188 ANALYSIS OF THE TERMS OF 
(see footnote on page 167) began in an upward direction in 
1915, fell back again in the next year, and then mounted 
rapidly through the years from 1917 to 1920. That this first 
rise was an effect of the shortage of essential supplies from 
overseas, and the second of the internal credit expansion and 
grand-scale borrowings, has already been demonstrated. But 
the extraordinary operations by which this credit was diffused 
throughout the Commonwealth call for further examination. 
The machinery set in operation by the Federal Treasury in 
pursuance of the war-time financial policy, served to expand 
the circulating medium even more effectively than did the 
actual retention of gold. Professor Taussig’s description of the 
analogous situation in the United States is so close in its applica- 
tion to the Australian situation that it might be adopted almost 
verbatim. The disposal of the successive war-loans was accom- 
plished by utilizing to the utmost the credit machinery of the 
banks. Purchases of the bonds and certificates were encouraged, 
‘indeed were fairly pumped up, by great subscriptions for which 
the banks supplied the funds’. Millions on millions were dis- 
posed of by this forcing process. ‘The banks made loans to 
the subscribers, creating deposits to their credit; cheques 
against these deposits served to pay for the bonds, the Treasury 
again deposited these to its credit, and in due time drew its 
own cheques for war expenditures.’l The large stock of gold 
held in the country enabled inflation to take place without any 
dangerous symptoms manifesting themselves, and surprisingly 
little criticism of what at ordinary times would be regarded as 
a dangerous proceeding was evoked.? Indeed the one infallible 
sign and the one effective check—the movement of gold—had 
been damped down by the embargo. In other words, the 
traditional links between price changes and international trade 
were no longer present; and the banks were thus free to raise 
war-loans by unlimited creation of credit. These new deposits 
were no temporary addition to the credit structure; but were 
piled one on another in the process of ‘pyramiding’, as the 
phrase of the time went. ‘First they were used by the Treasury 
! Taussig, International Trade, Chapter XXV. 
* See Parlinmentary Debates, 1918, No. 32, p. 4320. ‘I do not consider that we 
are within the danger zone. What should be the extent of currency reserves is 
largely a matter of opinion. I feel that at the present time the Australian note 
issue is perfectly safe.’—The Federal Treasurer (Mr. Watt).