HOW GEORGE SORORS MADE $1 BILLION

Leading up to Black Wednesday on September 16, 1992 when the British government was forced out of the European Exchange Rate Mechanism (ERM), there were many issues facing Britain.
The ERM required that Britain maintain the currency from fluctuating more than 6% against other currencies within the ERM.  The problem was that at the time Britain had an inflation rate three times that of Germany.  The ERM was also under attack itself as member countries felt the model would not work in the face of real-world issues. Britain falsely assumed that by joining the ERM inflation would be curbed – after all, Germany was part of the ERM and it had a very low inflation rate at the time.

George Soros saw through this tactic.   He correctly calculated that joining the ERM would do nothing to help the Pound, but would likely only hold the currency at artificially high levels.  With nothing substantial to hold the currency up it would eventually come crashing down as Britain was forced to realize the ERM could not save it from declining.

George Soros and other speculators shorted the Pound leading up to September 16, expecting that policy makers would be unable to support the currency above the fluctuation band it was mandated to adhere to.  In return, the Treasury tried to offset the speculators selling by buying Pounds.  This temporarily allowed the Pound to stay within “the band,” but ultimately even the Treasury couldn’t support the currency.  The Pound began to fall and British government got desperate.

On September 16, the government raised interest rates from 10% to 12% in attempt to bring buying support into the GBP.  The plan didn’t work and the Pound continued to fall. The massive interest rate hike was seen as a desperate attempt, and a very real signal, that the Pound was in big trouble.  More sellers flooded the market and that same day Britain said interest rates were moving up to 15%.  The announcement had little effect and was ultimately was not implemented.  Faced with a falling Pound and being unable to stabilize the currency within the band, Britain was forced to withdraw from the ERM.
In September alone the GBP/USD fell 15%, but the fallout continued.  By December the pair had fallen 25.4% – from a 2.0085 high in September to a 1.4980 low in December, 1992.

The falling Pound ultimately allowed the British economy to rebuild. It is for this reason September 16, 1992 is also called “Golden Wednesday.”