George Soros: a man shrouded in political
controversy and yet one of the most successful investors of all time. While many today are familiar with his political
endeavors, there is a much more interesting story that has in comparison avoided the public
spotlight. In this video, we’re going back to the decade
before the euro, where the wild west of European currencies allowed George Soros to almost
break the Bank of England and to make a billion dollars in the process. This video is brought to you by Skillshare. Watch my classes on how the stock market works
for free by registering with the link in the description. In the aftermath of the Second World War,
the nations of Europe decided that the only way to prevent the same sort of destruction
from ever happening again was by banding together and forming a closely integrated union. The idea was that if the European economies
all depended on each other they’d be unlikely to start another war. The ultimate expression of this integration
is, of course, the Euro, but before the single currency was introduced in 1999, Europe had
another system to manage its currencies. Back in 1979, the countries of the European
Community weren’t ready to give up their national currencies just yet, but they did
agree to link them all together at a fixed rate, effectively removing the exchange rate
fluctuations you usually have to consider when doing business across borders. This new system, known as the Exchange Rate
Mechanism or ERM, sounded good on paper and did make things easier for a lot of people,
but it also made the national banks of these countries very vulnerable. You see, people buy currencies every day in
vast volumes to fund imports or exports and these transactions have a significant effect
on the actual exchange rate you can get from the market. So once a country became a part of the ERM,
it had to constantly monitor the markets and intervene if their exchange rate started to
deviate too much. If too many people were buying, the national
bank would start to sell and if everyone was selling, it would go in to buy. Without going into too much detail, the ERM
was flawed because every country is unique: it has to constantly balance interest rates,
inflation and economic growth, which it cannot do if its currency is artificially chained
to others. Margaret Thatcher, the Prime Minister of the
UK at the time, understood this very well, which is why she opposed it and why Britain
wasn’t a part of the ERM when it first began. However, as the British economy worsened towards
the end of the 1980s, Thatcher’s eurosceptics lost ground to the more pro-European members
of the Conservative Party. By October 1990 Thatcher’s power had diminished
so much that Britain joined the ERM despite her opposition, thanks to the political power
of John Major, the Chancellor of the Exchequer at the time. Less than a month later, Thatcher had resigned
and Major was selected as prime minister, hailing the ERM as his victory. All my adult live I’ve seen British governments
driven off their virtuous pursuit of low inflation by market problems or political problems. I was under no illusions when I took Britain
into the Exchange Rate Mechanism. I said at the time that membership was no
soft option. The soft option, the devaluous option, the
inflationary option, in my judgement that would be a betrayal of our future at this
moment and I tell you categorically: that is not your government’s policy. But while November 1990 might have been the
start of a very successful political career for John Major, it was just the beginning
of Britain’s economic problems. You see, when the UK joined the ERM, it was
already in a recession. Now, when an economy is in a recession the
central bank, in this case the Bank of England wants to cut interest rates to prop things
up, but because of the ERM it could no longer do that. The British pound was already a very weak
currency, with the UK’s inflation rate being three times higher than Germany’s. If the Bank of England cut rates, it would
help the British economy, but it would devalue the pound so much that Britain would have
to leave the ERM, which of course John Major would never allow. And so between 1990 and 1992 the British economy
suffered. Of course, just keeping interest rates high
wasn’t enough to maintain the pound’s value and so throughout these two years the
Bank of England would frequently go to the market and start buying up pounds by the millions,
using up its foreign exchange reserves in the process. Even that didn’t really help though, since
the pound continuously weakened during this time, just barely within the limits of the
ERM. Pretty much every currency speculator understood
that eventually the British pound would have to devalue, but the billion-dollar question
was, when would that happen and the man with the answer was George Soros. He had been running his hedge fund since the
1970s and his specialty was predicting and sometimes forcing the catalysts to big market
events. He knew that almost everyone was ready to
bet against the British pound if only there was some sort of bad news that could trigger
a stampede big enough to overwhelm the Bank of England. Starting in August 1992, Soros and his fund
