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extent reproductive. But coming in the boom period its immediate effect was to promote further prosperity and stimulate constructional work.

At this point a note on the total public debts of the Commonwealth may be of interest. As pointed out above, the States continued borrowing for public works despite the enormous demands of the war and repatriation. The State Public Debts increased from £392,540,000 at June 30, 1918, to £506,880,626 at June 30, 1922. This gives a total debt, Commonwealth and State, of roughly £920,000,000 at June 30, 1922, and the rate of borrowing does not show any signs of diminishing. According to the official estimates of the Commonwealth Treasury the amount to be borrowed by the several authorities in the present year (1923–4) is £45,000,000, and “it appears that the total requirements for the next three years will be approximately the same as for the year 1923–4.” 2 How far this rate of borrowing may be sustained is doubtful, but the following comparison of the debts of the State and production is of interest.

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It will be seen that State borrowing was not in excess of production in this period, but if the interest burden for the Commonwealth be added it shows an enormous increase over production. This would make total interest for 1922 over £45,000,000 and nearly double the index-number. Of course

1 It is difficult to ascertain the exact amount spent on what may be called reproductive work, but the Commonwealth Year Book gives statistics for ex. penditure (presumably from loans) up to June 30, 1922, on soldier settlement, repatriation and war service homes amounting to nearly £50,000,000 (Year Book, No. 15, p. 934).

Report of the Conference of Commonwealth and State Ministers, May-June, 1923, p. 43. The figures of gross debt above exaggerate the position, inasmuch as £55,182,656 is included in both State and Commonwealth debts, being sums owing by the States to the Commonwealth, while the Commonwealth Sinking Fund amounts to £2,268,558 (1923), and that of the States to £14,462,608 (1922). Unfortunately the debt for the States at June 30 last is not available at the time of writing.

the effects of war finance are observable in this figure, but it should suggest the exercise of caution in regard to future borrowing.

II. CAUSES OF THE BOOM Government expenditure, however, was not the real cause of the boom. Its influence was felt only after the boom developed, but in its later stage it was a contributory factor of serious importance. I may set out the following as the main causes of the great prosperity in business in 1919 : 1. The great increase in the price of exported goods following

upon the rise of prices in Europe and America. 2. The great demand for war materials at home, coupled

with the prospect of diminished supply, which increased

home prices. 3. The prohibition of the export of gold and the use of notes

as a basis for the currency, which, together with the Government's policy of war finance, inflated the local

currency. 4. The relatively low rate of interest, and the expansion of

bank credits, facilitated thereby, and by (3) above. 5. The natural psychological factors. 6. The development of secondary industries, and construction

of works for them, stimulated by (a) the natural protection afforded by the war, and (b) the tariff of

1920. 7. The expenditure of loan-money by Governments.

Of these factors the first and second were of general application and the third, fourth and seventh are well established.1 With regard to the rate of interest, banking policy in Australia, as elsewhere, was defective. It was not until July 1920 that any action was taken by the Australian banks to use their power to check the unhealthy trade activity. Then an advance in deposit and lending rates of } per cent. was announced by the joint stock banks of Sydney, Melbourne and Adelaide. This advance was in keeping with the action taken a little earlier in the United Kingdom and U.S.A., but it was too long delayed and was anticipated in Australia “by advances in the rates offered for

1 The process of inflation which caused the rise in Australian prices I have described in the Joseph Fisher Lecture (University of Adelaide) for 1921, pp. 9-10. The expansion of bank deposits up to the end of 1919 has been described in the ECONOMIC JOURNAL, December 1920, pp. 496–9. · Banking and Insurance Record, July 1920, p. 361.

Government borrowings on the local money market, and by increases in the rates allowed by various Savings Banks.” With respect to “ business psychology,” little attention has been given to this factor in public statements upon the present condition of industry in Australia. Indeed the theory of the business cycle generally has scarcely been mentioned. But a recent writer points out : “the main causes of our present condition are to be found, not in the outstanding events of the past seven years, but in the more normal operation of the influences which produce business cycles." 1 It is not enough to say that the abnormal events of the war and post-war periods are responsible for the bad times we entered upon in the middle of 1921. The general effect of these events was to impoverish us, but for many years there was a great outward show of increasing wealth. The underlying effects were discernible only to those who examined the situation closely and impartially. This may be demonstrated by reference to recorded production.

