by Adam LeBor
In September 1930, a few months after the BIS opened for business, an American lawyer named Allen Dulles sat down in his office at 37 Rue Cambon, in Paris, to write a letter to Leon Fraser. Fraser, a fellow American, was also a lawyer. A former reporter for the New York World newspaper, Fraser had served as general counsel for the execution of the Dawes Plan and had taken part in the negotiations at Baden-Baden on the structure of the BIS. Fraser was now a board member of the BIS and the bank’s alternating president.
Dulles was confident that his request, which was simple enough, would be granted. After all, he was a scion of one of the most powerful families in the United States. His uncle, Robert Lansing, had served as secretary of state, as had his grandfather, John W. Foster. Born in 1893, in Watertown, New York, Dulles had graduated from Princeton University and joined the US Foreign Service. He was posted to Vienna, Austria, until the United States entered the war in 1917, when he moved to Bern, Switzerland, to work as a junior intelligence officer at the US Legation. Neutral Switzerland, home to squabbling émigrés, businessmen, and revolutionaries, provided a bountiful harvest of information. “It is almost impossible to stop for any length of time in Switzerland,” Dulles wrote, “without coming into contact with questionable characters. Bern is just full of agents and representatives of all nationalities.”1
Dulles relished the world of shadows. Even as a precocious schoolboy, he had shown an insatiable appetite for intrigue and geopolitics. He wrote his first book at the age of seven. The Boer War was short treatise on how the Boers, the Dutch settlers, had first claim on southern Africa, as they had arrived there before their British overlords. (Montagu Norman, who fought in the Second Boer War, at the start of the twentieth century, might have disagreed.) Seven hundred copies were privately printed and sold at fifty cents each, with the proceeds being donated to a Boer charity.
But the future director of the CIA did not always know how to assess a potential source. He later loved to recount the story of how one day in April 1917 the telephone rang at the US Legation in Bern. Dulles took the call. A Russian émigré leader urgently wanted to meet with an American diplomat. Dulles refused, as he wanted to play tennis instead. The next day the man who had telephoned left Switzerland on a sealed train for the Finland Station—a railway station in St. Petersburg, Russia. The city would later be renamed Leningrad in his honor. From Bern, Dulles was dispatched to Paris, as part of the US team at the 1919 Paris Peace Conference. Officially, he was included as a member of the commission drawing up the boundary of the new state of Czechoslovakia. In fact, Dulles was running the American diplomatic intelligence operation for central Europe and courting and monitoring its émigrés, exiles, and revolutionaries.
By 1930, when Dulles wrote to Leon Fraser, Dulles had left the Foreign Service. He and his brother, John Foster Dulles, became partners at Sullivan & Cromwell—the most powerful law firm in the United States, if not the world—headquartered at 48 Wall Street, in New York. Allen Dulles ran Sullivan & Cromwell’s office in Paris and knew Hjalmar Schacht well. In Paris in 1919, Dulles had learned about diplomacy. And in Paris in 1930, he would learn about the world of high finance and the BIS. Dulles, wrote biographer Peter Grose, was “plunged into a realm where sovereign frontiers were transparent and the trappings of democracies seldom allowed to penetrate. Like beguiled readers of Eric Ambler or Graham Greene, Allen discovered that only a thin line divided respectable high finance from a shadowy underworld.”2
While Montagu Norman and Hjalmar Schacht had exploited the chaos around the German reparations question to finesse the world’s leading powers into creating the BIS, the Dulles brothers used Europe’s disorder to broker deals and monetary instruments to refinance Germany that were so complex that few outside their offices at Sullivan & Cromwell could understand them.
Much of this web was connected to the BIS, via the Dulles brothers and their friends on Wall Street and in London and Germany. New York banks had led the way during the 1920s in raising money for Germany, and the City of London had also provided significant funds. Foremost among the British banks was J. Henry Schröder, the London operation of the well-established German banking firm of the same name that was based in Hamburg. Schröder, in London, set up a trust to invest in numerous German firms, including IG Farben, Siemens, and Deutsche Bank. Frank Tiarks, who was a partner in the London branch of Schröder, set up a subsidiary in New York, called Schrobanco. It opened for business in October 1923 and was an instant success. The president of Schrobanco was an American banker named Prentiss Gray, who was a close friend of John Foster Dulles’s, whom Gray had met at the Paris Peace Conference. Schröder’s historic German connections and contacts made that country a natural focus of Schrobanco’s. The company quickly became one of the leading agents for doing business in Germany and later, for processing loans under the Dawes and Young reparations plans. Among Schrobanco’s shareholders were a number of German, Swiss, and Austrian private banks, which included, naturally, the Hamburg branch of J. Henry Schröder, as well as a bank called J. H. Stein of Cologne. One of J. H. Stein’s partners, who was a scion of the Schröder dynasty, would later join the board of the BIS and use J. H. Stein to funnel money from German industrialists to Heinrich Himmler’s personal slush fund.
