by Adam LeBor
Born in 1894, in Tanum, Sweden, Jacobssen had made his name while working at the Economic and Financial Section of the League of Nations from 1920 to 1928. He was far more than an adviser. He shaped the bank’s policy recommendations of laissez-faire economics and the importance of individual responsibility over state provision. He supported European federalism and supranationalism. His legacy has shaped our world. Jacobssen was also a kind of global economic troubleshooter with a much-envied contacts book. During his time at the BIS, he oversaw numerous financial and economic inquiries into troubled countries and was especially well connected in the United States. As a perceptive observer, Jacobssen also co-wrote two thrillers, fusing his knowledge of international finance and diplomacy. The Death of a Diplomat, which was set in the League of Nations, was published in eight languages, and the film rights sold to a German company. The Alchemy Murder was macabrely prescient—especially when Hermann Schmitz, the CEO of IG Farben, joined the board of the BIS. The book’s storyline focused on chemical companies producing poison gas.
But Jacobssen’s reports for the BIS, no matter how detailed on economic and financial analysis, gave scant attention to the wider context in which the central bankers operated. It was their job, the bankers believed, to focus on finance, rather than on the complex moral and political issues that shaped nations and the world’s economy. In this they succeeded so well that an article in the Bankers’ Magazine in 1943 described the BIS reports as documents “whose emotionless neutrality would do credit to a visitor from Mars.” The Nazi persecution of the Jews and the systematic, state-organized theft of Jewish-owned firms and businesses is reported purely as a technical question. Page 101 of the 1939 annual report notes that some German firms had experienced a reduction in liquidity and were asking banks for credit to improve their liquidity. But this was not the only cause of the growth in requests for loans. “Other reasons for the demand for advances are to be found in the changes in the ownership of private enterprises due to the Aryanization of private firms.” There is not a word of condemnation, merely a dry noting of the changed circumstances.
The Anschluss, the Nazi annexation of Austria, is noted on pages 100 and 101 of the 1938 report as follows: “In connection with the incorporation of Austria in the German Reich in March and April 1938, the Austrian National Bank entered into liquidation and a series of measures were promulgated transferring most of its assets and liabilities to the Reichsbank.” These assets included the Austrian National Bank’s gold reserves and their 4,000 BIS shares. The BIS accepted their “transfer” to Berlin, the first of many decisions that the bank’s leadership would take to legitimize Nazi plunder and looting.
The BIS’s 1939 report does devote more space to the Third Reich’s methods, but mainly as a question of technical banking interest. The report notes with typical understatement that “Territorial changes in Europe in 1938 left their impress on the banking and credit structures of the countries concerned.” There was perhaps a note of relief in the statement that “the absorption of Austria into the German Reich presented comparatively few difficulties for the German banking system as Austria itself had a unified banking structure.” However, the report observed, “much more intricate questions were involved in the taking over of the Sudetenland,” the border province that Czechoslovakia had been forced to cede to the Nazis in September 1938. The Czechoslovak banks had 143 branches in the Sudetenland. These banks had to change their currency from crowns to Reichmarks. These 143 branches, the report notes, had to be “severed from their old head offices and adapted to the German system”—an adaptation that the BIS was finding very easy indeed.
