What Was Black Wednesday?

Before you start

Where this sits

On 16 September 1992 the pound opened at the edge of its limit

By 8 o'clock on the morning of Wednesday 16 September 1992, a pound bought 2.7794 German marks. Britain was a member of the European exchange rate mechanism (ERM), a European arrangement in which each member currency had a fixed central rate against the others and had to be kept within an agreed distance of it. For the pound, that meant not falling below 2.7780 marks. By the evening Britain had left the mechanism. Members of Parliament were soon calling the day black Wednesday.

Britain joined the mechanism in October 1990

Britain joined the mechanism in October 1990. The Prime Minister, John Major, later told the House of Commons that it had joined to help bring down inflation. While Britain was a member, base rates, the interest rates the high-street banks charge, came down from 15 to 10 per cent, the Prime Minister said, and by August 1992 retail prices were rising at 3.6 per cent a year.

The fixed rates could be changed, but only if the members agreed: a realignment, a reset of the fixed rates, could lower one currency's fixed rate against the rest, which is a devaluation.

Pressure on the pound built through the summer of 1992

On 2 June 1992 voters in Denmark rejected the Maastricht Treaty, the European agreement that included a plan for a single currency. After that vote, the governors of the European Community's central banks later reported, conditions in the currency markets changed sharply. In their account the Italian lira, Italy's currency, came under the most severe pressure, while the pound stayed close to its lower limit. France was to vote on the same treaty on 20 September.

On 3 September the British government announced that it would borrow foreign currency worth ten billion ECU, the European Community's own currency unit. A week later, in Glasgow, John Major said that, as the Chancellor had made clear, "there is going to be no devaluation, no realignment".

Italy and Germany acted in mid-September

On 13 September the members agreed to lower the lira's fixed rate. The central bank governors recorded a fall of 3.5 per cent in the lira's fixed rate and a rise of the same size in all the others'; together, on the Bank of England's account, the lira ended about 7 per cent lower against the rest. On 14 September the Bundesbank, Germany's central bank, cut its interest rates, by less than some in the markets had expected.

The pound fell again the next day and closed at 2.7812 marks. Reports that evening said the Bundesbank's President had told a newspaper a wider realignment would have worked better; the Bundesbank denied them. At its limit a member had to buy its own currency in unlimited amounts, the Chancellor later told the Commons, and higher interest rates make it dearer to bet on a currency's fall, the Bank of England noted.

Through the day the Bank of England defended the pound

In the hour after 8 o'clock that Wednesday the Bank of England bought pounds very heavily, with help from the Bundesbank and the Banque de France, France's central bank. At 11 o'clock it set its minimum lending rate, its own interest rate, which the banks' base rates follow, at 12 per cent, two points above where base rates had been. The high-street banks raised their base rates to match. The pound stayed at its limit.

At 2.15 pm a second rise, to 15 per cent from the next day, was announced. This time the banks held back. When the European exchange markets closed, the pound was still at its limit.

That evening Britain left the mechanism

Just after 7.30 pm the Chancellor of the Exchequer, Norman Lamont, the minister in charge of tax and spending, announced that Britain was suspending its membership of the ERM, and cancelled the second rise. At 9.30 the next morning the lending rate was cut back to where base rates had been, and the banks followed. The same night Italy's central bank stopped supporting the lira, and the peseta, Spain's currency, was devalued by 5 per cent.

Outside the mechanism, the pound fell

With no limit to hold it, the pound fell. On 18 September it closed at 2.6100 marks, 6 per cent below its old limit, and on 5 October it reached 2.3709 marks. It then recovered to around 2.50. By the end of 1992, the central bank governors reported, it was 13 per cent lower against the mark than on Black Wednesday. On the monthly averages in the chart, a pound bought about 2.81 marks in August 1992 and about 2.45 in October; each pound changed into that many marks.

The chart shows the pound's average value in marks each month, from January 1992 to the end of 1994. In the first half of 1992, while Britain was a member, that average was between about 2.86 and 2.93 marks.

The Treasury later counted the cost

The Treasury, the government department for tax and spending, later put the loss at 3.3 billion pounds on its preferred assumptions, measured at February 1994, in an internal note written in 1997 and released in 2005.

The pound had lost its fixed rate within a week of the Prime Minister ruling out a devaluation. Why could heavy buying, one rate rise and the announcement of a second not hold it, and what did Britain do once it was out? The next module takes it up.

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