Currency Wars 2: Throwback Black Wednesday, 1992
- In hopes to steer its economy to that of Germany’s, England has just joined the EU’s Exchange Rate Mechanism (ERM) in 1990, but the pound has always struggled to remain in its designated floating band (where the two or more currencies must remain within certain exchange rates with one another and are often subjected to government manipulation).
- Speculators like George Soros saw the fault in this monetary union and kept short-selling the pound. They repeated the process every few minutes with a profit every time. Soros even later went on to say that he pocketed £1bn from buying and selling sterling he didn’t own at all.
- On the morning of September 16, 1992, the value of the pound was sinking so much that Bank of England officials were buying back £2bn of sterling every hour to keep it within the floating band.
- By 11 a.m., England’s interest rates shot from 10% to 12% and eventually to 15% but still failed to make the pound more attractive to investors.
- And despite the Bank of England’s desperate attempts to soak up the pound from the market, Soro’s Quantum Fund was selling it even faster.
- When the market closed at the end of the day of September 20, 1992, the sterling was still outside of the band.
- At 7:40 p.m., Britain officially declared its exit from the ERM, deciding that throwing billions more to uphold its currency artificially just wasn’t worth it.
- Though Soros is infamous for “breaking Britain’s Bank”, the pound actually got a reality check from exiting the ERM and eventually upped its value again after gaining investor confidence. It also shed off unnecessarily high interest rates, which would ultimately sink its economy further into inflation.
May 4, 2015
February 24, 2015