Details emerge of Black Wednesday cover-up

John Major’s government disguised vast scale of operation to prop up pound

The efforts of John Major’s government to disguise the vast scale of the operation to prop up the pound in the Black Wednesday financial fiasco are laid bare in newly released official papers.

Following the dramatic events of September 16 1992, Chancellor Norman Lamont was under pressure to spell out how much of Britain’s foreign currency reserves had been used in the failed bid to prevent sterling crashing out of the European Exchange Rate Mechanism (ERM).

Publicly, Mr (now Lord) Lamont insisted no government would reveal such information, but papers released by the National Archives show that behind the scenes he was “increasingly anxious” about the way the true state of the reserves was being concealed.

The failure to prevent the pound falling out of the ERM – which pegged its value to the deutschmark – was a personal humiliation for Mr Major, who, as chancellor, had taken Britain into the ERM just two years earlier.

As interest rates rose from 10% to 12% and then 15% on a single day, it dealt a devastating blow to the Conservatives’ reputation for economic competence.

Figures finally released by the Treasury in 2005 under the Freedom of Information Act showed that in the course of August and September 1992, the Bank of England sold almost $40 billion in foreign currency as the pound came under sustained attack from foreign speculators.

The final cost of the operation was estimated at £3.3bn.

While it instantly transformed the position of the reserves – from a positive balance of $18bn to a negative balance of $16bn – the official figures at the time showed only a “minimal” loss of $2bn.

The details of what exactly happened are spelled out in a letter to No 10 from Mr Lamont’s private secretary Jeremy Heywood (now the cabinet secretary), dated November 26 1992, setting out the chancellor’s strategy for rebuilding the reserves.

He explained the government had been able to disguise the amount of additional borrowing required, in part through the creation of what was described as a “secret negative forward book”, to re-acquire foreign exchange through “forward swaps” worth around $12bn.

However, once the crisis was over, the opaque manner in which the operation was conducted meant the only way of running down the forward book was through a “non-publicised” programme of using sterling to buy back foreign currency – known as “creaming off”.

“In principle the forward book could be run down either by public borrowing or lower gross reserves; but having consciously disguised this part of the September’s operations it would now be very difficult to explain the real reason why we were now undertaking further borrowing or revealing lower gross reserves,” the letter states.

“That points to non-publicised ‘creaming off’ as the only acceptable approach – it is also the only way the net reserve position can be improved.”

The letter notes the Bank was “very cautious” about the tactic, fearing it could lead to further falls in the pound, fuelling inflation.

In an accompanying memo, Mary Francis in the No 10 private office notes: “He (Mr Lamont) is increasingly anxious about the way it is being used to conceal the actual state of the reserves.”

John Major, left, was personally humiliated by sterling crashing out of the ERM, while his chancellor Norman Lamont was ‘increasingly anxious’ about the true state of the country’s reserves being concealed.

Pictures: PA. John Major led the UK into the European Exchange Rate Mechanism (ERM) under the premiership of Margaret Thatcher. He later scored a notable victory over William Rees-Mogg.