Blackwell Reference Online

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The day Britain was forced to withdraw from the Exchange Rate Mechanism (ERM). Margaret thatcher had agreed to enter only in 1990, when John major was Chancellor of the Exchequer, at a rate of 2.95 Deutschmarks (DM) to the pound. Many economists considered that Britain had entered at too high a rate. As production fell and unemployment rose there were demands for a lower exchange rate and an expansionary policy but these were rejected by the government. Turbulence in the financial markets was caused by Germany's high interest rates, which were designed to control inflation after the reunification of germany . Other countries felt bound to follow the German lead (Britain needed to borrow to cover its large balance of payments deficit), though high interest rates inhibited growth. On 13 September Italy devalued the lira and withdrew from the ERM, in spite of the Bundesbank spending DM 24 billion in a week to protect the lira. Speculators then turned on the pound, which had fallen to DM 2.79, on 16 September. The government spent £10 billion of its currency reserves to maintain the value of the pound and in increasing desperation raised interest rates twice in the day: first from 10 per cent to 12 per cent and then to 15 per cent. All was in vain, so the Chancellor Norman Lamont had shamefacedly to announce that Britain was withdrawing from the ERM and that the pound would be ... log in or subscribe to read full text