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 some examples of fiduciary duty?

    Understand what it means to be a fiduciary, under what circumstances fiduciary duties arise and some common examples of fiduciary ...
  2. What impact does inflation have on the time value of money?

    Understand the impact that inflation has on the time value of money. Learn what you can do to mitigate the effects of inflation ...
  3. How are Rupert Murdoch's holdings distributed?

    Learn more about Rupert Murdoch's holdings and how he built his media empire around the world. Find out which popular brands ...
  4. How did Bernard Baruch attain his wealth?

    Learn how Bernard Baruch made his fortune, what advice he gave to aspiring market speculators and what makes him different ...
RELATED TERMS
  1. Warren Buffett

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

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

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

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

    A production and management philosophy that considers any part ...
  6. Nelson Peltz

    One of the most successful activist investors in the financial ...

You May Also Like

Related Articles
  1. Professionals

    Top Places to Work for Financial Advisors

  2. Stock Analysis

    What Makes Goldman Sachs a Good Bet?

  3. Mutual Funds & ETFs

    Invesco PowerShares: Joining Indexing, ...

  4. Entrepreneurship

    Why did Howard Schultz leave Starbucks, ...

  5. Fundamental Analysis

    How does Tim Cook's vision for Apple ...

Trading Center