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).