Britain’s Black Wednesday

Britain’s experience shows the risks of clinging to monetary commitments without the strength to back them up. For countries facing slow growth while negotiating trade demands from abroad, the episode stands as a cautionary tale.

Roh Jung-tae

The author is a writer and senior fellow at the Institute for Social and Economic Research.

On Sept. 15, 1992, Britain came under attack. George Soros, the hedge fund investor, directed his Quantum Fund to unload $10 billion worth of British pounds. Once Soros moved, other funds followed. By the end of the day, more than $110 billion worth of pounds had been pushed into the market.

At the time, Britain and other European countries had joined the European Exchange Rate Mechanism (ERM), a system designed to stabilize currencies in preparation for monetary union. Under the rules, the pound could only fluctuate within a 6 percent band against the German mark.

Hungarian-born US investor and philanthropist George Soros answers to questions after delivering a speech on the sidelines of the World Economic Forum (WEF) annual meeting in Davos on May 24, 2022. [AFP/YONHAP]

The problem had begun in 1990, when a newly unified Germany decided to exchange East German marks for West German marks at a one-to-one rate. That policy flooded the economy with excess currency, creating fears of inflation. To contain price growth, the Bundesbank raised interest rates 10 times in two years.

Germany’s rate hikes forced other ERM members to follow, including Britain. Higher rates pushed the British economy into a deeper downturn. Unemployment climbed, growth faltered, and hedge funds began betting heavily against the pound.

Prime Minister John Major then made what proved to be a disastrous decision. He announced that Britain would use its foreign reserves to defend the pound’s exchange rate. The move backfired. Once Soros and other funds doubled down, the Bank of England exhausted its defenses within a single day.

On Sept. 16, 1992, Britain was forced to withdraw from the ERM — the day is remembered as Black Wednesday. Soros made an estimated $1 billion profit. Britain, meanwhile, lost £3.3 billion ($4.5 million) in the failed defense of its currency.

Analysts later noted that Britain might have survived had its underlying economy been stronger. Without solid growth, however, the country had little choice but to concede. The attempt to maintain credibility in the currency system came at a heavy cost.

For economies with weak fundamentals, the lesson of Black Wednesday remains relevant. Britain’s experience shows the risks of clinging to monetary commitments without the strength to back them up. For countries facing slow growth while negotiating trade demands from abroad, the episode stands as a cautionary tale.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.