THE BALANCE OF INDEBTEDNESS, 1918-28 201 
One further aspect of the relation between gold and capital 
movements may be conveniently observed at this point. The 
present analysis of capital transfers from Great Britain to 
Australia has not made possible any material contribution to 
the debate as to whether the flow of gold precedes or follows the 
issue of a loan. The retention of gold parallel with the import 
of capital which has been noticed for the pre-war period may 
be regarded as either a gold flow, in effect, from the lending 
to the borrowing country, or as an anticipatory strengthening 
of the gold basis upon which the consequent expansion of 
currency, the enlargeinent of purchasing power, the rising price- 
level, and the secondary stimulus to imports and check to 
exports will depend. Under the conditions of intimacy existing 
between the Australian and British financial systems effect is 
given to the loan issue by opening credits which enlarge the 
London funds of Australian banks; and it is, within certain 
limits, immaterial whether the gold resides in the English or the 
Australian vaults of these banks. These funds are moved as 
required and largely in accordance with expediency, i.e. in the 
light of the existing equilibrium of payments; but the more or 
less gradual transfer of the credits to the Australian end 
necessitates, in the last analysis, an expansion of the Australian 
reserves of the banks affected. The order of precedence as 
between the enlargement of bank stocks of gold in Australia and 
the issue of the loan thus becomes largely an academic question 
of little practical importance ; and recent modifications of the 
theory of international trade would appear to support the view 
stated here. 
Nothing further need be said concerning the commodity 
balance of trade for the post-war years, except to call attention 
to the very curious fluctuations in the differences between debits 
Cf. Angell’s position: ‘The doctrine set up here regards the gold flows as an 
essentially short-run phenomenon usually of temporary importance alone, It bases 
its more long-run conclusions on the effects which significant changes between the 
demand and supply of bills of exchange produce upon the total volume of pur. 
chasing power in circulation. —T'heory of International Prices, p. 414. 
Also Keynes: ‘The modern age in which debits and credits between nations are 
settled by changes in the volumes of liquid balances held in international financial 
centres, instead of by movements of gold, brings with it a new type of problem for 
which ready solutions are not available. At present our authorities are content that 
the so-called “invisible” items in the international balance sheet should remain 
invisible in a literal sense.’ — Economic Journal, 1927, p. 551, “The British Balance 
of Trade’, 
3710 
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