna abolish the customs barrier between Lombardy and the Venetia, the completion of the Venice-Milan railway in 1857 (the Ferdinandea), the 1855 tariff opening the Kingdom of Sardinia to the benefits of free trade, and the Grand Duke of Tuscany championing the policy of laissez faire.

The Kingdom of Italy was created between 1859 and 1861. The military defeat of Austria by the allied armies of France and Piedmont (officially called the Kingdom of Sardinia) resulted in the annexation of Lombardy by the latter. This was followed by uprisings and plebiscites in most of Central Italy, sanctioning the decisions of the region’s constituent provinces to apply for membership in the enlarged Piedmontese State. Garibaldi’s expedition to Sicily and his march towards Naples prompted the abdication of the Bourbon King, and Piedmont’s annexation of the Kingdom of the Two Sicilies. The new Kingdom of Italy was proclaimed in March 1861. Italy then gained Venice and its territory, ceded to her by Austria in the wake of the Prussian war of 1866. Finally, Italian troops entered Rome in 1870, thereby completing the political unification of the Peninsula in a single sovereign state.6

(p.318) The first step to foster market integration was taken by extending the Piedmontese tariff to the new provinces, upon their joining the Kingdom of Sardinia. At the time of the proclamation of the new kingdom, therefore, Italy was, de jure, a large customs union with free trade within its borders and a mild uniform external tariff. A huge array of non-tariff barriers to the movement of goods and production factors, however, remained in place for a long period of time. Some of them will be discussed in the following section.

In many ways, a parallel may be found between the Italian situation of the 1860s and 1870s and that of the EEC in the late 1960s. In both cases, the legal creation of a ‘common market’ was only the first necessary step, and not a sufficient one, in the creation of a single market for goods and factors of production. Indeed, the single market is still far from being an accomplished fact in the European Union. Two questions arise from this comparison. Firstly, did monetary union speed up market unification in mid-nineteenth century Italy? Secondly, can we learn anything from that experience? Before discussing these issues, a brief account of Italy’s monetary unification in the 1860s and 1870s is appropriate as its history may shed light on the on-going process of European monetary unification.

The monetary regimes existing in Italy immediately preceding political unification are summarized in Table 1.

The reorganization of the payments system was one of the first tasks of the new state. In July 1861 the Piedmontese Lira, re-named Lira Italiana, was made legal tender in all the territories of the kingdom. The government, however, had to compromise with a Parliament that reflected the resistance of local populations to currency unification: it was therefore agreed that the divisional coins of the pre-unity states would retain the status of legal tender within their respective territories.7 This transitory provision was legally overcome in 1862 when an Act of Parliament made the gold Italian Lira the kingdom’s sole legal tender. At the same time, the new kingdom’s monetary standards were better specified, and clearly defined exchange rates for the lira with the currencies of the old Italian states, France and Belgium were established.8 The southern provinces were allowed to continue using pre-unity bank notes for local payments.9


Table 1. Italian Monetary Systems Before Unification.

Monetary regime

Unit of account

Exchange rates


Year of annexation





Gold content (grams)

Silver content (grams)

Metal content

Actual contenta


Piedmont, Liguria, Sardinia




1 : 15.5

lira piemontese
































1 : 15.5

lira di Parma











lira toscana






Romagna, Marche, Umbria




1 : 15.5

scudo romano




























Papal states




1 : 15.5

lira pontificia






(a) Exchange rate based on metal content of the Italian lira (gr. 0.290 of fine gold, and gr. 4.50 silver).

(b) Legal parity established by the Italian government.

Source: De Mattia, Unificazione.

(p.320) If we identify monetary unification with legislation introducing a new payment instrument as sole legal tender, and establishing an official conversion rate between the old and new legal tenders, then Italy’s monetary unification was in most respects achieved in 1862. If, on the other hand, we define a monetary union as an area where agents are endowed with the quantity of legal tender they demand, and prefer it for payments over and above other existing currencies, then monetary unification took much longer than two years to be completed.10

At the beginning of 1862 there were as many as 270 types of legal-tender metal coins in circulation, all of different weight and metal content.11 The decimal system was not predominant. It is therefore little wonder that—according to Mint records—the conversion of old coins into Italian lire was not completed until around 1874. The suspension of the convertibility of paper money into gold or silver in 1866 boosted monetary unification as the new banknotes had all been issued in lire. By 1874, paper money accounted for about 70 per cent of total circulation (up from about 10 per cent in 1862). In April 1874 an Act of Parliament reorganized the issue of banknotes by forming the six banks of issue into a consortium, with each bank contributing to total circulation in proportion to its own capital and reserves.12 This Act, together with the balancing of the state budget (achieved in 1876), stabilized expectations about the value of the lira which finally became universally accepted, even before the resumption of convertibility in 1883. It is safe to assume, therefore, that the monetary unification of the country was not realized de facto until the mid–1870s.

