How Did George Soros Break the Bank of England?

In Britain, Black Wednesday, which occurred on September 16, 1992, is now known as the day when speculators "broke the pound." This euphemism is used to describe the moment in time where market forces coalesced to force the British government to exit the European Exchange Rate Mechanism (ERM) by removing its currency from that agreement. Joining the ERM was part of Britain's effort to help the unification of the European economies. However, it soon became clear that Britain could not adhere to the agreed-upon terms. As a result, its currency, the Great British pound (GBP), was removed from the agreement.

Although it stood apart from European currencies, the British pound had shadowed the German Deutschmark (DEM) in the period leading up to the 1990s. This left Britain with low interest rates and high inflation. Britain entered the ERM with hopes of keeping its currency above 2.7 DEM to GBP. This was fundamentally unsound, primarily because Britain's inflation rate was many times that of Germany's.

The existing problems—stemming from the pound's inclusion into the ERM—were compounded by significant economic strain resulting from Germany's reunification. This, in turn, put pressure on the Deutschmark as the core currency for the ERM.

The drive for European unification also hit bumps along the road during the passage of the Maastricht Treaty, which was meant to create the euro. Speculators began scrutinizing the ERM, which resulted in questions about how long fixed exchange rates could fight natural market forces.

Spotting the writing on the wall, Britain upped its interest rates to the teens in an effort to attract more people to the pound. However, speculators such as George Soros began to heavily short the currency. When it became clear that it was losing billions of pounds, as a result of this attempt to artificially buoy its currency to higher levels, the British government gave in and withdrew from the ERM

While this was a difficult decision to undertake, the pound came back stronger because the British economy strengthened once inflation levels were controlled and high interest rates were reduced. For his part in "enforcing" market dynamics, Soros pocketed $1 billion on the deal and cemented his reputation as the premier currency speculator in the world.