Black Wednesday: How Soros Made $1 Billion Against the Bank of England

September 16, 1992 began with the British government promising, publicly and repeatedly, that the pound would not be devalued. It ended with Chancellor Norman Lamont standing outside the Treasury at 7:30 pm announcing that Britain was withdrawing from the European Exchange Rate Mechanism.

The ERM was a precursor to the euro: member currencies were required to trade within narrow bands against each other, anchored to the German mark. Britain had joined in October 1990 at a rate of 2.95 marks per pound. The problem was that Britain's economy in 1992 was in recession, while reunification was forcing West Germany to maintain high interest rates to prevent overheating. To defend the pound's peg, Britain had to match German rates — at exactly the moment its economy needed cheaper money.

George Soros's Quantum Fund had spent weeks building a short position in sterling, borrowing and selling pounds on the expectation that a devaluation was inevitable. By September, the position reached approximately $10 billion. Soros was not alone — other hedge funds and corporate treasuries made similar bets — but his fund's position was the largest single wager.

The Bank of England spent the day buying pounds and raising interest rates. The base rate was raised from 10% to 12% that morning, then to 15% by mid-afternoon. Neither move stanched the selling. The UK government had roughly $44 billion in reserves; the speculators had access to far more capital through borrowing.

Soros netted approximately $1 billion on the trade. The pound's exit from the ERM, despite the humiliation, coincided with the start of a sustained British economic recovery — lower rates were suddenly possible.