Frank Tiarks was a director of the Bank of England and a close colleague of Montagu Norman. Tiarks had his eye on an American financier named Gates McGarrah, whom Tiarks wanted to recruit to the board of Schrobanco. McGarrah, whom Tiarks described as “one of the most important American bankers,” was a director of the Federal Reserve Bank of New York. He also had excellent connections in Germany—he had represented the United States at the Reichsbank when it was held under international control. McGarrah stayed on the Schrobanco board until 1927 when he returned to the Federal Reserve Bank of New York as chairman. He stayed there until 1930—when he was appointed the first president of the BIS. As for Schrobanco, its complicated German investments were in good hands: the bank’s lawyer was Allen Dulles. The links were so close that in 1929 Schrobanco moved into spacious new offices at 48 Wall Street—the same building that housed Sullivan & Cromwell.
ALLEN DULLES HAD a simple request for Leon Fraser that autumn of 1930. His sister, Eleanor Lansing Dulles, had received a scholarship from Harvard University to write a book about the BIS. Eleanor Dulles was a well-regarded academic and currency expert, who had previously written a book about the French franc. Allen Dulles wrote, “Anything you can do for her would be greatly appreciated, and I can assure you she is a very discreet person.”3 Like her brothers, Eleanor Dulles also had easy access to the world’s most powerful bankers and financiers.
Allen Dulles’s letter was not the first Fraser had received that asked him to assist Eleanor. Owen Young had written in May of that year. And Gates McGarrah, the BIS president, was also getting letters about Eleanor Dulles. Paul Warburg, the eminent banker, had written to McGarrah from the headquarters of M. M. Warburg at 40 Wall Street, in New York. Warburg explained that Eleanor was a “sister of my good friend John Foster Dulles, whose name is well known to you as a writer on international questions and whom you undoubtedly know personally.”4
Jackson Reynolds, president of the First National Bank of New York, who had chaired the BIS Organization Committee in Baden-Baden, wrote to McGarrah from 2 Wall Street. He asked McGarrah to assist Miss Dulles—especially as she was the sister of Reynolds’ friend, John Foster Dulles.
There were few, if any, people in the United States then with a more powerful and influential set of friends than John Foster Dulles, who served as legal counsel to the US delegation at the Paris Peace Conference, where he had specialized in German war reparations. His time in Paris gave him a privileged insight into the workings of international finance and diplomacy and a network of coveted contacts. Dulles’s client list during the 1920s read like a who’s who of American finance: J. P. Morgan; Kuhn, Loeb & Co.; Harris, Forbes & Co.; Brown Brothers; W. A. Harriman; and Goldman Sachs. Dulles arranged
tens of millions of dollars’ worth of loans to clients, including to the cities of Munich, Frankfurt, Nuremberg, Berlin, and Hanover, and to the Union of German Mortgage Banks, the Berlin City Electric Company, Hamburg Street Railways, and the State of Prussia. Dulles also worked on the Dawes Plan German Loan in 1924 and the German Government International Loan of 1930 that had been instigated by the Young Committee.5
Wall Street in the 1920s was possessed by a near-mania to lend to Germany. In 1923 American banks and finance houses sent abroad $458 million in long-term capital. By 1928 that sum had risen to $1.6 billion. The German credit bubble reached ludicrous extremes. A small village in Bavaria, which needed around $125,000, was persuaded to borrow $3 million.6 But the real significance of this flow of capital was not just financial. The bonds between the American bankers, businessmen, and industrialists, and their German counterparts, would prove far more durable than the doomed Weimar Republic, and even the Third Reich. With the BIS as the central point of contact, these links would endure during the Second World War and reshape Europe after 1945.
Allen Dulles returned to Bern during the Second World War, as a far more experienced, powerful, and influential spymaster, harvesting much information through his assets at the BIS. John Foster Dulles went on to become US Secretary of State for the Eisenhower administration during the 1950s at the height of the Cold War. The Dulles brothers would help ensure that Nazi bankers, businessmen, and industrialists—many of whom should have been tried for war crimes—were seamlessly integrated back into powerful positions in the new Federal Republic of Germany.
FOR HJALMAR SCHACHT and Montagu Norman, January 20, 1930, was a date to savor: they had created a bank beyond the reach of either national or international law. On that date the governments of the United Kingdom, France, Germany, Belgium, Italy, Japan, and Switzerland signed an extraordinary document. The Hague Convention guaranteed that the BIS would be the world’s most privileged and legally protected bank. Its statutes, which remain in force to this day, essentially make the BIS untouchable. Article 10 of the BIS Constituent Charter noted,
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.7
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.”8 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.10 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.”13 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
