Well, think about internal -- it means within. Therefore, "internal conflict" is conflict within the mind (can't make up a decision, etc.) and external conflict means conflict on the outside (fist fights, etc.). He doesn't trust himself, so that takes place within his own mind, so it's internal conflict.
Explanation: in literature, a conflict is a struggle between opposite forces, usually between a character (the main character or a very important one) and himself (internal conflict), society or another character (external conflict). In the given scenario we can see an example of an internal conflict, because the signalman doesn't trust himself (he isn't in conflict with anyone else but himself).
