168 BANKING AND BORROWING POLICIES IN
the external factor. But further consideration suggests a partial
explanation which accords closely with the facts of past experience,
 and with the theory of international trade.
That the government's financial policy of currency inflation at
a time ‘when the quantity theory was operating in a closed
System’ was the main cause of disequilibrium and of the rise in
prices scarcely admits of argument. From the study of other
phases of our monetary history we should be prepared to find
& connexion between capital imports and the rise in domestic
prices; and, despite the abandonment of the gold-exchange
standard, there are grounds for supposing that, in part,
the increase in foreign indebtedness was the external supplement
 of the internal inflation policy. Between 1914 and
1920, the Australian overseas debt increased from £208 millions
bo £375 millions, i.e. at the rate of £24 millions a year, whilst
the total interest on the overseas debt rose from £8 millions to
£16} millions. In other words, the annual amount of new
overseas loan was once more largely in excess of the interest on
the old debt. The meaning of this change has scarcely been
appreciated in discussions concerning Australia’s present
sconomic position. Under circumstances which could probably
never be repeated, the borrowing cycle had begun afresh, and all the
‘boom’ phenomena associated with the early phases of heavy
borrowing—the cheap and -easy money, extended credit,
ambitious public works and rapid industrial expansion due to
governmental spending—became more prominent at a time
when every circumstance called urgently for the conservation
of capital. In this astonishing expansion of loan issues, allowing
for the proportion of borrowings spent abroad, is to be found one
officient cause, not only of the paradoxical prosperity of the
war years, but also of the settled depression of the later years.
Only the most highly favourable circumstances for the produetion
 and marketing of her commodities, resulting in a rapidly
enlarged proportion of the national income applicable to the
payment of external liabilities, in short nothing but a miraculous
 comparative advantage in trade, could have enabled
Australia to traverse unscathed the years following 1920. And
these highly favourable and urgently desirable conditions for
cither production or marketing have been notably lacking.
The phase of ascension in the borrowing cycle had to be followed