Making a billion dollars takes a lot of time, and sometimes is so hard that entire countries are unable to make it. Liberia, a former U.S colony, only reached one billion dollars in 1998. Of course, there are people whose net worth are way beyond Liberia's GDP in 1998—exactly 1810 people had a higher net worth according to Forbes—but how long did it take them to make their first billion dollars? In this infographic, we see that even Mark Zuckerberg, the fastest person to make a billion dollars, took about a year to achieve it. However, on September 16, 1999, a single man made over 1.5 billion dollars in one day. This is the story of George Soros, and how he broke the Bank of England.
To understand how Soros made over a billion dollars in a single day we have to understand Europe's economy during that time. After World War II, European governments wanted to create an economic block to compete with the United States and prevent another major war. That eventually led to the creation of the European Union in 1999; however, some steps were taken to help integrate the economy. One of Europe's solutions was the creation of the European Exchange Rate Mechanism—ERM. The ERM's primary goal was to set a fixed exchange rate between its members' currencies. At that time the German Mark was set to be the standard currency, therefore, all other members had to set their currency in respect to the mark. A fixed exchange rate allows firms to do business easier across countries since there would not be any wild exchange rate fluctuations. An important fact about the ERM is that the rates were set. For example, when Britain joined the ERM it set the rate to be 1 pound per 2.95 marks, and it could fluctuate between 2.78 and 3.13. In general a government can control the money supply, and subsequently its exchange rate, in two ways: exchanging reserves of foreign currency and interest rates.
1) Countries can increase the money supply by exchanging its foreign currency reserves into its own currency or vice versa. For example, if the Bank of England had a reserve of $10,000,000 and decided to exchange it all for pounds in the market, it would allow the supply of pounds to increase, raising the value of the pound in respect to the dollar.
2) The central bank can also increase money supply by decreasing or increasing interest rates. By decreasing interest rates, global investors start selling government bonds as the return is not as profitable. Increasing interest rates make British bonds look more attractive and lucrative to global investors.
Great Britain decided to join the ERM in 1990 as it was suffering from high inflation and unemployment. By joining the ERM the British government expected inflation and unemployment to decrease, and it indeed did. British economy seemed to be stable until 1992 when another recession happened. Unemployment rose from 1,600,000 to nearly 3,000,000 between 1990 and 1993, inflation was above 6% and as a result, the British pound started to lose value—the pound devaluing against the mark it approached the bottom of its pegged value of 2.78. In order to combat the devaluation make the pound within the ERM rates the British government had to sell its foreign currency supply or increase the interest rates. The government had already done the former for no effect, they only had one option. John Major, the British prime minister, argued that the priority was to keep the pound within the ERM limits.
That is when George Soros comes into play. Soros is a manager of a hedge fund—a fund that bets investments in a predicted outcome—and the 23rd richest man in the world—according to Forbes—as a self-made billionaire. George Soros was already a rich man at that time, as his hedge fund was worth 15 billion in 1980; however, he is famous for the events of September 16, 1992. Soros noticed the poor British economy and the lack of market response due to the Bank of England selling foreign currency, as a result he bet that the British government couldn't keep the pound within its ERM limits. George Soros' strategy was to borrow pounds and exchange it for stronger currencies like the German mark or the U.S dollar. Soros expected that the British government would need to quit the ERM and decrease its interest rates in order to boost the economy resulting in the devaluation of the pound. If successful, Soros would trade his stockpile of currencies for pounds again, profiting as a result. To explain, if you exchange £1 for $1.00 and on the next day the pound devalues 10% in respect to the dollar you would have £1.1, making £0.1.
Soros was right in his predictions. On September 16, the government announced it would raise the interest rates from 10% to 12%, and it had no effect on the value of the pound. The government was desperate and increased the interest rates again from 12% to 15%, again to no effect. The following day the British government broke with the ERM limit and reduced its interests rates to fall down to 10%, and in the process George Soros made 1.5 billion dollars. Truly, Soros also made more moves than simply borrowing and exchanging money, as buying bonds from the British government and expecting them to gain value again. Consequently, that is how Soros made most of his money and got the name as "the man who broke the Bank of England."
Other reads and sources:
http://priceonomics.com/the-trade-of-the-century-w...
http://www.businessinsider.com/how-george-soros-sh...
