Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (30 page)

Blessing was arrested and imprisoned at the war’s end, while the Allies considered whether to charge him with war crimes, as he certainly deserved. But behind the scenes, Blessing had powerful allies: Allen Dulles and Thomas McKittrick. The Nazi bankers and industrialists were correct in their belief that the western powers would need them to rebuild the German economy. In the contest between justice and realpolitik, Dulles would make sure that the latter would triumph.

In July 1945 the US occupation authorities asked Dulles to furnish a list of Germans “eligible on the basis of ability and political record for posts in a reconstituted German administration.” The first set of lists was quickly submitted. But by autumn, Dulles, now running the OSS station in Berlin, had more detailed information about suitable German bankers. Much of this would have come from McKittrick.

In September 1945 Dulles submitted his new white list. It was divided into two categories: A and B. On the A list were three names judged suitable for “higher posts in a ministry.” The B list contained five names that were suggested for “lesser posts such as Bureau head or division chief.”
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Among the names in group A was that of Ernst Hülse, the former head of the BIS banking department. Hülse, said Dulles, enjoyed “excellent connections with banking circles abroad,” had a Jewish wife, and was definitely anti-Nazi. Hülse was appointed to the Reichsbank in the British zone and was named president of the central bank for the federal state of Nordheim-Westfalen.

The first name on the B list was that of Karl Blessing, whom Dulles described as a “prominent businessman and financial expert” with “considerable
experience in international trade.”
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Dulles was well informed about Blessing’s central role at Kontinental-Öl, which the American spymaster described as a “government-owned holding company organized to coordinate German-controlled oil properties throughout Europe.” Dulles hedged his bets. Blessing’s relationship with Kontinental-Öl might, he wrote, disqualify him for a “high government position.” However Blessing had accepted the job “under pressure” and had been in touch with the German resistance. In addition, Dulles added, Blessing had not been a member of the Nazi Party. In fact Blessing had joined in 1937. And Blessing’s party records were held by the US authorities, had Dulles bothered to check. Blessing’s main claim to anti-Nazi activity was being included on the list of the July 1944 anti-Hitler plotters as a potential minister for economics. When the conspirators were arrested, Blessing was protected by Walther Funk, who told the Gestapo that Blessing had not known anything about the plot.

The whitewashing of Blessing was not the exception, but the rule. Declassified telegrams revealed that Dulles had long planned to rescue important German industrialists and scientists. In January 1945, Dulles wrote to William Casey, who was running operations inside Germany and who later served as CIA director in the 1980s:

           
My project contemplates that in normal course of events and without any prior contact with us but merely to escape impending chaos, important German industrialists, scientists, etc., will desire to find some haven, preferably Switzerland. If Switzerland is closed to them, these men might possibly turn to Russia as their only alternative. . . . Discreet preliminary conversations indicate some hope of securing Swiss cooperation.”
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Not everyone in Washington approved. The following month First Lady Eleanor Roosevelt wrote to her husband, “Memo for the President. Allen Dulles who is in charge of Bill Donovan’s outfit in Paris has been counsel,
closely tied up with the Schroeder Bank. That is likely to be the representative of the underground Nazi interests after the war. There seems to be in Paris a great many people who are pretty close to the big business side!”
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The president’s wife was certainly well informed about the importance of the Schröder bank network, which reached from Germany to London and New York, and to the BIS via Kurt von Schröder. But by summer 1945, after the death of her husband, Mrs. Roosevelt’s opinions counted for little in Washington.

Blessing was not charged with war crimes. Instead, with Allen Dulles’s help, he was freed and returned to his old job at Unilever. He became one of the highest paid executives in Europe, earning $75,000 a year. Blessing took a pay cut to $50,000 a year when he joined the Bundesbank in 1958, but the power and prestige was ample compensation. By the early 1960s, when Blessing was a regular attender at the Basel governor meetings, he had transformed himself into a former member of the resistance.

