Was Britain in 1901 the wealthiest and most powerful economy the world had ever known? Its ships carried most of the world's trade and its foreign investments were greater than those of all the other major economies combined. India provided a ready market for British goods. In other regions - Morocco, China, Persia and Ottoman Turkey - Britain enjoyed a form of 'empire on the cheap', based increasingly on its success as an exporter of capital. Nevertheless, by 1901 Britain's dominance of world trade was under threat - primarily from the USA and Germany - and unsustainable.

Free trade and competition Although Britain was still the world's largest exporter of manufactured goods, its output of coal and iron had now been overtaken by that of the USA and its steel production by both the USA and Germany. Britain had produced a third of the world's steel in 1880, but by 1902 it was under a seventh. The British economy was still dominated by traditional industries - coal, iron and steel, shipbuilding and cotton - and seemed to lag far behind its rivals in the industries of the new century - electrical engineering, motor car manufacture and chemicals. The 1901 Annual Report of the Chief Inspector of Factories noted that 'in the age of steam, this country led the way, whereas in the age of electricity we seem to follow America and other countries'. The stage was already set for the USA to supplant Britain as dominant power on the world economic stage.

Some argued that the British steel industry should be protected by taxing cheap imports - but this would then have forced up prices for manufacturers, whose exports were vital to the success of the British economy. Free trade continued to prevail: goods were imported into and exported from Britain without the imposition of extra duties. This was not the case with Britain's rivals in Europe and the USA, however, whose own domestic industries were protected by tariffs. Beyond the requirement to balance its own annual budget, free trade doctrine assumed that the state should leave the development of trade and industry to market forces.

Prosperity and inequality Average income per head, which had risen from £34.9 in 1874 to £42.7 in 1900, was higher than anywhere else.Yet, at home, Britain's wealth was very unevenly distributed, with half the nation's income going to one-ninth of its population. Observers spoke of 'public penury and private ostentation', and the social surveys of London and York by respectively Charles Booth and Seebohm Rowntree claimed that a third of the population lived in poverty. In the last quarter of the 19th century, wage-earners, especially skilled workmen, had seen a real rise in living standards as prices, particularly of foodstuffs, fell and wages rose, peaking in 1900. In 1901, some groups, notably miners, saw wages fall and prices rise. By 1914 the average family was spending proportionately more on food than at the start of the century. Should this, contemporaries asked, be the concern of the government which, in 1901, did not see itself as a controlling force in the national economy?