Th century: Second Industrial Revolution

During the First Industrial Revolution, the industrialist replaced the merchant as the dominant figure in the capitalist system. In the latter decades of the nineteenth century, when the ultimate control and direction of large industry came into the hands of financiers, industrial capitalism gave way to financial capitalism and the corporation. The establishment of behemoth industrial empires, whose assets were controlled and managed by men divorced from production, was a dominant feature of this third phase.

New products and services were also introduced which greatly increased international trade. Improvements in steam engine design and the wide availability of cheap steel meant that slow, sailing ships could be replaced with steamships, such as Brunel's SS Great Western. Electricity and chemical industries also moved to the forefront. In many of these sectors Britain had far less of an edge than other powers such as Germany and the United States, who both rose to equal and even surpass Britain in economic heft.

Amalgamation of industrial cartels into larger corporations, mergers and alliances of separate firms, and technological advancement (particularly the increased use of electric power and internal combustion engines fuelled by coal and petroleum) were mixed blessings for British business during the late Victorian era. The ensuing development of more intricate and efficient machines along with monopolistic mass production techniques greatly expanded output and lowered production costs. As a result, production often exceeded domestic demand. Among the new conditions, more markedly evident in Britain, the forerunner of Europe's industrial states, were the long-term effects of the severe Long Depression of 1873-1896, which had followed fifteen years of great economic instability. Businesses in practically every industry suffered from lengthy periods of low — and falling — profit rates and price deflation after 1873.

Long-term economic trends led Britain, and to a lesser extent, other industrializing nations such as the United States and Germany, to be more receptive to the desires of prospective overseas investment. Through their investments in industry, banks were able to exert a great deal of control over the British economy and politics. Cut-throat competition in the mid-1800s caused the creation of super corporations and conglomerates. Many companies borrowed heavily to achieve the vast sums of money required to take over their rivals, resulting in a new capitalist stage of development.

By the 1870s, financial houses in London had achieved an unprecedented level of control over industry. This contributed to increasing concerns among policymakers over the protection of British investments overseas — particularly those in the securities of foreign governments and in foreign-government-backed development activities, such as railways. Although it had been official British policy to support such investments, with the large expansion of these investments in the 1860s, and the economic and political instability of many areas of investment (such as Egypt), calls upon the government for methodical protection became increasingly pronounced in the years leading up to the Crystal Palace Speech. At the end of the Victorian era, the service sector (banking, insurance and shipping, for example) began to gain prominence at the expense of manufacturing.

Foreign trade

Foreign trade thus tripled in volume between 1870 and 1914, although (again) most of the activity occurred among the industrialized countries, or between them and their suppliers of primary goods or their new markets. In 1913, only 11 percent of the world's trade took place between primary producers themselves. Britain ranked as the world's largest trading nation in 1860, but by 1913 it had lost ground to both the United States and Germany: British and German exports in that year each totaled $2.3 billion, and those of the United States exceeded $2.4 billion. More significant was the emigration of their goods and capital.

As foreign trade increased, so in proportion did the amount of it going outside the Continent. In 1840, £7.7 million of its export and £9.2 million of its import trade was done outside Europe; in 1880 the figures were £38.4 million and £73 million. Europe's economic contacts with the wider world were multiplying, much as Britain's had been doing for years. In many cases, colonial control followed private investment, particularly in raw materials and agriculture. Intercontinental trade between North and South constituted a higher proportion of global trade in this era than in the late 20th century period of globalization.