There were only three days until the weekend referendum in France on the Maastricht treaty. Unlike the UK, French voters were preparing to decide on plans drawn up by the then president of the European commission, Jacques Delors, for majority voting and closer economic ties. Polls suggested 58% were against.
Sterling had joined the EU's longstanding Exchange Rate Mechanism (ERM) in 1990 but had struggled to remain inside its designated floating band. Now circling City speculators saw a chance to attack Britain's currency and wreck a fledgling monetary union that many of them thought would never work.
The Italian lira and Spanish peseta were also under pressure, but it was the pound that was grabbing the headlines.
George Soros's Quantum Fund led a field of speculators who borrowed UK gilts only to sell them and buy them back later at cheaper prices. They repeated the trick every few minutes, making a profit each time. Soros said later he had made £1bn from selling sterling he didn't own.
By mid-morning the selling was so intense that Bank of England officials were buying £2bn of sterling an hour.
The prime minister, John Major, was staying in Admiralty house in Whitehall. He was told about the frenzy of selling and convened a meeting of key ministers. He talked about the possibility of interest rate rises beyond the already sky-high 10% and the need for further interventions by the Bank of England. Senior Conservatives Michael Heseltine, Douglas Hurd and Kenneth Clarke joined Major and the chancellor, Norman Lamont, who was on the end of a phone.
At 11am they agreed to push up interest rates to 12%.
Jim Trott, former chief dealer for the Bank of England, described the day as "stunningly expensive". He said that behind the scenes he bought more sterling in four hours that day than anybody had before or since. All of his purchases lost value during the day – and went down even more when the government pulled out.
The ERM demanded that currencies stayed within a band set in relation to other currencies in the club. To maintain the currency values relative to each other, countries with the most valuable currencies had to sell their own and buy the weakest. In September the deutschmark was the most powerful currency and sterling the weakest within its band.
As Trott tells it, the Bank of England was furiously buying sterling but little was done by the Bundesbank to sell deutschmarks.
"The cavalry were the Bundesbank. We kept on looking over the hill, but there was no dust and there were no hats and no sabres. And then later at the conference call they suddenly didn't speak English, which was extraordinary. So we were kind of stretched on that day," he said. Thirteen years later, Treasury papers would be released showing the cost to be an estimated £3.3bn.
By lunchtime it was obvious the efforts of the central bank and attraction of high UK interest rates were outweighed by a complete lack of confidence in the UK's ability to stabilise its currency. News had filtered through to traders that the head of the German Bundesbank was in favour of Britain devaluing its currency. If this was his view, it explained why he was unwilling to spend money propping up the UK at a higher exchange rate. He obviously believed it was a doomed project and not worth any more German taxpayers' money.
Knowing Britain had a paucity of foreign currency reserves to sell, speculators such as Soros confidently moved in for the kill.
The radio news bulletins that afternoon quoted traders using words such as "slaughter" and "disaster" to describe the situation.
Lamont called Major to say the game was up, but Major disagreed and insisted interest rates should rise further to 15%. When the market closed later that afternoon, sterling was still outside its currency band.
At 7.40pm, after Major conceded defeat, Lamont, flanked by Treasury mandarin Gus O'Donnell and his adviser David Cameron, who were later to be Cabinet secretary and coalition prime minister respectively, declared that Britain had suspended its membership of the ERM.
The TV news bulletins went into overdrive. The BBC's Peter Jay said leaving the ERM would wreck the government's plans to bring down inflation by the end of the decade, though a cheaper currency would spur growth.
In parliament the next day John Smith, the Labour leader, derided the Major government's economic policy. He said: "The real lesson of the ERM crisis was that 'before you can have a strong currency you need a strong economy'."
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