What was the true cost to Britain of Black Wednesday, the day international currency speculators forced sterling out of the European Exchange Rate Mechanism (ERM)? Financier George Soros was said to have made $1 billion betting against the pound, but how much did the Treasury spend trying to salvage ERM membership?

According to documents released today by the Treasury after a Freedom of Information request by the Financial Times, the best estimate of the cost is £3.3 billion. As John Major, prime minister at the time, said of the documents' release this afternoon: "No one denies - least of all myself - that this is a substantial cost but it is also fair to note that it is a fraction of the figures of £27 billion, £20 billion, £13 billion, previously bandied about."

On Black Wednesday itself, September 16, 1992, the Bank of England sold some $28 billion of official foreign reserves trying to keep sterling within its ERM target range, the documents show. They failed and sterling was forced out of the EMS grid, allowed to float freely, and indeed to sink, in a development which helped restore Britain's economic competitiveness.

Altogether, the BoE sold some $40 billion of reserves in market intervention during August and September of that year, leaving Treasury with a "short position" of $16 billion. But the loss in sterling terms of those sales was only £800 million. The immediate "opportunity cost" - including the amount in sterling terms that Treasury would have made if they had kep those reserves while sterling dropped - took that figure up to £2.4 billion.

The Government then took the decision to rebuild reserves - although not to ERM-era levels - buying foreign currencies with the weakened sterling, which added more to the cost of Black Wednesday.

One of the documents released today, a 1997 document written by Treasury analyst Harold Freeman, said that Treasury could have recouped some £1.8 billion if they had maintained their short position until April 1997, by which time sterling was back at its 1992 levels against Deutschemark bloc currencies.

The analysis in that document, and in earlier ones produced by the Treasury in 1993, uses "counterfactual" calculations - working out the probable cost to to Britain of the decision to prop up sterling by comparing actual events with the the likely outcome of alternative decisions.

The "most reasonable" calculation, Mr Freeman wrote, would be based on the assumption that Mr Major had decided not to intervene on Black Wednesday and his Government had gradually reduced its foreign currency reserves by half over the next couple of years. "On that basis, the opportunity cost of intervention and the subsequent rebuilding of the reserves was about £3.3 billion measured at the end (of) February 1994," he concluded.

One of the documents released today was circulated the day after Black Wednesday, written by Chris Riley to Treasury mandarin Alan Budd (made famous more recently for the investigation that saw David Blunkett resign from the Home Office). Mr Riley admitted that his case had been overtaken by events, but said sterling's forced devaluation might prove to be "a blessing in disguise" by reviving a flagging economy.

All 11 documents released under the Freedom of Information Act will give valuable fodder for economists and historians trying to sort out fact from fiction during the ERM crisis, although most of the documents are "redacted" - sections are cut out to preserve "international relations", for example, or prevent a situation where the release of documents might impeded the provision of free and frank advice in future.

Fortunately for historians, however, most of the redacted sections were listed and explained in an e-mail mistakenly sent by the Treasury to the BBC and published on the BBC website today.

The reasons for the cuts varies. In one document from December 1993, a section was cut out referring to a letter in November in 1989 reporting a discussion a British diplomat in Bonn had with Karl Otto Poehl, then governor of the Bundesbank, in which Herr Poehl said he wished Britain had joined the ERM two or three years earlier.

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