Black Wednesday

Lamont and advisor run up the white flag

I’ve mentioned before that I’ve been jotting down some notes about the 1990s. As today is the twentieth anniversary of Black Wednesday, I thought I’d share what I’ve written about that…

In 1990 the British economy entered a recession caused by the raising of interest rates from 7.38% in May 1988 to 14.88% in October 1989. Thatcher’s government did this in an attempt to dampen the inflation they had unleashed with a pre election spending boom between 1985 and 1988 though they claimed it was that it was to prepare Britain for entry into the Exchange Rate Mechanism.

I remember all this quite well. The area I lived in was full of people with mortgages, people who had embraced the Conservative ethos of the property owning democracy in the 1980s. And now, in the name of European integration, they were being crucified on a cross of ERM by the same Conservative Party. ‘Repossession’ became a dreaded spectre, figures reported on the evening news. In 1989 there 15,800 repossessions, in 1991 there were 75,500 and I remember kids I was at school with losing their homes. As a Northerner down south my dad became something of a local oracle in how to deal with tough times and I remember a couple my mum knew through her babysitting group coming round for tea, digestives, and advice in how to deal with a mortgage they could no longer afford.

John Major possessed impressive reserves of self belief so he might not have been as stunned as everyone else by (his election victory in April 1992). Even so, these reserves were quickly depleted. Within six months of the election the Conservative Party had thrown away its trump card of sound economic management (the playing of which always involved a fair bit of bluff) and handed Labour a poll lead which it wouldn’t lose except briefly for another fifteen years.

The Exchange Rate Mechanism had been forced upon an unwilling but weakened Thatcher a month before she left office by Major, as Chancellor, the rest of the cabinet, and the civil service. It committed Britain to keeping the value of sterling pegged to the value of the deutschemark. When German spending on reunification threatened to stoke inflation the Bundesbank raised interest rates and, thus, the value of the DM. Britain had no choice but to follow.

Two approaches were pursued, both of them disastrous. First, more than £3 billion of Britain’s foreign currency reserves were spent on buying sterling in an effort to push its value up. All that did was make George Soros even richer. This just left interest rates.

Matters came to a head on September 16th 1992. That morning, with the cash for further currency manipulation gone, the government announced a rise in interest rates from 10% to 12%. Still the value of sterling fell. In the afternoon the government was forced to announce a further rise in interest rates to 15%. Even this failed to stop sterling’s slide. In the evening an exhausted looking Chancellor, Norman Lamont, emerged from Number 11 Downing Street with a young policy advisor named David Cameron at his side to announce defeat. Britain would leave the ERM and devalue.

Britain’s failed attempt to stay in had been nothing more than an expensive way to cause more pain for already suffering British businesses and mortgage holders. It became known as Black Wednesday, unless you were a Eurosceptic, in which case it was White Wednesday.

The Major government never recovered. The day after Black Wednesday Major phoned The Sun’s editor Kelvin MacKenzie and begged him to go easy on the government. “John”, MacKenzie is said to have replied, “I’ve got a large bucket of shit lying on my desk and tomorrow morning I’m going to pour it all over your head”

But after Black Wednesday something remarkable happened. With the government’s credibility on monetary policy utterly ruined the Bank of England was put in charge with the goal of using interest rates to control inflation. Worrying about the value of sterling vis a vis other currencies was in the past. And it seemed to work. The economy recovered and embarked on its longest ever boom. Unemployment fell from nearly 3 million in early 1993 to 1.7 million in early 1997. The economy, it seemed, ran better without politicians ‘managing’ it.

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2 thoughts on “Black Wednesday

  1. I think the root causes of the recession were a little different. The recession actually bit when the US savings and loans system collapsed after the stock market crash in 1987. That caused the cost of capital to soar, hence the peak in interest rates. Very much a case of the US sneezing and Europe catching a cold!

    However, you are largely correct about the ERM. The UK had seen strong recovery from around 1981 onwards and there had been a significant increase in asset prices, particularly housing. Sterling appreciated strongly, particularly against other European currencies and as this was – as now – the destination for about half of our exports, Lawson and the Treasury were keen on joining the ERM to head this off.

    In the period after the 1987 crash, he lowered interest rates to try to manage down the value of Sterling against the Deutsche-mark, which was weak due to slow growth and stubbornly high inflation. Those lower interest rates fed the housing bubble until late 1988 (which also saw the end of the tax break known as “double MIRAS”), but this finally burst as the impact of the high interest rates caused by the credit crunch triggered by the US markets drying up, stopped the market dead in its tracks shortly afterwards.

    It was ironic that the end of our membership of the ERM was caused by something of an inverse picture as the newly re-unified Germany saw its economy roaring ahead, the DM appreciating rapidly as we struggled to recover as our economy was hampered with a big hangover of personal debt, largely secured on homes which were worth less than people had paid for them.

    As ever, growth based on debt proved to be illusory!

  2. Black (or White) Wednesday was an eye opener for Gordon Brown. Like so many on the Labour benches he had been even more fervently in favour of membership of the ERM than many Tories. He swiftly and smoothly changed his position after our exit and our balanced, searching, independent media never noticed.

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