Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (34 page)

Speculators were pouring money into Italy. There inflation in 1988 was around five percent, compared to Germany at 1.3 percent. High inflation meant higher interest rates, but as the lira was locked into the EMS, its value was guaranteed. For investors there was no downside. The liberalization of capital movements had accelerated this process. The EMS was vulnerable, argued Lamfalussy and Europe must move to EMU as soon as possible. “It is for this reason that I would be in favor of a first stage that could be implemented as quickly as possible and not in a two or three year distant future, but starting this autumn or at least at the end of the year.”
¹⁷

The Delors Report, as it became known, was forty-three pages long. It was accompanied by a collection of fifteen papers which were written by the members of the committee. The influence of the BIS was clear. Jacques Delors wrote two of the papers, the first with the kind of grandiose title beloved of French politicians: “Economic and Monetary Union and Re-launching the Construction of Europe.” Three papers were written by Alexandre Lamfalussy. Lamfalussy’s articles dealt with some of the most important technical aspects of the process of monetary and economic union: the macro-coordination of fiscal policies in an economic and monetary union; the European Currency Unit banking market; and a proposal for centralizing monetary policy.

Back in the 1920s, Norman had mused to Benjamin Strong, the chairman of the New York Federal Reserve, about the need for a “private and eclectic Central banks’ club, small at first, large in the future.” When Norman had summoned Walter Layton, the editor of
The Economist
, to his office to ask him to draft the bank’s statutes, he had emphasized that they must, above all, guarantee the BIS’s independence. The Delors Report confirmed that crucial principle. Governments would be excluded from monetary policy making. The Delors report called for the creation of a new institution to centrally decide and coordinate member states’ monetary policy operations, to be called the European System of Central Banks (ESCB). Montagu Norman may not have approved of a Europe-wide currency, but he would certainly have applauded
the report’s demand that the ESCB must be completely independent from both national governments and European authorities.

The Delors Report’s recommendations that the European Union should adopt a single currency and a unified monetary policy were accepted. The momentum toward monetary, economic, and political union was unstoppable. A new bank, the most powerful institution within the ESCB, would be created to define and implement monetary policy. The European Central Bank’s primary task would be to ensure price stability while remaining free of all political pressures. It sounded all too familiar.

          
“European economic unity will come, for its time is here.”

           
— Walther Funk, 1942
¹

T
he Reichsbank president and BIS director was half right. European economic unity did indeed arrive, but it came sixty years after he predicted. Walther Funk lived to see two of the most important early milestones: the establishment in 1951 of the European Coal and Steel Community, Europe’s first supranational institution, whose loans were managed by the BIS, and the signing of the Treaty of Rome in 1957, when the six core countries—Germany, France, Italy, Belgium, Luxembourg, and the Netherlands—established the European Economic Community.

Funk was released from Spandau Prison in Berlin the same year and died in 1960, but his pan-European plan for a continent free of trade and currency restrictions lived on and flourished. A European customs union came into existence in 1968. Just over a decade later, in 1979, Europeans voted in the first elections for the European Parliament. In 1992 twelve European countries signed the Maastricht Treaty, which brought the European Union into existence. On January 1, 1993, the European single market began operating across the twelve member states of the European Union. Its citizens could live and work freely wherever they wanted, companies could sell their products, and currencies and capital flowed unhindered.

Funk would certainly have applauded. The Nazi economics minister had raised the idea of European monetary union as early as 1940, to be introduced
incrementally by harmonizing currency fluctuations and constraining exchange rates, as indeed happened.

To point out any similarities between the Nazis’ postwar economic plans for Europe and today’s European Union is to risk ridicule and invective. The European integration project, has, for many, become an untouchable truth, an article of faith in the world’s inexorable progress toward a brighter and more secure future. Certainly, European integration has many achievements to its credit: speeding up reconstruction after 1945; opening the continent for free trade and nurturing a new generation of pan-Europeans who think beyond national borders. By incorporating the shaky democracies of post–Communist Europe the European Union has helped stabilize the eastern half of the continent. The oft-stated values of the European Union: human rights, democracy, and protection of minorities are the very antithesis of the Third’s Reich’s ideology.

But it is a massive and illogical mental leap to claim, as did Helmut Kohl, the German chancellor, in 1996, “The policy of European integration is in reality a question of war and peace in the twenty-first century.”
²
Kohl’s statement embodies the technocrats’ belief, reaching back to Jean Monnet and Montagu Norman, that the wise guidance of a managerial and financial elite is all that is needed for Europe to prosper—and to prevent its fractious, ungrateful peoples from reverting to their natural warlike state. The historian Antony Beevor makes a more convincing counterclaim: Western Europe has remained free of wars since 1945, not because of the European Union, but because of democracy. “It is simply a question of governance. Democracies do not fight each other.”
³

The uncomfortable, unspoken truth is that the parallels between the plans of the Nazi leadership for the postwar European economy and the subsequent process of European monetary and economic integration are real. The BIS runs like a thread through both. Funk’s deputy Emil Puhl described the BIS as the “only real foreign branch” of the Reichsbank, because it was the crucial connection of the Reichsbank to the international network of central bankers.
⁴
These connections outlived the war. The BIS helped ensure that the postwar successors to the Reichsbank, the Bank deutscher Länder, and the Bundesbank, would continue
to dominate the economies of postwar Europe. The BIS provided the BdL and the Bundesbank with both legitimacy and prestige. The BdL, followed by the Bundesbank, took the Reichsbank’s former place at the governors’ meetings. The BIS gave the Bundesbank an instant network of connections to other central banks and a platform to shape the debate about the postwar European economy. Nor did the personnel change much: Karl Blessing, Schacht’s protégé, worked at the BIS during the early 1930s, transferred to the Reichsbank, oversaw an empire of slave laborers during the war, then returned to the BIS in 1958 as the president of the Bundesbank.

