Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (42 page)

There are small but encouraging signs that some central bankers understand that with great financial power comes social responsibility. In October 2012, Andrew Haldane, executive director for financial stability at the Bank of England, gave a speech on “Socially Useful Banking” at a meeting hosted by Occupy Economics, the London branch of the social protest movement.
²⁸
The Occupy movement, he said, had helped trigger the first stages of a “reformation of finance.” Policymakers were listening to criticism and were acting to close the “fault lines” in the global financial system. “Occupy has been successful in its efforts to popularize the problems of the global financial system for one very simple reason: they are right.” Over the years, there had been a “great sucking sound” as “people and monies” were drawn into banking, especially investment banking, draining human and financial resources from the rest of the economy. Even the BIS agrees. Haldane quoted recent research by the bank, which found that when the financial sector
reaches a certain level it impedes growth because the financial sector competes with other parts of the economy for scarce resources. “More finance is definitely not always better,” wrote Stephen Cecchetti and Enisse Kharroubi.
²⁹

WHAT THEN DOES
the future hold for the BIS? Over the decades, from the Schacht-Norman era, through the Second World War and the birth of the euro, to the present-day jamboree of regulatory committees, the bank has demonstrated an extraordinary ability to make itself essential to the times, repeatedly jettisoning its historical baggage and re-inventing itself to preserve its central place at the heart of the global financial system.

Keenly aware of the growing global hostility toward bankers, the BIS now emphasizes its status as an international organization and its contribution to the common good. This is certainly an effective recruiting tool. “The quality of the people working at the BIS is very high,” said King. “It helps, when recruiting really good individuals, to say this is an international institution for which you work, not just a think tank. People like to feel they are working in public service.”
³⁰

But the bank’s latest evolution, into a socially responsible institution, may prove the most difficult. Secrecy, opacity, and unaccountability—like gold—are embedded in the bank’s DNA. The bank will find it difficult to adjust to the new demands, outlined by Andrew Haldane, that financial institutions be accountable and socially responsible. Yet to survive, it will have to. In an age when information flows as fast as capital, when citizens demand ever more transparency and accountability from the institutions that have power over their lives, when even Wall Street can be occupied for weeks, the Tower of Basel is no longer inviolable.

Unlike its biblical predecessor, the Tower of Basel reaches only eighteen stories above the city skyline. But the fate of the biblical tower-builders should give the bankers pause. For when God saw their work, he confounded their speech and introduced a multitude of tongues. The builders could no longer understand one another. The construction work stopped, they were dispersed, and their tower vanished into history.

T
his book was born out of a conversation in New York with Clive Priddle, the publisher of PublicAffairs. Clive has been the best editor a writer could hope for: encouraging, insightful, and deeply knowledgeable. My brilliant agent, Elizabeth Sheinkman, of William Morris Endeavor, was an enthusiastic advocate of this project, and Jo Rodgers was always there to help. Numerous friends and colleagues provided encouragement, advice, and ideas, especially Roger Boyes, Justin Leighton, Erik D’Amato, and Nicholas Kabcenell. In New York, Peter Green, Bob Green and Babette Audant were warm and welcoming hosts, while Matt and Emmanuelle Welch in Washington, DC, provided a home from home. In Budapest, I am especially grateful to Flora Hevesi, who diligently transcribed many hours of interviews and never once complained about technical and banking terms. Many thanks to Lori Hobkirk for her production, organization, and editing expertise, to Daisy Bauer for her elegant design, and to Beth Fraser for her diligent copyediting.

