by Adam LeBor
The Bank is completely removed from any governmental or political control. No person may be a director who is also a government official. The Bank is absolutely non-political and is organised and operated on a basis purely commercial and financial, like any properly managed banking institution. Governments have no connection with it nor with its administration.3
McGarrah, like every international financier, regarded the Bolshevik Revolution with horror. Yet he and Vladimir Lenin had much more in common than either could know. The BIS president and the Russian revolutionary both understood that the twentieth century would be the bankers’ century. The new mechanisms of transnational capitalism allowed the bankers to send vast sums of money quickly and easily around the world and harvest vast profits from doing so, free from oversight.
The bankers could save a country from collapse and revive its economy—as they did in Germany in the early and mid-1920s, dispatching hundreds of millions of dollars and underwriting the Dawes loan—or they could help send it into a tailspin, by stopping the flow of cash and then pulling out, as they did at the end of the 1920s.
Massive capital movements were now increasingly common. The BIS, as the bank for central bankers, institutionalized that new power. In the first six months of 1931 the BIS advanced £3 million to the Bank of Spain to stabilize the peseta; gave a credit of 100 million Austrian schillings to the national bank when the Credit Anstalt bank went bust; and advanced $5 million to the Hungarian National Bank and arranged a further $10 million credit for Budapest. A small clique of financiers, unaccountable to any government, most of whom knew each other well, had somehow amassed unprecedented economic and political power. Lenin had understood the rising power of finance capital while he was living in exile in Zürich and working in his epic study of imperialism. “The old capitalism has had its day. The new capitalism represents a transition toward something,” he wrote. “Thus the beginning of the twentieth century marks the turning point at which the old capitalism gave way to the new, at which the domination of capital in general made way for the domination of finance capital.”4
ON JANUARY 5, 1939, almost two months after Kristallnacht—the state-sponsored pogrom against Germany’s Jews—Montagu Norman stepped off the train at the Zoologischer Garten station in Berlin and was met by Hjalmar Schacht. Norman was the guest of honor at the christening of Schacht’s grandson, and he was swiftly driven to Schacht’s apartment in the Reichsbank building where the ceremony took place. The baby boy was named Norman Hjalmar. Numerous articles in the German press welcoming Norman to Berlin heightened the friendly atmosphere. The two bankers then traveled to Basel together for the monthly board meeting at the BIS.
As Europe slid inexorably to war, British journalists and politicians were asking increasingly pointed questions about the close ties between Norman and Schacht. The Reichsbank president had been in London just before Christmas and had visited Norman at home. What had been discussed? The News Chronicle newspaper, for example, suspected that Norman might be an envoy, not just for the Bank of England, but for the pro-appeasement government, led by Prime Minister Neville Chamberlain. Why had he gone? What was Norman saying to the Nazi leaders in Berlin?5 The newspaper demanded to know. Ernest Bevin, a powerful trade union leader, also wanted answers. “One cannot enter into financial arrangements between these great central banks involving the economic life of the respective countries, without it having a direct reaction on the liberties and rights of the people,”6 he thundered—sentiments that are as true today as in 1939.
Bevin and the journalists were right to be suspicious of Norman’s relationship with Schacht. The Reichsbank president, more than anyone else, had rebuilt Germany, a country that would soon be at war with Britain. Schacht had wrought a miracle—a centrally planned economy that was not ravaged by inflation, a worthless national currency, or unemployment. In the six years since Hitler had taken power, unemployment had been reduced from six million to around three hundred thousand. Armies of the jobless were diverted to massive programs of public work—building the new network of motorways, gigantic public buildings, and planting forests. Arms production was soaring. Trade unions no longer existed and were replaced by the state-run German Labor Front (DAF). The work-shy, along with Jews, leftists, and others viewed as undesirables were dispatched to concentration camps.
