Before listening to the story, look through the following introduction

In British politics and economics, Black Wednesday refers to 16 September 1992 when the Conservative government of the day was forced to withdraw the Pound from the European Exchange Rate Mechanism (ERM) due to pressure by currency speculators − most notably George Soros who made over US$1 billion from this speculation. In 1997 the UK Treasury estimated the cost of Black Wednesday at £3.3 billion.

The trading losses in August and September were estimated at £800m, but the main loss to taxpayers arose because the devaluation could have made them a profit. If the government had maintained $24bn foreign currency reserves and the pound had fallen by the same amount, the UK would have made a £2.4bn profit on sterling's devaluation (Financial Times, 10 February 2005).

On September 16 the British government announced a rise in the base interest rate from an already high 10% to 12% in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15%, dealers kept selling pounds. Major currency traders like Goldman Sachs knew what the British Government was trying to do and knew that the international money markets would eventually prevail against the efforts to prop up the pound. This amounted to a major transfer of wealth from the government to the speculators, both individuals and investment banks.

By 19.00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12%.

B. After-Listening. In pairs, discuss the following issues:

§ the event and its aftermath

§ pseudo-reality vs. true reality clash in the case

§ British authorities’ handling of the situation

§ the role of major currency traders in the world economy.

Assignment 6. Jigsaw Reading. Scan the articles on Black Wednesday and its aftermath and discuss the major issues raised in the texts (group A reads Text 1, groups B, C and D read Texts 2, 3 and 4 respectively).

TEXT 1. Lessons learned on Black Wednesday

By E.Davis

 

Ten years ago the pound was forced out of the Exchange Rate Mechanism, a system for tying its value to that of other European currencies. Black Wednesday, as 16 September 1992 came to be known, provided one of the most memorable failures of post-war British economic policy.

It was the defining failure of John Major's government; it was a huge boost to Euro-scepticism; it made currency traders like George Soros rich. Policy-makers still bear the scars from that day − when speculators sold the pound, detaching it from its link to the deutschmark.

Britain's way of doing things is now respected worldwide − 10 years is obviously a long time in economics

The Exchange Rate Mechanism (ERM) had been the centre-piece of British economic policy − tie the pound to the deutschmark, it was said, and you will get a German-style economy, with stability and low inflation. In the event, the strategy DID give us low inflation, but not a stable economy. The fact that Britain had to follow German interest rates, combined with the fact that Germany needed tighter monetary policy than Britain at the time, meant the ERM prolonged an already painful recession in the UK. And leaving the ERM did not seem to hurt us.

Was it really a disaster?

At the time, it seemed that after Black Wednesday, Britain was sailing into the unknown. How low would the pound go? Would inflation erupt as a lower pound forced import prices to rise? Would people ever have confidence in economic policy again?

It was a nasty taste of a one-size-fits-all interest rate policy

In the event, things turned out rather well. The pound fell, but then rose again. (It is now high − above its target value in the ERM.) Inflation has stayed surprisingly benign since we left. And as for economic policy, Britain's way of doing things is now respected worldwide − 10 years is obviously a long time in economics.