Shropshire Star

The day the economy crashed

It was the bombshell that nobody saw coming. Interest rates, already at an eye-watering 10 per cent, shot up by a further five per cent in the space of a few hours.

Published
How the Shropshire Star reported Black Wednesday

People listened in disbelief as they were told their mortgages were about to rocket. The day that began with bright sunshine ended in the most bizarre fashion, with Government officials taping up a drain cover in a vain attempt to prevent embarrassing headlines.

It was also the day that transformed the political landscape for a generation. John Major's Conservative government had been on a role, re-elected with a surprise majority just five months earlier. But the crisis would engulf the rest of his premiership, eventually opening the door to 13 years of Labour rule. And, just as now, it was Europe that was at the heart of the furore.

It was the contentious European Exchange Rate Mechanism (ERM), the forerunner to the single European currency, which was at the root of the crisis.

The mechanism, also known as the "snake" – because it allowed for a little room to "wiggle" – was first introduced by the European Economic Community in 1979. The system was designed to fix the exchange rates of Europe's currencies within narrow bands, and it was the responsibility of individual governments to ensure that their currencies remained within those bands.

Margaret Thatcher was said to be suspicious of the scheme from the start, believing it would inevitably lead to a single currency and a loss of national sovereignty, but in 1990, during the dying days of her premiership, Britain finally signed up. Ironically, Major – who would ultimately be destroyed by the fall-out from the ERM – was the Chancellor of the Exchequer who took Britain in.

Up until that time, the government position had been that Britain would join the ERM "when the time was right", seen by cynics as a euphemism for kicking the the issue into the long grass. And when Thatcher was reluctantly persuaded to sign up to the mechanism in October 1990, the time was definitely not right, but political events had forced her hand.

Major's predecessor as chancellor, Nigel Lawson, had long been in favour of joining the ERM, and it was a major factor in Lawson's resignation in 1989. But as Mrs Thatcher's position became increasingly isolated in cabinet, coupled with rising inflation, the pressure to join increased.

However, Britain joined at a time when the pound was exceptionally strong, giving Major and his successor Norman Lamont little room for manoeuvre.

The problem was exacerbated by the fact that just as Britain was getting to grips with inflation, seeing it fall from seven per cent to 4.3 per cent, the opposite was happening in Germany, forcing the Bundesbank to raise interest rates. This forced the Bank of England to keep the base rate high, despite fears of a looming recession and rising unemployment.

In the weeks up to Black Wednesday, as the pound bumped along the bottom of its permitted levels, rumours were rife about a rift between Major and the more Eurosceptic Lamont. When the Chancellor said Britain was committed to remaining within the ERM on August 26, few believed his heart was truly in it.

It was the then little known currency speculator George Soros who finally killed of Britain's membership of the ERM. On September 15, 1992, his Quantum fund began selling the currency at an alarming rate, believing the exchange rate that Britain had signed up to was unsustainable. Lamont and Robin Leigh-Pemberton, the governor of the Bank of England, tried to prop up sterling by buying the currency, but it was futile as Soros was dumping the pound at faster rate than the Bank of England could buy it.

At 10.30 the following morning, Lamont was forced to accept that his attempt to keep the pound at the permitted level had failed, and announced an emergency two per cent rise in interest rates. But while the news sent shockwaves around the country, the financial markets thought he was bluffing.

By lunchtime, seeing that the pound had failed to rally, Lamont dropped another bombshell, by announcing a second rate rise in the space of a few hours, this time by a further three per cent. The Star reported how "a cry of horror went up from industry chiefs as firms shuddered at the prospect that recovery from recession would now be postponed for many months."

By 7pm, the game was up. While the political fall-out had been huge, even the five per cent in interest rates had failed to shore up the value of the pound. Norman Lamont stood outside the Treasury to announce that Britain's membership of the ERM had been suspended, and that the rises in interest rates he had announced just a few hours earlier would not be implemented.

It was at this time that the assembled photographers attempted to get the beleaguered Chancellor to stand next to a drain. Spotting the ruse, a quick-thinking aide began covering the drain by taping paper over it.

“They are not going to get their 'pound goes down the drain’ picture now,” he was heard to say, triumphantly. They really didn't need to.

It later emerged that Lamont had offered to resign, but his resignation was refused by Major, and the damage to both men would be irreparable, not helped by Lamont's fondness for pithy one-liners. The quiff-haired Scot had a reputation as something of bon-viveur around Westminster, and his sharp wit was popular with journalists. But his jocular responses over the weeks that followed did little to endear him with the wider public over the weeks that followed.

Later that month, at a press conference in the garden of the British embassy in Washington DC, Lamont was asked why he was so cheerful. He replied that it was "a beautiful morning", and that his wife had heard him singing in the bath. His response was not well received. When BBC reporter John Pienaar asked him about his greatest regret, he quoted the singer Edith Piaf: "Je ne regrette rien". Again, his deadpan humour went down well with the assembled journalists, but was perceived as arrogant by the population at large.

Britain's exit from the ERM, and the opportunity to devalue the pound to a more manageable level, actually led to an economic boom, but the damage to Major's government had been done.

While Major would survive as PM until 1997, Lamont quit his government the following year after turning down the post of Environment Secretary. In a withering resignation speech, he accused Major's government of "being in office but not in power". He later accused Major of turning down his resignation after Black Wednesday to deflect attention from his own role in the crisis.

It was a salutary lesson for all concerned, not just about the pitfalls surrounding European economic and political union, but also about how much power governments really held. Major and Lamont may have been elected to run the country, but it was Soros – who made £1 billion during the day – who was really pulling the strings.

None of this would be lost on the tall, thin young man who was observing the drama from the sidelines. Lamont's 26-year-old special advisor, was stood discretely in the shadows as his boss was left to face the music. His name? David Cameron.