Germany adored its miracle maker. In January 1937, on the occasion of his sixtieth birthday, Schacht had stood for four hours receiving hundreds of guests. Hitler himself sent a personal message praising him. Schacht told Hitler’s adjutant, who had brought the message, “Tell the Führer that he has no more loyal co-worker than I.” Schacht’s admirers believed, correctly, that without him, Germany would still be weak, poor, and, worst of all, humiliated. “Every branch of German finance, commerce, industry, and society and the armed forces was represented. There were bankers, manufacturers, merchants of all grades, big and little,” the New York Times reported. Hitler gave Schacht a painting by Carl Spitzweg, a German romanticist painter. Montagu Norman sent a mahogany clock.7
Schacht’s real job was to prepare Germany for war. In his correspondence with Hitler, Schacht repeatedly emphasized the importance of the armaments program. In May 1935 he wrote,
The following comments are based on the assumption that the accomplishment of the armament program in regard to speed and extent, is the task of German policy, and that therefore everything else must be subordinated to this aim, although the reaching of this main goal must not be imperiled by neglecting other questions.8
That same month Hitler appointed Schacht General Plenipotentiary for the War Economy. For all his old-world manners and elegant appearance, Schacht was a state-sanctioned crook, licensed by Hitler to tear up contracts, steal, extort, and fiddle the Reichsbank’s books, which was why he got the job. Schacht funded rearmament by inventing a piece of financial chicanery known as the “MEFO” bill, which allowed the state to illegally borrow billions of Reichmarks from the Reichsbank—a policy Schacht later described as “daring.” He hijacked the blocked funds of foreign depositors in the Reichsbank. He requisitioned German residents’ foreign currency holdings and ruled that all foreign currencies received as payments for exports must be sold to the Reichsbank. He fiddled the capital markets so that foreign firms could not compete on equal terms with German competitors. He could outsmart anyone, even the wily Jews, proclaimed Hitler:
Before each meeting of the International Bank at Basel, half the world was anxious to know whether Schacht would attend or not, and it was only after receipt of the assurance that he would be there that the Jew bankers of the entire world packed their bags and prepared to attend. I must say that the tricks Schacht succeeded in playing on them really provide that even in the field of sharp finance a really intelligent Aryan is more than a match for his Jewish counterparts. In spite of his ability I could never trust Schacht for I had often seen how his face lit up when he had succeeded in swindling someone out of a hundred mark note.9
Schacht was a creature of his time. The dreams of the internationalists who believed that the BIS, like the League of Nations, would engender global peace and harmony were dead. Invasion, annexation, and mass murder were the new tools of international empire building. The Third Reich was rising and would last a thousand years, proclaimed Hitler. Austria had been forcibly incorporated into the Third Reich in the Anschluss of March 1938—with little objection from its citizens. Italy had invaded Abyssinia (now Ethiopia) and was dropping poison gas on defenseless civilians. Japan was laying waste to Manchuria, having murdered hundreds of thousands during the Rape of Nanking in 1937. Neville Chamberlain, the British prime minister, had signed the Munich agreement that ceded the Sudetenland, a province of Czechoslovakia, to Germany. The Spanish civil war, with its flattened, charred cities, its savage brutality and atrocities, was a precursor of Europe’s fate.
Yet even as he rebuilt Germany’s economy, Schacht must have asked himself if the price was really worth paying. He did not b
elieve in the Nazis’ ideas of racial supremacy and refused to join the party. Rather, he was an authoritarian national conservative. He had made a deal with the devil to see his homeland rise again from, as he saw it, the humiliation of the Treaty of Versailles and the penurious obligations of the Dawes and Young plans. Like many Germans of his class, Schacht tried to rationalize the Nazis’ brutality and anti-Semitism until the contradictions could be borne no longer. In the summer of 1938, he turned to his partner at an elegant dinner in Berlin and asked, “Madam, how could I have known that we have fallen into the hands of criminals?” He might have been addressing the question to himself, for after five years of Nazi rule the answer was there in front of him—if he had chosen to look.
