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ALTIF Transcripts: Remembering Black Wednesday, Part Two

In the second of our three-part series on Black Wednesday, the sterling crisis that drove Britain out of Europe’s Exchange Rate Mechanism in the autumn of 1992, Neil and Jonathan look back on the events of the day itself with Sir Paul Tucker, who watched the mounting chaos from the Bank of England.

Presented by Jonathan Ford and Neil Collins.

With Sir Paul Tucker.

Produced and edited by Nick for Podot.

Additional editing by Ewan Cameron.

Sponsored by Briefcase.News

Hosted on Acast. See acast.com/privacy for more information.

Jonathan Ford 00:06

Hello, and welcome to a long time in finance with Jonathan Ford and Neil Collins, in partnership with briefcase dot news, the service that brings intelligent curation and analysis to your media monitoring. Welcome back to the second episode of our three part series on Black Wednesday, that event in September of 1992, 30 years ago, when Britain crashed, the pound crashed out of the currency system it was a part of and, and I think huge, huge changes took place both politically and economically.

Neil Collins 00:43
Yeah, we think they’re seismic and the consequences resonate to this day.

Jonathan Ford 00:48

Yeah. So in episode one, we dealt with the run-up and why the UK got itself into such a unfortunate place, tied itself into the Exchange Rate Mechanism at a high rate and made it central to its economic strategy. It’s caught out by German reunification, which put German interest rates up and as the EDRM demanded that we follow interest rates set in Germany, we ended up deepening our recession. And lastly, you know, growing uncertainty about the European situation means currencies were increasingly subject to speculative attacks. And meanwhile, all the time John Major is going around saying we will never devalue and he also wont raise interest rates, so the pound in the autumn of 1992 is sliding hideously towards its floor which is 6% below the 295 central rate, which is about 277. In the last episode, we ended up with the Bath meeting, which is where Norman Lamont hosts a load of European finance ministers and essentially they spend a lot of time talking about German interest rates, upset the German Bundesbank Chairman Helmut Schlesinger by demanding he cuts rates and then he blows a raspberry and leaves the meeting, then, of course, the markets swing into action, having sharpened their knives, and the first in line under the attack is not actually the pound. It’s the Italian lira, which is… the Italians are even bigger, I think in an even bigger pickle in the UK. And the lira comes under huge pressure.

Neil Collins 02:21

Yes, it certainly did. Well, because it was the weakest in the block, even worse than Sterling

Jonathan Ford 02:27

It was the first antelope in front of the leopard. But it turned out to be a hungry leopard. That’s the trouble, unfortunately. So we’re now sort of in the end game and the 10th of September. This is literally within a week of Black Wednesday, John Major who’s gone to Scotland to stay with the queen at Balmoral decides in one of his fits of political genius to give a speech in Glasgow where he basically responds to the increasing turbulence in the markets by saying to those traders ‘do your worst!’

John Major (Excerpt) 02:40

I was under no illusions when I took Britain into the Exchange Rate Mechanism. I said at the time that membership was no soft option, the soft option, the devalue option, the inflationary option, in my judgement, that would be a betrayal of our future at this moment. And I tell you, categorically, that is not the government’s policy.

Jonathan Ford 03:21

I just want to pause for a second. John Major, I mean, he amazingly is the one who doesn’t get chiboshed by this policy. But you have to ask yourself, here we are, you’re in the middle of a fully-fledged Sterling crisis. His own chancellor has been coming and yanking at his sleeve all summer suggesting that they might need to change policy, you know, back to our runaway locomotives and looming buffers and frogs in boiling water. Yet here he is, he’s still making these ever madder speeches saying I’m basically never going to change, doesn’t matter what you do. Do you think he’s just totally delusional?

Neil Collins 04:00

I think he just believed it and was not prepared to consider anything else. And he believed that he could by sheer force of oratory, something for which he was not particularly well renowned, actually hold up the tides.

Jonathan Ford 04:15

So he’s King Canute, basically, well.

