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

by Adam LeBor

  The Nazis also seemed “pretty smart” to the BIS’s American management. “Order and discipline in Germany are at the present time exemplary,” wrote Gates McGarrah to Leon Fraser in 1933. “The vast majority of the population has the feeling that the fortunes of Germany are in the hands of strong leaders who are inspired by goodwill, so that an optimistic view as regards the future development is justified.”14 The German order, discipline, and goodwill that McGarrah so admired came at a high price, although he did not have to pay it. Carl Melchior did.

  As McGarrah eulogized the new Germany, his colleague Melchior, the vice president of the BIS, was forced by the Nazis to resign. The fate of the eminent Jewish banker was regrettable, they murmured in Basel, especially after three years of loyal service, but there was nothing to be done—and certainly not by the BIS, which must remain neutral in its members’ internal affairs. Leonardus Trip, the president of the Bank of the Netherlands, swiftly replaced Melchior. The Dutch banker’s elevation left a vacancy on the bank’s board, which was filled—as it was noted in the BIS 1933 Annual Report—by “Baron Curt von Schröder of the banking house of J. H. Stein, Cologne.”

  This terse description rather undersold the German nobleman. Kurt Freiherr von Schröder (his name is usually spelled with a “K”) was one of the most powerful and influential bankers in Nazi Germany, a scion of the dynasty whose empire included J. Henry Schröder in London and Schrobanco in New York, whose board Allen Dulles joined in 1937. Sociable, cosmopolitan, and well-traveled, von Schröder was known as a reliable, international financier, part of the new global elite who were equally at home in the gentlemen’s clubs of London or the dining rooms of Wall Street. The German banker was especially close to Frank Tiarks, the director of the Bank of England who was a partner in J. Henry Schroder bank in London. Tiarks had set up Schrobanco in New York, recruiting Gates McGarrah to its board. Between 1923 and 1939 Kurt von Schröder regularly traveled to London and frequently met Tiarks. The two men had “many business talks together,” von Schröder later testified. While in London, von Schröder arranged loans for the Flick industrial concerns, whose head, Friedrich Flick, was pouring money into the Nazi party. The loans, like most of Kurt von Schröder’s arrangements, went through his relative Baron Bruno von Schröder, the head of the London branch of J. Henry Schröder banks. Kurt von Schröder also did business with several other major British banks, including Guinness Mahon, Kleinwort, and Lloyds, all on behalf of J. H. Stein, the influential private bank in Cologne where he was a partner.15

  Hjalmar Schacht personally appointed von Schröder to the BIS board. The summons came out of the blue. “Mr Schacht called me up one day in Berlin and said that they must have a new man for the BIS and told me he thought I was the right one. . . . I was very surprised,” von Schröder told Allied interrogators in 1945.16 Such modesty was unconvincing. Von Schröder enjoyed close personal links with the highest reaches of the Nazi party. He had helped to bring Hitler to power. In January 1933 von Schröder had hosted a meeting at his villa in Cologne between Hitler and Franz von Papen, the former chancellor, who later served as Hitler’s vice chancellor. Rudolf Hess, Hitler’s deputy in the Nazi party; Heinrich Himmler, the chief of the SS; and Wilhelm Keppler, Hitler’s fundraiser and liaison with German businessmen were also there. Keppler later ran the Himmlerkreis, the circle of businessmen who channelled money to Himmler’s slush fund at the J. H. Stein bank.

  At the meeting, Hitler outlined his plans for economic autarky.17 Germany could no longer be dependent on foreign countries for any of its needs. The country must be self-sufficient—especially in synthetic oil and rubber. Without these Germany could not wage war, Hitler announced. Production of synthetic oil and rubber was the responsibility of IG Farben, the giant Nazi chemicals conglomerate, which is why Hermann Schmitz, the CEO of IG Farben, would later join Schacht and von Schröder on the board of the BIS. During the war Schmitz channeled money to Himmler via Schröder into special account “S” at J. H. Stein bank, British intellience documents reveal. In 1941 alone, Schmitz transferred 190,000 Reichsmark into the SS leader’s personal account. Himmler appreciated Schmitz’s generosity, Schröder wrote to his fellow BIS board member, asking Schmitz to transfer a similar sum:

  I, therefore, take the liberty of asking you again, this year, to remit the same amount for the Reichsführer-SS to the Special Account “S” with the banking firm of JH Stein, Cologne. I would be grateful to you if you complied with this request. As you know, the Reichsführer has always particularly appreciated this contribution and you may be sure of his gratitude.18

  Carl Melchior, who had served his country and the BIS so diligently, had been long plagued by ill health, and he died in December 1933.

