How George Soros Broke The Bank Of England On 1992's 'Black Wednesday'

93-year-old George Soros is among the most successful and influential investors of all time, besides being a big name in global philanthropy. But above all, the billionaire is known as the man who broke the Bank of England in 1992.

What Did George Soros Do In 1992?

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George Soros is called the man who broke the UK¡¯s central bank, i.e. the Bank of England, because of his short sale of $10 billion worth of pounds sterling, which made him a profit of $1 billion during the 1992 Black Wednesday UK currency crisis.

His role in the 1992 currency crisis is said to have forced the British government to withdraw from the European exchange rate mechanism (ERM) and devalue its currency, the pound sterling.

This event, which occurred on September 16, 1992, is known as Black Wednesday, and it earned Soros the nickname ¡°the man who broke the Bank of England.¡± Soros currently has a net worth of $6.7 billion (as per Forbes).

Where It All Began

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To stabilise the exchange values of the European currencies and get them ready for the future introduction of a single currency, the Euro, the European Exchange Rate Mechanism, or ERM, was a monetary system set up in 1979.

When the ERM was first established, Britain first turned it down in favour of maintaining an autonomous and flexible monetary policy. However, as part of its commitment to the European integration process, the U.K. agreed to join the ERM in 1990, under the leadership of Prime Minister Margaret Thatcher. By adopting the ERM, Britain anticipated advantages such as reduced interest rates, lower inflation, and a stronger currency. Soros was against Britain joining the ERM.

But there were issues with Britain's choice to join the ERM. As per Investopedia, the goal of Britain when it joined the ERM was to keep its currency above the DEM 2.70 to GBP 1 ratio, but this proved to be virtually impossible. Speculators' scrutiny of the ERM and the inclusion of the pound added to these already existing issues, raising concerns about how long fixed exchange rates might resist the forces of free markets.

The Bank of England increased interest rates into the teens as a response, hoping to entice more investors to purchase the pound. However, investors like George Soros started to take significant short positions in the currency because they believed that this monetary intervention was artificial and unsustainable.

For the uninitiated, a short position involves selling an asset with the intention of later purchasing it at a discount and profiting from the action.

When George Soros Put His Bet Against The Pound

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Even though George Soros criticised the Bank of England's policies, he wasn't the only one to place bets against the pound. He initially placed discreet bets against the pound, building up a position of about $1 billion, but he soon started speaking out louder.

In fact, a large number of other speculators and investors recognised that Britain's participation in the ERM was unsustainable and that at some point the country would have to either discount its currency or abandon the system entirely. The most aggressive and significant speculator, though, was Soros. He established a sizable short position on the pound.

George Soros borrowed billions of pounds from numerous banks through his hedge fund, Quantum Fund, which he later exchanged for other currencies.

As a result, there was a tremendous increase in demand for other currencies and a huge supply of pounds, which resulted in a decrease in the market value of the pound. Soros also increased the leverage of his investments by using derivatives like options and futures contracts.

How Britain¡¯s Efforts Failed Amid Soros¡¯ Pressure

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By boosting interest rates and repurchasing pounds from the market, the British government and Bank of England tried to stabilise their currencies. In order to entice investors to purchase pounds and support their exchange rate, they declared on September 16, 1992, that they would increase their interest rates twice, first to 15% and subsequently to 12% from 10%. Additionally, they used a large portion of their foreign exchange reserves to purchase billions of pounds back from speculators like Soros.

These steps, however, weren't sufficient to stave off the intense selling pressure from Soros and other shorts. In addition, the market didn't think that Britain could maintain such high interest rates for very long without hurting its own economy. The low and diminishing foreign exchange reserves of Britain.

Germany was working behind the scenes to support the ERM's efforts to maintain the pound. In mid-September, German officials publicly said that realignment inside the ERM might be conceivable. But Soros made the decision to significantly increase the magnitude of his wager in response to these remarks made by German officials.

Soros increased his position from $1.5 billion in the middle of September to a huge $10 billion.

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When Black Wednesday Happened

On September 16, 1992, the British government realised that it could no longer afford to continue purchasing pounds at the set exchange rate after hours of frantic intervention and bargaining. It made the decision to leave the ERM and allow the pound to trade freely.

The outcome was a 15% decline in value for the pound against the mark and a 25% decline against the dollar. As per Investopedia, George Soros' winning wager against the pound resulted in a profit of nearly $1 billion.

The British government suffered a humiliating setback and a severe blow to its confidence and reputation when it withdrew from the ERM. As a result of the high interest rates, rising inflation, rising unemployment, and reduced public spending, it also contributed to economic turbulence and social unrest in Britain. Additionally, it tarnished the Conservative Party's and British Prime Minister John Major's reputations for poor financial management.

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Also Read:

Why Did George Soros Bet Against The British Pound?

In 1992, Soros made a bet against the pound because he thought that Britain's membership in the ERM was unsustainable and that eventually it would have to abandon the system or weaken its currency.

He sold billions of pounds and purchased other currencies using his Quantum Fund, which increased the demand for other currencies and decreased the value of the pound in the market.

What Effect Did Black Wednesday Have On George Soros?

Due to his involvement in "Black Wednesday," George Soros amassed enormous money as well as notoriety. Some hailed him as a genius and a visionary, while others denounced him as a selfish and vicious speculator who preyed on the flaws in the system and harmed millions of people. He was also charged with having a political agenda because of his outspoken support for European integration and criticism of Britain's refusal to adopt the euro.

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What Effect Did Black Wednesday Have On The UK?

In the near term, Black Wednesday had a terrible influence on the British economy and politics, but in the long run, it may have had a good effect. In the short term, it led to public spending reductions, rising unemployment, an economic recession, and social unrest. The Conservative administration led by Major, who had succeeded Margaret Thatcher in 1990, likewise suffered damage to its credibility and reputation. The government received a lot of criticism for failing to safeguard the pound and mismanaging the economy.

Some of its members, who opposed the Maastricht Treaty and deeper European integration, also rebelled against it. Black Wednesday did, however, ultimately enable Britain to reclaim its monetary autonomy and flexibility. It increased exports and growth while lowering interest rates and inflation. This improved the UK's confidence and competitiveness.

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