Tower of Basel: The Shadowy History of the Secret Bank that Runs the World

by Adam LeBor

  WHEN I EXPLAINED to friends and acquaintances that I was writing a book about the Bank for International Settlements, the usual response was a puzzled look, followed by a question: “The bank for what?” My interlocutors were intelligent people, who follow current affairs. Many had some interest in and understanding of the global economy and financial crisis. Yet only a handful had heard of the BIS. This was strange, as the BIS is the most important bank in the world and predates both the IMF and the World Bank. For decades it has stood at the center of a global network of money, power, and covert global influence.

  The BIS was founded in 1930. It was ostensibly set up as part of the Young Plan to administer German reparations payments for the First World War. The bank’s key architects were Montagu Norman, who was the governor of the Bank of England, and Hjalmar Schacht, the president of the Reichsbank who described the BIS as “my” bank. The BIS’s founding members were the central banks of Britain, France, Germany, Italy, Belgium, and a consortium of Japanese banks. Shares were also offered to the Federal Reserve, but the United States, suspicious of anything that might infringe on its national sovereignty, refused its allocation. Instead a consortium of commercial banks took up the shares: J. P. Morgan, the First National Bank of New York, and the First National Bank of Chicago.

  The real purpose of the BIS was detailed in its statutes: to “promote the cooperation of central banks and to provide additional facilities for international financial operations.” It was the culmination of the central bankers’ decades-old dream, to have their own bank—powerful, independent, and free from interfering politicians and nosy reporters. Most felicitous of all, the BIS was self-financing and would be in perpetuity. Its clients were its own founders and shareholders—the central banks. During the 1930s, the BIS was the central meeting place for a cabal of central bankers, dominated by Norman and Schacht. This group helped rebuild Germany. The New York Times described Schacht, widely acknowledged as the genius behind the resurgent German economy, as “The Iron-Willed Pilot of Nazi Finance.”11 During the war, the BIS became a de-facto arm of the Reichsbank, accepting looted Nazi gold and carrying out foreign exchange deals for Nazi Germany.

  The bank’s alliance with Berlin was known in Washington, DC, and London. But the need for the BIS to keep functioning, to keep the new channels of transnational finance open, was about the only thing all sides agreed on. Basel was the perfect location, as it is perched on the northern edge of Switzerland and sits almost on the French and German borders. A few miles away, Nazi and Allied soldiers were fighting and dying. None of that mattered at the BIS. Board meetings were suspended, but relations between the BIS staff of the belligerent nations remained cordial, professional, and productive. Nationalities were irrelevant. The overriding loyalty was to international finance. The president, Thomas McKittrick, was an American. Roger Auboin, the general manager, was French. Paul Hechler, the assistant general manager, was a member of the Nazi party and signed his correspondence “Heil Hitler.” Rafaelle Pilotti, the secretary general, was Italian. Per Jacobssen, the bank’s influential economic adviser, was Swedish. His and Pilotti’s deputies were British.

  After 1945, five BIS directors, including Hjalmar Schacht, were charged with war crimes. Germany lost the war but won the economic peace, in large part thanks to the BIS. The international stage, contacts, banking networks, and legitimacy the BIS provided, first to the Reichsbank and then to its successor banks, has helped ensure the continuity of immensely powerful financial and economic interests from the Nazi era to the present day.

  FOR THE FIRST forty-seven years of its existence, from 1930 to 1977, the BIS was based in a former hotel, near the Basel central railway station. The bank’s entrance was tucked away by a chocolate shop, and only a small notice confirmed that the narrow doorway opened into the BIS. The bank’s managers believed that those who needed to know where the BIS was would find it, and the rest of the world certainly did not need to know. The inside of the building changed little over the decades, recalled Charles Coombs. The BIS provided the “the spartan accommodations of a former Victorian-style hotel whose single and double bedrooms had been transformed into offices simply by removing the beds and installing desks.”12

  The bank moved into its current headquarters, at 2, Centralbahnplatz, in 1977. It did not go far and now overlooks the Basel central station. Nowadays the BIS’s main mission, in its own words, is threefold: “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in these areas, and to act as a bank for central banks.”13 The BIS also hosts much of the practical and technical infrastructure that the global network of central banks and their commercial counterparts need to function smoothly. It has two linked trading rooms: at the Basel headquarters and Hong Kong regional office. The BIS buys and sells gold and foreign exchange for its clients. It provides asset management and arranges short-term credit to central banks when needed.

