Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (6 page)

                 
The Bank, its property and assets and all deposits and other funds entrusted to it shall be immune in time of peace and in time of war from any measure such as expropriation, requisition, seizure, confiscation, prohibition or restriction of gold or currency export or import, and any other similar measures.

The BIS enjoys the legal privileges of an international organization, but, arguably, it is not one as usually understood by the term. It is a highly profitable bank that is accountable to, and controlled by, its members: central banks. Under the cover of the Young Plan, as well as the need for an impartial financial institution to administer German reparation payments, Norman, Schacht, and the central bankers had by brilliant sleight of hand created a bank with unprecedented powers and privileges. As Gianni Toniolo, the official historian of the BIS, notes,

                 
It was no accident that, although the settlement of the reparations problems had been the immediate cause for setting up the BIS, the bank’s statutes defined its actual purpose much more broadly:

                 
To promote the co-operation of central banks and to provide additional facilities for international financial operations; and to act as trustee or agent in regard to international financial settlements entrusted to it under agreements with the parties concerned.
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In February 1930, the governors of the central banks of Britain, France, Italy, Germany, and Belgium gathered with representatives from Japan and three American banks to sign the BIS’s instrument of foundation. As the Federal Reserve Bank
of New York was not permitted to own shares, for political reasons, a consortium was formed—J. P. Morgan, the First National Bank of New York, and the First National Bank of Chicago—to represent the United States. The BIS formally came into existence on February 27, 1930. The bank’s initial share capital was set at 500 million Swiss francs, which was divided into 200,000 shares of 2,500 gold francs. The governors of the founding central banks were ex officio members of the board of directors. Each could appoint a second director of the same nationality. The second director did not have be a central banker. He could be drawn from finance, industry, or commerce—a provision that would later prove crucial in ensuring Nazi influence over the BIS.

The BIS was incorporated under Swiss law. Its authorized activities included the following:

            
• buying, selling and holding gold for its own account or for central banks

            
• buying and selling securities other than shares

            
• accepting deposits from central banks

            
• opening and maintaining deposit accounts with central banks

            
• acting as an agent of or correspondent for central banks

            
• entering agreements to act as a trustee or agent in connection with international settlements

There were some restrictions that were intended to prevent the BIS from becoming a competitor of commercial banks. The bank could not issue banknotes, open accounts for individuals or commercial organizations, own property other than its headquarters or offices, or have a controlling interest in a business. (The immunities granted under international treaty for reparations settlements did not apply to all of its banking operations to ensure that it maintained the confidence of the international markets.)

Even better, although the BIS was protected by international treaty, unlike the League of Nations, it was not dependent on budgetary contributions from its
members. It enjoyed a guaranteed revenue stream from the reparations payments that it would manage under the Young Plan, as well as from the highly profitable services it would carry out for its clients, the central banks. In the final analysis, notes Toniolo, the BIS, “although founded by an international treaty sanctioned by national governments, was very much tailored to the views and requirements of the national banks.”
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The key provisions of the bank’s statutes were given “protected” status and so could only be changed with the consent of all signatories to the Hague Convention.

The BIS was quickly inundated with job applications, even though it was located in humdrum Basel. Its comparatively modest headquarters at the Grand Hôtel et Savoy Hôtel Univers, next door to Basel main railway station at least offered convenient direct connections to Paris, Vienna, Milan, and Geneva. An article in the
New York Times Magazine
, headlined “The Cashless Bank that Deals in Millions,” reported,

                 
There is only one bank in Basel that does not look like a million dollars. It is the super-bank. Indeed, it is doubtful if there is anywhere a bank that looks less like a bank than does the Bank for International Settlements. . . . There is no “Bank for International Settlements” stretching in big solid letters across its façade. There is no ostentatiously small bronze plaque at the door. There is nothing at all to reveal its identity to the passer-by.
⁹

Nor did the building sound like a bank. There were no counters where banknotes rustled, no adding machines, nor even the sound of a pen scratching on a ledger. The monies did not physically move through the BIS. When Germany made a reparations payment, it informed the BIS that the Reichsbank had credited the BIS’s account in Berlin. The BIS then informed the national banks of those countries receiving reparations, such as, for example, Britain, that the monies were available to draw on, if they so wished. If they did not, in case the movement of substantial sums might affect exchange rates, the funds remained in the BIS’s
account. In the meantime, the BIS used the funds earmarked for Britain to buy securities—which it could sell if and when Britain wanted to draw its monies.

That was the theory. The practice, at least at first, was not quite so smooth. In February 1931, Gates McGarrah, the bank’s American president, wrote to H. C. F. Finlayson, in Athens, asking about the Bank of Greece’s gold. Finlayson, a former British financial attaché in Berlin, was now an adviser to the Bank of Greece. Some of the Greek bank’s gold may have gone missing. Rather like nowadays, it seemed the accounting at the Bank of Greece left something to be desired. “What has ever happened to the gold of the Bank of Greece, some of which you thought might be left in our custody in Paris or elsewhere?” inquired McGarrah, who, as the president of the BIS might have been expected to know what it held and where.
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It might, McGarrah suggested, be a good time to find the Greek gold and place it with the BIS.

The BIS, wrote McGarrah, could give the Bank of Greece “all sorts of facilities, rather greater than those of a local Central Bank.”
¹¹
For example, if the Bank of Greece held gold at the Bank of France and wanted to buy another currency, it first had to buy francs from the Bank of France. The Bank of Greece then converted the francs to the second currency, with all the usual losses of exchange rates and commissions. However, if the Bank of Greece held gold at the Bank of France in the name of the BIS, the BIS could “give the Bank of Greece any currency it desires at any time and can fix an agreed rate without going through the actual exchange operation.”
¹²
And, the BIS did not charge any commission.