  ON WALL STREET, Hitler’s rise was watched with fascination and concern. Fascination because the advent of an extreme nationalist, one-party state in Germany seemed to have finally banished the specter of Bolshevism. But were Wall Street’s investments and holdings really safe? Substantial sums were at stake, involving the most powerful companies in America, several of which were deeply entwined with IG Farben. The German firm operated in the United States as General Aniline and Film (GAF). GAF’s founding board members included Walter Teagle, Standard Oil’s president; Edsel Ford, the president of Ford Motors; Charles E. Mitchell, chairman of the National City Bank; and Paul Warburg, of the banking dynasty. Standard Oil was GAF’s most important partner, and the two firms signed a research and development agreement on oil production. (Standard Oil was also on excellent terms with the BIS—Robert Porters, the bank’s chief administrative officer, left to become an adviser to the oil company.)

  Standard Oil owned the patents on synthetic rubber, known as Buna, but had ceded control of them to IG Farben. In 1929 Walter Teagle had agreed to a “division of fields” cartel arrangement with its German partner. “The IG are going to stay out of the oil business and we are going to stay out of the chemical business,” explained one Standard official.19 The Standard Oil–IG Farben agreement set the pattern for a series of powerful cartels. John Foster Dulles carried out much of the pioneering legal work for these. Sullivan and Cromwell represented General Aniline and Film, IG Farben’s American subsidiary.

  Dulles was a director of the International Nickel Company (INKO), the largest producer of the metal in the world. In 1934 INKO signed a cartel agreement with IG Farben, swapping supplies of nickel sources for the license rights to a newly patented nickel-refining process.20 Dulles also arranged chemical cartels. He represented the Solvay American Investment Corporation, the American subsidiary of a Belgium firm that was a partner of IG Farben. Solvay American held 25 percent of the stock of the Allied Chemical & Dye Corporation, an American company. In 1936 Allied entered a cartel agreement with IG Farben on dyestuff production. And so it went, all through the 1930s, as American financiers and lawyers—none more than John Foster Dulles—ensured that American money, commodities, and expertise flowed steadily into the Third Reich.

  But there was still some unease in the boardrooms and clubs, not because of the persecution of the Jews or the concentration camps, but because the Nazi party seemed to still have some dangerous tendencies: its full name, for example, translated as the German Nationalist Socialist Workers’ Party. The Brownshirts, the Nazi “leftist” faction, remained powerful. The bankers and industrialists needed fresh, firsthand reassurance. They needed a meeting with Hitler.

  Wall Street’s envoy was Sosthenes Behn. On August 4, 1933, the New York Times reported that Hitler had held his first meeting with “representatives of American finance.” The newspaper noted, “Chancellor Hitler, who is resting at his mountain retreat on the Salzburg, today received Sosthenes Behn, a director of the National City Bank of New York, and Henry Mann, its resident vice president for Germany. . . . There was no hint of the motive.” But there did not need to be. Behn had founded the International Telephone and Telegraph Company (ITT) in 1920. ITT had grown to be one of the most powerful companies in the world
. It had substantial holdings in Germany, some of which were engaged in armaments production. ITT needed a well-connected banker there to look after its interests and subsidiaries. It found one—in Kurt von Schröder.

