Government documents provide new insight into day that defined British politics for a generation
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The pile of dry Whitehall memorandums released yesterday provoked an inevitable flurry of interest around the corridors of Westminster.

The 13-year-old documents, composed by Treasury mandarins and produced yesterday under the Freedom of Information Act, provide a fresh insight into a few hours which proved to be a defining moment in modern British politics.

Yet the ageing files would never be able to convey the scale of the human drama of that day: Black Wednesday, 16 September 1992. Within a few short hours the economy had been plunged into crisis and the Tories were dealt a crippling blow from which they are still struggling to recover.

The cost of Black Wednesday to the Conservative Party has been incalculable. It destroyed the Tories' claims to competence on the economy for a generation, and led to a collapse in the Tories' poll ratings from which they have never recovered.

In one remarkable day, interest rates were raised twice to 15 per cent in a vain attempt to prop up the value of sterling. The fight was given up when a whey-faced Norman Lamont, the Chancellor, announced on the evening news broadcasts that Britain was withdrawing from the Exchange Rate Mechanism, the system in which the pound was pegged to other EU currencies.

The trigger for the run on the pound was an interview given by Helmut Schlesinger, the President of the German Bundesbank, suggesting that the pound was too high. This, a Treasury official recalled, "sealed the pound's fate". Mr Major's government - and in particular its Chancellor, Mr Lamont - had been humiliated.

The dramatic day began at 8.50am when, in the secrecy of the Treasury, Mr Lamont called the Prime Minister to suggest that interest rates should be increased, but Mr Major was "not keen to do so". After a sustained run on sterling, Mr Major relented and a 2 per cent increase in interest rates was announced in the city at 11 am.

Mr Lamont recalled: "I went into the outer office in my room at the Treasury and looked at the Reuters screen, waiting for the announcement to be made. When it was, the pound did not move at all. From that moment, I knew the game was up."

He said he "felt like a TV surgeon in Casualty watching a heart monitor and realising that the patient was dead". There were strong rumours around Whitehall that Mr Major had a nervous breakdown, and could not be contacted by fellow ministers. Mr Lamont says the rumours are untrue. However, he does say Mr Major "seemed unwilling to face up to the issue" and was too slow to take the difficult decisions that were needed.

Mr Lamont urged Mr Major to withdraw Britain from the ERM and avoid wasting more public money in buying sterling. He was furious when Mr Major refused to take his Chancellor's advice, and instead called a meeting of key Cabinet members to decide on what to do next. It had to be held in Admiralty House as Number 10 was being rebuilt following the IRA mortar-bomb attack the year before.

Douglas Hurd, the Foreign Secretary, Kenneth Clarke, then Home Secretary, and Michael Heseltine, the Deputy Prime Minister, were summoned to the meeting with the Chancellor and the Prime Minister. Mr Clarke said that Admiralty House lacked the modern technology to keep them informed. They were also against withdrawing from the ERM. Mr Lamont told them every minute they delayed a decision was "costing us millions".

Overriding Mr Lamont's views, they agreed a further 3 per cent increase in interest rates to 15 per cent. According to Mr Clarke's account, when he got into his official car to go back to the Home Office, his driver told him that he would have to return for another meeting before the day was out. The driver had been listening to the radio, and the pound was still falling.

When they were later recalled to a second crisis meeting at Admiralty House, Mr Clarke says, he and Mr Heseltine decided that they had to find out what was going on in the markets by ordering the civil servants to bring in a radio. Both Mr Major and Mr Lamont deny that they had no information about the markets - Eddie George, the Governor of the Bank of England, had a pocket Reuters monitor updating the value of sterling every minute.

Mr Lamont recalled: "At one point in the meeting, the PM referred to the humiliation of withdrawing from the ERM and said that there would be demands for my resignation, adding `and my own as well'."

Mr Major yesterday revealed for the first time that he had penned a letter of resignation to the Queen because of the disaster, but was dissuaded from quitting by a "very senior colleague".

The humiliation of the Major Government was so complete that when Downing Street was asked to put up a minister for a Panorama special about Black Wednesday, a few days later, neither Mr Major nor Mr Lamont would go on the programme. Mr Hurd and Mr Heseltine declined. In spite of being the Home Secretary, Mr Clarke agreed to go on to defend the chaos in the Government, after a briefing with his officials at the Pimlico Tandoori.

Only six months earlier, Mr Major had unexpectedly led the Tories to a fourth successive election victory against Neil Kinnock's Labour Party. He had persuaded Margaret Thatcher against her instincts to take Britain into the Exchange Rate Mechanism in October 1990 when he was Chancellor.

The Treasury papers released under the Freedom of Information Act confirm that Lady Thatcher demanded a cut of 1 per cent in the interest rate as a quid pro-quo for her agreement. Remarkably, the most damaging extracts were to have been redacted - excised - from the documents, but these were leaked to the BBC yesterday.

An analysis of the ERM debacle written for the Major government by Stephen Davies, a Treasury official, in 1993 suggested that the ERM policy was undermined from the start by the tensions between Lady Thatcher and her Chancellor, Mr Major. "The open warfare between the Chancellor and the Prime Minister makes it especially difficult for the markets to decide what the objectives of the Government were."

Lady Thatcher had refused to allow Mr Major's predecessor, Nigel Lawson, to take sterling into the ERM. Lord Lawson resigned later over a row about the influence of her economic adviser, Alan Walters. The leaked Treasury extracts make it clear that her change of heart when Mr Major became Chancellor reflected her diminishing power.

