Black Wednesday: Currency Crisis in the UK
The British pound faced severe pressure from currency speculators, leading to its withdrawal from the European Exchange Rate Mechanism. The government was forced to raise interest rates significantly to defend the pound, but ultimately failed. This resulted in a sharp devaluation of the currency against the German mark, creating significant economic turmoil within the UK and affecting the public's confidence in the government’s economic policies.
The pound was forced out of the ERM.
Interest rates peaked at 15% to defend the pound.
George Soros famously profited from speculating.
Event shifted UK monetary policy towards independence.
What Happened?
On this day, the British pound experienced an unprecedented collapse as currency speculators launched a massive attack against it, betting that the pound would ultimately have to devalue. The UK was then part of the European Exchange Rate Mechanism (ERM), aimed at stabilizing exchange rates among EU countries. However, the pound’s position in the ERM was increasingly seen as unsustainable due to the UK’s economic conditions, including high inflation and low interest rates compared to Germany. As speculators such as George Soros poured billions into short-selling the pound, the UK government was forced to take drastic measures, including raising interest rates from 10% to 12% and later to 15% in an attempt to defend the currency’s value. Despite these efforts, the market was unyielding, and soon the British government conceded defeat, pulling the pound out of the ERM, leading to a rapid devaluation against the German mark and heightened financial instability.
Why Does it Matter?
This incident underscored the vulnerability of national currencies to speculative attacks and highlighted the challenges of maintaining fixed exchange rates in the context of differing national economic conditions. It brought about a profound shift in UK economic policy, prompting a reevaluation of the country's monetary strategy and an eventual shift towards a more independent approach, paving the way for the UK's later decision not to adopt the euro.