A variable capacity pump/motor has a meshing internal and external gear set disposed between an upper mandrel and a lower mandrel, each including a flange extending towards the gears to divide a pump/motor chamber into suction and discharge chambers. The outer gear is fixed and the internal gear is axially moveable with respect thereto. The inner gear and the upper mandrel move in response to changing pressures in the casing, allowing the motor to vary displacement and the pump to vary its output based on supplied fluid pressure or based on the speed of the prime mover. An external configuration includes a pair of meshing gears mounted on separate shafts in a casing. One gear is fixed and the other is axially moveable with respect thereto and moves in response to changing pressures in the casing. Each of the gears is sealed by a seal/bushing on a free end thereof.