Yesterday George Soros was awarded the Presidential Medal of Freedom. Naturally this led to a cascade of trolls berating him. Over the past decades, Soros has come to be at the center of every insane conspiracy theory. And given the anti-Semitic era we’re entering, his status as a multi-billionaire Holocaust survivor with his own foreign policy agenda has definitely not helped.
But Soros deserves every award he receives. He created the Open Society Foundations which helped end the USSR and fostered a large network of civil society organizations in former communist countries. He also founded Central European University, which has financed education for countless low-income individuals. Either of the above two achievements would be enough for a Presidential Medal of Freedom for any normal person. Alas, Soros is not normal.
So I’ve chosen to focus on neither of these two obvious accomplishments. Curious individuals can read OSF’s history or think about how hard it is to create a good university from scratch.
Instead, I will focus on Soros’ status as the Man Who Broke the Bank of England. Given that this is one of the most famous stories for why people hate Soros, I thought it fitting to explain the value of what he did.
(Note: the below is based on a video I made for my now-almost-certainly-failed YouTube Channel a year ago)
The common story goes as follows: the Bank of England had a fixed exchange rate to the Deutsche Mark. Soros started borrowing pounds and selling them at a huge rate. As a result, the Bank of England was unable to maintain the exchange rate peg and was forced to devalue, this then led to great suffering. Therefore, Soros is bad.
The story is mostly right up until the last sentence. The reality is that the Bank of England originally pegged the pound to be worth 2.95 Marks, with a lower bound of 2.77. This was far too high. To maintain the exchange rate peg the Bank of England generally resorted to two mechanisms: (1) forex interventions (2) altering interest rates.
The former is simple. If you have a reserve of USD or German Marks, you use them to buy up Pounds, increasing their value. This works fine as long as you have a reserve of foreign currency. Unfortunately central banks can only print domestic currency, therefore, it’s not exactly a viable long-term solution.
The other method you can use is changing interest rates. This is a blunt instrument that has great effects on the entire economy, but can definitely help strengthen the currency when need be.
More specifically, higher interest rates generally cause (Scott Sumner forgive me for this gross oversimplification) lower inflation, a stronger currency, higher unemployment, and lower economic growth. This meant that when the Bank of England pegged its currency too high, it was forced to make the real sector of the economy suffer. And in 1992 the country was in a recession. This meant that the Bank of England wanted to lower interest rates to help the economy recover. But it could not do that because this would in turn lead to currency depreciation, breaking the peg to the Mark. What now?
Well, if you know anything about the UK, you probably realize that their solution to every economic crisis is to say “sux” and hope that it gets better on its own. But in this one instance, the Bank of England had a savior in the form of Soros. By shorting the equivalent of 10 billion pounds, Soros made it extremely difficult for the BoE to maintain the fixed exchange rate. In fact, it led to an extremely funny instance of them announcing an interest rate hike at 11AM and canceling it at 7:30PM. This was because they could no longer justify making the economy suffer because of a stupid number.
As a result, the United Kingdom ended its exchange rate peg to the Deutsche Mark. The pound devalued to 2.42 marks by end of year and the economy started growing. The economy recovered because it was not held back by insane monetary policy.
If not for Soros, the UK would’ve been forced to keep interest rates high to keep the pound afloat. The recovery would have been much slower and the country would undergo grain pain. Just ask the US during the Great Depression.
Ultimately, this is the story of a man who used the free-market mechanism to defeat the government and prevent it from making its own population suffer with idiotic policy choices. It is the story of the individual triumphing and causing an improvement in the lives of the masses for extremely counter-intuitive reasons. If that is not deserving of the Presidential Medal of Freedom, then nothing is.
I mean, this is a good argument for knighthood but I don’t see how this should get him the Medal of Freedom. I think a bigger objection to Soros in the US context is OSF’s funding of progressive DAs, which is a much better case against giving Soros the PMoF.
They touch on this in Fragile by Design, interesting to see part of the reason the peg was broken! You can only have so many forex reserves anyways after all