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  • Print publication year: 2020
  • Online publication date: September 2020

11 - The Spine Theory and Its Collapse


In October 1990, after a sustained campaign from the Treasury, the UK joined the European Monetary System’s Exchange Rate Mechanism. The move was heavily supported by Leigh-Pemberton, who persuaded the US central banker, Alan Greenspan, to persuade Margaret Thatcher that the ERM was a modern version of the nineteenth century gold standard. UK entry into the EMS ERM was accompanied by an interest rate cut, but the consequences of German unification and of German interest rate moves led to tightening of monetary policy at a moment of UK recession. In September 1992, the UK’s exchange rate became unsustainable as very large speculative flows bet on a UK exit from the mechanism (September 16). The result was initially seen as a massive humiliation for the UK and its monetary policy-makers, Black Wednesday, but quite quickly opinion shifted to considering it as a liberation that allowed policy reform, White Wednesday. The UK’s ERM experience thus became a game-changer in thinking about monetary policy and exchange rates.

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