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Black Wednesday

Why Black Wednesday Happened

Explain why Britain could not keep the pound in the ERM in 1992, what policy replaced it, and why ministers and their critics disputed whether leaving helped.

Before you start

What you'll be able to answer

  1. Why could Britain not hold the pound in the mechanism in September 1992?
  2. What did Britain do once it was out of the mechanism?
  3. Did leaving the mechanism help Britain?

Where this sits

Black Wednesday ยท this module is lit

  1. 8 Oct 1990Britain joins the European exchange rate mechanism (ERM), which holds member currencies within set limits of each other
  2. 2 Jun 1992Danish voters reject the Maastricht Treaty, the agreement on a single European currency
  3. 16 Jul 1992The Bundesbank, Germany's central bank, raises one of its official interest rates
  4. 3 Sep 1992The British government announces it will borrow foreign currency worth ten billion ECU, the European Community's own currency unit
  5. 13 Sep 1992The Italian lira's fixed rate in the ERM is lowered
  6. 16 Sep 1992Black Wednesday: after a day defending the pound, Britain suspends its membership of the ERM
  7. 24 Sep 1992Parliament is recalled to debate economic policy
  8. Oct 1992The Chancellor of the Exchequer, the minister in charge of tax and spending, sets out a new framework for monetary policy, the setting of interest rates to steer inflation
  9. 26 Jan 1993Base rates, the rates banks charge, reach 6 per cent

Eight days later, Parliament was recalled

On 24 September 1992, eight days after Britain left the European exchange rate mechanism (ERM), the system that held member currencies within set limits of each other, Parliament was recalled to debate the government's economic policy. The Prime Minister, John Major, told the House of Commons: "In the circumstances, there was no choice. No mechanism could have survived the market's attack on the scale that occurred last Wednesday." Ministers and their critics spent the day arguing over what had gone wrong, and who was to blame.

Predict first

In that debate the Chancellor of the Exchequer, Norman Lamont, the minister in charge of tax and spending, named what he called the more fundamental cause. What do you think it was?

German interest rates rose while Britain's economy was weak

After Germany reunified in 1990, demand there grew fast and the Bundesbank, Germany's central bank, tightened its policy step by step to hold inflation down. In July 1992 it raised its discount rate, one of its official interest rates, to 8.75 per cent.

Britain's own economy was weak: on current official figures output, the value of everything the country produces, fell in six of the eight quarters from mid-1990 to mid-1992, and unemployment reached 9.9 per cent in the three months to August 1992. The Chancellor told the Commons that German interest rates were higher than many countries needed.