  The BIS is a unique institution: an international organization, an extremely profitable bank and a research institute founded, and protected, by international treaties.14 The BIS is accountable to its customers and shareholders—the central banks—but also guides their operations. The main tasks of a central bank, the BIS argues, are to control the flow of credit and the volume of currency in circulation, which will ensure a stable business climate, and to keep exchange rates within manageable bands to ensure the value of a currency and so smooth international trade and capital movements. This is crucial, especially in a globalized economy, where markets react in microseconds and perceptions of economic stability and value are almost as important as reality itself.

  The BIS also helps to supervise commercial banks, although it has no legal powers over them. The Basel Committee on Banking Supervision, based at the BIS, regulates commercial banks’ capital and liquidity requirements. It requires banks to have a minimum capital of eight percent of risk-weighted assets when lending, meaning that if a bank has risk-weighted assets of $100 million it must maintain at least $8 million capital.15 The committee has no powers of enforcement, but it does have enormous moral authority. “This regulation is so powerful that the eight percent principle has been set into national laws,” said Peter Akos Bod. “It’s like voltage. Voltage has been set at 220. You may decide on ninety-five volts, but it would not work.” In theory, sensible housekeeping and mutual cooperation, overseen by the BIS, will keep the global financial system functioning smoothly. In theory.

  The reality is that we have moved beyond recession into a deep structural crisis, one fueled by the banks’ greed and rapacity, which threatens all of our financial security. Just as in the 1930s, parts of Europe face economic collapse. The Bundesbank and the European Central Bank, two of the most powerful members of the BIS, have driven the mania for austerity that has already forced one European country, Greece, to the edge, aided by the venality and corruption of the country’s ruling class. Others may soon follow. The old order is creaking, its political and financial institutions corroding from within. From Oslo to Athens, the far right is resurgent, fed in part by soaring poverty and unemployment. Anger and cynicism are corroding citizens’ faith in democracy and the rule of law. Once again, the value of property and assets is vaporizing before their owners’ eyes. The European currency is threatened with breakdown, while those with money seek safe haven in Swiss francs or gold. The young, the talented, and the mobile are again fleeing their home countries for new lives abroad. The powerful forces of international capital that brought the BIS into being, and which granted the bank its power and influence, are again triumphant.

  The BIS sits at the apex of an international financial system that is falling apart at the seams, but its officials argue that it does not have the power to act as an international financial regulator. Yet the BIS cannot escape its responsibility for the Euro-zone crisis. From the first agreements in the late 1940s on multilateral payments to the establishment of the Europe Central Bank in 1998, the BIS has
been at the heart of the European integration project, providing technical expertise and the financial mechanisms for currency harmonization. During the 1950s, it managed the European Payments Union, which internationalized the continent’s payment system. The BIS hosted the Governors’ Committee of European Economic Community central bankers, set up in 1964, which coordinated trans-European monetary policy. During the 1970s, the BIS ran the “Snake,” the mechanism by which European currencies were held in exchange rate bands. During the 1980s the BIS hosted the Delors Committee, whose report in 1988 laid out the path to European Monetary Union and the adoption of a single currency. The BIS midwifed the European Monetary Institute (EMI), the precursor of the European Central Bank. The EMI’s president was Alexandre Lamfalussy, one of the world’s most influential economists, known as the “Father of the euro.” Before joining the EMI in 1994, Lamfalussy had worked at the BIS for seventeen years, first as economic adviser, then as the bank’s general manager.

