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Black Wednesday Summary Questions

Black Wednesday (16 September 1992) is easily the most interesting and relevant story that illustrates the principles of fixed exchange rate systems.

If you can explain what happened to the British Government on this day, you will have a very good handle on exchange rates.

These questions are to compliment the 1997 BBC1 Documentary: Black Wednesday. This video is 49 minutes long and available here: Black Wednesday Video

Before you begin:

  1. Explain why it is essential for two countries to have similar interest rates if they are to have fixed exchange rates against each other.

Key point: The ERM established that the fixed exchange rate would be 2.95 Deutschmarks to the Pound.

  1. Explain why Britain’s membership in the ERM meant British businesses struggled to sell their goods abroad.

  2. Explain why membership in the ERM would be a way of establishing Britain as a low inflation economy.

  3. Use a supply and demand diagram to explain why traders buying Deutschmarks (and selling pounds) would have caused the pound to depreciate.

  4. What happened to Norman Lamont in Bath? What did he try to convince the Germans to do? Did it work?

  5. What was the effect of the newspaper story that contained the interview with Helmut Schlesinger?

Black Wednesday: 16 September 1992

  1. Why was it a gamble to hold onto pounds when there were rumours that the pound would devalue?

  2. Explain George Soros’ strategy to make money on the chance that the pound would devalue.

  3. Explain what the Bank of England did to fight the ‘waves of selling.’ Why was this so expensive?

  4. Why would putting up the interest rates (from 10% to 12%) help ease the pressure on the pound?

  5. What was the value of the Bank of England’s foreign currency reserves? How much was it spending per hour to defend the pound?

  6. ‘A further interest rate rise would be disastrous for the economy.’ Why?

  7. When John Major raised interest rates a second time, what did he raise them to?

  8. Did Helmut Kohl support John Major when Major asked for support?

  9. ‘At 4pm, the Bank of England stopped supporting the pound.’ How did the markets know that the government had decided to suspend membership in the ERM?

You don’t need to watch after 38:30; the rest of this programme deals with the political impact of this crisis.

Extra credit: who is the first person to walk in front of the cameras at point 42:00?

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