Hermann Abs, of Deutsche Bank, was the most powerful commercial banker in the Third Reich, and he was not on Dulles’s A list. Rather, he was high on an Allied blacklist of important Nazi officials to be arrested. In the American zone Colonel Bernard Bernstein, the head of the Finance division, had Abs, indeed all the Nazi financiers in his sights. Bernstein ordered that every banker and industrialist be detained as a suspected war criminal.

Luckily for Abs, he was living in the British zone. There he met his old friend, Charles Gunston of the Bank of England, whom he used to see in Basel during the 1930s at BIS meetings. Gunston was a senior official in the British occupation authority. Gunston had no interest in the Nazi atrocities. All he cared about was getting the banks working again. Gunston asked Abs to help rebuild the banking system in the British zone. Abs was more than happy to oblige. Bernstein was enraged and demanded that Abs be extradited to the American zone. Gunston refused, but in early January 1946 he returned to England. Abs was then finally arrested as a suspected war
criminal, and he spent three months in prison before being released and was never charged. Instead Abs went to work, fulfilling his promise to his old friend Charles Gunston.

KARL BLESSING, LIKE
Hermann Abs, certainly understood when to be helpful. In 1960 the gold spike threatened to undermine the stability of the postwar financial system. The United States and Britain proposed joint operations on the London market to protect the value of both countries’ reserves. Blessing quickly offered to make some of West Germany’s reserves available to the Bank of England. But any coordinated international action would need bilateral agreements, which would necessitate lengthy negotiations with governments. Britain persuaded the United States that there was a much simpler approach to organizing multilateral interventions: through the governors’ meetings at BIS. Between them the countries represented there, as well as the United States, accounted for about 80 percent of the world’s reserves. The BIS staff was not enthusiastic about the idea. As the world pioneer in transnational finance, the BIS was a firm believer in the primacy of market forces. The market was now being shunted aside, wrote one official, “so that the inconvenience of certain financial policies can be avoided.”
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Any such doubts were ignored by the governors. In November 1961 the London Gold Pool (LGP) was set up. The United States, West Germany, France, Italy, Britain, Belgium, the Netherlands, and Switzerland contributed a total of $270 million to the pool. The funds would be used to maintain dollar parity at $35 an ounce, in line with the Bretton Woods agreements. The banks would keep the gold price stable, by buying and selling when necessary. All of the participating banks agreed not to buy gold themselves on the London market while the pool was in existence. The BIS gold cartel was constructed on conditions of complete secrecy. There was not even a formal written agreement. The bankers’ word, and a handshake, was enough to seal the deal. As Coombs noted of the governors’ meetings, “However much money was involved, no agreements were ever signed nor memoranda of understanding
ever initialized. The word of each official was sufficient, and there were never any disappointments.”
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The Bank of England carried out the LGP’s monetary transactions, but the BIS was essential to its operations. Every month the Bank of England reported to an experts’ group of officials from BIS member banks and the BIS itself, which met at the BIS.

Eventually, word got out. The story was picked up by
The Times
(of London), then by
The Economist
. The LGP was forced to release detailed accounts, which were published in the Bank of England’s quarterly bulletin. For the first five years, the LGP worked. The price in London stayed between $35.04 and $35.20 per ounce. The group of gold experts expanded their briefs to cover the foreign exchange market. The gold pool became the Committee on Gold and Foreign Exchange. It still exists today and is known as the BIS Markets Committee. The committee’s agenda and deliberations remain secret.

THERE WERE TIMES,
especially during crises, that the mutual trust engendered over the lunches and dinners in Basel proved crucial in stabilizing the global financial system.

November 23, 1963, was such a day. The assassination of President John F. Kennedy triggered panic selling on the stock market. Coombs was at work at the New York Fed when the news came through. He put aside his shock and horror and focused on the task at hand: the immediate defense of the dollar. Coombs considered banning foreign exchange transactions to prevent panic selling, but such a decision would be slow to implement and would need political support. Immediate action was needed, though, and he decided that closing the foreign exchange market was anyway not feasible. It would send a signal of panic and desperation. There would be a frenzy of selling of both dollars and gold.

