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Last Updated: Wednesday, 9 February 2005, 12:12 GMT
Q&A: The ERM and Black Wednesday
Former Prime Minister John Major
John Major saw the pound slide out of the Exchange Rate Mechanism
The 1992 withdrawal of the UK from the European Exchange Rate mechanism, designed as a forerunner to a European political and currency union, sent shockwaves around the continent.

The John Major government attempted unsuccessfully to prevent a devaluation of the pound. The currency was eventually forced out of the ERM on a day known as Black Wednesday.

What exactly was Black Wednesday?

Black Wednesday, 16 September 1992, was the day Britain crashed out of the ERM - a system for tying the pound and other currencies' values to that of the German mark, and was a precursor to the creation of the single European currency.

Why is it in the news again?

There is a row over a request from the Financial Times, using the Freedom of Information Act, for the release of Treasury papers assessing what went wrong 13 years ago.

Prime Minister at the time, John Major, and Chancellor Norman Lamont, have denied a report they have blocked the request of the papers.

According to an email accidentally sent to the BBC there are differences of opinion in the Treasury about how much paperwork to release.

Were there not frantic government attempts to keep us in the ERM?

Prime Minister John Major and Chancellor Norman Lamont raised interest rates during the day from 10% to 12% to 15% and authorised the spending of billions of pounds in a doomed effort to keep the pound within the range allowed by ERM.

The UK's two year membership of ERM was suspended and the second interest rate reversed. The UK never rejoined the ERM.

Why had the UK joined in the first place?

By hitching the pound to the deutschmark, it was hoped to get a German-style economy, with stability and low inflation.

Although the move did give us low inflation, it did not provide a stable economy.

Following German interest rates, combined with the fact Germany needed tighter monetary policy than Britain at the time, meant the ERM prolonged a painful recession in the UK.

What happened after we left the ERM?

Things turned out better than might have been expected. The pound fell, but then rose again. And inflation has been rather benign since we left.

The ERM may have helped set a low-inflation foundation for the subsequent decade, however the ERM did prolong the British slump, by preventing UK rates from being cut to the levels justified by the UK economy.

How is the incident viewed now?

At the time it was a severe blow to the Conservatives' reputation for sound economic management.

However, then-chancellor, Norman Lamont, has said the cost of the ERM has been exaggerated, and the costs were outstripped by the gains as Black Wednesday helped to 'kill off inflation'.

Did anyone benefit from the events of September, 1992?

George Soros, the Hungarian-born global financier is reputed to have made a $1bn profit at Britain's expense.

He had borrowed heavily to bet that sterling would be devalued. Mr Soros showed the amounts of money that could be made by well capitalised, risk-taking traders.

What influence has Black Wednesday had?

It has generally made the UK a bit more sceptical about hitching itself to external currency systems. Pro-and anti-euro campaigners agree the ERM was a mistake, they do not agree on which route we should now follow, with those opposed in the "no" camp using it as a reason why the UK should not join the euro.

Andrew Marr examines the latest findings

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