Labour Market Unification

In what follows the authors deal with the space and time patterns of market unification for the factors of production (labour and capital). A discussion of factor, rather than commodity, markets will allow us to draw better analogies to the current creation of a single market in the European Union, after the introduction of the euro. While the completion of the single market deals both with products and factors of production, (p.321) it is undoubtedly on the latter that most of the policy-makers’ attention is now focusing. Goods have circulated quite freely in the European Community since the late 1960s while, until relatively recently, most member states maintained a good grip on capital movements, and social security legislation still provides a powerful barrier to labour mobility.

To economists, a market is typically a place where a single price applies to homogeneous commodities. Whenever the rule of one price is not verified, we are in the presence of different (or segmented) markets. The process of market unification entails the creation of conditions whereby, at any given time, homogeneous commodities fetch close to single prices at different points in space. Unfettered traders typically bring about a single market by taking advantage of price differentials between localities (a process called ‘arbitrage’). By definition, arbitrage takes place only when price differentials make it profitable to buy a commodity in market A and sell it at a higher price in market B. The larger the price gap, the less integrated the markets are said to be. By measuring price differentials we can tell how close we are to the realization of a single market. It must be remembered, however, that price differentials across regional markets will never disappear given the existence of positive transaction costs to arbitrage. The latter can in fact be quite large and determine the limits to price convergence.

A synthetic measure of market integration is given by the coefficient of variation (CV) of prices across points in geographical space.13 By studying the direction and pace of changes in the CVs over time, we can assess the speed of the market-unification process.

Measuring price convergence, however, is not as simple as it may seem. To start with, we must make sure that we are measuring like with like. In the second place, goods or factors of production taken into account must be frequently and sizably traded in as great a number of local markets as possible. More technically, price convergence must be measured for items—commodities, capital goods, labour services— that are both homogeneous and ubiquitous. These two conditions are seldom, if ever, simultaneously met. Empirical and historical investigations must, by necessity, find practical and acceptable compromises between these two features. Since 1986, The Economist has measured world-wide price convergence with the cost of (p.322) a McDonald’s ‘Big Mac’ hamburger in the main cities across the globe, suggesting that it satisfies both requirements of homogeneity and wide representation.14 In assessing the pace of factor-market unification in nineteenth-century Italy, the first question to be asked is the following: what was the Big Mac for the Italian labour market? In other words: among the occupations for which wage data are available over the period 1860 to 1880, what are the ones most suited to testing the ‘law of one price’?

The search for a nineteenth-century labour-market Big Mac leads us to focus on the construction industry. There are at least three good reasons for this choice:

  1. 1. Contrary to most industries, particularly in the manufacturing sectors, construction was one of the most ubiquitous trades, not being constrained by specific location advantages. It was, furthermore, one of the most important industries, employing roughly 14 per cent of the total industrial workforce.15

  2. 2. Technological innovations were slow relative to other sectors and likely to affect job descriptions uniformly within the whole industry. (Whatever the region, job descriptions are likely to better preserve a relative consistency over time.)

  3. 3. Data on hourly wages of construction workers (i) turn out to be relatively abundant, and (ii) clearly distinguish between skilled and unskilled workers.

Skilled and unskilled wage convergence was measured on the basis of two samples of adult male workers: ‘hodmen’ and ‘master masons’.16 Hodmen were workmen assigned to very basic activities, such as carrying bricks, digging, moving masses of soil and the like.17 Master masons ‘were required to possess a licence certifying their qualification, and guaranteeing some knowledge of arithmetic, geometry, drawing and architecture’.18 On the building site they occupied a position somewhere in between the architect and the most highly skilled masons.

(p.323) In order to assess the speed of the creation of a single Italian labour market after monetary unification, we estimated the CVs of nominal hourly wages for skilled (master masons) and unskilled (hodmen) labour, for each individual year, between 1862 and 1874. The observed trend of the CVs over time provides evidence on price convergence across the country and on its speed (a downward-sloping trend suggesting the occurrence of convergence).19 We also estimated numerical approximations of the standard errors associated with the CVs.20 The results are summarized in Figure 1.

Lessons from Italy’s Monetary Unification (1862–1880) for the Euro and Europe’s Single Market

Figure 1. Dispersion of nominal wages, Italy 1862–1878.

Figure 1 shows the estimated CVs of hourly wages for the whole Kingdom of Italy, together with their 90 per cent confidence intervals. It depicts a downward-sloped trend in the dispersion of both the hodmen’s and the master masons’ wages, indicating a slow but steady convergence. Confidence intervals illustrate that the CV point estimates are accurate up to a 15–20 per cent factor (approximately).

Taken in isolation, the results summarized in Figure 1 go in the expected direction. They seem to tell a story of slow but steady integration of the national market for the services of masons, both skilled and unskilled. If, however, as in Figures 2 and 3, the national market is broken down into four macro-areas, we get surprising results. They reveal an underlying mechanism in national labour market unification that is in need of explanation.


