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Black Wednesday is the name given to 16th September 1992, when the British Pound and Italian Lira were forced by currency speculators to leave the European Exchange Rate Mechanism (ERM).

The ERM was started in 1979 as an agreement between governments to peg their currencies to each other. Each currency was allowed a 2.5% band either side of their fixed peg rate, outside of which the currency was not supposed to move.

The British government under Margaret Thatcher took sterling into the ERM in 1990. The then Chancellor of the Exchequer, John Major, was instrumental in the decision to peg the currency, and remained a strong advocate of the system until days before the pound's unceremonious exit.

Some economists argue that the pound was doomed from the start, entering the system, as it did, while the UK was in recession. Nevertheless, the final seeds of doom were sowed in August 1992. The newly reunified Germany was desparately defending the Deutschmark from a steady decline brought about by the uncertainty, and had raised interest rates to 9.5%. This was starting to threaten the fragile pound, which was moving ever closer to the edge of its band. John Major, who was now Prime Minister, was working hard to talk up the currency, and took every opportunity to promise that it would never be devalued.

Meanwhile, even as the Conservative government was gambling its very future on keeping the pound within the ERM limits, George Soros, the billionaire currency speculator and head of the Quantum hedge fund, was borrowing billions to bet that they would fail to keep that promise. Soros was confident that the Bundesbank was sufficiently keen for the pound and lira to devalue that they would have to give in to a sustained speculative assualt. Speaking a month after the event, Soros justified his massive gamble as follows:

"I felt safe betting with the Bundesbank. The Bundesbank clearly wanted the lira and pound devalued, but it was prepared to defend the franc. In the end, the score was Bundesbank, 3-nil; speculators, 2-1. I did even better than some others by sticking to the Bundesbank's side."

With this in mind, he started dealing the cards for a multi-billion dollar poker game with the British and Italian central banks. He began shorting the two currencies, eventually selling over $10 billion worth of sterling.

On Monday 14th September, 1992, the British government sent a delegation of economists to Frankfurt, in one final attempt to convince the German central bankers that the pound could stay at the DM2.95 level that John Major had promised. Two days later that promise was in tatters.

There has been much debate and recrimination over the exact events of Black Wednesday itself. The Prime Minister, John Major, and his chancellor Norman Lamont have attacked the other viciously in the years since, over the other's version of the events of that day. Lamont's version has him demanding, and failing to get, a meeting with the Prime Minister to discuss the impending crisis mid morning on the day. The two eventually met at 12.45pm. Mr. Major denies that Mr. Lamont tried to get a meeting before this time:

"It just beggars belief that if the chancellor of the exchequer on a day like Wednesday, 16 September wanted to see the prime minister that anybody kept him at a distance. It just is inconceivable"

It was not until 5pm that the government gave in to the onslaught by George Soros and other speculators and suspended Britain's membership of the ERM. Soros later admitted his gamble against the pound had paid off to the tune of nearly $1 billion, with his speculation against the lira and in support of the franc taking his total profits to over $2 billion.

For the Conservative government and John Major, however, this was the beginning of the end. The pound was devalued by 30%, and interest rates on Black Wednesday peaked at 15%. The ensuing embarrasment and financial turmoil are cited as the main factors in the collapse of the Tory party and their massive defeat at the 1997 General Election. Echoes of Black Wednesday are still felt to this day, as its memory is often called upon by opponents of Britain's entry into the euro.

Pound Punches above its Weight - The Guardian, 11 Jan 2000
The Royal Economic Society, Annual Report 1996. res.org.uk
How Mr Soros made a billion by betting against the pound - The Times - 26 Oct 1992
Various news reports - news.bbc.co.uk

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