Britain in the international economy, 1900-1939

Britain was heavily and increasingly engaged in the international economy in the era before the First World War. Policy and institutions played a crucial role in sustaining this internationalism, notably through continued adherence to the gold standard and to free trade. The gold standard, which fixed a gold value for sterling and obliged the Bank of England to maintain that value, established a pre-eminent objective to which other aspects of government economic policy had to be subordinated. While the gold standard was supposedly automatic in operation and therefore free of political pressures, so free trade was also ensured that no group could bargain for political privileges. It therefore followed that British producers had to face competition in both home and overseas markets, and, under the liberal agenda, these competitive pressures were supposed to ensure British industry remained efficient. These pressures were reinforced by the distinctive character of Britain's industrial structure, dominated as it was by small and medium-sized firms that made it difficult for firms to collude in fixing prices. The contribution of the state to an efficient economic system was to restrict its expenditure, keep taxation low and balance its budget.