Lessons from Italy’s Monetary Unification (1862–1880) for the Euro and Europe’s Single Market

Figure 2. Dispersion of nominal wages, by macro-area-Hodmen, 1862–1878

Lessons from Italy’s Monetary Unification (1862–1880) for the Euro and Europe’s Single Market

Figure 3. Dispersion of nominal wages, by macro-area-Master masons, 1862–1878 324

(p.325) The evidence on the convergence of regional labour markets can be summarized as follows:

  1. 1. There is no evidence of convergence within the north-western and central regions, neither in the skilled nor in the unskilled labour markets.

  2. 2. In the north east, the dispersion of wages of unskilled workers slowly decreases. The same does not occur with skilled workers’ wages, where the trend of the coefficient of variation is segmented.

  3. 3. The southern parts of the kingdom and its islands show the highest degree of convergence. For both occupations, the dispersion of wages declines monotonically over the whole period.

  4. 4. Overall, the trends observed in Figure 1 seem to be driven by the pronounced convergence observed in the southern and island areas.

Capital Market Unification

As in the case of the labour market, understanding capital market unification requires, in the first place, the selection of a Big Mac. We must, in other words, choose a financial asset frequently and substantially traded on as great a number of local markets as possible. The price of (interest rate on) bank loans has sometimes been used to assess the existence of a single market for capital. This does not seem to be the best choice. Data on individual unsecured loans are well kept secrets (bank archives contain only scanty price information), and, even if available, allowance for risk assessment would need to be made in order to compare like with like. Secured loans, such as mortgages, were still largely made intuitu personae and, at any rate, a secondary market for mortgage securities (cartelle fondiarie) developed only at the end of the century. A thick market existed, however, for such Government Securities as Consols (the so-called ‘non-redeemable debt of the state’, or Rendita Italiana—Italian Rent), the favourite outlay for middle-class savings. We therefore took the Rendita Italiana 5% to be our Big Mac for financial markets.

The Rendita Italiana 5% originated in August 1861 from the consolidation of the outstanding public debt of the previous states into a single sovereign debt of the Kingdom of Italy. The very accessible minimum size of the negotiable bond, the high yield, the perceived low (p.326) default risk, the high liquidity provided by the thickness of the secondary market, and its being universally accepted by financial intermediaries as collateral for loans, all contributed to making the Rendita Italiana 5% by far the most popular security among Italian savers. It was widely distributed across social classes and geographic areas.21

In the 1860s and 1870s as many as seven (eight after 1870) main stock exchanges were active in Italy: Genoa, Turin, Milan, Florence, Naples, Palermo and Venice (after 1866), and Rome (after 1871). The most important one, both in terms of transaction volume and the number of listed securities, was the Genoa Bourse, followed by that of Milan. Out of a total number of listed securities varying from 30 to 50, only 7 were listed in more than 2 stock exchanges, and not all of them were simultaneously traded on any given day. The authors’ analysis is based upon one weekly (Wednesday) observation of the closing (published) price for the Rendita Italiana (i) over the years 1869 to 1878 for all the existing stock exchanges but Palermo’s, and (ii) over the period 1862 to 1878 for the stock exchanges of Florence, Genoa, Milan and Naples.22

To assess the extent to which arbitrage opportunities were exploited and a single market for financial assets was created, the authors closely followed the methodology outlined in the discussion of labour market convergence. Accordingly, the authors estimated the weekly CVs in the recorded prices for the Rendita Italiana 5% across all the available bourses. Fifty-two CVs (corresponding to as many weeks) were thus obtained for each of the years between 1862 and 1878, which were then summarized by the median value from each of the CV-series. The available evidence is plotted in Figure 4, showing the price-dispersion trend (as measured by the weekly median CVs) of the Rendita Italiana 5% across Italian exchange markets over the years 1862 to 1878.23


Lessons from Italy’s Monetary Unification (1862–1880) for the Euro and Europe’s Single Market

Figure 4. Dispersion of prices of the Rendita Italiana 5%-Available bourses, 1863–1877.

The time path of financial market unification appears in Figure 4 to be characterized by four phases:

  1. 1. Slow divergence in the three years following political unification (from 1863 to 1866).

  2. 2. A faster convergence pace from 1867 to 1872.

  3. 3. A shock of some kind that clearly hits the market in the second semester of 1873. It is followed by two years during which each individual market seems to be going its own way (rapid increase in divergence).

  4. 4. Fast resumption of the convergence process that takes place from 1876 onwards.

Was Convergence Slow? If So, for What Reasons?

Understanding the Pattern of Labour Market Unification

In the two decades following the political and monetary unification of the country, the market for masons’ services (both skilled and unskilled) (i) showed a very low pace of convergence towards national (p.328) integration, as the overall convergence was mostly driven by the southern regions, and (ii) remained segmented at the regional level as well, with the important exception of the southern part of the country (Figures 2 and 3). In other words, only in the south did arbitrage (through labour migration) actively take place between high- and low-wage locations.

