Black Wednesday And Its Impact

Question 1

What was the exchange rate mechanism (ERM)

Answer 1

-set up 1979 aiming stabilise exchange rates between different currencies in EEC by limiting how much their value could change

Question 2

When did Br join and how did this impact the pound

Answer 2

-joined Oct 1990
-value of pound tied to value of other European currencies e.g. DM to provide currency stability + predictability

Question 3

Why did this lead to a run on the pound in 1992

Answer 3

-pound tied to value of Gr currency the DM
-Gr economy much stronger than Br + pound struggled keep in like leading to run on the pound

Question 4

What was a run on the pound

Answer 4

-money markets bought foreign currencies as investment + sold to make profit
-investors believed pound overvalued so rapidly sold to avoid losses
-money markets flooded with pounds making them cheaper devaluing currency

Question 5

How did the Bank of England try to avoid run on pound

Answer 5

-increased interest rates to 12% then 15%
-bought sterling on the foreign exchanges

Question 6

What was Br eventually forced to do

Answer 6

-forced leave ERM + devalue pound
-this became known as black Wednesday

Question 7

What was the impact of leaving the ERM

Answer 7

-badly affect gov economic credibility
-approval ratings dropped in polls
-critics called it ‘the beginning of the end’ + Lamont the Chancellor resigned 1993 following declaring would never leave ERM

Question 8

What was the impact on major

Answer 8

-personal authority badly weakened when fiercely criticised by newspapers
-lab party ahead in polls