I spent Black Wednesday – the day the markets successfully bet against the power of the British government to prop up the pound sterling – on the 28th floor of Dresdner Bank’s headquarters in Frankfurt. I had just been hired as an exchange-student intern in the back office for currency options and interest rate derivatives. Though all days on the trading floor were busy, I had never seen anything like it before.
From one end of the room to the other, men in suits (there were few women) were shouting down phone lines, shouting at each other, or doing both at the same time. There were piles of feather-light trade tickets with numbers scribbled on them: 10, 50 or 100 million Deutschmarks, dollars, francs or pounds.
The excitement was over the exchange rate mechanism (ERM), the framework set up by the European Economic Community in 1979 to keep its members’ currencies in a “trading band” of similar values. If a currency threatened to breach its band, central banks had to intervene. This forerunner to the euro was designed to avoid sharp currency fluctuations and high inflation, and for years did rather well.
