118 EXCHANGE IN RELATION TO CAPITAL
not included within these groups are home-trade goods, e.g.
local services and bulky or perishable goods which cannot be
transported.
Now, enlarged purchasing power consequent upon an expan-
sion of credit in Australia will affect both home- and foreign-
trade goods, although not to the same extent. Increased demand
for the former will be followed by either increased supply or
rising prices or both. ‘But foreign-trade products will continue
to be governed by world-prices, and the increase in demand for
them will be felt mainly in the attraction of additional imports,
and the diversion of exportable goods to the home market.’
The important consequence for our purpose is the excess of
imports which develops, and which, if other factors did not
intervene, would have to be paid for in gold. ‘The true signifi-
cance of this phenomenon is that, when the currency is depre-
ciated by a credit expansion, the world prices of foreign-trade
products at the fixed par of exchange become too low in relation
to the people’s purchasing power. Too many of these arti-
ficially cheapened goods are bought; and, being bought, have
somehow to be paid for. There can be little doubt from the
examination made so far of the prosperity phases of Australian
business cycles that this has been one of the factors operating
to produce an excess of imports. But the banks, by timely
control of credit, could manage such a situation with com-
parative ease. Always providing that other more powerful
factors did not influence the situation. heroic measures would
not be necessary.!
But the alternative of credit contraction in London is an
entirely different matter. Again and again in the course of this
survey the instantaneous and emphatic effect on the Australian
financial system of a sudden credit contraction in Great Britain
has been noticed. The explanation of this phenomenon is, of
course, that a maladjustment of credit as between the two
L See Copland, op. cif., p. 81: ‘In addition to the automatic correctives applied
by the exchanges to undesirable price and trade movements the gold standard
gave the necessary elasticity to currency. . . . If imports were heavy and banks
found it necessary to pay out funds in London on behalf of their Australian clients,
they could always procure sufficient cash for their London reserves by the simple
expedient of obtaining gold there or shipping it from Australia. This would cause
a contraction of currency in Australia at a time when excessive importing demanded
it. Such expansion and contraction of credit and currency in Australia was a
orominent feature of pre-war banking conditions.
