Note.-Imports reached a maximum in February 1921, when they stood at 18.8 millions in comparison with 7.0 millions for the previous February.

The Commonwealth statistician estimates that there was a net excess of imports (after allowing for loans) of over 27 millions, whereas the liabilities by way of interest, etc. amounted to 22 millions. Consequently the value of the exports for the year was about £50,000,000 short of the amount required to pay for the imports and to meet the standing obligations on account of interest, etc."1 Exchange on London was very difficult and demand drafts rose to 37/6 per cent. No doubt business was done at a much higher figure, but this is much the highest official quotation since 1900.

If we turn to banking statistics we find further evidence of the ills that afflicted the business community at the end of 1920. The following table is of interest on this point.

We notice here a tendency for "current " deposits to expand, more particularly in 1920, when there was an increase of 13.2 per

1 Commonwealth Year Book, No. 14, p. 497.

cent. This is evidence of the degree to which banks were offering accommodation. At the same time "fixed" deposits were almost stagnant, while reserves increased by only 2.7 per cent. Consequently the proportion of reserve to current deposits decreased to 42 per cent. and the proportion to total deposits to 23 per cent. The former figure is lower than any calculation I have made up to that date. Before the war it was never below 52 per cent., and no doubt this fact greatly influenced bankers in the action they took in July 1920, when they raised their deposit and loan rates, and later also when they commenced to discriminate very carefully in making advances, and brought compulsion upon their clients to reduce their overdrafts.

The years 1922 and 1923 show a further drop in reserves. This is due largely to the trade recovery that is proceeding and the contemporaneous attempt on the part of the Australian Notes Board to reduce the note issue. This has been reduced from nearly £58,000,000 in 1921 to £52,000,000 at June 30, 1923, but the amount in the hands of the public has decreased by less than one million. Bankers have found their reserves falling at a time when they were forced to give customers accommodation.

IV. CAUSES OF THE ECONOMIC CRISIS

Following this brief analysis of the period of deflation we may now give the main causes of the depression :

(i) The deflation in England and America and the heavy fall in domestic prices in Australia.

(ii) The over-issue of credit beyond the limits allowed by

reserves.

(iii) The stringency of the money market, the rise in the rate of interest, and the action of the banks in respect of credits.

(iv) The drop in the prices of metals causing great difficulty

to mining companies.

(v) The heavy fall in prices of agricultural products and meat, and later of dairy products.

(vi) The bad harvest of 1919-20.

(vii) Heavy importations due largely to the supplying of orders long overdue.

(viii) The difficulties of regulating industrial costs to the changing price level.

(ix) The decrease in production from 1914 to 1921.
(x) The psychological reaction from the boom period.

Some of these factors have already been discussed in Section IV. Others require further mention. The harvest of 1919-20 was very poor, the wheat yield being only 46 millions of bushels. The previous yield was only 75 millions in contrast with 115 millions in 1917-18 and 146 in 1920-21. Further, the prices of agricultural products fell 40 per cent. from June 1920 to June 1921, and consequently the rural community found its purchasing power very much reduced. It would be interesting to compare the purchasing power of the farmer and the manufacturer in 1919 and 1921. The farmer's products in 1921 brought him about 50 per cent. less purchasing power than they did two years before. The position may best be illustrated by reference to the relation between internal wholesale prices and export prices as under.

It will be noticed that even in the boom years of 1920-21 the price of exports as a whole showed a rise of only 75.3 per cent. over the 1913 level, while general internal wholesale prices rose 101-4 per cent. Two important groups of exports-agricultural and dairying—had risen much higher and producers benefited accordingly. But in the following year all groups were below the internal level and the export index showed a rise of 33-3 per cent. over 1913 compared with 68.2 per cent. for internal prices. This may be taken to indicate roughly the relation between costs and selling prices for export producers. Internal prices kept costs up, while the export market had collapsed. There is a recovery in the export market at present, but the index-number of export prices is not available.

The crisis was most noticeable in the mineral industry, where selling prices were only 28.2 per cent. above the 1913 level. This, of course, was due to the heavy fall in the world prices of base metals in 1920. The effect on mineral production may be shown as follows:

This serious fall produced a crisis in the mining industry from which it is only now recovering. Some mines actually closed down, while others produced on a smaller scale, and there was a serious fall in exchange quotations of mining shares. Thus Broken Hill Proprietary stood at 66/6 on July 19, 1920, but on June 16, 1921, they had fallen to 39/6, and on October 17 were only 31/4. The quotations of Mount Lyell on the same dates were 24/-, 13/11 and 12/6 respectively. With two large branches of industry, constituting over 70 per cent. of the national income, suffering from such a decrease in purchasing power a serious economic crisis was inevitable.

Hard hit by the slump in prices, our primary producers, along with the commercial and industrial world generally, had to meet a reverse at another point. By the end of 1920 bankers were pressing upon their customers the importance of retrenchment. Every endeavour was being made to restrict advances and reduce overdrafts. This naturally roused great opposition from the commercial community, but the view of the bankers was that the check given to advances was necessary for the purpose of "limiting the trading demand for accommodation in the future" and "facilitating the disposal of present stocks of goods without undue competition from later arrivals." Any tendency to increase orders had to be discouraged, for Australia, in common with the rest of the world, " was reaching the end of the false prosperity produced in the first instance by war activity, war prices, and war inflation supported by the stretching of credit, and continued in the second place by the demands of the reconstruction succeeding the war." 2

The effect of these measures is to be seen in the movement in advances and deposits as shown in Table IV. For the banks

1 Some Aspects of the crisis in the mining industry are described in the Round Table for December 1921, p. 174.

2 Banking and Insurance Record, February 1921, p. 82.

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in Australia inclusive of the Commonwealth Bank current deposits decreased from 133.9 millions in June 1920 to 127.8 in 1921, and to 123-8 in 1922, while "fixed" deposits increased from 113.7 millions in 1920 to 120.4 in 1921 and 126.1 in 1922. Meanwhile the ratio of reserves to current deposits increased from 42 per cent. in 1920 to 44 per cent. in 1921 and 45 per cent. in 1922. These statistics show that there was a considerable decline in banking activity, and clearing-house returns confirm this. In 1920 the clearing-houses of Sydney and Melbourne registered exchanges to the value of 1602 millions sterling, but in 1921 there was a decline to 1440 millions. From the records given in the Banking and Insurance Record the following striking contrast is available:

This decline in clearings portrays not only the influence of banking policy, but also the decrease in business activity as a result of the depression.

Of the other causes noted above, the influence of psychological factors is obvious. Trade definitely slumped in the middle of 1921, and Stock Exchange journals record a period of relative inactivity. This may be observed from the quotations of securities. I have collected information upon Broken Hill Proprietary and Mount Lyell shares which show the following fluctuations:

Whilst many factors connected with production and prices in the industry affect the share quotations, they may be regarded