The possible explanations for this convergence pattern (or rather lack thereof) are to be found among factors affecting the cost of arbitrage (transaction costs). They are typically of two types: (i) transport, insurance, and related costs, and (ii) barriers created by institutions, customs, language, market power and the like. As far as labour markets are concerned, transport and related costs can be neglected in explaining Italy’s labour market behaviour as they are likely to be (i) an inverse function of time, and (ii) higher in the south, where ‘arbitrage’ did actually take place, than in the north, where markets remained segmented.24 Why, then, did the southern market for masons’ services become ever more integrated, while a similar trend is only partially observed in the north east and not at all in the two other macro-areas of the country? A priori, two possible explanations stand out: (i) the long-lived political and, to some extent, monetary, unification of the south,25 (ii) the diversity of land-tenure contracts.26

All other things being equal, long-established, uniform, well-understood institutions result in lower information and similar costs of migration within the area where such conditions apply, relative to the costs of moving outside the area itself. As institutional changes take a long time to be appreciated and accepted, it might be argued that it was more than one or two decades before migration across the borders of the former independent Italian states took place in numbers large enough to affect wage determination. Workers simply preferred to move within the boundaries of their former countries. Of the four macro-areas into which the authors have divided the peninsula, only the one labelled ‘South-Islands’ consisted almost entirely of a single pre-unity state. The other three macro-areas in Figures 2 and 3 (p.329) were all divided up by the borders between the previous states. If migration across the former borders was perceived to be more costly than movements within previous borders, then an explanation could be found for wage convergence in the south, and lack of it elsewhere.

But this explanation is hardly convincing in the light of the subsequent labour market history. In the 1890s and 1900s, southern Italians emigrated in very great numbers to the Americas. Emigration was both permanent and seasonal, as in the case of Argentina. In emigrating, southern Italians moved across much wider institutional and cultural barriers than those involved in migration to central and northern Italy. Given large enough incentives, southern Italians were easily persuaded to move across the Atlantic. It is therefore difficult to argue that the feeling of ‘going abroad’ when moving outside the former Bourbon Kingdom plays a major part in explaining the observed dispersion pattern by macro-area (Figure 2). The phenomenon must be otherwise explained.

Both the persistence of a segmented labour market for unskilled construction workers in the north-western and central areas, and the market-unification drive in the south are most likely due to differences in land-tenure regimes. During the nineteenth and the first part of the twentieth centuries, construction typically provided a link between agriculture and manufacturing occupations, drawing—part-time at first—from the former, and eventually leading to the latter. Therefore under-employed agricultural labour was, with occasional exceptions, the main source of unskilled construction labour. The extent of time during which workers were allowed to leave the fields depended, however, on the organization of the farm, in other words on agrarian institutions. Only where workers could absent themselves from agriculture for relatively long periods of time (weeks or months) could they move from their home villages far enough to take advantage of higher wages in the construction industry, wherever they might happen to be offered them. And only by them doing so could arbitrage leading to labour market unification effectively take place. In the northern and central areas of the peninsula, land tenure institutions were such that workers moved only locally, usually within distances consistent with a daily return home. A substantial proportion of southern peasants, on the other hand, worked the land under conditions permitting longer periods of absence from home.

(p.330) Italy’s land tenure regimes were multifarious and complex and are the subject of innumerable studies.27 While it is impossible here even to begin to review the literature on the subject, the key stylized facts for understanding labour market behaviour are easily spelled out. By the middle of the nineteenth century, the northern and central regions had developed (i) various forms of co-participation in expenses and revenues by tenants and landlords (particularly efficient were share-cropping contracts prevailing in Tuscany and Umbria), and (ii) long leases to capitalist tenants whose farms mostly employed permanent fixed-wage workers. In both cases there were indeed slack periods when one or more members of the peasant household, temporarily under-employed, wished to supplement their income by working outside the farm. But daily presence on the land was often required either by contract or by the need to care for a small family-owned plot. Before the diffusion of the bicycle, therefore, the typical agricultural worker offered his hodman’s services only to those construction sites that were located within, say, 16 kilometres of his residence. The land tenure contracts in the northern and central areas, ultimately reflecting a fairly adequate population to land ratio, seem therefore to be directly responsible for the segmentation of the market for unskilled construction labour. This market segmentation accounts for the lack of convergence in the north-western and central areas in the mid–1860s, and again in the mid–1870s (Figure 2) in the Turin and Florence areas during the construction booms in both towns.28

In the southern parts of the former Papal States (Latium and Abruzzi) and in the whole of the former Kingdom of the Two Sicilies, land tenure regimes differed considerably from those in the northern and central parts of the Peninsula. The diffusion of large estates (latifundia) and of single-cropping (mostly grain) rather than multi-cropping was consistent with the employment of most of the work force as day labourers, often hired daily in the town square by the landlord’s agents. Employment was highly seasonal, leaving the worker unemployed for long stretches of time. Hence the incentive for adult males to look for gainful occupation outside agriculture, and their willingness in doing so to travel long distances, inasmuch as the opportunity cost of an extended absence from home was minimal. An extreme instance (p.331) of this attitude was found in later years in the large number of people available for seasonal employment in the southern hemisphere during Europe’s winter. Under these conditions, arbitrage between local markets for unskilled labour could develop. Judging from the levels of the coefficients of variation in the early 1860s, soon after unification markets were more segmented in the south than anywhere else in the country. While the north-western and central areas made little or no progress towards higher market integration, progress did however take place in the southern part of the country. The reasons for the fairly good market integration of the north east can be explained by the existence in parts of the region of land tenure and labour contracts similar to those in the south.29