  For a staid, secretive organization, the BIS has proved surprisingly nimble. It survived the first global depression, the end of reparations payments and the gold standard (two of its main reasons for existence), the rise of Nazism, the Second World War, the Bretton Woods Accord, the Cold War, the financial crises of the 1980s and 1990s, the birth of the IMF and World Bank, and the end of Communism. As Malcolm Knight, manager from 2003–2008, noted, “It is encouraging to see that—by remaining small, flexible, and free from political interference—the Bank has, throughout its history, succeeded remarkably well in adapting itself to evolving circumstances.”16

  The bank has made itself a central pillar of the global financial system. As well as the Global Economy Meetings, the BIS hosts four of the most important international committees dealing with global banking: the Basel Committee on Banking Supervision, the Committee on the Global Financial System, the Committee on Payment and Settlement Systems, and the Irving Fisher Committee, which deals with central banking statistics. The bank also hosts three independent organizations: two groups dealing with insurance and the Financial Stability Board (FSB). The FSB, which coordinates national financial authorities and regulatory policies, is already being spoken of as the fourth pillar of the global financial system, after the BIS, the IMF and the commercial banks.

  The BIS is now the world’s thirtieth-largest holder of gold reserves, with 119 metric tons—more than Qatar, Brazil, or Canada.17 Membership of the BIS remains a privilege rather than a right. The board of directors is responsible for admitting central banks judged to “make a substantial contribution to international monetary cooperation and to the Bank’s activities.” China, India, Russia, and Saudi Arabia joined only in 1996. The bank has opened offices in Mexico City and Hong Kong but remains very Eurocentric. Estonia, Latvia, Lithuania, Macedonia, Slovenia, and Slovakia (total population 16.2 million) have been admitted, while Pakistan (population 169 million) has not. Nor has Kazakhstan, which is a powerhouse of Central Asia. In Africa only Algeria and South Africa are members—Nigeria, which has the continent’s second-largest economy, has not been admitted. (The BIS’s defenders say that it demands high governance standards from new members and when the national banks of countries such as Nigeria and Pakistan reach those standards, they will be considered for membership.)

  Considering the BIS’s pivotal role in the transnational economy, its low profile is remarkable. Back in 1930 a New York Times reporter noted that the culture of secrecy at the BIS was so strong that he was not permitted to look inside the boardroom, even after the directors had left. Little has changed. Journalists are not allowed inside the headquarters while the Global Economy Meeting is underway. BIS officials speak rarely on the record, and reluctantly, to members of the press. The strategy seems to work. The Occupy Wall Street movement, the anti-globalizers, the social network protesters have ignored the BIS. Centralbahnplatz 2, Basel, is quiet and tranquil. There are no demonstrators gathered outside the BIS’s headquarters, no protestors camped out in the nearby park, no lively reception committees for the world’s central bankers.

  As the world’s economy lurches from crisis to crisis, financial institutions are scrutinized as never before. Legions of reporters, bloggers, and investigative journalists scour the banks’ every move. Yet somehow, apart from brief mentions on the financial pages, the BIS has largely managed to avoid critical scrutiny. Until now.

  PART ONE: KAPITAL ÜBER ALLES

  CHAPTER ONE

  THE BANKERS KNOW BEST

  “I rather hope that next summer we may be able to inaugurate a private and eclectic Central Banks ‘Club’, small at first, large in the future.”

  — Montagu Norman, governor of the Bank of England, to Benjamin Strong, governor of the Federal Reserve Bank of New York, in 19251

  One day in the summer of 1929, Montagu Norman, the governor of the Bank of England, picked up the telephone and spoke to Walter Layton, the editor of The Economist. Norman excitedly asked Layton to come to his office as soon as possible to discuss a very important matter.

  During Norman’s term as governor, from 1920 to 1944, he was one of the most influential men in the world, an apparently permanent bastion of the global financial system. His gnomic utterances were scoured for meaning. When he was re-appointed governor in 1932, the New York Times described him as overseeing Britain’s “invisible empire of wealth.” “Gold standards may come and go,” the article noted, “but Montagu Norman remains.”2 Such was Norman’s power that a single speech could move markets. When, in October 1932, Norman gloomily proclaimed at a bankers’ dinner in London that the world’s economic disorder was beyond the control of any man, government, or country, stocks, bonds, and the dollar all slid sharply and quickly in New York.

