Black Wednesday
Financial crisis forcing UK withdrawal from the European Exchange Rate Mechanism.
On 16 September 1992, the UK government was forced to pull the pound sterling out of the first European Exchange Rate Mechanism (ERM I), after failing to keep its value above the required lower limit. This event, known as Black Wednesday or the 1992 sterling crisis, happened while the UK held the presidency of the Council of the European Union. The crisis hurt the credibility of John Major’s second government on economic issues, and the ruling Conservative Party suffered a heavy defeat at the 1997 general election, not returning to power until 2010. In the years that followed, the UK economy rebounded, partly due to the pound’s depreciation and a shift from tracking currencies to an inflation-targeting policy for monetary stability.
- Field
- Financial crisis
- Nationality
- United Kingdom
- Known for
- Forced withdrawal of sterling from the ERM I on 16 September 1992
- Impact
- Damaged Conservative economic credibility; led to inflation targeting policy
Lore & Background
When the ERM was set up in 1979, the United Kingdom declined to join. Chancellor Nigel Lawson admired West Germany's low inflation and from early 1987 to March 1988 the Treasury followed a semi-official policy of 'shadowing' the Deutsche Mark. After Lawson's resignation, John Major convinced the Cabinet to sign Britain up to the ERM in October 1990, entering at DM 2.95 to £1. From the early 1990s, high German interest rates set by the Bundesbank to counteract reunification inflation caused stress across the ERM. The UK and Italy had double deficits, and the UK was hurt by the rapid depreciation of the US dollar that summer.
Reader's Guide
Black Wednesday is significant as a pivotal moment in modern British economic history. The crisis forced the UK to abandon the ERM and adopt an inflation-targeting monetary policy, which many credit with the subsequent economic recovery. The depreciation of sterling and the new policy led to re-establishment of economic growth with falling unemployment and inflation. However, the crisis damaged the Conservative Party's reputation for economic competence, contributing to their landslide defeat in 1997. Some commentators later referred to the ERM as an 'Eternal Recession Mechanism,' while some Conservatives called the ejection a 'Golden Wednesday' that paved the way for revival. The event remains a cautionary tale about fixed exchange rate systems and speculative attacks.
Did You Know?
- The UK entered the ERM on 8 October 1990 at DM 2.95 to £1, with a permitted fluctuation range of 6%.
- George Soros built a huge short position in sterling before Black Wednesday, believing the entry rate was too high.
- Bundesbank president Helmut Schlesinger's remarks in an interview triggered the attack on the pound.
- The Bank of England spent billions of Deutsche Marks of foreign currency reserves trying to prop up the pound.
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