If agrarian regimes go a long way towards explaining the behaviour of the markets for unskilled labour in the four macro-areas of the country, the same does not hold for skilled labour markets. The master mason’s profession was highly regulated at the local (municipality) level. An entrance examination was required over which provincial authorities and the local masons’ craft organization retained joint control, as they subsequently did over the master masons’ contracts and wages. Preference in local employment was given to locals, or to ‘foreigners’ holding a local licence.30 This is hardly surprising in view both of the trust component in the master mason’s job and of the market power enjoyed by local professional organizations (the old arts and crafts guilds).

The strength of such a market power, however, was not the same across the country. In particular, the vitality of the local communities and of the crafts organizations is well known to have been much lower in the south than in the rest of the country. It is therefore likely that in the territory of the former Kingdom of the Two Sicilies, the regulatory power of the local bodies would yield to market pressures more easily than in the more compact and organized central and northern regions.31

(p.332) Understanding the Integration of Financial Markets

Monetary unification per se is likely to have had a favourable impact on financial market convergence as it eliminated exchange rate risk and made prices at the various stock exchanges readily comparable. The process of consolidation of the debt of pre-unity states into the sovereign debt of the Kingdom of Italy, however, did not favour market unification. As the stock of outstanding debt by northern states, particularly Piedmont, largely outweighed those of the Pope’s and Bourbons’ states, the bulk of Rendita Italiana ended up by being concentrated in the northern and central areas of the country. This fact in itself was responsible for thicker secondary markets for the Rendita in those areas relative to the rest of the country. Moreover, the stock exchanges of Genoa and Turin were not only more efficiently organized than most of the others but traders there had closer business (and information) connections with the Paris Bourse, the actual price-setter for Italian government bonds. Thicker markets, a relatively efficient organization, and proximity to the main Continental Stock Exchange are the reasons behind the comparatively fast creation of a single market for financial assets in the north. The speed of convergence of the Florence prices of the Rendita with those of Genoa (the largest and best organized Italian bourse at the time) is faster than that of Naples with Genoa. Such core-periphery differentials in convergence speed also characterize today’s European Union.

Figure 4 shows that little, if any, convergence in financial assets prices was obtained at the overall national level in the twenty-odd years after political unification. This result is likely due to the offsetting forces driving the markets in opposite directions. On the one hand, market unification was promoted by both decreasing transaction costs and government regulation. The transaction costs of arbitrage were reduced by rapidly decreasing communication costs resulting from the huge investment drive by the new kingdom in railways, roads and harbours. Of paramount importance was the rapid spread of telegraph lines and the enormous decrease in the cost of telegrams. At the time of political unification, Italy possessed 12,000 kilometres of telegraph lines; this grew to almost 50,000 a decade later. In 1878 it became mandatory for (p.333) every town with a municipal centre to possess a telegraph station.32 Shortly before unification, sending a 20–word telegram cost the colossal sum of 20 lire (a sum equivalent to more than 20 days’ wages for an unskilled male worker). In 1871 the cost of the same telegram was down to 1 lira.33 Government regulation of such matters as price fixing and stockbroker qualifications and accountability promoted transparency within and across stock exchanges, thereby lowering the information and contract enforcement costs of arbitrage. Market regulation by the government also played a role in improving the conditions for market unification. In particular, regulators sought to standardize price formation and contracts among the various regional stock exchanges, and to lower asymmetries of information by setting standards for the brokerage profession.

If these trends promoted market unification, other forces were at work to throw as much sand as possible into the gears of the process. If the national economy benefits from technical and institutional changes promoting lower communication and non-tariff barriers to trade, a number of individuals stand to lose in the process. Protected local markets create rent positions, and it is only natural that those enjoying them should fight for their preservation. This was the case in mid-nineteenth century Italy, as it is the case in today’s Europe. During the process, threatened local vested interests in the financial intermediation industry put up as stern a resistance to change as was possible. They resisted both the effects of lower communication costs (typically by refusing to install telegraph stations within the premises of the local bourses) and the government’s efforts to increase transaction transparency. Ultimately, a clash developed between stockbrokers and regulators. In the early months of 1873, an Act of Parliament stipulated that only registered stockbrokers could legally perform financial market operations. The norm was meant to safeguard small savers, often from dishonest off-market self-styled brokers. As such it was expected to please official, registered stockbrokers and to loosen their silent opposition to more efficient and transparent markets. But the government, then in its last drive to achieve a balanced budget, muddled the matter by increasing both the transaction tax and the guarantee deposit required of the official stockbrokers. The latter reacted in a strong protest. Out of the 120 Genoa stockbrokers, 40 did not renew their registration (p.334) and set out to perform off-market illegal operations. Their example was followed throughout the country. Price-fixing became difficult and often meaningless. The episode explains the upward blip in the CVs observed in Figure 4. Neither the government nor the stockbrokers being willing to compromise, the stock markets remained empty, as observers claimed at the time. The Act was revised only in 1876, after the fall of the Minghetti cabinet. A balanced budget had by then been achieved. The protest subsided and markets began to converge again.

