Reviewed by Jun 10, 2021| Updated on
Black Wednesday refers to the 16th of September 1992, when a crash of the pound sterling forced Britain to exit the European Exchange Rate System (ERM). The United Kingdom was pushed out of the ERM because the value of the pound could not keep it from falling below the lower limit defined by the ERM.
Black Wednesday had been globally criticised at that time as a massive waste of money. Black Wednesday, on the other hand, helped the U.K. come out of the eurozone and save itself from all the future economic problems.
In the late 1970s, the European ERM was formed to stabilise European currencies in preparation for the Economic and Monetary Union (EMU) as well as the adoption of the Euro. Countries trying to substitute their currency with the Euro had to maintain their currency’s value for several years within a defined range.
The U.K. was with ERM for over two years before the Black Wednesday. The pound gradually depreciated and fell near the lower limits set by the ERM. The British government had taken measures to support the pound, including raising interest rates and allowing the purchasing of pounds using foreign currency reserves.
But George Soros, Hon’ble FBA, a Hungarian-American billionaire investor and philanthropist had believed that the U.K. would fail in its attempts to prop up the pound. Soros secretly stacked up a short position against the British currency.
He, then, started addressing publicly about his belief that no one could defend the pound. Many speculators also began betting against the pound, while investors hedged against a crash in the exchange rate.
The Soros-inspired gathering against the pound had many of the characteristics of a prophecy that fulfilled itself. A recession became more likely as more people began to assume that the British pound would fall out of the European ERM. Businesses and investors needed to prepare for this because it became more probable. Their plans then pressurised the pound further to sink.
Soros’ Quantum Fund started selling massive sums of pounds on the market the day before Black Wednesday, leading the price to plunge further. The Bank of England took action to stop the sell-off but could not succeed. The Bank of England finally announced that the U.K. was going to leave the European ERM on the day of black Wednesday.
Hence, George Soros is known for “breaking the Bank of England” because of Black Wednesday. Media reports suggest that he made a USD 1 billion profit that day, which has cemented his reputation as a great forex trader.
Apart from the vast loss of money, Black Wednesday undermined the credibility of efficient economic management of British Prime Minister John Major and his Conservative Party.
In an inevitably unsuccessful effort to combat Black Wednesday, the U.K. government invested billions of pounds of the foreign-exchange fund. The public benefitted very little, despite Soros and other wealthy speculators making billions.
Although many identify Black Wednesday as a tragedy, others believe it has helped pave the way for an economic revival. They believe that economic policies enacted in the U.K. after the Black Wednesday contributed to economic prosperity, lower unemployment, and less inflation.