  SCHACHT SOON TURNED on the bank he had helped create. The 1932 Lausanne conference had canceled Germany’s obligations to pay reparations to the Allied victors. But the loans Germany had taken out under the Dawes and Young plans to meet those obligations were still outstanding. It was of little concern to the Wall Street financiers whether Germany used their funds to pay for reparations or to fund a new armaments drive. They wanted to know that they would get their money back. Schacht told the BIS governors at the June 1933 board meeting that he supported paying the Dawes loan but not the Young loan. Germany simply did not have sufficient resources to pay them both. Schacht was under intense political pressure from the Nazi leaders, who wanted both loans written off, seeing them as the final vestiges of Germany’s humiliation at Versailles.

  The creditors, naturally, disagreed. Another conference was called, this one chaired by Leon Fraser, the BIS president, and hosted by the Reichsbank in Berlin in May 1934. The Berlin gathering was a total failure. Soon afterward Germany announced a complete moratorium on all medium- and long-term debts, including the Dawes and Young loans. The announcement caused fury as bondholders saw their assets vaporize. J. P. Morgan even suggested that the BIS stake a claim to German funds held in Switzerland. That was neither realistic nor practical. The BIS could do nothing except issue a protest against what Fraser called the “thoroughly arbitrary way in which the German government has disregarded its engagements.”21

  It had no effect, for the old fox, as Schacht was known, had outmaneuvered everybody with a high-stakes game of international poker. The Reichsbank governor understood that a blanket default would severely damage Germany’s international standing and credit-worthiness. Yet it was imperative to disentangle Germany from the obligations of the Dawes and Young plans and all the political and emotional baggage that they brought in their wake. The policy of economic autarky outlined at the meeting at Kurt von Schröder’s house and the memo written by Karl Blessing back in 1930 demanded no less. So as soon as Germany had broken free from the BIS, Schacht swiftly concluded bilateral agreements with Dawes and Young loan bondholders in seven countries, including Britain, France, and Italy, albeit at reduced rates of interest. It was the old principle of divide and rule, brilliantly applied to the new field of international finance. Just as the rule of law had been torn up in Germany, so had the country’s international financial obligations.

  Schacht’s arbitrary rewriting of Germany’s debt obligation proved that Germany’s commitments were not worth the paper they were written on. At the same time, the dealings of some of those working in the BIS also seemed less than scrupulous: the combination of secrecy, insider information, and vast amounts of money sloshing around was having unwelcome effects. Some of the BIS staff were, it seems, insider trading. Basel was full of rumors that BIS officials were using their privileged knowledge of the bank’s activities to speculate against the Swiss franc. A hard-hitting article in the Berner Tagblatt, a Swiss newspaper, in May 1935, had caused uproar, especially as it appeared to be based on documentation or a high-level source inside the BIS. Swiss bankers widely believed that the BIS had no confidence in the Swiss franc. A Swiss MP had even raised the conduct of the BIS in the Swiss Parliament. The situation was getting uncomfortable for the BIS management.

  The following month the staff was questioned one by one. Gates McGarrah, who had stepped down as president, but remained on the board, wrote to Johan Willem Beyen, his Dutch colleague and fellow board member, that the investigation had turned up some alarming information. One of the bank’s “higher officials” had bank accounts in both London and Switzerland, both of which had been overdrawn on the security of stocks and shares. The staff member had been shorting sterling and Swiss francs—selling the currencies when strong and buying them back when they weakened. “This, of course, is a clear case of currency speculation,” admitted McGarrah, but there was no need to take any action, he wrote. If the banks do not object and the overdrafts were long-standing, “it might be difficult to criticize too harshly or to interfere with any vigor in the private affairs of a man of some standing who is endeavoring to look after his own fortune in the way he considers best.”22 In other words, even though the senior BIS official was indeed speculating, nothing should be done, especially as he was a man of “some standing.”

