Until the mid-1920s the Italian banking system was lightly regulated, even though law-makers commenced first to modify the regulatory architecture in 1913. Changes in regulation depended on adaptive strategies to external constraints adopted by the main bank of issue, the Bank of Italy, forced to manage scarce gold reserves according to the pre-war trilemma (Obstfeld and Taylor, 2004). Although from the 1907 crisis the Bank of Italy operated as a central bank in the making, the Italian banking system was largely centred upon free banking principles up to 1926. In fact, throughout the 1920s the nature of the banking system as a whole changed significantly, especially after a relatively long regulatory cycle developed in February 1925, when rumours of the return of the British sterling to the gold standard mounted. Actually, the return to the gold standard in Europe spread the principles of central banking and central bank cooperation as defined by Montagu Norman. The associated shifting to central banking in Italy is a matter for debate, as it may be assumed as the result of endogenous processes, that is a specific reaction to domestic instability, or as the effect of a broader adaptive strategy to a changing international environment.

Recently, some scholars (Gigliobianco, Giordano and Toniolo, 2009) have stated that this regulatory cycle was a response to recurrent phenomena of internal instability and, thus, essentially related to endogenous factors. According to this approach, the regulatory cycle was shorter and lasted until the late-1920s. Yet, such a perspective may be detrimental to our comprehension of the full picture, as the return to the gold standard in the mid-1920s imposed both restrictive monetary policies and regulatory intervention through which central banking supplanted laxer financial (and fiscal) regimes. The paper investigates how a stricter monetary policy required by a changing international environment affected major choices and actors within the Italian banking system as a whole, paving the way to a longer regulatory cycle lasting up to the mid-1930s. Under such circumstances, the end of the spurious free banking in the interwar period is not simply related to the (undeniable) search of internal financial stability, but it was the result of a more complex quest for macroeconomic stabilisation in the 1920s, which brought about mixed results in terms of stability and growth. In fact, the return to the gold standard entailed restrictive monetary policies, which eventually affected the size and value of banking assets, leading at last to a systemic crisis and the bail out of the largest universal banks in the early 1930s.