By 1938 Schacht had begun to play a perilous game, using the BIS as a secret back channel to Britain to try and bring down Hitler and stop the march to war, or so he claims in his memoirs. Schacht first approached several senior military leaders to encourage them to launch a coup. None would agree. That left the monthly meetings at the BIS. “The more conditions in Germany approached a climax, the greater my desire to make use of my connections in Basel as a means of preserving peace,” he wrote.10 The Reichsbank president took Montagu Norman aside at a BIS meeting and asked him to approach Chamberlain to set up a channel between London and the anti-Nazi Germans. Four weeks later Norman and Schacht met again in Basel. Norman told Schacht that he had discussed his proposal with Chamberlain. Schacht asked what was his reply. Chamberlain had said, “Who is Schacht? I have to deal with Hitler.”11
After Kristallnacht, even Schacht’s self-deception and rationalization began to fade. The attack on Germany’s Jews, Schacht proclaimed in his speech to the Reichsbank Christmas party, was “such a wanton and outrageous undertaking as to make every decent German blush for shame. I hope none among you had any share in these goings-on. If any one of you did take part, I advise him to get out of the Reichsbank as quickly as possible.”12 Schacht’s indignation, whether real or feigned, was wasted. His Reichsbank was the Nazis’ most important instrument for looting the assets of German Jewry. After Kristallnacht, the Nazis imposed a fine of one billion Reichmarks on German Jews, to be paid in four installments.
Schacht then proposed to Hitler a bizarre plan to help German and Austrian Jews to emigrate, the kind that only a banker could dream up. Jewish holdings in both countries would be placed in an international trust. The trust would sell twenty-five-year bonds—which would pay dollar dividends—to world Jewry. Part of the dividend would finance the emigration of German and Austrian Jews, and part would be used to boost German exports. Hitler agreed to the plan, but, not surprisingly, nothing came of it. Schacht did help save Bella Fromm, the high society Jewish journalist. Fromm had continued her acerbic observations of Berlin society, politics, and diplomacy, until the summer of 1938 when it became clear she had to flee. She was packed and ready to go when the paperwork got stuck for the transfer of her personal funds—this was a disaster, as without the monies she would not be allowed into the United States. She asked Schacht for help, and he rushed her case through the Foreign Exchange Office. Fromm immigrated to New York.
MEANWHILE, AS EUROPE slid to war, the atmosphere in Basel between the central bank governors remained “entirely cordial,” reported Merle Cochran. Cochran traveled to Basel every month from his base at the United States embassy in Paris, to meet Montagu Norman and Hjalmar Schacht at the governors’ meeting. He was not allowed to attend, but Norman and Schacht briefed him afterward on the discussions. Cochran then sent on the information to Henry Morgenthau, the Treasury secretary, and to the State Department. Cochran had excellent sources at the BIS, including Paul Hechler, the German assistant general manager, who signed his correspondence “Heil Hitler.” Most of the central bankers had “known each other for many years, and these reunions are enjoyable as well as profitable to them,” Cochran reported to Washington on May 9, 1939. “The wish was expressed by some of them that their representative statesmen might quit hurling invectives at each, get together on a fishing trip with President Roosevelt or at a World’s Fair, overcome their pride and complexes, and enter into a mood that would make comparatively simple the solution of many of the present political problems.”13
If only things were that simple. Basel at least was a safe haven from the world’s vicissitudes. The governors’ monthly meeting took place at 4 p.m. on Sunday, without notes or minutes being taken, after which high tea was served. The rest of the two days were busy with breakfasts, lunches, dinners, concerts, receptions, and walks along the Rhine and in the Black Forest. Bank officials’ wives were also drafted to lighten the atmosphere at social events. Each governor—just as nowadays—was provided with his own office. The doors were closed while the governors were in discussions with their staffs but were otherwise left open so that bank staff and other governors could make social calls or drop by to exchange news and information.