‘Lessons’ for the European Union

About 140 years have passed since Italy’s monetary and slow market unification. Does its history provide any useful economic insight into the on-going processes of European monetary unification and the creation of a ‘single market’? Needless to say, a number of conditions in the EU today are different from those in mid-nineteenth-century Italy. Arguably, the existence of the European Central Bank and today’s cheap and sophisticated communication technologies provide more favourable conditions for swift monetary and market unification than those existing in the 1860s. At the same time, back then Italy enjoyed the advantage over today’s Europe of possessing a single central government. In spite of these and many other differences between the situations ‘then’ and ‘now’, Italy’s historical case study underlines issues that can be usefully studied and analysed in the present European context.

Our study reminds us that—when discussing market unification—measurement issues should not be overlooked.34 In particular, it is of paramount importance to make sure that we are measuring like with like. Even in the case of apparently well-defined Big Macs, we have seen that the job description of a ‘mason’ may vary from one locality to the other. More surprisingly, even a financial asset such as the Rendita Italiana 5% was not homogeneously defined across local stock exchanges. Needless to say, the problem becomes excruciatingly complex when dealing with a bundle of commodities (price indices and the like). Awareness of these measurement problems implicit in any discussion of market unification cautions scholars and policy-makers (p.335) alike against jumping to easy and often not fully warranted conclusions. We should also bear in mind that perfect price convergence will never be achieved: over time and space, every economy is always in a state of tension between such forces as local endowments, transaction costs, information asymmetries, vested interests that make for price divergence and arbitrageurs taking advantage of such differences and thereby producing price convergence.

On a more substantive ground, the first ‘lesson’ to be brought home from the study of nineteenth-century Italy is that actual (de facto) monetary unification is bound to be a much longer process than formal (de jure) unification. It took at least two decades and powerful exogenous shocks for the Italian lira to be unquestionably preferred by Italians over the traditional currencies, in spite of the obvious advantages of holding the former over the latter. The currency we use is such an intimate part of our daily life that parting from it entails a major change in deeply rooted habits, even in long-standing loyalties. Twenty years after changing over from ‘old’ to ‘new’ francs, the French were still routinely counting in terms of the former currency. As it is the case with the European Monetary Union after 1999, the Italian lira coexisted formally for a while (from 1861 to 1862) with the previous legal tenders at a fixed and irrevocable exchange rate. After 1862 the official currency of the kingdom became the only legal tender (as happened to the euro in 2002) but, as we have seen, ordinary citizens were very slow in changing over to the new currency. European monetary authorities seem to be well aware of the problem, when Mr Duisenberg candidly admits that ‘we are still in the process of making the euro a currency in the minds of the people’.35

Probably the main set of ‘lessons’ to be drawn from the Italian case is that pre-existing economic conditions, habits and institutions are of crucial importance in shaping the pattern of market unification. More so as they are usually the playground for the vested interests that would probably be upset by larger and more efficient markets. The lack of internal labour migrations has often been cited as one major weakness of Europe as a single currency area. The time span examined in this paper precedes that of the great Italian domestic and international labour migrations. Land tenure contracts and, probably, cultural and linguistic barriers barred most agricultural labourers from moving around far enough to provide efficient arbitrage in the labour (p.336) markets. It is likewise unlikely that in the near future the mason’s wage will be equalized across Europe. In the case of master masons, these difficulties were compounded by the licence system, a form of protection for local insiders. Today’s Europeans have gone quite far in the cross-recognition of diplomas and degrees, but powerful professional associations are still in the way of full mobility for highly qualified professionals. History shows that until such regulations are done away with, European consumers are unlikely to benefit fully from an unfettered single market for professional services.

It is by no means surprising that rent-seekers resort to any available means to oppose the advent of a larger single market. We have seen how Italian local stockbrokers sternly fought against open market measures; similar oppositions against the single market are emerging all over Europe. National stock exchanges and stockbrokers have, so far, retained their independence, merger projects having rapidly been shelved. Likewise, medical doctors, pharmacists, lawyers, notaries, accountants, tax consultants and several other professionals remain strongly entrenched in local customs and regulations as a way of excluding outsiders. Car-makers will not yield on the issue of exclusive dealership contracts. The list of sectors where traditions and local regulations are invoked and used as protective devices could fill many more pages. History shows that determined governments can do a lot to break those oligopolies that are in the way of the full completion of a single market. The Italian case also shows that government action is routinely met by strong protest that, as in the case of the stock exchanges in 1872, can actually disrupt the market mechanism. It is the fear of social unrest and of ultimately achieving perverse results that often makes authorities shy away from pushing their regulatory powers to their ultimate, and beneficial, consequences. Surely, the long disruption of business in the Italian bourses after 1872 was a costly outcome of government action. Yet, in historical perspective, its consequences can only be regarded as moderate, and worth suffering, relative to the long-run benefits of more open and better regulated markets. This is a political, rather than strictly economic, lesson from the past that today’s European rulers might well regard as not entirely off the mark.