Neil Collins 04:20

No King Canute knew what he was doing…King Canute knew it wouldn’t happen. And he thought he could actually hold up the tide. And having been Chancellor, you would have thought that he would have some understanding of how markets worked and the power that they exercise in an open economy.

Jonathan Ford 04:37

I think it’s a very, very central political skill to be able to see when the game is up. And when you basically need to change tack rather than pouring your troops into a kind of losing situation. The more I look at this, the more I think Major completely fails that test here.

Neil Collins 04:56

I don’t think there’s any question that he failed.

Jonathan Ford 04:59

No, no… I’m talking about in character terms, I think he shows himself to be a weak and inflexible politician. He’s not reading the room as people would say these days. Anyway, so the following day after the speech that John Major gives the Friday the 11th of September, and the markets turn up the heat further, the lira slumps, and the Bank of Italy has to intervene. Now, the interesting thing here is under the rules of the ERM, the Bundesbank has to join in, it has to defend a fellow currency. But at the end of the day, on the Friday, Schlesinger, just concludes its a complete waste of money, and says to the Italians, I’m not going to throw away any more German taxpayer’s money, you’re on your own. So Italy is basically totally screwed at this point. And they realise that they’ve got to devalue. Also, logically, as we know, once the lira is out of the way, and the speculators and traders have made their profits on the devalued lira, they’re going to be rubbing their hands and looking where to go next.

Neil Collins 06:02

And of course, the market in Sterling was much bigger than that in the Lira. So the opportunity of making money is almost an order of magnitude greater.

Jonathan Ford 06:11

So over the weekend… actually, the Germans finally do realise that they have to offer something, they can’t just basically watch the ERM collapse without making some sort of concession. So the German government sits down with Bundesbank, and they hash out a deal. And the deal is, which they offer both the Italians and the Brits, is they say, we will cut interest rates, if you agree to devalue inside ERM. And the Italians take the deal. They say thanks very much we’ll devalue on Monday morning and the British once again, this is Major, this is entirely Major! Basically say no way we’re going to tough it out. What do you make of that ?

Neil Collins 06:50

I’m afraid that there is no defence for this because you cannot defy reality indefinitely, right?

Jonathan Ford 06:58

And reality is now knocking at the door. So on the 14th of September, which is the Monday the Italians open the day by devaluing by 7%. And the Germans cut interest rates, but only by a measly quarter of a percentage point.

Neil Collins 07:10
That will make all the difference…

Jonathan Ford 07:13

So which is the worst possible situation because basically, it’s basically game over anyway, and they all stsart selling the pound. At this point, that kind of crisis becomes fairly surreal. It’s that sort of sense that all of a sudden, there’s nobody really at home and everything is falling apart, but no one is in charge anymore. This becomes a very recurring theme through the rest of Black Wednesday. This idea that events, these enormous events are happening and nobody kind of is at home to answer the telephone. But basically, the first very surreal thing that happens is it’s the day before Black Wednesday, the Italians are devalued, the pound has been punished in the exchange markets. And the one thing which is absolutely vital, is that the Germans don’t do anything to upset the applecart and Schlesinger has to keep his mouth shut, but for some reason best known to himself, he decides on that day to give an interview to a journalist at Handelsblatt called Werner Benkhoff who here steps out of the shadows into the spotlight (inaudible) any time in his career, I think. And he asked lessons during this interview about Italy and Schlesinger, in a kind of Tourette’s moment, he volunteers that the realignment of the ERM, he uses that word, hasn’t gone far enough. And the obvious implication of this is that the British should have devalued the pound.

Neil Collins 08:41

It’s hardly an implication, it’s an invitation.

Jonathan Ford 08:43

So Bankhoff then obviously writes it up and goes back to the Bundesbank for comment and the Bundesbank try to walk back what Schlesinger has said, and Schlesinger thing is I said it all off the record. And Bankhoff says, but I’ve got the tapes. So this is sort of turning into a total kind of carry on situation. Anyway, in the afternoon, that story starts to filter back through the wires to London. And Paul Tucker is asked to call up Schlesinger and ask him to correct the record, because the British rightly see this as a total disaster if this story comes out, and is not denied. Basically, they’re screwed. And this is what Tucker says about his attempt to he has to call him up because the governor of the Bank of England is too busy to speak to Schlesinger.

