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.