, Britain
A joinery firm in Reading started Wednesday 16 September 1992 with an overdraft of about £60,000, priced at 3% over base, and a bank manager who had already asked twice that year what the plan was. By the time the owner came back from a site visit that afternoon, base rate had been raised from 10% to 12% and a further rise to 15% had been announced for the following morning.
At 15% base, his facility would have cost 18%. He did the sum on the back of a delivery note and concluded that he had about five months.
The pound was pegged, and the peg was the whole policy
Britain joined the Exchange Rate Mechanism on 8 October 1990. The commitment was to hold sterling within a band against the other member currencies, with the Deutschmark as the anchor. The central rate was DM2.95 to the pound.
The point of it was inflation. Tying the currency to the Bundesbank's credibility was a way of importing low inflation without having to establish your own track record. The cost of it, which was well understood at the time and understood much better afterwards, was that interest rates had to defend the currency rather than suit the domestic economy.
By 1992 the domestic economy needed rates to come down. Britain was in a recession that had started in 1990, unemployment was rising, house prices had been falling for three years, and a great many businesses and households were carrying debt taken on in the late 1980s at values that no longer existed. German reunification, meanwhile, meant German rates were high. The two requirements pointed in opposite directions and the markets could see it.
Two rate rises before the evening and one of them never happened
On the morning of 16 September the Bank of England spent very large sums buying sterling. Base rate was raised from 10% to 12%. Sterling kept falling. In the afternoon a further rise to 15% was announced, to take effect the next day.
That evening the Chancellor, Norman Lamont, announced that Britain was suspending its membership of the ERM. The 15% was never implemented. Rates went back to 10% and were cut to 9% within days.
For anyone running a business, the sequence of that day is the part worth remembering. For several hours the official cost of money in this country was going to 15%, and every firm with variable rate borrowing did the arithmetic. Some of them cancelled orders that afternoon. Some laid people off within the week. The policy was abandoned before the rate took effect, but the decisions taken in the hours when everyone believed it were not unmade.
The firms that paid for it had no part in it
This is the reason we write about 1992 from a workshop rather than from a dealing room.
The joinery firm had not borrowed recklessly. It had a normal facility for a business of its size, priced the way every such facility was priced, at a margin over a base rate set by somebody else for reasons that had nothing to do with joinery. Its exposure was total and its influence was nil.
That is the ordinary position of a small British business and it does not get discussed much, because it is not a story about decisions. Fixed rate borrowing was not readily available to a firm of that size in 1992. The overdraft was repayable on demand, as overdrafts are. And the personal guarantee behind it was secured on a house that had lost value since 1989.
Business failures in Britain peaked around 1992 and 1993, and the great majority of those firms were not badly run. They were geared normally into a period when the price of money went somewhere nobody had planned for.
The recovery began that week and arrived much later
The unusual thing about Black Wednesday is that the day of the humiliation was also the day the recovery started.
Freed from defending the currency, policy could suit the economy. Rates came down steadily through the winter and were down to around 6% within months. Sterling fell substantially against the Deutschmark, which made British exports cheaper and gave manufacturing its best stretch in years. Inflation targeting was introduced in October 1992, the framework that eventually became the Bank of England's remit, and inflation stayed low anyway. From 1993 Britain grew, without interruption, for a long time.
None of which was any use to a firm that failed in February 1993. This is the pattern that repeats in every one of these episodes: the macroeconomic turning point and the point at which a small business feels better are separated by about eighteen months, and the gap is where the casualties are. Surviving a recession is mostly a question of whether your cash lasts as long as the gap.
Where this shows up in the game
Play through September 1992 in Business Baron and your facilities are priced over a base rate that moves on the real dates, including twice on the 16th. The letter from the bank arrives the same week. Whether you cut staff on the afternoon of the announcement, before it was withdrawn, is a decision the game will let you make and will remember, and the record the game keeps of your career is built from what you did rather than what you meant.