A:

In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually break it, but they forced the British government to pull it from the European Exchange Rate Mechanism (ERM). Joining the ERM was part of Britain's effort to help along the unification of the European economies. However, in the imperialistic style of old, she had tried to stack the deck.

Although it stood apart from European currencies, the British pound had shadowed the German mark in the period leading up to the 1990s. Unfortunately, the desire to "keep up with the Joneses" left Britain with low interest rates and high inflation. Britain entered the ERM with the express desire to keep its currency above 2.7 marks to the pound. This was fundamentally unsound because Britain's inflation rate was many times that of Germany's. (Keep reading about this in Stop Keeping Up With The Joneses - They're Broke.)

Compounding the underlying problems inherent in the pound's inclusion into the ERM was the economic strain of reunification that Germany found itself under, which put pressure on the mark as the core currency for the ERM. The drive for European unification also hit bumps during the passage of the Maastricht Treaty, which was meant to bring about the euro. Speculators began to eye the ERM and wondered how long fixed exchange rates could fight natural market forces. Spotting the writing on the wall, Britain upped its interest rates to the teens to attract people to the pound, but speculators, George Soros among them, began heavy shorting of the currency.

The British government gave in and withdrew from the ERM as it became clear that it was losing billions trying to buoy its currency artificially. Although it was a bitter pill to swallow, the pound came back stronger because the excess interest and high inflation were forced out of the British economy following the beating. Soros pocketed $1 billion on the deal and cemented his reputation as the premier currency speculator in the world.

For more on George Soros, see The 5 Most Feared Figures In Finance.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. What are the biggest risks associated with covered interest arbitrage?

    Covered interest arbitrage is when an investor buys into foreign currency that has an interest rate that will yield the investor ... Read Full Answer >>
  2. How does price elasticity affect my stock purchase decisions?

    The person who handles a corporation's short-term investments varies depending on the size of the company, the corporate ... Read Full Answer >>
  3. Why are the tangible assets of a company important to investors?

    A financial forecast is an estimation or projection of likely future income or revenue and expenses, while a financial plan ... Read Full Answer >>
  4. Which financial instruments have par values?

    Short-term investments can include a number of possible investment vehicles. Marketable equity securities are just one of ... Read Full Answer >>
  5. What are some examples of fiduciary duty?

    Under the U.S. legal system, a fiduciary duty is the legal term describing the relationship between two parties that obligates ... Read Full Answer >>
  6. What impact does inflation have on the time value of money?

    The impact that inflation has on the time value of money is that inflation decreases the value of a dollar over time. The ... Read Full Answer >>
Related Articles
  1. Real Estate

    Best 3 Mortgage Calculator Websites for Canadian Residents

    Understand the key features of Canadian mortgages, and discover a few of the best online mortgage calculators for Canadian home loans.
  2. Active Trading Fundamentals

    This Is How 3 Investors Made a Billion Dollars

    Read about three major hedge fund managers who are worth at least $1 billion and who made large amounts of money on a single trade idea.
  3. Investing

    George Soros: 3 Best Investments Ever

    Learn about some of the most successful trades famed investor George Soros has made during his career, including a billion dollar profit against the pound.
  4. Economics

    How Warren Buffett Made Berkshire A Winner

    Berkshire Fine Spinning Associated and Hathaway Manufacturing Company merged in 1955 to form Berkshire Hathaway.
  5. Investing News

    Building a Case for the Bulls: 3 Opinions

    These three big names are bullish on the economy. Are there good times ahead?
  6. Fundamental Analysis

    Gloom and Doom for Global Markets in 2016?

    Learn about the volatility in global markets during the beginning of 2016. See why famous investors are saying some economies could see recessions.
  7. Mutual Funds & ETFs

    Mutual Fund Fact Sheets: What You Need to Know

    Novice or experienced investors should read mutual fund sheets. Fees and explanations will be discussed providing valuable information to the investor.
  8. Investing News

    Feeling Bearish? If So, You're in Good Company

    These investing practitioners and pundits earned notoriety for their accuracy; they're sending a dire warning about the global economy.
  9. Investing News

    The 5 Biggest Asset Managers at the End of 2015 (BLK)

    Learn about the worldwide asset managers that prospered in 2015 despite a year of very poor performance in stocks, bonds and commodities.
  10. Stock Analysis

    How BlackRock Became a Mammoth Asset Manager

    The rise and continued growth of BlackRock, the world's largest investment firm.
RELATED TERMS
  1. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
  2. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
  3. Steve Cohen

    A trading magnate also referred to as the Hedge Fund King and ...
  4. David Tepper

    A legendary investor who specializes in distressed debt and manages ...
  5. David Einhorn

    Known for his short selling strategy, activist investor David ...
  6. Lean Enterprise

    A production and management philosophy that considers any part ...
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center