Shortly after leaving university, I joined the treasury. This was in the early 1990s, when the government still controlled all the levers of British economic policy, including interest rates. One afternoon, one of Norman Lamont’s young advisers—it might even have been David Cameron—stuck his head around our office door and announced: “They’ve done it!” The Conservative government had ordered a cut in interest rates.
Monetary policy then was down to the whims of the chancellor. Everyone knew it was determined as much by the political calendar as by the economic cycle. This approach came unstuck on 16th September 1992. On that day, Lamont put up interest rates twice, to 15 per cent, to try to keep the pound in the European exchange rate mechanism (ERM). But traders continued to sell sterling in the belief that they would soon buy it back more cheaply. Within hours, sterling tumbled through the ERM’s floor of DM2.778.
By then I was working at a bank in the City. Walking down Cannon Street that September evening—”Black Wednesday”—you could feel the gloom. Britain, economically weak after a recession, had been humbled by mighty Germany. Helmut Schlesinger, president of the Bundesbank, whose policies sealed sterling’s fate, looked on intractably from Frankfurt, while in an office near Wall Street George Soros counted the £3.3bn the government had wasted defending the ERM link.
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