Black Wednesday refers to September 16, 1992, when a collapse in the pound sterling forced Britain to withdraw from the European Exchange Rate Mechanism (ERM). The UK was forced out of the ERM because it was unable to prevent the value of the pound from falling below the lower limit specified by the ERM. The European ERM was introduced in the late 1970s to stabilize European currencies in preparation for the Economic and Monetary Union and the introduction of the euro. Countries seeking to replace their currency with the euro were required to keep the value of their currency within a certain range for several years.
Breaking Down Black Wednesday
Before Black Wednesday, the UK had been in the European ERM for two years. But the pound had been depreciating, and the British government took steps to bolster its value, including raising interest rates and authorizing the use of foreign currency reserves to purchase pounds. Believing that the UK would not be able to prop up the pound, George Soros had been accumulating a large short position against the currency.
The day before Black Wednesday, Soros' Quantum Fund began selling large amounts of pounds on the market, causing the price to plummet further. Although the Bank of England took steps to stem the sell-off, it was unsuccessful and later declared on Black Wednesday that the UK would leave the European ERM. Because of Black Wednesday, George Soros is known for "breaking the Bank of England." It has been reported that he made a $1 billion profit that day, which cemented his reputation as a great forex trader.
Although Black Wednesday is described as a disaster by many, some believe it helped prepare the way for an economic revival. Some believe that economic policies enacted in the UK in the aftermath of that day contributed to an improvement in economic growth, lower unemployment, and less inflation.