(p.337) References

Bibliography references:

Archivio Storico della Banca d’ltalia, Roma (Bonaldo Stringher, folder no. 53).

Boyer, George R., and Timothy J. Hatton. ‘Regional Labour Market Integration in England and Wales, 1850–1913.’ In Labour Market Evolution, edited by George Grantham and Mary MacKinnon, 84–106. London/New York: Routledge, 1994.

Barber, T. ‘Bloodied, but Unbowed.’ Financial Times, 26 November 1999: 12.

Barro, Robert J., and Xavier X. Sala-i-Martin. Economic Growth. New York: McGraw-Hill, 1995.

Bevilacqua, Piero. Storia dell’Agricoltura. Venezia: Marsilio, 1990.

Cafagna, Luciano. Dualismo e sviluppo nella storia d’ltalia. Venezia: Marsilio, 1989.

De Cecco, Marcello. L’Italia e il sistema finanziario internazionale 1861–1914. Roma-Bari: Laterza, 1990.

De Mattia, Renato. L’unificazione monetaria italiana. Torino: ILTE, 1959.

De Vecchi, Giorgio, and Cristina Treu. Le organizzazioni operaie edili in Lombardia 1860–1914. Milano: Nuove Edizioni Operaie, 1979.

Di Rollo, Franca. ‘Le retribuzioni dei lavoratori edili a Roma dal 1826 al 1880.’ In Archivio Economico dell’Unificazione Italiana, Vol. 13, sec. 4, 1–31. Roma: IRI, 1965.

Ercolani, Paolo. ‘Documentazione statistica di base.’ In Lo sviluppo economico in Italia, edited by Giorgio Fuá, Vol. 3, 388–476. Milano: Franco Angeli, 1978.

Feinstein, Charles. ‘The Rise and Fall of the Williamson Curve.’ Journal of Economic History 48, no. 3 (1988): 699–729.

Giorgetti, Giorgio. ‘I contratti agrari.’ In Storia d’ltalia, Vol. 5, Documenti, 699–758. Torino: Einaudi, 1973.

Insolera, Italo. ‘L’urbanistica.’ In Storia d’ltalia, Vol. 5. Documenti, 725–86. Torino: Einaudi, 1973.

Levi, Giovanni. ‘I salari edilizi a Torino dal 1815 al 1874.’ In Miscellanea Walter Maturi, edited by the Istituto di Storia Moderna e del Risorgimento, 335–405. Torino: Giappichelli, 1966.

Martello, Tullio, and Armando Montanari. Stato attuale del crédito in Italia e notizie sulle istituzioni di crédito straniere. Padova: Salamin, 1874.

Ministero di Agricoltura, Industria e Commercio. Direzione Generale della Statistica. Salari. Prezzi medi di un’ora di lavoro degli operai addetti alle opere di muratura ed ai trasporti di terra e mercedi medie giornaliere degli operai addetti alle miniere. Roma.

O’Rourke, Kevin H., and Jeffrey G. Williamson. ‘Late Nineteenth-Century Anglo-American Factor-Price Convergence: Were Heckscher and Ohlin Right?’ Journal of Economic History 54, no. 4 (1994): 892–916.

Pakko, Michael R., and Patricia S. Pollard. ‘For Here or To Go? Purchasing Power Parity and the Big Mac.’ Federal Reserve Bank of St Louis Review 78, no. 1, (1996): 3–21. (p.338)

Pittaluga, Giovanni B. ‘La monetizzazione del Regno d’Italia.’ In II progresso economico dell’Italia, edited by Pierluigi Ciocca, 177–206. Bologna: II Mulino, 1992.

Ripa di Meana, Carlo, and Mario Sarcinelli. ‘Unione monetaria, competizione valutaria e contrallo délia moneta: è d’aiuto la storia italiana?’ In Monete in concorrenza, edited by Marcello De Cecco. Bologna: II Mulino, 1992.

Roccas, Massimo. ‘L’Italia e il sistema monetario internazionale dagli anni sessanta agli anni novanta del secolo scorso.’ In Ricerche per la storia della Banca d’Italia — Contributi, edited by Franco Cotula, Vol. 1, 3–67. Bari-Roma: Laterza, 1990.

Rosenbloom, Joshua L. ‘Occupational Differences in Labour Market Integration: The United States in 1890.’ Journal of Economic History 51, no. 2 (1991): 427–39.

