by Peter Franklin
Friday, 30
September 2022
Debate
07:00

The silver lining of Black Wednesday 2.0

Short-term devaluation may lead to long-term benefits
by Peter Franklin
Kwasi Kwarteng, UK chancellor of exchequer, departs 11 Downing Street. Credit: Getty

When Kwasi Kwarteng unveiled his mini-budget last Friday, sceptical commentators focused on the medium-term. Would the Chancellor’s offering — a double album of Thatcheresque golden oldies — get the British economy growing again? (I had my doubts.)

But then came the short-term verdict of the financial markets: an instant vote of no-confidence. It was the sort of thumbs-down normally given to the economic policies of a banana republic, not a G7 democracy. Welcome to Britazuela.


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There was an especially nasty moment on Wednesday when the Bank of England was forced into an emergency purchase of UK government bonds. Given the day of the week, this triggered memories of 16 September 1992 — a.k.a. Black Wednesday — another occasion when the markets lost confidence in the economic policies of a Tory government. 

It was a national humiliation. The Chancellor at the time, Norman Lamont, was sacked a few months later, but the reputation of John Major’s government never recovered. The Conservatives went down to a landslide defeat at the next election in 1997. A similar fate threatens the Tories today.

However, looking back on the first Black Wednesday we can see that the long-term consequences weren’t all bad. The forced devaluation of the pound was followed by an export-led recovery, a new economic policy helped curb inflation, and Britain’s traumatic removal from the ERM meant that we weren’t sucked into the European single currency. There was also a transformative effect on the Tories: they became a profoundly Eurosceptic party, which eventually paved the way for Brexit.

For Brexiteers, at least, the first Black Wednesday can be seen as a ‘White Wednesday’. So might the same apply to the second Black Wednesday? Years hence, will we able to look back on current events with something other than horror?

Perhaps. For instance, a lasting impact on the value of the pound, if it happens, might boost British exports. Rising interest rates might tame house prices (though at a cost to mortgage payers). And future governments might have more respect for the limits on what they can safely borrow. 

A further benefit could be a Conservative Party cleansed of its militant tendency. The idea that the solution to every problem is a tax cut has been tested to destruction. In place of the libertarian snake oil peddled by Liz Truss and her fellow ideologues, an authentically conservative agenda could have a chance to establish itself. 

Of course, in the meantime we have to deal with the economic consequences of Mr. Kwarteng. The possibility that the second Black Wednesday will one day be seen as a second White Wednesday is of scant comfort right now. However, that’s all the more reason why anti-Truss Tories must work to take back their party and salvage what they can from the wreckage. 

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AC Harper
AC Harper
2 months ago

An immediate response by a hostile press over something that will take months to play out is… unhelpful.
The media has become too deeply corrupted by the need for death and disaster (even if only metaphorical) to make money. Does anyone recall how Brexit was going to make the sky fall? The sky is still there.

Ian Barton
Ian Barton
2 months ago

The QE/asset bubble had to burst sometime, so it’s far from certain that it is the wrong strategic move to do it now.
Anyone (including the MSM and Mr Franklin) who prematurely uses words like “wreckage” should not be taken seriously.

Last edited 2 months ago by Ian Barton
W O'Driscoll
W O'Driscoll
2 months ago

Continuing the massive over-reaction by commentators to a mini-budget that announced policies that had mostly been trumpeted for weeks, if not months, before the event.
My financial advisor is always telling me something has been “priced in” by the markets – usually a long time in advance. Clearly he’s giving the markets more credit than they deserve if they didn’t even know that taxes were going to be cut – or, in most cases, not increased.

Ian Stewart
Ian Stewart
2 months ago

Oops you wrote that too soon. Todays news revealed the BoE’s intervention was due to poor risk management of bond investments, that they had been warned about 5 years ago. It was an accident waiting to happen – and now the more important question is why did the BoE ignore this market risk?

Justin Clark
Justin Clark
2 months ago

A Superficially-Black Wednesday perhaps…

Russell David
Russell David
2 months ago

Weird, choppy article. Says there may be good to come out of this and then rubbishes Truss.
Having lived through the hysterical responses of the Left to all the vital and sensible supply side reforms Mrs T put through in the ’80s – and the eventual massive good they did the British economy – it’s most amusing to me to hear all the same kind of cries again.
And, hilariously, Labour are convinced they’ll romp the next election. They won’t.

Mark Goodhand
Mark Goodhand
2 months ago

The idea that the solution to every problem is a tax cut has been tested to destruction

How can anyone write such utter drivel?
How does it get past the editors?
The IFS are hardly right-wing extremists, but even they will tell you that the tax burden remains higher now than at any time since 1980.
“While the tax reductions announced in this budget are substantial, their impact is only forecast to return the UK tax burden to 2021-22 levels – reflecting the large increases in the tax burden previously forecast for the coming years”
If Kwarteng’s “cuts” look big as a % of GDP, it’s only because his predecessors have massively increased the tax burden.
https://ifs.org.uk/articles/mini-budget-response

michael harris
michael harris
2 months ago

The Black Wednesday fall in sterling was reversed within a year. The present fall (against the euro, the dollar being sui generis at present) is already unwinding.
The best course is to wait things out and refuse to be branded nasty or incompetent. If we do better over two years than other nations the Truss government has a chance at the next election. Given the dangers in the world, including the chances of general war and of deep economic depression, it is hardly possible that the mini budget can make prospects worse.
The survival of the Conservative party is not the most vital matter now. But, if it is to continue, it had better not undermine its fourth leader in four years who is at least trying to steer it from the rocks.

Aaron James
Aaron James
2 months ago

”The forced devaluation of the pound was followed by an export-led recovery,”

Which exports in 2022? I know those 1990 years were the times when North Sea oil and gas were booming – I think they exported then. Not all the industry had off shored by 1990s.

One thing the low £ will bring is investments from outside into British real estate. I am not sure giving up British property for imported consumer items is a good swap.

Nicky Samengo-Turner
Nicky Samengo-Turner
2 months ago

The UK Government actually had to put together a syndicated loan to pay for the defence of sterling after ‘ Badger’ Lamont had set it up as a no lose, one horse race target for the markets.. I know as my Father put the deal together as debt head at Citi… his forex boys having previously made fortunes out of Lamonts incompetence…