The answer, Coombs decided, was for the United States to sell massive amounts of foreign currency to defend the dollar. The question was where could Coombs get it? He had access to only $16 million worth and held
none at all of several major European currencies. He could sell gold to cover the purchases. But once news got out that the United States was selling its gold reserves after its president had been assassinated, the dollar would immediately plunge.

The best option was to borrow and sell foreign currency by drawing on the Federal Reserve’s currency swap network. Currency swaps allowed Central Bank A to hold reserves in Central Bank B’s currency (or a third currency), which Central Bank A could draw on, without having to purchase the foreign currency from Central Bank B. This was an excellent solution apart from one small problem: the time difference. No bank could draw on currency swaps without the approval of the partner bank. The president had been shot at 1:30 p.m. Eastern Standard Time, six hours behind Europe. The European governors that Coombs urgently needed to contact had left their offices and were on their way to dinner or home. There were no mobile telephones or Internet. The governors were unreachable.

Coombs now faced the most important decision—or rather, gamble—of his life. If he bet wrong, not just his career would end. He would be remembered as the man who wrecked the dollar at a time of a national crisis. There was no time to consult or get the support of his superiors. A run on the dollar could start at any moment. Could he count on the governors of Europe’s central banks to underwrite the sale by the Federal Reserve of hundreds of millions of dollars’ worth of their currencies without their prior consent or knowledge? For if the sales went ahead, and the governors protested, or refused to authorize the transactions, both he, and the dollar, would be finished. The governors, he decided, would back him.

At 2 p.m., Coombs instructed the foreign exchange desk to offer 10 million deutschmarks for sale and to inform the bank acting as the Fed’s agent that more such offerings would follow. Eight minutes later the Fed offered substantial amounts of sterling, followed by large holding of Dutch guilders and Swiss francs. Meanwhile, the Bank of Canada had stabilized the US-Canadian dollar exchange rate, and the Fed reciprocated.

At 2:30 p.m. Coombs ordered his officials to inform the market that the Federal Reserve would supply foreign exchange in unlimited amounts to defend the dollar and would call in its entire $2 billion of available credit swaps if necessary. Only then did Coombs report to Alfred Hayes, the president of the New York Fed. Meanwhile, the New York Fed’s telephone operators were searching for the other central bankers. They reached Roy Bridge, of the Bank of England, first. He immediately agreed to help. Bridge told Coombs he could ask for “all that he wanted.” The Bundesbank was equally cooperative. As soon as the Frankfurt foreign exchange market opened on the following Monday, the Bundesbank made sure to show itself as a buyer of dollars. In Bern the Swiss bankers agreed to enlarge the Fed’s credit facility by another $100 million. Coombs’s strategy worked. The stock market recovered. When the markets opened on Monday, the dollar remained stable.

THE BIS WAS
going from strength to strength. In 1961 the ten key industrial IMF member states, known as the G10 (which largely overlapped with the membership of the BIS) set up the General Agreement to Borrow (GAB). The G10, plus Switzerland (which did not join the IMF until 1992) put aside $6 billion as a stand-by credit for the IMF. The GAB funds were to be made available if an IMF member was suddenly threatened by short-term capital flight. Two years later, the IMF began a detailed study of the international monetary system. It asked the BIS to provide information on the gold and Eurocurrency markets and central banks’ short-term credit arrangements.
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When the IMF report was published in 1964 it recommended that all G10 central banks send the BIS confidential statistics about their monetary reserves. The BIS, as the depository of this data, could then act as an early warning system if a country’s reserves were being depleted and might need to draw on the GAB. So it seemed only natural that the Sunday evening governors’ dinners at the BIS should be expanded to include Canada and Japan. (The two countries were members of the GAB but did not join the BIS until 1970.) The BIS
had effectively relocated one of the most important international meetings of the key IMF members from Washington to Basel.