Tower of Basel
is a book about networks, connections, and the exercise of covert power. Mapping those links is always easier when insiders and former insiders are ready to share their expertise and knowledge. I spoke to numerous sources with firsthand knowledge of the Bank for International Settlements, the world of central banking and related themes. Some prefer to remain anonymous; they know who they are and I am very grateful for their insight. Others did agree to speak on the record. My thanks to Dan Alamariu, Peter Akos Bod, Dean Baker, Geoffrey Bell, Rudi Bogni, Stephen Cecchetti, William de Gelsey, Charles de Vaulx, Adam Gilbert, Richard Hall, Frigyes Hárshegyi,
Andrew Hilton, Zsigmond Járai, Karen Johnson, Sir Mervyn King, Malcolm Knight, William McDonough, Laurence Meyer, Ron Paul, Rupert Pennant-Rea, Nathan Sheets, Paul Volcker, and Peregrine Worsthorne. William White was especially informative and helpful. Thanks also to Sarah Ashley at the Bank of London press office, Gillian Tett, Ralph Atkins, David Dederick, Paul Elston, Barbara Wyllie, Steve Bloomfield at
Monocle
, Jonathan Brandt, John Hubbel Weiss, Peter Grose, John Lloyd, Greg Ip, Peter Rona, William Clothier at Brody House in Budapest, Paulina Bren, Zoltan Markus, Mark Milstein at Northfoto, Alex Kuli, and the folks at the Federal Reserve Press Office. Ryan Avent read the manuscript and shared his insight into the world of central banks while John Shattuck kindly gave me access to the Central European University’s library in Budapest. Lee Goddard built me a fine website at
www.adamlebor.com
.

I am especially grateful to the staff of the following archives: Bank of England; Columbia University Rare Book and Manuscript Library; Federal Reserve Bank of New York; Franklin D. Roosevelt Presidential Library; Seeley G. Mudd Manuscript Library at Princeton University; National Archives, London, and the US National Archives and Records Administration at College Park, Maryland. Special thanks go to my team of researchers. In London, Rosie Whitehouse found valuable material in the Bank of England archives. Elysia Glover diligently searched the records of the Federal Reserve Bank of New York, the archives at Columbia University Library and the Henry Morgenthau diaries, which are held at the Franklin D. Roosevelt Presidential Library in Hyde Park. In Washington, DC, Emmanuelle Welch at French Connection Research (
www.frenchpi.com
), located a number of valuable documents at the US National Archives. Andras Lengyel and Esther Judah deftly translated from German and French into English.

This book is an unauthorised investigative history of the BIS and has not been read or vetted by any staff member or bank official. However I would like to extend my thanks to several people at the BIS. Edward Atkinson was always insightful, and good-humored as he guided me through the archives. Dr. Piet Clement, the bank’s historian, readily shared his knowledge of historical matters, no matter how arcane. Margaret Critchlow and Lisa Weekes at the BIS press office kindly added me to the bank’s media mailing list, answered a good number of
my questions, provided numerous photographs, and arranged an interview with Stephen Cecchetti, the head of the Monetary and Economic Department.

All works of historical enquiry draw on their predecessors. I am glad to acknowledge the contribution of Professor Gianni Toniolo and Dr. Piet Clement. Their authoritative study of the BIS,
Central Bank Cooperation at the Bank for International Settlements 1930–1973
, is an invaluable work of reference. I am especially grateful to Christopher Simpson, professor of journalism at American University, and to Jason Weixelbaum, a very talented, young historian. Professor Simpson, a pioneer in researching the connection between big business and genocide, was extraordinarily generous with his time and expertise, guiding me through the US National Archives and sharing original documentary material from his own archive. Jason Weixelbaum, an expert in the links between American companies and the Nazis, shared a number of documents about the BIS and allied themes and was also a tenacious researcher. Professor Harold James was generous with his insight into the BIS and the historical backdrop to this book. Donald MacLaren kindly shared his insight into his father’s life and work. I am grateful to Helen Scholfield who first contacted me about the extraordinary story of how British secret agents worked against Nazi economic interests in the United States. That episode, like much wartime cross-border economic intrigue, leads back to the BIS.

Thanks most of all to Kati, Danny, and Hannah, for putting up with my long absences, and for daily reminding me that there is indeed life outside the
Tower of Basel
.

INTRODUCTION

1.
Gates McGarrah, “A Balance Wheel of World Credit,”
Nation’s Business
, March 1931, 24. BIS archive, File 7.18 (2), MCG8/55.

2.
Jon Hilsenrath and Brian Blackstone, “Inside the Risky Bets of Central Banks,”
Wall Street Journal
, December 12, 2012.