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This table shows conclusively how artificial was the prosperity of recent years. But the high money values and the enormous expenditure of loan money created conditions indicative of increasing wealth, and the growing money profits from business imparted confidence to the commercial community. Here we have all the real weaknesses of the boom that heralds a crisis. They were intensified in Australia on this occasion, for production was actually declining; but thanks to the artificial financial · Lavington : The Trade Cycle, p. 11.

If the production per head of the population be considered the decline is even more pronounced. Mr. E. C. Dyason has pointed this out (see the Monthly Letter of E, C. Dyason & Co. for February, 1922).

conditions there continued an almost universal belief in uninterrupted prosperity. Up to June 1920 trade journals were very optimistic and recorded very active business conditions without warning of troubles ahead. Thus Messrs. Mullen and Co. of Sydney, writing in the Banking and Insurance Record for February 1920, remark that “the investment market has continued to show a surprising amount of strength and vitality," 1 while the Sydney Daily Telegraph, in reviewing the situation for the years 1919 and 1920, declared, “one may search through the official figures and nowhere find an industry that has died away or is even languishing. ... The future is very bright indeed.”

The sixth cause of the boom can in the present state of economic investigation be only roughly estimated. The exact influence of the war on secondary production and the effect of the highly protective tariff of 1920 require close examination. It is natural to suppose that the latter would give a temporary and artificial stimulus to manufactures, and coming at the height of the boom period would exercise an important influence. This is not the place to criticise the general tariff policy of Australia, but the great increases in duties imposed in 1920, coming after a long period of natural protection, did no doubt encourage the expansion of establishments and the investment of capital in factories. It would be difficult to find an exact statistical measure of this, but a close examination of investment and balance sheets of leading manufacturing companies would afford some guidance. On the other hand, the importance of secondary production in Australia is generally over-estimated. In reality it supplies on the average less than 30 per cent. of total production and is concerned mainly with the domestic market. Its prosperity is in the long run dependent upon the primary industries.

III. THE CRITICAL PERIOD Early in 1920 prices in England and America began to break, and a process of deflation followed. The peak of wholesale prices in Australia was not reached until August 1920, when the index-number stood at 2692 as compared with 2311 in the previous January. The graph published by the Commonwealth Bureau of Census and Statistics portrays a very persistent rise from March 1919, when the index was about 1940, until August 1920,2 when the peak was reached. The rise in this period was nearly 40 per cent. and indicates a state of feverish trade activity. But the prices of some commodities commenced to fall before August. This was most pronounced in the jute and leather group, and in agricultural produce and the groceries group. As early as May this tendency had been noted. Thus the Banking and Insurance Record remarked : “ During the last few weeks there have been plain indications that the rise in prices . . . has reached its limit, and that a reaction has begun to set in; the markets for wool and certain other raw materials as well as some of the leading industrial metals now presenting a different aspect from that of a few months ago.” 1

1 Banking and Insurance Record, 1920, p. 80.

Labour and Industrial Branch Report, No. 12.

The drop in wholesale prices from August 1920 was as sudden as the increase in the previous period. From 2692 the indexnumber fell to 2245 in December, to 1845 in the following June, and to 1684 in December 1921. This represents a fall of 38 per cent. in sixteen months. This was a feature of the price level in all countries during the crisis. Prices had reached a level altogether out of keeping with the real production and purchasing power of the community, and a serious fall was inevitable. The movement in retail prices during the period from March 1919 to August 1920 was almost as great (39 per cent.) as that in wholesale prices, though previously the latter had shown a much greater increase. But the fall of 25 per cent. was much less than the fall in wholesale prices, and when rents are added to retail prices to give an index of the cost of living this tendency is greatly accentuated. There being no legal restriction on the increase in house rents in this country, rents were rising during the whole period. Consequently the cost of living fell less than 16 per cent., and for some months after August 1920 the fall was very slight indeed. This discrepancy between movements in the cost of living and wholesale and retail prices constituted one of the greatest disturbing factors in the early months of the crisis.

During this process of deflation difficulties of another kind arose. For each of the years 1917–20 there had been an excess of exports over imports, and for the year ending June 30, 1920, this excess reached the record figure of over 50 millions. But for the following year there was a decrease of exports of over 15 millions and a very heavy increase in imports of 65 millions. This brought about an excess of imports of over 30 millions, and caused great difficulties in financing imports at a time when the banks were deliberately restricting their advances for home trade. The following table shows how this factor became of increasing importance towards the end of 1920.

1 May 1920, p. 203.

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