16 September 1992: Black Wednesday sees sterling crash out of the ERM

On this day in 1992 – 'Black Wednesday' – the value of the pound crashed as currency speculators sold, dumping sterling out of the European Exchange-Rate Mechanism

Evening Standard with a headline on the ERM crisis
(Image credit: © In Pictures Ltd./Corbis via Getty Images)

Before the euro, there was the ERM – the European Exchange-Rate Mechanism – created in 1979 as a precursor to full European monetary union, and which tied member-currencies' values to that of the deutsche mark.

The UK entered the ERM in 1990, hoping it would help us achieve a German-style economy, characterised by stability and low inflation. But, as Greece, Portugal, Spain, Italy and others could tell you, what's good for Germany isn't necessarily good for anyone else.

Britain did get low inflation, but the economy was far from stable. And having the pound hitched to the deutsche mark meant we weren't able to manipulate interest rates to suit the conditions at the time.

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Sterling was having great difficulty remaining within its designated band. Speculators sniffed blood, and the currency began to fall. George Soros and his Quantum Fund had been building up a position in sterling for some time, with the intention of profiting from a fall. On Tuesday, he began selling.

Soon, the currency was being sold much faster than the Bank of England could buy. The Bank of England bought more sterling in four hours than it had ever been bought before or since, according to the Bank's former chief dealer, Jim Trott, quoted in The Guardian. Interest rates, recently raised to 10%, went up to 12% in a bid to tempt currency traders to buy. Still sterling slid, so interest rates went up again to 15%.

At 7.40pm on this day in 1992 – Black Wednesday – Britain announced it had suspended its membership of the ERM, and interest rates would fall back to 12%. The next day, they fell again to 10%.

HM Treasury has since estimated the cost of propping the currency up to be £3.3bn. George Soros made a profit of $1bn.

The episode damaged the Conservatives' reputation for good financial management. An opinion poll in October that year showed support had plummeted from 43% to 29%. They wouldn't win another general election outright until 2015.

Ben Judge

Ben studied modern languages at London University's Queen Mary College. After dabbling unhappily in local government finance for a while, he went to work for The Scotsman newspaper in Edinburgh. The launch of the paper's website, scotsman.com, in the early years of the dotcom craze, saw Ben move online to manage the Business and Motors channels before becoming deputy editor with responsibility for all aspects of online production for The Scotsman, Scotland on Sunday and the Edinburgh Evening News websites, along with the papers' Edinburgh Festivals website.

Ben joined MoneyWeek as website editor in 2008, just as the Great Financial Crisis was brewing. He has written extensively for the website and magazine, with a particular emphasis on alternative finance and fintech, including blockchain and bitcoin. As an early adopter of bitcoin, Ben bought when the price was under $200, but went on to spend it all on foolish fripperies.