You've been given lots of ideas and several points of view. I think all are valid. If it were mine, I'd focus on the frame. IMHO the paint is gone-gone-gone! Some new paint and — if you can replace the decals, it would be a real love. I agree that the brakes are a centre-piece in the component line up.

Personally speaking I don't freak out over the possibility of creating what some members consider a "frankenbike", but within reason. I do not have a bike as old as yours, but I think the vintage bikes I've built from the 'frame on up' are no insult to the periods in which they were made. Of course the purist's ideal is to rebuild it as close to original as possible. Your choice — of course.

As for making/replacing the transmission, there are enough bits of older Shimano 600 and Suntour Cyclone or Superbe around that are still in nice condition. Nitto is a Tokyo company that makes retro-looking bars, seat posts, and quill stems in different sizes and diameters. A lot of their finish and polishing is still done by hand. Tange make some very nice cartridge BB's, and in my opinion they are not a glaringly objectionable on an older steel frame. Tange makes a classic looking headset. MKS makes several models of classic-looking peddles that can be fitted with straps and toe clips. DiaCompe make some very nice vintage-looking parts.

I think you can make a very nice, classic looking bike that is a combination of what what you can salvage and what is available in used, older parts and retro, modern production. I don't think you have to go madly into Campagnolo group sets like you suggested. You can keep the costs down and still have a very nice classic steel bike that is special to you.

Back to the frame: As was suggested above, it really needs to get to a frame builder. The builder will inspect the tubing and offer expert opinion as to whether any rust has compromised the frame and made it either a "write-off" or something salvageable — another decision point. The bottom bracket needs to be refaced, and you may as well have the head tube done at the same time. The threads on the bottom bracket and steering-tube will be chased out and made clean and smooth again. The builder will check the alignment of the triangle and make any corrections. Drop-outs will be aligned (and in my experience, they are nearly all out of alignment on veteran frames.) Chain and seat stays will be centred and can be cold-set to accommodate the hub you want to use. My guess is that it is currently 120 mm. Are you going to go single speed, classic freewheel six speed, or even an internally geared Sturmey Archer hub? (Many "clubman" bikes of this type in that era came with Sturmey Archer hubs — now being manufactured in Taiwan — apparently with some refinements). Whatever you chose, the frame builder can optimize the frame in accordance with how you want to build it up.

I agree that the cost of rebuilding this bike may not reflect what you may ultimately want in a bike — ie: it won't be the modern, wonder rocket. So I agree with the above advise. Buy the modern rocket, and keep this bike for quiet rides in the crisp fall air among the falling leaves and soft sunshine. Many of us think there is romance in these old dears. Explore the link above to "Classic Lightweights" — you just might find yourself restoring it to original configuration.

I once had a frame that was not too much different from the one you have. It was non-butted, straight gauge Reynolds 531, cottered cranks and oil fed hubs and BB. I wish I still had it.

PS — My mother was born in Middlesex — Northwest London — home of Mal Rees