112 THE COMMONWEALTH, 1900-14 
throughout the Commonwealth which deepened with the pro- 
gress of the months. An immediate reaction in overseas trade 
and disturbances in the rates of exchange between Australia 
and Britain were the immediate consequences. During the two 
previous years of wonderful prosperity the great excess of exports 
had acted so much in favour of Australia that ‘drafts on London 
had sold at a discount, a state of things almost without prece- 
dent for half a century’. But the adverse trade balance which 
marked the last half of 1908 so seriously altered the situation 
that the exchange position was not only reversed, but gold 
shipments were stimulated and a credit restriction immediately 
developed. 
The reaction of all these factors on Australian business was 
cumulative, and the course of events followed the usual dis- 
tressing sequence. Dullness deepening to stagnation quickly 
succeeded the previous buoyancy, all industries experienced a 
sudden check, unemployment figures swelled, construction and 
building slackened everywhere, and prices for most materials 
fell. From the financial viewpoint the situation was quite as 
difficult. Bank deposits, advances and clearings fell sharply, 
the value of production declined largely on account of the drop 
in wool and copper prices, wholesale prices reached the lowest 
level since 1899, and bankruptcies showed a marked increase. 
Even these facts fail to furnish the complete explanation of 
the credit stringency which developed so suddenly. The in- 
creased speculation and over-trading of the boom years had 
weakened the position of the banks very considerably. By 1907 
the percentage of coin and bullion held against average liabilities, 
viz. 20-05, had reached the lowest point since 1889; and the 
ratio of reserves to deposits subject to cheque was dangerously 
low. The realization by the banks of their somewhat precarious 
position led to the usual recall of advances and credit stringency. 
This is, of course, merely a normal phase of the credit cycle 
which Hawtrey and others have treated exhaustively! The 
tendency to inflation during the prosperity phase of the cycle 
is as common a feature of Australian business as it is of all 
1 Vide Hawtrey, Trade and Credit, p. 22: ‘Before the war . . . the gold-using 
countries, as a group, used quite regularly to allow credit to expand to an excessive 
extent, and then, when their gold reserves threatened to fall short of legal require- 
ments, they hastily took steps to contract credit. often at the cost of precipitating 
a panic.’