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Black Wednesday

In British politics and economics, Black Wednesday refers to September 16, 1992 when the government was forced to withdraw the pound[?] from the Exchange Rate Mechanism[?] (ERM) by currency speculators[?]. The event is estimated to have cost the people of Britain 4 billion in reserves, spent trying to prop up the pound.

When the Exchange Rate Mechanism[?] had been set up in 1979 Britain declined to join. This was controversial, with the Chancellor of the Exchequer Geoffrey Howe[?] who despite his econmically 'dry' credentials was a convinced pro-European. Another chancellor, Nigel Lawson, was also a believer in a fixed exchange rate, although he was a mild Eurosceptic he admired the low inflationary record of Germany attributing it to the strength of the Deutsche Mark and the management of the Bundesbank[?]. The Treasury followed a semi-official policy of Shadowing the Deutsche Mark. As the exchange rate was largely kept in place by the use of interest rates, then interest rates were set without the domestic economy in mind. This led to a couple of years of lower interest rates than would have otherwise been in place and so rising inflation.

The pressure came to a head in a clash between Margaret Thatcher's economic advisor, Alan Walters[?] and Lawson - when Walter's claimed that the Exchange Rate Mechanism was "half baked". This led to Lawson resigning as chancellor to be replaced by his old protege John Major.

John Major and Douglas Hurd[?], the then Foreign Secretary, pressured Margaret Thatcher to sign Britain up to the ERM in October 1990, effectively guaranteeing that the British Government would follow a economic and monetary[?] policy that would prevent the exchange rate between the pound and other member currenices from fluctuating by more than 6%. The pound entered the mechanism at 2.95 Deutschmarks to the pound, thus if the exchange rate ever neared the bottom of its permitted range, 2.778 marks, the government would be obliged to intervene. High German interest rates, set by the Bundesbank[?] to avoid inflationary effects related to German re-unification, caused the pound to fall perilously close to the bottom of the band. Currency speculators, such as George Soros, sold the pound heavily in early September knowing that the British Government would be forced to buy them. On the sixteenth the government announced a rise in the base rate[?] from 10% to 12% in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise rates again to 15%, dealers kept selling pounds. By 7pm that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would revert to 10%.

The effect of the high German interest rates, and so the high British interest rates, had been arguably to put Britain into recession as large numbers of businesses failed and the housing market crashed.

In the ensuing months, the pound fell to as low as 2.20 Deutschmarks to the pound. However over the past decade the currency has steadily strengthened (at one point reaching 3.20 DM), and commentators believe that 'Black' Wednesday has proved to be good for the British economy in the long-term - as interest rates were allowed to find their natural level. However the reputation of the Conservatives for competent handling of the economy was shattered. Many commentators believe that that event is a key reason for the party's continued relative unpopularity.

Technically any country wishing to join the single european currency would have to join an ERM-like system tagging their current currency to the euro. However given the notority of the system within the British public at large, many believe this will not be a pre-requisite should Britain ever wish to join.

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