The bankers began to see the broader picture—the global linkages between their decisions and their consequences. “As they sat down around the table for two days, you could almost see their point of view change as they began to realize the effect of their own actions,” reported W. Randolph Burgess, deputy governor of the New York Federal Reserve.14 Norman and Schacht were still the star attractions. Johan Willem Beyen, a Dutch banker and BIS president in the late 1930s, recalled,
Norman’s prestige was overwhelming. As the apostle of central bank cooperation, he made the central banker into a kind of arch-priest of monetary religion. The BIS was, in fact, his creation. He came on Saturday night and left on Monday night, accompanied by his retinue. The other governors invariably flocked to his room. He had an unbounded admiration for Schacht (in every respect the opposite of himself) and a thorough dislike for one or two others.15
And Norman also had his hat—a beautifully crafted, black silk Homburg with a red silk lining embroidered with a golden bee. When Beyen commented on the detail, Norman quipped, “Oh yes, that’s the bee I wear in my bonnet.”16
In 1939 the BIS board welcomed one of the world’s most powerful industrialists: Hermann Schmitz, the CEO of IG Farben—the giant German chemical conglomerate. IG Farben was much more than an ordinary business. It was a virtual parallel state, which would soon evolve into an unprecedented synthesis of finance capital and mass murder. Born out of a merger in the 1920s between Bayer, BASF, Hoechst, Agfa, and other companies, IG Farben was the fourth-largest concern in the world (after US Steel, General Motors, and Standard Oil). It produced pharmaceuticals, chemicals, high explosives, film, plastics, fuel, rayon, paint, pesticides, car tires, poison gases, lightbulbs, aspirin, margarine, detergents, fertilizer, and much more. IG Farben provided the nickel for the engines of the Heinkel and Stuka bombers, the aluminum for their bodies, the magnesium for their wings, and the artificial rubber to hold the windshields together.17 It refined the fuel, oils, and greases that let the Wehrmacht unleash the Blitzkrieg. The firm once attacked by the Nazis as “Isadore G. Farber”—a macabre reference to the former presence of prominent Jewish financiers such as Max Warburg on its supervisory board—was now the centerpiece of the Nazi war machine.
IG Farben had a liaison office with the Wehrmacht to plan its takeover of competitors in newly occupied countries. It ran its own intelligence service, known as “Buro IG,” from its headquarters on the Unter den Linden in Berlin. During the war, IG Farben managers built and ran the company’s private concentration camp at Auschwitz, known as “IG Auschwitz,” which manufactured Buna, or synthetic rubber.
The presence of Hermann Schmitz on the BIS board highlighted how deeply the bank was entangled with the Third Reich. Nazi Germany benefited immeasurably from its relationship with the BIS. By 1939 the BIS’s investments in Germany totaled 294 million Swiss gold francs ($96 million), a substantial sum. But the BIS brought much more than money. As the “Young Nazi” quoted at the start of this chapter in Merle Cochran’s telegram explained, the BIS gave the Third Reich the chance for a m
ore “normal” type of business relations with foreign countries. It provided the Reichsbank with a ready-made network of contacts and business channels. It gave Schacht, the architect of the German war economy, a regular opportunity to meet his peers and gain intelligence, both financial and political. It legitimized a national bank engaged in state-sponsored financial chicanery, theft, and appropriation of Jewish businesses through state-organized terror. The BIS thus ensured that the Reichsbank, which should have been a pariah institution, remained a central pillar of the global financial system. Schacht’s status and prestige and his regular attendance at the Basel meetings made the criminal actions of the Reichsbank seem acceptable. The personal connections of the central bankers, fostered at the BIS’s lunches, dinners, cordial receptions, and strolls in the woods, were crucial in this acculturation of Nazi methodology.
The BIS reports during the 1930s and the buildup to war are especially illuminating in this respect—for what they do not discuss, as much as the information they do impart. The bank’s access to figures provided by the world’s leading central banks allowed it to collate and analyze statistics, to dissect global trends, and to make policy recommendations in a unique, new format. The BIS annual reports, wrote John Maynard Keynes, the influential British economist, were now “the leading authority for certain statistics, not easily obtainable,” and the staff were to be congratulated. The reports were supervised and written by Per Jacobssen, who had joined the bank in 1931 as economic adviser.
