168 BANKING AND BORROWING POLICIES IN 
the external factor. But further consideration suggests a partial 
explanation which accords closely with the facts of past ex- 
perience, 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 sup- 
plement 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 produe- 
tion 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 miracu- 
lous 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