George Soros is a name that many associate with political controversy, but he’s also one of the greatest investors ever. Let’s dive into an intriguing chapter of his life that’s often overshadowed by his political antics—how he almost broke the Bank of England and made a cool billion dollars in the process.
After WWII, European nations banded together to form a tightly knit union, believing that economic interdependence would prevent future wars. Before the Euro came about, Europe had another way to manage its currencies—the Exchange Rate Mechanism, or ERM. Introduced in 1979, the ERM aimed to link European currencies at fixed rates, reducing exchange rate fluctuations and boosting cross-border business.
While this sounded good, it made national banks vulnerable. Countries had to constantly keep their exchange rates stable, buying and selling currencies to keep things balanced. However, each country had its unique economic factors to juggle, like interest rates and inflation, which made things tricky. The UK initially stayed out of the ERM, thanks to Thatcher’s skepticism, but eventually joined in 1990 as the British economy was tanking.
Once Britain was in the ERM, it faced a catch-22. The UK was in a recession and needed to cut interest rates to revive the economy, but doing so would devalue the pound too much, forcing it out of the ERM. Despite efforts to prop up the pound by buying millions of pounds in the market, the currency weakened.
Enter George Soros. Known for his sharp market predictions, Soros saw the inevitable—Britain would have to devalue the pound. Beginning in August 1992, he started borrowing pounds to sell on the foreign exchange market, betting the currency would drop. By September, he had a massive position against the pound, waiting for the right moment to strike.
On September 16, the President of the Bundesbank made a vague comment implying that some currencies might come under pressure. Soros jumped on this, borrowing and selling pounds aggressively. By the time Britain woke up, Soros had sold $10 billion worth of pounds, causing chaos.
Despite desperate attempts by the Bank of England to buy back pounds and even increasing interest rates, the effort failed. On September 17, Britain announced it was suspending its ERM membership, leading to a sharp fall in the pound’s value.
In the following days, the pound dropped by 15% against the German mark and 25% against the US dollar. Soros made a tidy profit of $1 billion, while the cost to British taxpayers was over £3 billion. Ironically, freed from the ERM, the Bank of England could control the pound again, cutting interest rates and eventually restoring economic growth.
Some even call that day “White Wednesday,” as it marked the start of a long period of economic expansion for the UK. So, while Soros pocketed a hefty sum, he might have inadvertently helped Britain in the long run.
This tale of financial intrigue showcases Soros’s shrewdness and the complexities of international finance, reminding us that sometimes, market villains can become unexpected heroes.