Gold Standard: First used in Britain in 1821, the gold standard signifies a monetary system under which gold is the only standard
of value, freely convertible at home or abroad into a fixed amount of gold per unit of currency. By definition limited to the actual gold
reserves of the Earth, the gold standard was phased out in the 1920s for the gold bullion standard, under which nations backed
their currencies with gold bullion and agreed to buy and sell the bullion at a fixed price.
British capitalism and its development is very different from that in the rest of Europe. European governments saw the economic
dominance which the industrial revolution brought to Britain and soon realised that, if they were going to compete with Britain, they would
have to speed up their own industrialisation process. As a result, the state sought to encourage the growth of capitalism. This resulted in
the development of a ‘state interventionist’ tradition in mainland Europe, where governments have long-practised active policies to
control and develop the economy.
Broadly, the two approaches have developed to become known as free market capitalism (the British model) and social market
capitalism (the European one). Thus, in Britain, the central idea of free market capitalism has dominated - that the running of society
should be left wherever possible to market forces and that market forces perform best when they are free from state interference.
Social market capitalism, on the other hand, looks to state regulation, both to direct the markets and ensure greater co-operation within
society, which it is argued, leads to greater stability and efficiency. Major long-standing differences between Britain and Europe
also exist in the development of the financial sector. Britain’s financial position largely grew out of the enormous profits gained from
being the world’s first industrial economy. As such, the banking system was a response to the industrial revolution, and only began to
expand after it was well underway. As a result, British banks did not evolve to provide finance for the emerging capitalist system. Rather,
they evolved in order to deal with the massive wealth being created by British capitalism. This is in marked contrast to financial sectors in
countries such as Germany and Japan, where banks were developed to meet the investment needs of the growing industrial sector. Here,
the banks were also regulated by the state in order to ensure that enough money was available to fund the industrialisation process.
From the outset, the banking system in Europe was closely linked to domestic industry and specifically, to the provision of long term loans
for inward investment.
Since banks did not actively finance Britain’s industrial revolution, they had no strong links with industry and were not
dependent on its success. Instead, Britain’s banks found themselves with vast sums of money pouring in from the proceeds of the
industrial revolution. These vast sums were soon attracting foreign borrowers keen to draw on these surpluses and willing to pay high
returns in order to fund their own industrial process. As a result, Britain’s financial sector quickly became internationally orientated,
and most of its energies were devoted to channelling funds into and out of Britain, rather than to the provision of finance for domestic
industry. As demand for British money grew from abroad, sterling strengthened. In turn, as the strength of sterling rose, the City of
London became the world’s leading financial centre. Pounds sterling became the world’s trading and reserve currency, and it took on a
similar role to that played in today’s world markets by the US dollar.
Since the British banks were first and foremost about protecting the wealth of the industrial revolution by investing it abroad, British
finances rapidly became dominated by the need to maintain the conditions in which export capital was safe. This meant defending the
value of sterling and ensuring international commercial and financial operations could freely function (therefore ensuring British capital
could continue to dominate in world markets). British industrialists therefore found their bankers and government preoccupied with such
issues, and not with investing in British industry.
With little support from the state, British industry had no means of persuading bankers to make long-term loans to industry
on any scale, or put up risk capital in sufficient quantities, and hence it was forced to heavily rely on its
own inadequate internal funds for innovation and modernisation. Starved of investment, Britain’s domestic economy began to
decline, while at the same time, the financial sector became the most vibrant part of Britain’s economy. As a result, the City of London
acquired a powerful and often dominant position within domestic affairs, both economically and politically. This was to have far
reaching consequences for the British economy. As the importance of the financial sector grew, Britain’s political class increasingly directed
policies aimed at maintaining dominance as the world’s financial centre. This centred on maintaining the high level of the pound
(incidentally making British goods expensive abroad), and increasingly intervening militarily and politically in order to protect
overseas financial interests.
At first, this extension of British imperialism benefited domestic
industry. The maintenance of the empire ensured the continuation of protected markets for increasingly uncompetitive British-made goods,
as colonies were forced to accept and pay for them. But under-capitalised British industry could only be sheltered from modern
competitors for so long. As Britain’s share of world trade began to steadily decline, the need for state intervention to protect domestic
industry and to boost investment became increasingly urgent. However, the investment needs of the domestic economy could
only be met at the expense of the financial sector. Boosting British industry meant reducing the level of the pound, lowering interest rates
and new protectionist measures to prevent the import of cheaper foreign goods. The financial sector, dependant on free trade and a
high pound, would suffer, and thus Britain’s position as a leading world power would be threatened. Each new generation of Britain’s
political elite saw the problem but couldn’t face the solution consequently, maintaining Britain’s ‘greatness’ as a world power won
the day time and again, and government policy repeatedly supported the financial sector, at great cost to the domestic economy. The
result being that Britain’s manufacturing base was in serious decline from the first years of the 20th Century.
With exports falling and imports pouring in from the US and Europe, some British politicians, academics and industrialists sought
increased support for Britain’s domestic sector. Even as early as 1903, Tory leader Joseph Chamberlain launched a campaign to
abandon the free market and introduce protectionist measures, mainly on employment grounds. This was fiercely resisted by the
City of London, and a bitter debate ended once again in victory for them, with free trade policies maintained.
In the City, the victory brought yet further investment abroad.Between 1905 and 1914, some 7% of national income was invested
abroad; more than that invested in Britain. It was during this period that Britain’s dual economy was firmly established, with the dynamic,
powerful financial sector servicing imperialism and operating profitably, and the investment-starved domestic economy fixed in
relative decline, unable to compete with the high-tech US, German and Japanese economies.
After a brief period of state intervention during the First World War, Britain returned to free market policies, and 1925 saw it return to
the ‘gold standard’, with the pound set at its pre-war value, overvalued by some 10%. The result was the collapse of British
exports and a flood of cheap imports. Again, it was the working class that bore the brunt of the economic stagnation that followed, as
unemployment rose and wages fell. Elsewhere, the world economy was booming. Britain’s disastrous return to the gold standard led to
further demands for the state to support the domestic economy. The influential economist, John Maynard Keynes, headed these demands
but, for the rest of the 1920s, both the Tory and Labour governments resisted the calls. The 1929-31 Labour government was particularly
loyal to the free market philosophy, as it attempted to prove to capitalists that they had nothing to fear from a Labour government.
The “socialist” government eventually fell over its attempt to cut dole provision, as part of a package to cut public spending in the face of
rising unemployment.