The changes reflected the government's refutation of its aim to restore the free trade system based on the gold standard and a strong valuation of the pound. The continuing preoccupation with the encouragement of trade through stable exchange rates can be seen in the establishment of the sterling area. Britain sought, in the absence of the gold standard and the stable exchange rates that flowed from it, to pursue trade with those countries (mainly in the empire) who had wanted to link their economies to sterling after the collapse of the gold standard. Trade was about exchange rates and protectionism in the form of imperial preference. Along with these measures, and with rearmament in the latter half of the decade, the economy slowly recovered during the 1930s.
The reports of the Balfour Committee on Industry and Trade in 1929, and particularly the Macmillan Committee on Finance and Industry in 1931, were critical of current economic policy. Both pointed to lack of direct investment by banking in manufacturing, recommending closer involvement of banking in industry, similar to the German model. The Macmillan Report found that adherence to the gold standard at a high value for the pound and associated high interest rates had damaged industry and increased unemployment. The Macmillan Report factored in the changing policy. Devaluation of the pound enabled an increase in exports, which then stimulated production and employment. Interest rates were reduced to 2 per cent by June 1932 and the new 'cheap money' policy also stimulated economic activity.
By 1931 the Cabinet was considering import tariffs, a policy supported by manufacturing. The enactment of the Import Duties Act in February 1932 inaugurated protectionism in Britain, bringing to end a long period of commitment to free trade. The Act placed a 10 per cent tariff on manufactured imports, while foods, raw materials and empire manufactures were exempted. In 1932 the Import Duties Advisory Committee doubled the basic tariff to twenty per cent. Thereafter, import duties were increased piecemeal, and in the case of steel, reached 50 per cent by 1935.
During the early 1930s, Britain looked towards fostering trade with its Empire to offset effects of trade barriers and shrinking world trade. While empire self-sufficiency was not possible given that a high percentage of colonial exports went to countries outside the Empire, an Imperial Economic Conference met in Ottawa between July and August 1932 to improve the situation. The British hoped to persuade the dominions to lower tariffs and enable free trade within the Empire.
The circumstances, however, limited the extent to which this could be achieved. The dominions decided to keep their import tariffs while making preferential concessions to British imports in exchange for similar concessions in British markets. For political reasons, the British negotiators were determined to maintain a degree of protection for farmers, something that annoyed dominion representatives. The system of imperial preference therefore did not have the coherence of the old free trade system.