  Another case, which even the emollient McGarrah noted “calls for comment,” involved a member of staff who borrowed money in London to buy gold. Alarmingly, the BIS staffer did this, he explained when questioned, “at the same time as his chief.” Such practices were “highly undesirable,” argued McGarrah, especially as the staffer’s chief was a member of the BIS management (it is not clear who from the documents).23 Thus, the BIS was in no position to issue an official denial about speculation, McGarrah continued. The bank’s best option was to inform the Swiss National Bank that it had received the assurance of its management and staff that no speculation had taken place (even though it had) and that the bank would take measures against the possibility of it happening in the future. Bankers in the 1930s, like many of their present-day contemporaries, wanted any potential scandal about their personal probity shut down as soon as possible. “It might be best to endeavor to let the matter die a natural death outside the house and to proceed only with a further internal investigation,” McGarrah noted.24

  CHAPTER FOUR

  MR. NORMAN TAKES A TRAIN

  “The above-mentioned young Nazi and his friends believe that the BIS offers them their best contact with the outside world. They want to have capable representatives in the BIS in order to break the way for [an] approach to more normal business and monetary relations with the important countries of the world.”

  — Merle Cochran, an American diplomat who monitored the BIS, in a telegram to the State Department, May 9, 19391

  The Berner Tagblatt newspaper’s revelations about the murky goings-on inside the BIS highlighted the growing questions about the bank’s role and function. Insider trading during the 1930s was often the rule rather than the exception, but there were wider issues at stake. The BIS had been established for three main purposes. The first, and ostensibly the most important, was to manage German reparations payments under the 1930 Young Plan. The second was to facilitate cooperation between central banks. And the third was to act as a bank for central banks. The BIS was barely five years old in 1935, but it had already had lost its primary reason for existence and the second reason was under threat. How long would it be before the third reason—to act as a central bank for banks—was called into question?

  The Young Plan had collapsed almost as soon as it was agreed to. The Hoover Moratorium, announced a year later, had paused reparation payments. The 1932 Lausanne Conference had confirmed that Germany’s war debts would be written off. Thus, there were no more reparations payments. The BIS was also the trustee for the loans that Germany had taken out under the Dawes and Young plans to make those reparations payments. But Gemany had stopped using the BIS to repay the Dawes and Young plan loans. Instead Schacht had blackmailed Germany’s creditors into signing new bilateral agreements. The Reichsbank, a cofounder of the BIS, had broken its legal, financial, and moral obligations with complete impunity and delivered a serious blow to the BIS’s credibility as a neutral interlocutor.

  So for what other reasons did the BIS continue to function? It acted as a facilitator of central bank cooperation for countries whose currencies were on the gold or gold exchange standard. (The gold standard valued a national currency at a set amount of gold. The gold exchange standard included the country’s holdings in US dollars and British pounds as part of its national reserves.) The statutes of the BIS assumed that international finance was based on the gold and gold exchange standard and so would continue to grow smoothly and steadily, facilitated by the
bank. As Toniolo notes, “The gold standard was embedded in the very DNA of the BIS.”2 The bank kept its accounts in Swiss gold francs, with each franc worth 0.29 grams of fine gold. But the central banks were losing their enthusiasm for gold. Even Britain had come off the gold standard. By the end of 1932 only seven of the forty-six countries that had been on the gold standard remained, including France, Italy, and the United States, which left the following year.

  With no more reparations and the collapse of the gold standard, why did the BIS stay in business? In part—as others who wished to dissolve the bank would find in later years—because it was founded under an international treaty, and its statutes were essentially immutable. Schacht and Norman had designed their bank superbly. It was not possible to close the BIS. In fact, the end of reparations and the collapse of the gold standard proved a boon for the BIS. It allowed the bank to focus on its founders’ intentions: to build a new transnational financial system of large capital movements, free from political or governmental control. Gates McGarrah, the bank’s first president, had explained as much soon after the bank was founded. Writing in Nation’s Business magazine, McGarrah admitted that German reparations payments were a “routine operation,” which any trust company could administer.

  The conception seems to have formed in the popular mind that the Bank for International Settlements, which began at Basel, Switzerland, May 20, 1930, was organized merely to handle German reparations payments and the so-called inter-allied debt and that its principal operations are concerned with the German debt payments. That is a mistaken, although an understandable, view.

  Although the prime reason for the bank’s creation was to administer the monthly sums paid into it by Germany, this duty has already become the smaller side of the Bank’s activities. The handling of the German reparations payments is a routine operation, which any trust company could carry on. Within six months after opening for business the Bank has developed much larger and more important activities and has become a medium of service, which is one of the saving features in a tense world situation. . . .