Thirteen thousand people applied for jobs at the BIS, and by the end of 1930 ninety-five people worked there. However, few were bankers—many were lawyers or economists who had previously been employed at international organizations such as the League of Nations or the Dawes Plan Agent General’s office. Salaries were comparatively high: the president received $36,000 plus $14,000 entertainment allowance. Heads of department were paid between $15,000 and $20,000 a year, all tax free. (The average American salary in 1930 was about $2,000 a year.) The management reflected the balance of nationalities: the general manager, Pierre Quesnay, was French and a
former member of the Young Committee. His German deputy, Ernst Hülse, had worked for the Reichsbank.

But not everyone was happy. Hjalmar Schacht, who loved to refer to the BIS as “my bank,” continued to rage over the scale of reparations under the Young Plan. In December 1929 he wrote to J. P. Morgan that he would not take up his directorship at the BIS. The following March, Schacht resigned from the Reichsbank. Hans Luther, a former minister of finance and former German Chancellor, replaced him. Schacht returned to his old métier: public relations. That autumn he went on a lecture tour across Europe and the United States. He passed the time during the journey across the Atlantic by reading Adolf Hitler’s
Mein Kampf
. The style was crude and hectoring, he believed, but the author displayed a “keen brain.”
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Wherever Schacht spoke, he gave the same address: fulminating against the Young Plan, the Versailles Treaty, and reparations. He even appeared with John Foster Dulles at a dinner hosted by the Foreign Policy Association at the Astor Hotel in New York. Dulles played down the German elections in September 1930 in which the Nazis won 107 seats, making them the second largest party. The “difficulties” claimed Dulles, “are of a character which are largely psychological and consequently subject to ready reversal.”
¹⁴

Dulles’s prediction was widely shared by his fellow financiers, especially those in Germany. Hans Luther, the new Reichsbank president, was especially keen to reassure his American colleagues that the surge in Nazi support would not disrupt the smooth flow of international finance. On September 22, eight days after the German election, Gates McGarrah, the BIS president, wrote to his friend and former colleague at the New York Federal Reserve, George Harrison, who was now its president:

                 
We have the strongest assurances from Dr. Luther that we need not be disturbed about the result of the election. . . . The German people are not revolutionary and in our opinion anything beyond occasional street brawls will be summarily dealt with.
¹⁵

Not everyone shared McGarrah’s faith. Investors rushed to sell Reichmarks. Paradoxically, the political and financial uncertainty was good for the BIS, giving the new bank an early opportunity to intervene in the money markets. The bank launched a rescue operation for the German currency. The next day, on September 23, McGarrah sent a telegram to Harrison: “Confidentially we intervened today on several markets to the tune of £300,000 with very helpful psychological effect, including cessation of offer of marks.”
¹⁶
But in thinking that the reparations issue would settle down in Germany under the BIS’s influence, Luther and McGarrah were wrong. The Young Plan, like German democracy, was a terminal case.

ON MAY 19, 1931,
McGarrah presented the BIS’s first annual report to the first general meeting. He noted that the bank had assisted with international financial operations and capital movement, where the “opportunities for constructive service are almost boundless,”
¹⁷
then he turned to the numbers. Profit making, noted McGarrah demurely, had “never been a primary object” of the BIS—which surely made him a banker unique in history. But he was pleased to report that thrifty investing during the bank’s first ten and half months of existence had brought net profits of 11,186,521.97 Swiss francs. He noted that shareholders had increased from the original seven to twenty-three, including the national banks of Greece, Romania, Hungary, Latvia, Lithuania and Estonia, Sweden, and Czechoslovakia. The small, new European countries such as Czechoslovakia—a fragile construct carved out of the remains of the Austro-Hungarian empire—doubtless hoped that a stake in the BIS would bring stability, credibility, an improved standing in the sinternational community, and even a measure of defense against predatory neighbors. It would prove to be a faint hope.

But for now the bankers were celebrating. Norman and Schacht had invented a perpetual money machine.

          
“The post of Head of Section in the BIS is for Germany’s foreign policy definitely as important as the posting of many ambassadors accredited with foreign governments.”

           
— Karl Blessing, Reichsbank official, 1930
¹

S
chacht’s colleagues in Berlin had a very particular view of the role of the BIS—one quite different to that which the Allies had envisaged when signing the Hague Convention. The bank set up to administer reparations was to be used to wreck them. Karl Blessing, a protégé of Schacht, wrote a lengthy memorandum in April 1930, setting out policy on the BIS. “Opinion on how the Reichsbank should conduct itself in the BIS” called for Germany to gain as much influence at the BIS as possible. German employees of the bank, Blessing wrote, should make sure that “no important business decisions are made without a German representative having knowledge of them or having had an opportunity to express their opinion.”
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Blessing recognized the bank’s importance for Germany’s national interest. He called for Germany to fill its posts in the bank with the most able and perceptive individuals.

All BIS member states wanted to protect their national interests in the new international forum. But Blessing understood what many bankers did not: that while the BIS might portray itself as neutral, objective, and technocratic, the bank was an inherently political institution, dealing with one of the most contested and bitter issues in politics—German war guilt and reparations. Blessing wrote, “The fact that the reparation question has been delegated to a banking institution naturally turns this bank into a political institution, even if this is officially denied.”
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