"Mrs Thatcher's removal of her veto on ERM membership was determined by her own increasing political weakness," wrote Mr Davies. "October 1990 was clearly not an optimal time for the UK to join the ERM."

Mr Lamont, was a known eurosceptic, and famously later revealed he had been "singing in the bath'' at Britain's withdrawal from the ERM. He reveals in his memoirs, In Office, that in the run-up to the crisis, he wanted to pull Britain out of the ERM, but Mr Major refused. He could have resigned as Chancellor, but decided he would support the policy, only until the end of 1992. "That was a fateful decision," he wrote.

In a further leaked extract, Sir Nigel Wicks, the second permanent secretary at the Treasury, criticised ministers in his response to the Davies memorandum, saying their domestic political handling of ERM entry provided "an unhelpful and distracting backcloth for our preparations." He added: "Having so convinced ourselves that ERM membership was a good thing we found it difficult to contemplate the possibility of being outside it. All this was strongly underpinned by the politics of Maastricht."

Mr Lamont's habit of speaking his mind also drew criticism. "Quite apart from the election, the position that `unemployment is a price worth paying' is one that ministers find it difficult to defend,'' said an official.

The Chancellor's "undiplomatic handling of (Helmut) Schlesinger" , the President of the German Bundesbank, was also a contributory factor, possibly leading to the remarks that caused the crisis.

The papers show that the Government clearly blamed Britain's European partners for adding to the crisis. One note reveals that Britain was spying on the French and discovered in advance that the French were about to announce an increase in interest rates, which would put more pressure on sterling.

Kate Jenkins, from the Information Rights Unit at the Treasury, last week asked for this reference to be redacted, saying: "It is not clear that the information source for this was. The source could be covert and still be in use."

The papers reveal that the Major government resisted an increase in interest rates before the 2001 election for political reasons, even though all the other ERM members had raised theirs.

The Davies memorandum says: "Clearly an interest rate increase would have set off a wave of domestic protests about the damage being caused by ERM membership and especially if the political fall-out had seemed to increase the likelihood of a Conservative defeat at the general election, sterling's position could have been undermined rather than reinforced."

Sterling survived, although it was weak, in the run-up to the general election. It may come as an embarrassment to Gordon Brown, then shadow Chancellor in Mr Kinnock's Shadow Cabinet, that the Treasury felt his support for the Tory policy helped to sustain the pound.

"Clearly the shadow Chancellor's statements committing a Labour government to maintaining the existing parity were a great help," said the Davies memorandum.

Some within the Labour Party say that Mr Brown's support for the ERM may in part have handed the leadership to Tony Blair.

One document revealed that the Governor of the Bundesbank, Karl-Otto Pohl, told the British ambassador in Bonn in 1989 that he wished Britain had joined the ERM "two or three years previously".

The ERM was popularly seen as a club in which the other members would come to the aid of any one that got into trouble. However, on 16 September, Mr Major and Mr Lamont could not call on help from the other members of the ERM. There were claims that Britain had joined at the wrong rate, and that sterling was too high, but that is rejected, even with the benefit of hindsight, by the Treasury officials who carried out a post-mortem examination of the disaster for the Major government in the years that followed.

One of the papers laments the failure of the Treasury before the crisis to convince the markets that devaluation was not on the agenda.

The Wicks memorandum, written on 5 January 1994, questioned the Major government's handling of the crisis. "I think it is fair to conclude that we should have recognised earlier and more clearly the possibility of facing a clear choice between raising interest rates or leaving the mechanism.

"Although we did some contingency planning during the summer of 1992, we didn't really address this brutal choice or ask ourselves what in the end was the crucial question - how much would we be prepared to `spend' via intervention before throwing in the towel?"

The Scandinavians and the French learned from Britain's misfortune by deciding in advance how far they would go to defend their currencies. "I do not suggest any of this would have made much difference to the way things panned out up to the morning of 16 September," Sir Nigel added.

However, the only winner that day was George Soros, the Hungarian-born global financier, who made an estimated $1bn profit by borrowing heavily to bet that sterling would be devalued.


As chancellor, Norman Lamont, pictured left facing the press on Black Wednesday, raised interest rates and authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets. But he failed to prop up the diving pound and the UK was forced to withdraw from the monetary system it had joined two years earlier. He was replaced by Kenneth Clarke eight months later.


Black Wednesday was a colossal failure for John Major, who as chancellor had taken sterling into the ERM in 1990, overriding the misgivings of Margaret Thatcher in the last month of her premiership. Entry did not provide economic stability, as hoped, and it prolonged the recession. Aside from the boost Black Wednesday gave to Euroscepticism, it fatally undermined Mr Major's personal credibility, his government, and the Tories' reputation for competent economic management.


The governor of the Bank of England's reputation for calm professionalism was shredded by Black Wednesday. As an advocate of entry into the ERM, he took much of the blame.


"The Germans have totally undermined the pound," John Major raged on Black Wednesday. The man he blamed was Helmut Schlesinger, president of Germany's Bundesbank, whose loose talk the day before, casting doubt on the ability of the ERM to stay together, precipitated the final attack that sank the pound. In truth his comments acted only as a catalyst for the markets' loss of faith in the British government's ability to maintain the pound's minimum ERM rate.

Oliver Duff