by Adam LeBor
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.
CHAPTER THREE
A MOST USEFUL BANK
“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, 19301
Schacht’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.”2 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.”3
France and Britain might believe that the establishment of the bank settled the reparations issue, but Blessing understood that the existence of the BIS actually offered a forum to open up the issue once again. Blessing’s savvy ruthlessness was in sharp contrast to Montagu Norman’s notion of a cozy club. The Reichsbank, Blessing argued, should certainly cooperate with the BIS in its new role as the bank for central banks. As a trading nation that relied on exports, Germany could only benefit from an improved international economy. Reparations, however, were an entirely different matter.
Blessing called for German officials to undermine the new bank by making impossible demands that would sour the atmosphere and weaken its credibility. He demanded a sophisticated form of psychological warfare against the BIS. German officials there must “time and again refer to the completely utopian objectives of the bank.” German bankers should repeatedly ask the BIS to guarantee export credits for high-risk ventures, even when it was clear that the credits would never be granted. The aim was to “gradually create an atmosphere in the Bank in which the anti-reparation bacillus finds fertile ground.”4 If the bank began to lose legitimacy, then so surely would the Young Plan, which the bank was mandated to administer. In 1931 Blessing left the Reichsbank to take up a senior post at the BIS.
But even with Blessing on board, the BIS could not solve the German financial crisis. The elections in 1931, which saw the Nazis and Communists win one-third of the seats in the Reichstag, had made the country almost ungovernable. That political instability triggered capital flight, which caused a further rise in unemployment and a lack of confidence in both government and the banking system and led to further capital flight, higher unemployment, and more support for the Nazis and the Communists. The Weimar Republic had entered its death spiral.
In June 1931 Chancellor Heinrich Bruning declared that he doubted if Germany could meet the next payment due under the Young Plan. The situation was so grave President Herbert Hoover called for a moratorium on all war debts and reparations. It was agreed, for one year. The Bank of England, the Bank of France, the New York Federal Reserve, and the BIS agreed on an emergency loan to Germany of $100 million.
As Toniolo notes, the “newborn BIS was at the heart of the first experiment ever of a multilateral attempt at managing an international financial crisis.”5 It was not successful, but then it was never likely to be. Fixing the German debt crisis was a task far beyond the BIS, even if the BIS had been created expressly for the purpose of facilitating reparations.
In December 1931 the German minister of finance wrote to the BIS, saying that as Germany was suffering a “crisis without parallel” the bank must re-examine the whole question of reparations. The BIS set up a committee, headed by an Italian board member, Alberto Beneduce, to examine the matter. Carl Melchior, a prominent German Jewish banker and vice chairman of the BIS, represented Germany. Melchior had served as a captain in the German army in the First World War, in which he was badly wounded. A skilled diplomat and financier, Melchior had been a member of the German delegation at the Paris Peace Conference in 1919. He had represented Germany on the Young Committee and chaired the finance committee of the League of Nations. His tact and skills had helped Germany re-enter the community of nations. The Beneduce Committee’s conclusions, published just before Christmas 1931, were a triumph for Berlin. All intergovernmental reparations and war debts must be “adjusted” to ensure peace and economic stability. “Adjustment” was a euphemism for abolition. Six months later, in 1932, European governments met in Lausanne to consider the Beneduce Committee’s recommendations. They agreed to cancel German reparations, except for one final payment.
THE BIS PRESENTED itself as a new and modern institution, but central banks and war had been entwined through history. The Bank of England had been founded in 1694 in part
to raise funds for King William III’s war against France. The bank accepted deposits and issued personal notes against the funds, which could be redeemed for gold. Clerks added the customer’s personal details to the document, the precursor of today’s banknotes. A little more than a century later, in 1800, Napoleon Bonaparte founded the Bank of France. The emperor aimed to bring about stability and economic growth after the wars and revolutionary turmoil of the late eighteenth century. The Reichsbank was founded in 1876 in part to finance future German expansionism, after the Franco-Prussian war of 1870 had triggered a liquidity crisis. The German bankers had planned ahead. A law suspending gold convertibility of Reichsmarks in time of war was drafted in 1904.6 By the summer of 1914, the approaching war had triggered a run on the Reichsbank reserves. In July the Reichsbank lost 103 million marks in a week. The bank suspended gold convertibility, which was an illegal act. Parliament passed an act retrospectively authorizing that decision four days later.7
Yet there was also an argument in favor of empowering the financial technocrats to get on with running the global economy, unbound by political considerations. It was the politicians and governments, some of them democratically elected—not the bankers—who had led the world to war and caused the deaths of millions. The bankers would finance their political masters’ conflicts, as they were required to do, but they had no desire to order men to walk into a hail of bullets to gain an inch of mud-soaked field in Belgium. Rather, the central bankers shared similarly benign aims: stability, economic growth, and increased prosperity for all. The central bankers formed a global brotherhood, united by common bonds that transcended parochial national interests. In an era when nationalism had ripped apart the old European order, perhaps the bankers’ transnationalism could bring peace. The BIS, had after all, been specifically designed in the aftermath of war for that purpose. By managing Germany’s reparation payments and acting as a trustee for the Dawes and Young loans that had allowed Germany to meet its international obligations, the bank should, theoretically, defuse the explosive German question.
The bankers’ personal friendships could be deep and enduring. The bond between Norman and Schacht, for example, lasted for almost thirty years, until Norman died in 1950. It outlasted the hyperinflation of the early 1920s, the stock market crash of 1929, the collapse of the Weimar Republic, the rise and fall of the Third Reich, Schacht’s trial at Nuremberg for war crimes, the disintegration of the British Empire, the onset of the Cold War, and the division of Germany. Such deep connections between powerful men were rare and potentially valuable.
