166 BANKING AND BORROWING POLICIES IN 
monopoly of the note-issue and a State bank, Australia was in 
rather a unique position for financing a war.’ 
The use made by the Federal Government of its powers has 
a direct bearing upon our theme, and the course of events must 
be carefully noted. The three main safeguards under the gold 
standard were the free export of gold, the use of gold as a reserve 
for bank clearings, and, just prior to the war, the maintenance 
of the original conditions of the Australian Notes Act of 1910. 
‘Within three months of the declaration of war these safeguards 
had all been surrendered. The note-issue was restricted, in a 
country where new gold supplies were forthcoming yearly, by 
a 25 per cent. reserve only; the export of gold was prohibited, 
and the banks had adopted Australian notes as a basis for 
clearings. The gold standard was thus in practice abandoned, 
and Australia had a note-issue which was virtually inconvertible, 
inasmuch as the banks had adopted the notes for clearing pur- 
poses and would not press the Treasury for gold, where alone 
the notes were legally convertible.’”l The normal corrective of 
gold movements was thus abolished, an inconvertible paper 
issue established, and a system of financing war-loans adopted 
which amounted to a deliberate policy of inflation, not only of 
government notes, but also of bank credit. The evidence all 
goes to show that the enlarged issue of notes was the main 
dynamic behind the general expansion of bank credits which 
occurred, and that the fluctuation in prices was in some degree 
dependent upon the increase in the note-issue from £9-5 millions 
in 1914 to £59 millions by the end of the war. 
But to attribute the whole difference in price-levels to the 
influence of the inflation of the currency would be to disregard 
the very important influence of borrowing operating through 
the trade balance. Copland, indeed, realizes to the full the 
importance of this factor: but. owing to the difficulty of 
! The actual details of the change are well summarized by Copland, Foreign 
Banking Systems, p. 51. ‘The traditional arrangements under the Anglo-Australian 
gold exchange standard . . . were completely altered soon after war broke out. In 
the first place, an embargo was placed on the export of gold which was allowed 
only under licence from the Federal Treasurer, Secondly, the mints no longer freely 
issued sovereigns to the public in return for gold bullion. Thirdly, the practice of 
the banks in providing gold freely was abandoned, and notes became the basis of 
their clearing-house arrangements. The Federal Treasurer also discouraged the 
practice of paying out gold in return for notes at the seat of government, and the 
note issue was thus virtually inconvertible.’