Black Wednesday refers to the events of September 16, 1992, when Britain was compelled to withdraw from the European Exchange Rate Mechanism (ERM), a system designed to maintain currency stability within a set of exchange rate bands. On this day, Britain was also forced to devalue the pound by 15%. This crisis struck just two years after the British pound joined the ERM in 1990.
From the beginning, British Prime Minister John Major faced significant challenges in maintaining the pound within its assigned exchange rate band. Adding to the tension, a French referendum on the Maastricht Treaty was scheduled for the weekend following September 16, with polls indicating that 58% of the French population opposed closer economic and political integration with the EU. This uncertainty heightened market anxiety and exerted additional pressure on the pound, which was seen as the weakest link in the emerging monetary union.
The ERM system required participating governments to maintain their currencies within a specified band by intervening in the currency markets. Countries with stronger currencies, like the German Deutschmark, were expected to sell their own currency and buy the weaker ones to stabilize the exchange rates.
In September 1992, the British pound emerged as the weakest currency in the system, while the Deutschmark remained the strongest. It wasn’t just the pound that was under pressure; the Spanish peseta and Italian lira were also struggling. However, the pound attracted the most media attention.
The main antagonist on Black Wednesday was George Soros, a currency hedge fund speculator, and his Quantum Fund. Soros directly challenged the Bank of England by borrowing UK gilts (government bonds) and selling them, only to buy them back at a lower price, profiting from each transaction. Following Soros’ lead, other speculators engaged in similar activities, further destabilizing the pound.
Throughout the day, the Bank of England attempted to support the pound by purchasing it in the markets, at one point buying £2 billion worth of pounds every hour. They also raised interest rates to 12%, and later to 15%, in a desperate attempt to stabilize the currency. Despite these efforts, the pound remained outside its designated exchange rate band by the close of the London currency markets.
At 7:40 pm that day, the British government announced that it had suspended its membership in the ERM, marking the end of the country’s participation in the system. The shock of Britain’s withdrawal nearly led to the collapse of the entire European Exchange Rate Mechanism. Crisis talks were held by the European Community’s monetary committee to prevent the system from unraveling.
It was later revealed that the German Bundesbank had not fulfilled its obligations under the ERM agreement by failing to sell Deutschmarks and buy pounds on that critical day. In its efforts to combat the currency speculators, Britain had spent nearly £10 billion, approximately a quarter of its reserves.
Thirteen years later, documents released by the Treasury revealed that the Bank of England had lost £3.3 billion on Black Wednesday due to the falling value of their own currency they kept purchasing.