Even the BIS’s more nebulous mandate of central bank cooperation had its defenders. Economists and bankers had long argued that as the world economy became more sophisticated, and central banks became more powerful, there was a need for some kind of coordinating body to ensure financial stability. Julius Wolff, a professor at the University of Breslau, had proposed in 1892 that a new financial institution in a neutral country be set up to issue an international currency. The new unit would be backed by central banks’ gold reserves and be used for emergency lending to countries in crisis. Luigi Luzatti, an Italian politician, wrote in 1907 in the Viennese newspaper Neue Freie Presse that central banks were waging an unnecessary “monetary war” by competing for gold supplies by raising interest rates and other devices. It would be far better, he posited, for banks to adopt a policy of “cordial cooperation” by supplying gold to those banks that needed it. He called for a new commission to coordinate “international monetary peace,” since even when central banks did lend to each other, national interests colored those loans. Thus there was a need for a technical, apolitical institution to handle these transactions, a financial equivalent of the postal and telegraph unions. The BIS seemed to fit the bill.
The bank was also a creature of its time, of new multilateral institutions run by apolitical technocrats. The League of Nations, which was the forerunner of the United Nations, would defuse the world’s political crises, while the BIS would ensure financial stability. Pierre Mendes-France, a French Socialist politician, wrote in July 1930, that the BIS, after administering the Young Plan, “will progressively increase its patch and little by little the experience will show the areas that it may approach safely.”8 Mendes-France, who served as prime minister in the 1950s, praised the BIS and the League as the potential harbingers of peace. “In the mists of the future, the mystical purpose of a union in financial order . . . under wise and prudent management,” he wrote, “may become a potent aid for the preservation of world peace.”9
The US government took a very different view. The BIS was born out of reparations negotiations chaired by two Americans, Charles Dawes and Owen Young. Its first presidents, Gates McGarrah and Leon Fraser, were American. But Henry Stimson, the secretary of state, proclaimed that the United States did not wish to “directly or indirectly participate in the collection of German reparations through the agency of a bank or otherwise.”10 The United States had never asked for reparations, thus it had no reason to participate in the BIS. It had not even joined the League of Nations, even though President Woodrow Wilson had practically invented the institution. The State Department’s opposition to the BIS was so strong that George Harrison, the governor of the New York Federal Reserve, even avoided Basel when he traveled to Europe. Washington, DC, refused the BIS directorship offered to the Federal Reserve. The consortium of American banks—J. P. Morgan, the First National Bank of New York, and the First National Bank of Chicago—that had bought shares at the bank’s founding took up the directorship instead.
Eleanor Lansing Dulles, however, was firmly in the internationalist camp. She published her book on the BIS in 1932, despite some difficulties when she was rumored to be an American spy and then lost her office and access to internal documents. McGarrah, the bank’s president, wrote of his regret to John Foster Dulles that the bank could not have been more open to her. “I am sorry not to have been able to be more useful to your sister, and we would have been glad to open everything up to her, including an office here, but . . . the work of this bank, like that of any other is in large measure confidential.”11
Eleanor Dulles was by far the most attractive of the Dulles siblings. She was a feisty career woman with a sharp mind of her own in an age that did not welcome such women. Her personal life was marked by tragedy—a pronounced anti-Nazi, she fell in love with David Blondheim, a Jewish intellectual, and married him, to the dismay of her family. He later committed suicide. Eleanor Dulles went on to enjoy a stellar career in the US Foreign Service, specializing in Germany. In The BIS at Work, she described a smooth-running institution, a kind of financial League of Nations, where different nationalities worked in harmonious cooperation. The bank was a future model for the world and should have been granted stronger powers to prevent national interests asserting each themselves. “If the BIS is not given the power and the facilities to work at this problem the result will be the emergence of financial rivalries,” she warned.
One central bank after another will gain a predominating influence and as this central bank is threatened from time to time by rival financial influence, the stability of the economic system will be strained to the breaking point again as it has been in 1931. It is to avoid such catastrophes that the BIS should be strengthened to meet the urgent needs which lie before it.12
Unfortunately for Eleanor Dulles and her fellow idealists, Blessing and Schacht’s plan for the BIS was about to come to fruition. The new regime in Germany would exploit the BIS’s supranational reach to advance its own national interests. By April 1933 the Nazi terror had begun in earnest. Legalistic as ever, the German legislators had voted their democracy out of existence. The Enabling Act, passed by the Reichstag the previous month, removed citizens’ rights to free speech, assembly, travel, and protest. It permitted arbitrary arrest, torture, and detention. Germany was now a racially based dictatorship. On April 1 Nazi stormtroopers ran riot across the country, barricading the entrances to Jewish shops, da
ubing them with Stars of David and slogans that called on shoppers not to buy from Jews. The first prisoners began arriving at Dachau, the SS’s prototype concentration camp.
Soon after the April pogrom—the clearest signal yet of the Nazis’ intentions for Germany—Hitler asked Schacht if he would return to his old job as president of the Reichsbank. Schacht accepted and so regained his seat on the board of directors of the BIS. Schacht was a conservative German nationalist, rather than a believer in Aryan racial supremacy. Jews, he believed, were rather too pushy, but could still be useful for the economy. Schacht tolerated, rather than advocated Hitler’s anti-Semitism. Schacht used his privileged position to occasionally speak out against the campaign against the Jews, but he was no anti-Nazi. He wanted a strong, economically independent Germany. If Hitler offered the best chance for that, then so be it. Back in 1930 Schacht had told Bella Fromm, a Jewish society columnist, “Why not give the National Socialists a break? They seem pretty smart to me.”13 Now he had the opportunity to do so.