  Layton was not surprised by Norman’s agitated manner. The governor was a scion of an old and respected banking dynasty, but his mental state was an open secret among financial insiders. Norman was a mercurial figure, a manic-depressive, and a workaholic, notorious among financial insiders for his mood swings. Shy and hypersensitive, Norman was introverted to the point of neurosis. Before the First World War, Norman had consulted Carl Jung, the Swiss founder of analytical psychology, to discuss a course of treatment, with no success. Jung had implied that Norman was untreatable, which did not help matters.

  The world’s most powerful banker abhorred publicity, being recognized or socializing, and was prone to fainting fits. He once threw an inkpot at the head of an underling who failed to meet his exacting standards. “He was a very unlikely banker. He was more like a seventeenth-century nobleman or painter,” recalled his stepson, Peregrine Worsthorne. “He was always very neurotic and had very bad nervous breakdowns. He was very shy and a loner. He had no care for conventions. He came down to dinner without socks and traveled to work on the underground, which was very unusual in those days.”3

  Nor did Norman look the part of a sober financier, with his cape, neatly trimmed Van Dyke beard, and sparkling, jeweled tiepin. But despite his own flamboyant dress sense, he disapproved of showy behavior, said Worsthorne. “He lived very austerely and discouraged all signs of ostentation. He hated cocktail parties.” Norman’s horror of publicity naturally had precisely the opposite effect. Although when he sailed across the Atlantic he used an assumed name because the press covered his every move, hordes of journalists and photographers still awaited when he disembarked in New York.

  The balmy months in 1929 were the last hurrah of the Roaring Twenties. The American bull market was still growing. Share prices kept rising. The value of stock in Radio Corporation of America (RCA) rose by almost 50 percent in a single month. Even Wall Street’s shoeshine boys were passing on tips to their broker customers. In August a brokerage firm announced a new service for those heading to Europe on ocean liners: on-board trading during the weeklong crossing.

  Layton, responding to Norman’s summons, quickly made his way to the bank’s headquarters at Threadneedle Street, the epicenter of the city, as London’s financial quarter is known
. Surrounded by a high wall, covering most of a city block, the bank’s headquarters were meant to impress, even to intimidate. Behind the giant bronze door lay a complex of courtyards, banking halls, and a garden with a fountain, a veritable Alhambra of money, crowded with clerks and underlings who were bustling along its corridors. Even the terminology was regal: the bank was ruled over not by a board, but by a “court.”

  Layton was ushered into Norman’s office where he sat at a mahogany table in the center of the wood-paneled room. Norman wanted to talk about a new bank, to be called the Bank for International Settlements. The BIS was being set up in connection with the Young Plan, the latest and hopefully final program for implementing German reparations payments for the First World War. But Norman had much more ambitious ideas. The BIS would be the world’s first international financial institution. It would be a meeting place for central bankers. Away from the demands of politicians and the prying eyes of nosy journalists, the bankers would bring some much needed order and coordination to the world financial system. But for the BIS to succeed and properly fulfill its potential, Norman explained, he needed Layton’s help. A subcommittee would soon meet in Baden-Baden, in Germany, to draw up the bank’s statutes. The editor of The Economist, Norman said, was just the man to draft the BIS’s constitution, one that must, above all, guarantee the bank’s independence from politicians.

  TO UNDERSTAND HOW and why the BIS wields such influence today, it is necessary to step back to the early 1920s and the arguments about German reparations payments for the First World War. German war guilt was enshrined in the 1919 Treaty of Versailles. But no amount of money could bring back the dead, whose numbers were almost incomprehensible. In July 1916, on the first day of the Battle of the Somme, Britain lost 60,000 men—the equivalent of a medium-sized town, mown down in a few hours. France lost a total of 1.4 million soldiers during the four years of fighting, and Germany lost 2 million. The United States, which did not enter the conflict until 1917, lost 117,000 men.