Paul Tucker (Excerpt) 09:37

Can’t remember exactly what terms but you know, in careful terms, agreed with the government and the governor and Schlesinger’s his response was along the lines (and I may not be getting this exactly right); ‘You’re asking me to, to kind of correct the statement that’s out on Reuters and I don’t know how to do that.’ I thought this was an episode, if I may offer a kind of personal view, and I know this is a period that reflects incredibly poorly on him, on Schlesinger as a man, what he could have said, and I think I’m much better thing; ‘well Mr. Tucker can you relate to Robin your Governor that I’m just not prepared to do that because of a reason.

Jonathan Ford 10:12
What you can see from this is Schlesinger is, I think, Schlesinger is basically just clearly bored of being told what to do by people in London.

Neil Collins 10:20

I’m not sure bored is the word. Exasperated?

Jonathan Ford 10:24

Exasperated, exasperated. So basically, the upshot, of course is the record is not corrected. And in later life, Schlesinger seems to say afterwards that he couldn’t deny it, because he actually said it. He could say it was off the record. But he couldn’t – he wasn’t willing to say that he hadn’t said what he said. So he’s quite an honourable man, really? Yeah, well, if an unhelpful one. And the story is then published the next day, and the next day is Black Wednesday. Of course, the famous person who breaks the Bank of England on Black Wednesday is George Soros. Yes. And it’s still a bit of a mystery how much money he really makes. He claims that he had a position of $10 billion. And because Sterling fell 10%, he made about a billion.

Neil Collins 11:17

A lot of people join, joined in the fun. And actually, as far as the UK is concerned, it was the biggest single transfer of wealth from the public sector to the private sector in a single day, which we’d ever see, because lots of people were joining in, it wasn’t just a few, well-heeled speculators. Indeed, it was a dramatic increase in private sector wealth.

Jonathan Ford 11:45

And I think, I think you can see that because the previous day in the evening, when the Handelsblatt story is sort of swimming around in an alarming way, the Treasury and the Bank of England sit down and say, well, we really ought to prepare to have this sort of fighting fund to intervene if basically, the shit hits the fan tomorrow morning. The number they come up with to earmark for this fighting fund is a billion pounds. And on Black Wednesday, they run through their billion pounds in about half an hour.

Neil Collins 12:14
To be fair, it would seem quite a large sum of time.

Jonathan Ford 12:17

And they end up spending 16 billion defending the pound and losing well, people think about three to four, I think was a number that was only released about five or six years after the event.

Neil Collins 12:29
Yeah, I mean, obviously they only lost the difference between the rate at which they bought it and the rate at which they sold it.

Jonathan Ford 12:36

Anyway, so they’re intervening madly all morning. And by lunchtime, it’s clear, it’s not going to work. The bank basically say, Eddie George, who is in charge of the market says to Norman Lamont; intervention isn’t going to stop this. You need to raise interest rates, if you’ve got any hope of holding the thing. The government decides finally, totally belatedly, to raise interest rates by 2%, which it does at lunchtime, or about half past 11 in the morning. And Major doesn’t just do it with Norman Lamont. He calls in three senior cabinet ministers who will be a feature of this whole story throughout the afternoon. Douglas Hurd is the Foreign Secretary, Michael Heseltine, who is the Business Secretary and Ken Clark, who is Home Secretary. Basically, they’re told broadly, to dip their hands in the blood. And basically, they all agree – we’ll put up interest rates to 12% from 10%.

Neil Collins 13:29

So politically, that was quite an astute thing for Major to do, and probably didn’t feel he had much choice. But it was quite clear what was happening. And if he and Lamont took responsibility for it on their own, I would think he would have been out within weeks.

Jonathan Ford 13:47

Yes. So he’s, I think you’re absolutely right. I think at this stage Major’s now, he’s realised his policy has gone up in smoke. And he’s all about ‘how do I save myself from being the guy who made this mess and single handedly’. So all of a sudden multiple hands have been called. But it’s interesting also, why Hezeltine, and Clark and Herd are so enthusiastic about going down with the ship. They raise interest rates, and it’s basically still not working. And I think we talked to Paul Tucker, about the Bank of England and it’s about now I think that they decide this is really a failed experiment, the markets aren’t going to buy any interest rate rises. And this is what he says, about this point in the day.

Paul Tucker (Excerpt) 14:31

It was quite tense. By far the most important thing that day, other than the kind of tactical iterations, was that at some point in the day, Eddie said this isn’t going to work, and it needs to be stopped. Now. We need to pull out now, my perception was that he remained upset about this for a long time and felt that the country had wasted money.

Jonathan Ford 14:51

But Major despite all of this going on in the Bank losing confidence, Major still doesn’t get it and around 2:30, there’s a further interest rate rise to 15%. So they’ve now gone up five percentage points in a day. And basically, the pound does a little kind of tiny twitch and then falls right back to the floor of the ERM. And they still at the floor at this point, because they’re still buying everything at the bottom of the (inaudible). So one question which comes up here is, would anything have worked at this stage? And we asked Paul Tucker, that and this was his theory about the fact that the only thing that might have worked at this juncture was a sudden kind of Dawn Raid on the speculators and raising interest rates to crazy level and starving them out. This is what he had to say;

Paul Tucker (Excerpt) 15:39

What you do, if you want to break a speculator is you raise your interest rate, absolutely on one step, and without notice, to 100%. And if that’s not enough, you raise it to 200%. Because they’re shorting your currency, and they’ve got to borrow it to deliver into their short position, they’ve got transactions. And so what you want to make them have to pay an awful lot of money to borrow the currency, they’re borrowing your currency in order to sell it outright. And you need to make the first part of that transaction cost them so much money, that they’re not going to be in net profit when they sold it. This is textbook stuff.

Jonathan Ford 16:16
What do you make of that?

Neil Collins 16:20

I think it might have bought a day or two? I mean, it was it would have been so absurd, that the idea that 100% interest rates, whatever, could be sustained within the economy, if it filtered into the economy, rather than just into the the markets of the day, it would have been absolutely catastrophic. Because it would essentially meant that you couldn’t borrow.

Jonathan Ford 16:46

So you’re back, you’re gambling, that you’re bankrupting the speculators before they bankrupt the economy.

Neil Collins 16:51

Exactly, exactly. And it would only work if the speculative attack had not been justified, and there was some extraneous reason for it happening in the first place, it might work. If it actually reflects the reality in the marketplace, then all you can do is buy a little bit of time at a huge cost.

Jonathan Ford 17:13

I think that’s right, I think it’s game over and I didn’t see any merit at that point in doing.. but we now come… so we’re now mid-afternoon, we come to the second kind of really surreal moment in this crisis, where there’s a sense that there’s nobody at home. So Major is not actually in number 10 at this point. John Major has moved out of number 10, because it’s been rocketed by the IRA a few months before in a kind of sneak attack, and he is living in Admiralty house, and from contemporaneous accounts, he is sort of almost sort of, you know, living out of a suitcase. And there isn’t much there. So all these senior cabinet ministers are sitting in the middle of this massive market crisis where their government is basically sinking by the hour. And they’re totally cut off from what’s going on around them. They don’t have any information. So Ken Clark, one of the ministers there, says at one point, you know, we don’t know what’s going on. So they start hunting around Admiralty house for a Transistor radio. So they listen to the news to find out what’s going on in the real world. But in the late afternoon, they finally decide I think that the game is pretty much up and Lamont is at this point is very clearly saying we must devalue, probably suspend our membership to the ERM.

Neil Collins 18:31

Suspend, I think, before we completely run out of reserves,

Jonathan Ford 18:35

exactly. So we can basically let the pan fall. But they don’t know how to announce it. There’s a kind of debate, because there’s this weird committee, the monetary committee in Brussels, they have to notify. And they have to tell them they’re leaving and agree. And they can’t summon this committee for hours. So they kind of get into a terrible (inaudible). We can’t announce we’re leaving, because then we’ll be asked questions and we hadn’t left! So in the end, they kind of do nothing. And after about four o’clock, they stopped buying Sterling, but they just don’t tell the market that they’ve given up. So they haven’t left the ERM, but effectively they have, because they’re no longer defending the pound.

Neil Collins 19:13

Presumably they had somehow told the bank to stop buying.

Jonathan Ford 19:17

Yes. So the bank stops buying it about four ,under instruction, under instruction from the government, from the Chancellor. But they feel they can’t announce it as if the world hasn’t sort of figured out what’s going on, because they have to tell the monetary bureaucrats in Brussels first, and they say oh, well, let’s get the chairman of the Conservative Party, Norman Fowler to go on the six o’clock news. And just say he’d heard that something was up but he couldn’t really tell them anymore at this stage. And finally, of course, they realise actually, this is total madness. We’ve got to say something so they duly send out Norman Lamont for his famous statement on the steps outside the Treasury, there is a very famous photograph of him standing. And if you look closely, somebody has very thoughtfully covered up, the drain hole cover just in front of him with with a file on the ground, they knew that the camera cameraman would take pictures and everyone would say, Lamont going down the drain.

Neil Collins 20:21

I think that man should have been promoted.

Jonathan Ford 20:25

I think he was called David Cameron. And so the day ends in utter chaos, I think we can both agree that, you know, it’s impossible to look at what happened on Black Wednesday and not feel that the public is left with a spectacle of incredible chaos. It’s not just that this policy has failed. It’s basically that it’s just ended in the cloud.

Neil Collins 20:40

They had no idea what they were doing.

Jonathan Ford 20:45

So that really brings us to the end of Black Wednesday, the events of the day, where we are now is Britain’s out of the ERM, but we’ve suspended our membership. We’ve not critically decided to leave and the public doesn’t really know whether that departure is permanent or temporary. The pound has dropped way below its floor within the ERM of about 277 and has settled around 250 which is a big devaluation, although it corrects a bit subsequently, the second interest rate rise is cancelled, but rates are still two percentage points higher than they were the day before, which is a bit of a shock if you have a mortgage. And the Cabinet has given an indelible sense that it’s run by a bunch of headless chickens. So it’s not a good situation I think we can say.

Neil Collins 21:38

  think they got their just desserts in the press the next day. They struggled to rewrite the story as the day went by.

Jonathan Ford 21:47

Anyway, so we’ll come back with the sum of the aftermath and what it really meant, but it’s worth just saying the following day a journalist at the Financial Times, journalist Philip Stevens, who’s a political correspondent to the FT in those days, goes round see Norman Lamont at the Treasury. He’s rather surprised to be invited to come round. He phones up and says, can I come, and Norman Lamont says fine. And he asks Norman Lamont you know, what do you feel about this terrible calamity. Lamont is rather surprising by saying, I haven’t slept better in months. And he says it’s the first time I’ve been able to stop worrying about the value of the pound. Which of course, in a way, it becomes his political epitaph.

Neil Collins 22:29

But Lamont went to see Max Hastings, who was then Editor of The Telegraph. And he explained what was happening. And Max said to him, who’s going to be Chancellor in this new regime? And Lamont puffed himself up and said, well, of course I am. I am the chancellor. And Max said to him, well, you’re a bloody fool. If you resign now, you’ll be back in the cabinet in six months time. If you hang on, you’ll be out. And Max says in his book, we’ve never exchanged a civil word since.

Jonathan Ford 23:02
It sounds like he wasn’t exchanging much of a civil word then. Anyway, next time we’ll be back to look at the aftermath of Black Wednesday.

Neil Collins 23:14

That was a long time in finance with Jonathan Ford and Neil Collins. Editing and Production is by Nick Hilton. And our sponsorship partner is briefcase dot news. Join us again next week.

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