THE BALANCE OF INDEBTEDNESS, 1918-28 201
One further aspect of the relation between gold and capital
movements may be conveniently observed at this point. The
present analysis of capital transfers from Great Britain to
Australia has not made possible any material contribution to
the debate as to whether the flow of gold precedes or follows the
issue of a loan. The retention of gold parallel with the import
of capital which has been noticed for the pre-war period may
be regarded as either a gold flow, in effect, from the lending
to the borrowing country, or as an anticipatory strengthening
of the gold basis upon which the consequent expansion of
currency, the enlargeinent of purchasing power, the rising price-
level, and the secondary stimulus to imports and check to
exports will depend. Under the conditions of intimacy existing
between the Australian and British financial systems effect is
given to the loan issue by opening credits which enlarge the
London funds of Australian banks; and it is, within certain
limits, immaterial whether the gold resides in the English or the
Australian vaults of these banks. These funds are moved as
required and largely in accordance with expediency, i.e. in the
light of the existing equilibrium of payments; but the more or
less gradual transfer of the credits to the Australian end
necessitates, in the last analysis, an expansion of the Australian
reserves of the banks affected. The order of precedence as
between the enlargement of bank stocks of gold in Australia and
the issue of the loan thus becomes largely an academic question
of little practical importance ; and recent modifications of the
theory of international trade would appear to support the view
stated here.
Nothing further need be said concerning the commodity
balance of trade for the post-war years, except to call attention
to the very curious fluctuations in the differences between debits
Cf. Angell’s position: ‘The doctrine set up here regards the gold flows as an
essentially short-run phenomenon usually of temporary importance alone, It bases
its more long-run conclusions on the effects which significant changes between the
demand and supply of bills of exchange produce upon the total volume of pur.
chasing power in circulation. —T'heory of International Prices, p. 414.
Also Keynes: ‘The modern age in which debits and credits between nations are
settled by changes in the volumes of liquid balances held in international financial
centres, instead of by movements of gold, brings with it a new type of problem for
which ready solutions are not available. At present our authorities are content that
the so-called “invisible” items in the international balance sheet should remain
invisible in a literal sense.’ — Economic Journal, 1927, p. 551, “The British Balance
of Trade’,
3710
a