During the 1930s and ’40s, like the 1980s and ’90s, the politicians laid out the general theory of European unification, while the technocrats—such as Funk—outlined the practical steps. As early as 1940, Arthur Seyss-Inquart, the ruler of the Nazi-occupied Netherlands, called for a new European community “above and beyond the concept of the nation-state,” which would “transform the living space given us by history into a new spiritual realm.”
⁵
The new Europe would benefit from “the most modern production techniques and a continent-wide system of trade and communications developed on a joint basis.” Rapidly increasing prosperity was inevitable “once national barriers are removed.”
⁶

When Hitler called for the “clutter of small nations” to be removed, Funk readily agreed. “There must be a readiness to subordinate one’s own interests in certain cases to that of the European Community.”
⁷
The Reichsbank president laid out his thoughts in a detailed, eight-page memo called “Economic Reorganization of Europe,” a copy of which is stored in the BIS archive in Basel. The document was translated by Per Jacobssen’s staff and passed to Thomas McKittrick on July 26, 1940.
⁸

All sorts of slogans were flying around about the “construction and organization of the German and the European economic system after the war,” and the favorite was “European large-unit economy,” noted Funk in his 1940 paper. Such a construct did not yet exist, but “the new European economy must be an organic growth” and will result from “close economic collaboration between Germany and European countries.” The Reichsmark would be the dominant currency, but
the currency basis of postwar Europe was of secondary importance to economic leadership. “Given a healthy European economy and a sensible division of labor between the European economies, the currency problem will solve itself because it will then be merely a question of suitable monetary technique.” Here Funk seems to anticipate the arguments of the euro enthusiasts who, fifty years later, claimed that a common currency, if properly constructed in the right economic conditions, could not fail.

Funk’s analysis and prediction are unsettlingly prescient of the subsequent course of postwar European economic and political history. The Reichsmark would be the dominant currency, and once it had been freed of foreign debt, its currency area must “continue to widen.” Bilateral payments must be transformed into multilateral economic transactions and clearing arrangements, “so that the various countries may enter into properly regulated economic relations with one another through the intermediary of clearing arrangements of this kind”—just as happened with the 1947 Paris agreement on multilateral payments and its successor mechanisms, such as the European Payments Union (EPU).

Foreign exchange controls could not be abolished in one move or monetary union quickly introduced. The process must be incremental, Funk argued, anticipating the need for a halfway system like the EPU, which liberated non-residents from exchange controls, although they remained in place for citizens. “The problem is not one of free exchange or European monetary union, but in the first place, of a further development of clearing techniques for the purpose of ensuring a smooth course for payments within the countries participating in the clearing.” The conversion rates must be controlled and kept stable. This was also the aim of the Snake in the Tunnel and the European Monetary System, which were, like the EPU, managed or serviced which were, like the EPU, by the BIS.

An actual monetary union was more complicated, Funk presciently argued, as it demanded “a gradually assimilated standard of living, and even in the future the standard cannot be the same in all the countries participating in the European clearing”—a statement that neatly anticipated the modern disequilibrium between Germany and Greece. But once the European central
clearing system was operating, foreign exchange restrictions would be abolished, first for travelers crossing frontiers and then for import trade. There would be a bonfire of regulations that slowed down trade and commerce; Funk wrote, “Meticulous surveillance and all the regulations, which weigh down on the individual business enterprise with a mass of forms, will no longer be necessary.”
⁹

Funk also predicted, correctly, that the future European currencies would not be linked to gold. The new multilateral monetary system would provide the necessary backing. The deciding factor in trade relations would be the quality of German goods for export, “and in this respect we really need have no anxiety.” German needs would be central to the new European economy. Germany would reach long-term economic agreements with European countries so that they would plan their long-term production on the German market, and there would also be “better outlets for German goods on European markets.”
¹⁰

The Nazi leadership welcomed Funk’s plans. In 1942, The German Foreign Ministry created a “Europe Committee,” whose members drafted plans for a German-dominated European confederation. That same year the Berlin Union of Businessmen and Industrialists held a conference at the city’s Economic University, entitled “European Economic Community.” As the writer John Laughland notes, the titles of the speeches delivered at the conference are “eerily reminiscent of modern pro-European discourse.” They include “The Economic Face of the New Europe,” “The Development Towards the European Economic Community,” “European Currency Matters,” and the hardy perennial, still much discussed today: “The Fundamental Question: Is Europe a Geographical Concept or a Political Fact.”
¹¹
In June a German official drafted the “Basic Elements of a Plan for the New Europe,” which outlined how the new confederation would work. Much of it sounds very familiar. The section entitled “The Economic Organization of Europe” called for a European customs union, a European clearing center that would stabilize currency rates with the eventual objective of European monetary union, and the “harmonization of labor conditions and social welfare.”
¹²

Germany’s postwar remodeling of itself as a penitent bastion of democracy was predicted by Heinz Pol. Pol, a former editor of a Berlin newspaper, had fled from the Nazis to the United States. The BIS, wrote Pol, was a central pillar of this policy of expediency: the recognition that the war was lost, and Germany needed to make a deal with Allies that would preserve its dominance of Europe. During the war, both Hermann Schmitz, the CEO of IG Farben, and Kurt von Schröder, the Nazi banker, used their positions as BIS directors to keep channels open to the Allies, wrote Pol in his book,
The Hidden Enemy
, which was published in 1943. “Since the beginning of this war, both have maintained contacts, through go-betweens, with their business friends in all the countries of the United Nations.”
¹³