Sannucci, Valeria. ‘Molteplicità delle banche di emissione: ragioni economiche ed effetti sull’efficacia del contrallo monetario (1860–90).’ In Ricerche per la storia della Banca d’Italia — Contributi, edited by Franco Cotula, Vol. 1, 181–218. Bari-Roma: Laterza, 1990.

Serení, Emilio. Il capitalismo nelle campagne (1860–1900). Torino: Einaudi, 1947.

———. Capitalismo e mercato nazionale in Italia. Roma: Editori Riuniti 1966.

Spinelli, Franco, and Michele Fratianni. Storia monetaria d’Italia. Milano: Mondadori, 1991.

Supino, Camillo. Storia della circolazione cartacea in Italia dal 1860 al 1928. Milano: Editrice libraría, 1929.

Williamson, Jeffrey G. ‘Globalization, Convergence, and History.’ Journal of Economic History 56, no. 2 (1996): 277–306.


(1) The Treaty contained transitory provisions that allowed member countries slowly to lower their respective tariff barriers and adopt a common external tariff. The Common Market was fully operative by the late Sixties.

(2) Business Week (30 August 1999).

(3) II Sole-24 Ore (4 June 1999).

(4) Weak because ‘membership’ was not formally sanctioned and an implicit opt-out clause existed which was very often exercised.

(5) See, for example, Williamson, ‘Globalization’; and O’Rourke and Williamson, ‘Late Nineteenth-Century’.

(6) The regions of Trento and Trieste were added to the Kingdom as a result of World War I.

(7) See De Mattia, Unificazione monetaria.

(8) The parity being 1 to 1.

(9) See Spinelli and Fratianni, Storia monetaria; Pittaluga, ‘Monetizzazione’.

(10) See De Cecco, Italia; Roccas, ‘Italia’; and Ripa di Meana and Sarcinelli, ‘Unione monetaria’.

(11) See Martello and Montanari, Stato; and Supino, Storia.

(12) Sannucci, ‘Molteplicità’.

(13) On alternative approaches for examining labour market integration, see Boyer and Hatton, ‘Regional Labour’.

(14) Pakko and Pollard, ‘For Here or To Go?’

(15) Ercolani, ‘Documentazione’.

(16) Ministero di Agricoltura, Industria e Commercio, Salari.

(17) Levi, ‘Salari’.

(18) Di Rollo, ‘Retribuzioni’, p. 6.

(19) More precisely, what is being measured is the rate of Σ-convergence, as defined by Barro and Sala-i-Martin, Economic Growth.

(20) Standard error estimates allow assessment of the extent to which the observed intertemporal differences are due to statistical noise, for instance to sampling variation, and errors of measurement. The authors used a non-parametric bootstrap procedure, which allows them to obtain numerical approximations of the standard errors associated with the CVs. For details, see Conte et al., ‘Factor Price’.

(21) Bonaldo Stringher reports that over the period 1860–1913 the Rendita Italiana 5% accounted for at least 80 per cent of the total value of transactions on the financial markets.

(22) The main sources for the years after 1869 are the weekly journal L’Economista d’Italia (of Florence-Rome), and the financial daily Il Sole (of Milan).

(23) The authors should mention that they are not reporting estimates of the standard errors associated with the median CVs. In this case, it is safe to assume that the available price data for the Rendita Italiana 5% are extremely close to exhausting their own universe. The authors therefore implicitly assumed negligible non-sampling errors (such as editing errors), thereby assimilating the CVs to the ‘true’ population parameters rather than to their estimates.

(24) This is the case if, for instance, transport costs are approximated by the development of the rail network.

(25) One of the authors developed this intuition in the course of a conversation with Gabriel Tortella, to whom they are indebted. It should be recalled that, with the exception of scarcely-populated Sardinia, the whole of the South-Islands macro-area had belonged to the Bourbon Kingdom of the Two Sicilies.

(26) See Sereni, Capitalismo e mercato, and Sereni, Capitalismo nelle campagne.

(27) For reviews of the issues involved, see Bevilacqua, Storia; Giorgetti, ‘Contratti’; and Cafagna, Dualismo.

(28) See Insolera, ‘Urbanistica’.

(29) In parts of the north east such as the Po Delta and some areas east of Venice, large mono-cultural (sugar beet, tobacco) estates prevailed with labour regimes (seasonal day labourers) not dissimilar to those in the south. Further investigation into the extension of such contracts is needed before coming to a conclusion about the similarities of the two labour markets.

(30) We have found evidence of out-of-province candidates for the Milan examination in the 1870s, probably attracted by the relatively buoyant construction industry there. See De Vecchi and Treu, Organizzazioni.

(31) Note that our findings here are similar to those in Rosenbloom’s ‘Occupational Differences’ on the US labour market, where organized, skilled construction workers, while exploiting within-region arbitrage opportunities, prevented greater inter-regional arbitrage.

(32) L’Economista d’Italia, 1878, p. 713.

(33) L’Economista d’Italia, 1871, p. 780.

(34) See Feinstein, ‘Rise and Fall’.

(35) Barber, ‘Bloodied’, p. 12.