This is a blog in response to one I have just read.
In British politics and economics, BLACK WEDNESDAY, refers to 16th September 1992.
When the conservative government of the day was forced to withdraw the Pound from the European Exchange Rate Mechanism.(ERM) due to pressure by currancy speculators- most notably George Soros who made over $I billion from this speculation.
In 1997 the UK Treasury estimated the cost of Black Wednesday at £3.4 billion.
The trading losses in August ans September were estimated at £800m, but the main loss to taxpayers arose because the devaluation could have made them a profit.
The papers show that if the government had maintained $24bn foreign currancy reserves and the pound had fallen by the same amount, the UK would have made a £2.4bn profit on sterling's devaluation.
The papers also show that the treasury spent £27bn of reserves in propping up the pound: the Treasury calculates the ultimate loss was only £3.4bn.
When the RRM was set up in 1979, Britain declined to join. This was a controversial decision as the Chancellor of the Exchequer Geoffrey Howe, was a convinced pro-european.
His successor Nigel Lawson was also a believer in a fixed exchange rate, he admired the low inflationary record of Germany, attributing it ot the strength of the Deutsche Mark.
Although Britain had not joined the ERM, for several years the Treasury followed a semi-official policy of "shadowing" the Deutsche Mark.
At the same time, and in addition to open market trading of currencies, the Treasury's amin tool in attempting to control the exchange rate was through the setting of the value of Sterling. As a consequence, interest rates were set with consideration of the domestic demand and inflation environment as only a secondary consideration. This led to a number of years of lower interest rates than would have otherwise been the case, and hence to rising inflation.
Matters came to a ahead in a clash between Margarets Thatcher's economic advisor, Alan Walters and Nigel Lawson, when Walters claimed that the Exchange Rate M echanism was "half baked." This led to Nigel Lawson resigning as chancellor to be replaced by John Major.
John Major, who, with 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 an economic and monetary policy that would prevent the exchange rate between the pound and other member currencies from fluctuating by more than 6%. The pound entered the mechanism at 2.95 Deutsche Mark to the pound.Hence, if the exchange rate ever neared ythe bottom of it's permitted range, 2.778 marks, the government would be obliged to intervene.
With UK inflation at three times the rate of Germany's interest rates at 15% and the "Lawson Boom" about to bust, the conditions for joining the ERM were not favourable at that time.
From the begining of the 1990's, high German interest rates, set by Bundesbank to counteract inflationary effects related to excess expenditure on German reunification, caused significant stress across the whole of the ERM.
The UK and Italy had additional difficulties with their double deficits. Issues of national prestige and the commitment to a doctrine that the fixing of exchange rates within the ERM was a pathway to a single European currency inhibited the adjustment of exchange rates.
In the wake of the rejection of the Maastricht Treaty by the Danish electorate in a referendum in the spring of 1992, those ERM currencies that were trading close to the bottom of their ERM bands came under speculative attack in the foreign exchange markets by currency speculators.
On September 16th the British government announced a rise in the base interest rate from an already high 10% to 12% in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15%, dealers kept selling pounds.
Major currency traders like Goldman Sachs knew what the British government was trying to do and knew that the international money markets would eventually prevail against the efforts to prop up the pound.
This amounted to a major transfer of wealth from the government to the speculators, both individuals and investment banks.
By 19.00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12%.
Just another example as to why no-one should vote Conservative in the up coming elections.