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The Challenge of Hegemony

lower direct and indirect taxes. The Treasury opposed high taxation in peacetime because it would leave little room for expansion during war. To protect Britain’s international creditworthiness, London renewed its debt repayment to the Sinking Fund. While Britain’s tradition of war ‹nance had dictated that the national debt should be kept down to the lowest pos- sible level by paying for wars out of current taxation, and in particular through an income tax, the outcome of war was often high debt. However, failure to meet past debt responsibilities would damage Britain’s ability to obtain new foreign loans at reasonable interest rates during an emergency and would erode foreign con‹dence in Britain’s economic stability.

The Bank of England

For the Bank of England, the Treasury’s ‹scal sibling, the central concern was the restoration of the gold standard, which had been suspended in 1919. The Bank of England was supported by ‹nanciers, overseas banking, insurance, shipping, and the Treasury, who viewed a ‹xed currency and stable exchange rate as essential for the revival of trade (Newton and Porter 1988, 59). The service economy urged the government to return to the prewar gold standard as quickly as possible in order to restore the ‹nan- cial position of the City of London and to help businessmen, particularly exporters (Skidelsky 1976, 30–33). Montagu Norman, the governor of the Bank of England (1920–44), warned that if Britain failed to go back “the world center would shift permanently and completely from London to New York” (Tomlinson 1990, 54). This policy posed a challenge to indus- try since restoration of the gold standard involved an overvalued pound, especially in relation to the dollar, further disadvantaging British exports (Longstreth 1979, 164–67). Returning to the prewar valuation left the prices of British goods about 10 percent above their real value (Brawley 1993, 155). Suspicion was heightened among economic nationalists by the fact that the inner cabinet of the Bank consisted of directors of mer- chant banks, acceptance houses, and overseas banks, ship owners, and merchants, but only a few industrialists (Williamson 1984, 108). The Bank of England also advocated the establishment of central banks throughout Europe, which would be free of political control and would cooperate to manage the new ‹nancial order.

The City of London

Invisible exports favored a return to free trade and ‹scal orthodoxy. While weakened by World War I, beginning in 1921, the City of London (ship-

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