Economists don’t usually attach much importance to dates, but this week marks the 30th anniversary of one of the most important days in recent economic history, September 16, 1992. On that fateful Wednesday, the pound sterling was ejected from the European Exchange Rate Mechanism (ERM). ), which linked the pound to other European currencies, with enormous economic and political consequences, some of which we still live with today.

The events of that day were dramatic. Interest rates rose twice, first from 10% to 12%, then from 12% to 15%. Across the country, people panicked. Many mortgage holders, dismayed to realize they would not be able to maintain their mortgage payments, posted the keys to their properties on the doorsteps of their mortgage lenders.

With the second interest rate hike, the stock market soared. Market operators understood that the game was won. We should leave the ERM. The result would be that not only would the pound fall, but we would be able to operate with much lower interest rates. So it turned out. Even 15% interest rates and massive official purchases of sterling could not sustain the exchange rate. In the evening we were out.

Almost anyone who lived through that day could tell a personal story of misfortune – including me.

At the time, I was still a young city economist working for HSBC. The previous August, after studying the events of 1931 when sterling withdrew from the gold standard, I came to the conclusion that we would be forced out of the ERM.

I wrote an article to circulate among our institutional clients which claimed that interest rates would be raised to 15% in an attempt to stay in the ERM but we would be kicked out and interest rates would then fall to something like 5%. Moreover, far from being catastrophic, it would lead to a strong economic recovery accompanied by low inflation.

It was radical economic research and my employer was reluctant to publish it immediately. I had to go on vacation abroad and I didn’t have time to talk about it with the key people in the bank before leaving. So I decided to postpone the issue until I got back from vacation, hoping to persuade the bank that it would be acceptable to post.

I came back on September 16. I turned on the radio to hear that we had indeed been kicked out of the ERM after interest rates were raised to 15%. I was drained. What would surely have been the biggest prognostic blow of my career had been missed.

And other than a few people inside the bank, no one would know how justified my bold forecast had been. These events were a determining influence in convincing me, a few years later, to create my own independent consulting firm, Capital Economics.

Nevertheless, there was an immediate silver lining. In stages, interest rates were indeed reduced drastically. Over the next few months, in research notes and journals, on radio and television, I assiduously promoted my message that, contrary to establishment pessimism, our exit from the MCE would not result in the inflation and recession, but rather a strong economic recovery, accompanied by low inflation.

This is indeed what happened. Eventually, what had first been dubbed “Black Wednesday”, became known as “Golden Wednesday”. And I was recognized as one of the few to have foreseen this.

Many features of today’s economic and political reality have their origins on this day. The monetary authorities were traumatized by what had happened. Having previously lost faith in the money supply as a means of controlling inflation, and no longer able to live with an exchange rate target, they sought a new anchor for nominal values. What they aimed for, wisely in my view, was a target for the rate of inflation itself. With some later modifications, this system continues to this day.

In addition, to maintain the credibility of policy in financial markets, the government has given a more independent voice to the Bank of England. Full independence came a few years later with the arrival of the Labor government in 1997.

The events of that day also had a profound effect in making public opinion more Eurosceptic. The close involvement of the United Kingdom in this European project had brought us to the brink of disaster.

Despite all the previous official protestations about the importance of belonging, once outside we did perfectly well. Indeed, the following years were among the most successful in modern times. This whole episode was an important factor in persuading most members of the public against our adherence to the ERM’s successor, the euro.

I suspect that the events of that day and subsequent years also had a major effect on the popular estimate of economic forecasters’ capacity. The establishment pundits were spectacularly mistaken.

This was to echo much later with the so-called “Project Fear” documents released by the Treasury before the EU referendum in 2016. These foresaw dire consequences if we dared vote to leave the EU. Some people may have been intimidated into voting Remain, but I suspect the overwhelming reaction was one of disbelief and even amused disdain – influenced by memories of what happened on “Black Wednesday” and after. .

But the most important consequence of that fateful day was that the Conservatives lost their reputation for economic competence. Although the next five years brought steady economic growth, the Conservatives lost the 1997 election by a landslide.

The coming months will bring great adversity and it will feel like a succession of Black Wednesdays. But good things can come out of bad. Governments should never spoil a good crisis. Now is the time to chart the right course for politics – and stick to it.


Roger Bootle is President of Capital Economics