3.
Sir Mervyn King interview with the author, in London, February 2013.

4.
Paul Volcker, interview with the author, in New York, May 2012.

5.
Peter Akos Bod, interview with the author, in Budapest, October 2011.

6.
Laurence Meyer interview with the author, in Washington, DC, May 2012.

7.
Agreement between the Swiss Federal Council and the Bank for International Settlements to determine the bank’s legal status in Switzerland, February 10, 1987, amended effective January 1, 2003. Available for download at
http://www.bis.org/about/headquart-en.pdf
.

8.
Memorandum A, “Benefits which the US might be expected to derive from representation on the board of the BIS,” October 16, 1935, NARA, MD. RG 82—FRS, NWCH, box 13.

9.
Charles Coombs,
The Arena of International Finance
(New York: John Wiley, 1976), 26.

10.
“King: Ace or Joker,”
Economist
, March 31, 2012.

11.
Harold Callender, “The Iron-Willed Pilot of Nazi Finance,”
New York Times
, March 4, 1934.

12.
Coombs, op. cit., 26.

13.
http://www.bis.org/about/index.htm
.

14.
The International Monetary Fund, as its name indicates, is a fund, rather than a
bank. The IMF supplies credit to its 188 member countries and imposes strict conditions on the loans, often demanding changes in governments’ economic and fiscal policies. The World Bank Group is composed of five agencies, including the International Bank for Reconstruction and Development, and lends money to poor, low, and middle-income countries. The World Bank Group’s aim is to relieve poverty, not to make a profit.

15.
http://www.investopedia.com/terms/b/basel_i.asp#axzz2JIIsrfcm
.

16.
Gianni Toniolo,
Central Bank Co-operation at the Bank for International Settlements 1930–1973
(London: Cambridge University Press, 2005), xiii.

17.
World Gold Council, World Official Gold Holdings, February 2012.

CHAPTER ONE: THE BANKERS KNOW BEST

1.
Gianni Toniolo,
Central Bank Co-operation at the Bank for International Settlements 1930–1973
(London: Cambridge University Press, 2005), 30.

2.
Kathleen Woodward, “Montagu Norman: Banker and Legend,”
New York Times
, April 17, 1932.

3.
Peregrine Worsthorne interview with Rosie Whitehouse, carried out for the author in Hedgerley, England, March 2012.

4.
John Weitz,
Hitler’s Banker
(London: Warner Books, 1999), 71.

5.
Op. cit., 73.

6.
Liaquat Ahamed,
Lords of Finance
(London: Windmill Books, 2010), 216.

7.
Op cit, 327.

8.
Ibid, 332.

9.
Hjalmar Schacht,
Confessions of the Old Wizard
(NY: Houghton Mifflin, 1956), 232.

10.
Op cit., 235.

11.
Andrew Boyle,
Montagu Norman
(London: Cassell, 1967), 247.

CHAPTER TWO: A COZY CLUB IN BASEL

1.
Peter Grose,
Gentleman Spy: The Life of Allen Dulles
(Boston: Houghton Mifflin, 1994), 30.

2.
Op. cit., 101.

3.
Allen Dulles to Leon Fraser, September 3, 1930. BIS archive, File 7.18 (2) MCG, 10/76.

4.
Paul Warburg to Leon Fraser, May 28, 1930. BIS archive, File 7.18 (2) MCG, 10/76.

5.
Ronald W. Preussen,
John Foster Dulles: The Road to Power
(NY: The Free Press, 1982), 70–71.

6.
Op. cit., 72.

7.
Gianni Toniolo,
Central Bank Co-operation at the Bank for International Settlements 1930–1973
, 49.

8.
Op. cit., 51.

9.
Clarence K. Streit, “A Cashless Bank That Deals in Millions,”
New York Times Magazine
, July 27, 1930.

10.
Gates McGarrah to H. C. F. Finlayson, February 9, 1931. BIS archive, File 7.18 (2) MCG, 4.23.

11.
Op cit.

12.
Ibid.