Short summary

• The European ERM was introduced in the late 1970s to stabilize European currencies in preparation for the Economic and Monetary Union (EMU - euro users) and the introduction of the euro.
• Countries seeking to replace their currency with the euro were required to keep the value of their currency within a specific range for several years.
• The U.K. was forced out of the ERM because it could not prevent the value of the pound from falling below the lower limit specified by the ERM on 16th September, 1992
• Why? - Pound Sterling collapsed falling below the lower limit specified by ERM
• How? George Soros shorted Pound Sterling

Shorting a stock

Let's say you think snowmobiles are overpriced, and are about to go down in price. So you go and rent one for $10 a day, and immediately sell it to your neighbor for $500. A week later, the same one is selling for $250, so you buy it, return it to the rental place, pay $70 rent, and come out $180 ahead. Now if the price went up instead, you would have lost money on the deal.

Shorting works the same way, but with stock, not snowmobiles.

George Soros - man known for “breaking the bank of England”

• Before Black Wednesday, the U.K. had been in the European ERM for two years.
• Pound was depreciating already. Government increased interest rates and authorized the use of foreign currency reserves to purchase pounds
• He believed firmly that pound was going to fall under the lower limit. He made a short sale  of US$10 billion worth of pounds sterling, which made him a profit of $1 billion during the 1992 Black Wednesday UK currency crisis, collapsing the pound below the lower limit