On This Day – September 16th

Black Wednesday

On 16 September 1992 the British government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after it was unable to keep the pound above its agreed lower limit in the ERM.

In 1997, the UK Treasury estimated the cost of Black Wednesday at £3.4 billion. In 2005, documents released under the Freedom of Information Act indicated that the actual cost may have been slightly less, £3.3 billion. At that time, the United Kingdom held the Presidency of the European Communities.

The trading losses in August and September were estimated at £800 million, but the main loss to taxpayers arose because devaluation could have made them a profit. The Treasury papers show that if the government had maintained $24 billion foreign currency reserves and the pound had fallen by the same amount, the UK would have made a £2.4 billion profit on the pound sterling's devaluation.

At 10:30 AM on 16 September, the British government announced a rise in the base interest rate from an already high 10 to 12 percent to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 7:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent; however, on the next day the interest rate was back on 10%.

It was later revealed that the decision to withdraw had been agreed at an emergency meeting during the day between Norman Lamont, Prime Minister John Major, Foreign Secretary Douglas Hurd, President of the Board of Trade Michael Heseltine, and Home Secretary Kenneth Clarke (the latter three all being staunch pro-Europeans as well as senior Cabinet Ministers), and that the interest rate hike to 15% had only been a temporary measure to prevent a rout in the pound that afternoon.