In the 1970s, 80s and 90s, several large European countries decided to peg their currencies together. This was to stabilise the exchange rates and volatility of international payments in the region.
In 1990, the UK joined this system, called the Exchange Rate Mechanism (ERM), and set about to keep the GBP above 2.7 Deutschmarks.
In order to keep prices pegged, governments of these nations need to buy and sell their own or other currencies. This is so that they can adjust the supply/demand in order to get the price they want — the peg price (2.7 DM).
At the time, Britain’s economy was very different to Germany’s, with their inflation being much much higher (a factor in exchange rates).
Many traders reasoned that, because of the economic differences, the rate of 2.7DM was too high.
Traders started selling pounds heavily, with George Soros being the highest profile of these traders.
The Bank of England therefore needs to buy all of the GBP that the traders are selling, in order to keep the peg.
The BoE doesn’t have infinite GBP to sell. In order to buy all of these pounds, the BoE needs to find the money — it’s foreign currency reserves.
On a day in September 1992, after spending around $6billion to keep itself in the ERM, the BoE gave up. GBP fell sharply against other currencies.
Soros made over $1 billion. He became known as ‘the man who broke the Bank of England’.
He said it was ‘inevitable’.