began building a position against the pound and here’s how he did it. He’d go to a big bank or another hedge fund
and he’d borrow pounds from them, with the promise of repaying them with some interest
on top. Then, he’d go to the foreign exchange market
and he’d sell those borrowed pounds to buy G
You can expect my next video two weeks from now, and until then: stay smart.erman marks
instead, the idea being that when the exchange rate drops he’d be able to buy back those
pounds cheaper, earning the difference as profit. By the end of August Soros had slowly built
up a position equivalent to $1.5 billion dollars against the pound, but the exchange rate had
barely moved. He needed some sort of news to really start
increasing his position and luckily for him, on September 16th the President of the Bundesbank
held a seemingly innocent interview that Soros could nevertheless use. The Bundesbank President said that he “doesn’t
rule out that some currencies might come under pressure,” which in and of itself is a very
vague and unconvincing statement, but Soros decided that it was good enough for him. That same night, while Europe was fast asleep,
Soros called up any international bank or company or really anyone that had British
pounds and he tried to borrow them with great success. By the time the British woke up, Soros had
sold the equivalent of $10 billion worth of pounds on the open market. Unsurprisingly, the Bank of England was in
complete chaos. After an emergency meeting with John Major,
the Chancellor of the Exchequer began a desperate fight. At 8:40 AM on September 17th, he authorized
the purchase of one billion pounds from the market to no effect. By 9 AM he had purchased another two billion
pounds, at which point he dialed John Major again to request permission to increase the
interest rate, which of course because Britain was in a recession would be devastating to
the economy. Initially, John Major refused because he thought
it would be political suicide, but as Soros and the global currency market continued selling
pounds, by 11 AM Major conceded and Britain made a surprise announcement that it was increasing
its interest rates by two percent, which is a very big increase. By the end of the day, Britain had purchased
27 billion pounds and had increased its interest rate a second time to 15%, but just Soros
alone had sold about half as many pounds and by that point the entire world was following
suit. At 7:30 PM the British government accepted
defeat with the following news conference. A unique day in London’s financial markets
ended with the Chancellor announcing that the pound was being suspended from the ERM
and that the second of two dramatic interest rate rises during the day was after all cancelled. Today has been an extremely difficult and
turbulent day. Massive speculative flows continued to disrupt
the functioning of the Exchange Rate Mechanism. As chairman of the Council of European Finance
Ministers I have called a meeting of the Monetary Committee in Brussels urgently tonight to
consider how stability can be restored to the foreign exchange markets. In the meantime, the government has concluded
that Britain’s best interests are served by suspending our membership of the Exchange
Rate Mechanism. Over the next few days, as the foreign exchange
markets were left to their own devices, the British pound fell by 15% against the German
mark and by 25% against the US dollar. Soros and his fund pocketed a nice $1 billion
from their trade, while the estimated cost to the British taxpayer was over 3 billion
pounds. Here’s the funny thing though: in the aftermath
of Black Wednesday, as they called it, the Bank of England was once again free to control
the British pound, which it did and over the next few years it steadily cut interest rates
and actually restored the British economy to high levels of growth. By 1997 the British pound was actually more
valuable than it had been during the ERM and the UK was on its way to 16 consecutive years
of economic expansion, so much so, that some people actually call that day White Wednesday. So in the end, Soros might’ve actually done
the British a favor, even though he pocketed about $15 for every man, woman and child in
Great Britain. Now, if you enjoy learning about financial
markets then you’ll be happy to know that I have two animated courses on Skillshare
about how the stock market works. The first one is a 20-minute general introduction,
whereas the second one is a 40-minute exploration that dives deeper into how stocks actually
work and how you can value them. You can watch both my classes right now for
free if you’re one of the first 500 people to sign up for Skillshare using the link in
the description. I’d appreciate it a lot if you watch my
courses and even more so if you share it around with your friends. Of course, you’re also welcome to share
this video and I really hope you enjoyed.
Interesting video! But Christ, the comment section is abominable.
Loved the video! I’ve always read it’s 1. Pegged currency 2. No capital controls 3. Economy health-based central bank policy.
Pick 2. There’s simply no way all three can last. The UK was sacrificing 3 to get 1. China is currently sacrificing 2 to get 1 (trying to keep the Yuan below 7/USD) and 3.
No trap.