It Was 30 Years Ago Today, George Soros Taught the Bank to Play

Happy Black Wednesday Friday

Margaret Thatcher always used to say that “you can’t buck the markets.” Having in 1990 been dragged very much against her will into joining the exchange rate mechanism of the European Monetary System (in which other EU currencies traded in a fixed band around the deutsche mark in what was intended as a precursor to the euro), she appeared to gain vindication 30 years ago today, when the UK government abandoned its attempt to keep the pound within the mechanism and let it float — which in practice meant that it let the currency collapse.

The events of “Black Wednesday” were a classic example of how economic actors can inadvertently display their weakness when they try to show strength. The pound had been overvalued when it entered the mechanism. Then the mark strengthened still further after the Federal Reserve in the US started to cut rates in an attempt to stimulate the economy. That briefly pushed the pound above $2.00, an infeasible level. The chart shows what happened next: