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Black Wednesday Essay

792 words - 4 pages

From the section above, the European Exchange Rate Mechanism was created in 1979. But, up until October of 1990, Britain had refused to join the ERM. The two officials at the time John Major and Douglas Hurd convinced the government to sign up for the ERM, introducing the pound sterling to the ERM for the first time. By joining the ERM, the exchange rate between Britain's pound sterling and other member’s currency would not fluctuate more than 6%. The British Government followed economic and monetary policies to ensure that the fluctuation rate was maintained (Black Wednesday - The Prelude - Encyclopedia II).
Chancellor Geoffrey Howe and his successor Nigel Lawson were both advocates of a fixed exchange rate, both admiring the record of low inflation that Germany maintained and their management of the Bundesbank and the strength of the Deutsche Mark. The Britain treasury had a policy to shadow the Deutsche Mark.
There was huge controversy for the government officials involved in this potential adoption in the ERM with the debate between Margaret Thatcher's economic advisor, Alan Walters, and Lawson, had come to a presuppose like state, when Walters stated that the Exchange Rate Mechanism was "half baked" (Kaletsky). All this partisan bickering and endless debate led to Lawson resigning as chancellor to be replaced by John Major (Kaletsky).
The two government officials John Major and Douglas Hurd had been able to force Margaret Thatcher to sign up Britain to the ERM in October of 1990, effectively ensuring that the British Government would follow an economic and monetary policy that would prevent the exchange rate between the pound and other member currencies from fluctuating by more than 6%. The pound entered the mechanism at 2.95 Deutschmarks to the pound. Hence, if the exchange rate ever neared the bottom of its permitted range, 2.778 marks, the government would be obliged to intervene.
The year 1990 set the stage for a “perfect storm” of economic events to collide with each other to put pressure upon Britain’s economic system, High German interest rates, set by the Bundesbank to avoid inflationary effects related to German re-unification, caused significant stress across the whole of the ERM. Issues of national reputation and central bankers stubborn inability to realign exchange rates within the ERM...

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