Black Wednesday, The Day Soros Broke the Bank of England Background

On 8^th of October 1990, sterlin joined the ERM (Exchange rate mechanism), a system designed to stabilise exchange rates between currencies by setting a central rate and allowing limited fluctuations within a predefined band. The UK pegs to the Deutsche Mark (DM) at DM 2.95/£ with a ±6% band. That put the legal floor near DM 2.773–2.778/£; if the rate hits the floor, authorities must buy pounds and vice versa.  

The timing was unfortunate. While Britain slid into recession in the early 1990s, Germany—newly reunified—was keeping interest rates high to fight inflation. The gap in economic fundamentals made sterling appear overvalued, and markets began to doubt that the UK could defend its peg. 

The crisis gathered pace in mid-September 1992, when Italy devalued the lira and Bundesbank president Helmut Schlesinger suggested that further “realignments” of currencies might be needed. Traders interpreted this as a signal that sterling would be next. 

Soros’s Bet 

George Soros and his team at the Quantum Fund positioned themselves aggressively. Using both spot and forward markets, they borrowed and sold sterling, buying deutsche marks and other currencies in return. Their wager was simple: Britain could not keep the pound above the ERM floor, and once it broke, sterling would plunge. 

Estimates vary, but Soros’s short position may have grown as large as $10 billion. 

Black Wednesday: 16 September 1992

Morning: From the market open, sterling came under relentless selling pressure. The Bank of England began buying billions of pounds to support the rate, reportedly spending around £2 billion per hour at one point. 

11:00 a.m. With interventions failing, the government raised interest rates from 10% to 12%. The idea was to make holding sterling more attractive. Traders, however, were unconvinced. 

Early Afternoon: The selling continued. The Bundesbank was expected to help by buying pounds in exchange for marks, but its support was limited. Confidence in Britain’s defense of sterling waned. 

Mid-Afternoon: In a last-ditch effort, the government announced a further rise to 15%, a dramatic increase meant to shock the market into retreat. Yet the move lacked credibility few believed such high rates could be sustained during a recession. Traders continued to sell. 

Evening (7:40 p.m.): With reserves draining and credibility shattered, Chancellor Norman Lamont announced Britain’s suspension from the ERM. Sterling would be allowed to float, and the promised 15% interest rate was abandoned. 

Aftermath 

The immediate result was a sharp fall in sterling. Soros’s Quantum Fund and other speculators reaped enormous profits, with Soros personally gaining legendary status as “the man who broke the Bank of England.” 

The UK Treasury, meanwhile, was left with heavy losses. While early estimates put the cost as high as £27 billion, later reviews suggested the net loss was closer to £3.3 billion after accounting for subsequent trades. 

Ironically, leaving the ERM helped Britain recover. Freed from defending an overvalued exchange rate, the pound depreciated, exports became more competitive, and the government shifted to an inflation-targeting regime that stabilized the economy through the 1990s. 

Why the Defense Failed 

• Sheer Market Pressure: The scale of selling, including Soros’s positions, dwarfed the Bank of England’s reserves. 

• Lack of Credibility: A pledge of 15% interest rates during a recession was not seen as sustainable. 

• Insufficient External Support: The Bundesbank, preoccupied with domestic inflation, offered little rescue. 

Conclusion 

Black Wednesday was not caused by Soros alone, but his audacious short crystallized the vulnerability of Britain’s policy. The day demonstrated that when market fundamentals and political commitments diverge, even the might of a central bank can be overwhelmed. 

It remains a textbook example of the limits of defending a currency peg, and of the fortunes that can be made by betting against it.