In 1990 Britain joined the ERM (Exchange Rate Mechanism) of the European Union. This meant, in practise, that Britain pegged its currency, sterling (GBP), to a band relative to the Deutschmark, the German currency before the Euro. In 1992, with pressure mounting on sterling, it was becoming increasingly problematic for the government to keep the currency within its band and it had to keep selling foreign currency reserves to buy sterling to support it.
Eventually, on September 16, 1992, after relentless selling of sterling from speculators and others, the government had enough. They allowed the pound to come crashing out of the ERM. Sterling collapsed, speculators who bet against the government made a fortune – at the expense of the Bank of England – and the government under Tory Prime Minister, John Major, were left embarrassed. That day became known as Black Wednesday.
The initial effect was a substantial fall in GBP’s exchange rate, but a secondary, and very important effect, was that it allowed the UK government to cut interest rates, which they continued to do over the next few years.
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