The bankers gathered at Basel were not burdened with idealism except in one respect: they wanted to work together to facilitate the free flow of international capital. They sought economic stability, low inflation, and global free trade that would provide political stability and control unemployment—reasonable aims that were shared by much of the world. The bankers may not have been immoral (apart from Schacht), but they were certainly amoral. They believed that financial considerations existed in a vacuum, away from troublesome politics and national interests. Ethical considerations of right and wrong simply did not exist in their universe. What counted was the bottom line and the interest of the banks themselves, especially, now, the BIS. As Merle Cochran noted, “The Directors prefer to view the BIS as a long-term proposition, and insist that its field of usefulness need not be analyzed or altered with every shift in world monetary and economic conditions.”18
It was a peculiar arrogance that granted such self-belief to a clique of unaccountable financiers. A clique that had, by sleight of hand, built its own bank that was untouchable and beyond the reach of any government—and then proclaimed its existence to be something of virtue for the rest of mankind. The most important thing, the bankers agreed, was that transactions were properly authorized and formal procedures followed. It was not the bank’s business to ask where the money came from or how it had arrived. It was this obsessive formalism, repackaged as “neutrality,” that would soon lead the BIS to become, in the words of Henry Morgenthau, the US Treasury Secretary, “a symbol of Nazi instrumentality.”19
TRANSNATIONAL CAPITAL HAD decided the fate of Spain. The Spanish civil war lasted from July 1936 to April 1939, when the Nationalist army, led by General Franco, finally captured Madrid, the capital, from the left-wing Republicans. Spain is often described as a trial run for the Second World War. It was an exceptionally savage conflict, marked by atrocities on both sides. The airplanes of Germany’s Condor Legion bombed Spanish cities and strafed civilians, perfecting the strategies that would soon be deployed in the Blitzkrieg. But the conflict was also a trial run for newly honed techniques of economic warfare.
Money, as much as superior numbers and military forces, helped Franco to victory. Nazi Germany and Fascist Italy provided hundreds of millions of dollars worth of aid. The nationalists understood that finance was a weapon as effective as bullets. They set up their own rival economy, complete with a separate national bank that issued its own currency, also called the peseta. This was a psychological as well as economic assault on the Republic. It was chillingly effective. By July 1937, a year into the war, the Republican peseta was worth three times less in French francs than the fascist version, even though the Republicans were the legitimate government of Spain and controlled the national economy, its currency, and the country’s gold reserves.20 Inflation was far higher in the Republican zone. Between July 1936 and March 1937 prices doubled in the Republican zone, while in the nationalist zone they rose by only 15 percent. The nationalists steadily corroded the Spaniards’ belief in their currency and, by extension, in their government.
Yet arguably, the Republican government’s peseta should have been worth three times the nationalists’ scrip. At the end of 1935 Spain had the fifth-largest gold reserves in the world, after the United States, France, Britain, and the Soviet Union. The BIS annual report for 1936 notes that Spain had gold reserves of 2,225 million gold Swiss francs, nearly three times that of Italy. Much of this had been accumulated during the First World War when Spain remained neutral. For the previous four years the country had enjoyed a current account surplus, much of which had been invested in gold.
The country should have been in a prime position to issue bonds, backed by the abundant gold reserves, to finance the economy and the war. Yet as Pablo Martín-Aceña, Elena Martínez Ruiz and María A. Pons, the authors of the paper “War and Economics: Spanish Civil War Finances Revisited,” note the Spanish government did not do so. “The reasons for this decision are controversial: either they were not able to do so because of the political aversion of international banks and financiers, or it was a deliberate policy decision.”21 Probably it was a mix of both. The country was under an arms embargo. And where would the bonds have been sold? Allen Dulles and his friends on Wall Street had no desire to buttress a government that—from their perspective—was composed of dangerous leftists.
Nor would London have been more enthusiastic. Britain also preferred Franco’s fascists to the Republic.
So Spain simply sold its gold reserves. France bought 175 tons and the remainder was purchased by Moscow. The BIS report for 1937 records a fall in Spain’s holdings to an estimated value of 1,600 million gold Swiss francs.22 The money was used to pay for weapons, aircraft, tanks, food, and other supplies. As neither Spain nor the Soviet Union were members of the BIS, they were not able to use its special facilities for crediting and debiting national banks’ accounts. Instead the gold was physically moved. Spain’s gold reserves were held in the subterranean vaults of the Bank of Madrid. As Franco’s forces advanced on the capital the reserves were transferred to a naval store in Cartagena, on the Mediterranean coast. From there the reserves were loaded onto four Soviet ships and taken to the port of Odessa, to be transported to Moscow on a special train. When the gold was gone, the Bank of Spain sold its silver reserves of 1,225 tons to the United States and France.
The Republicans’ chaotic politics also weakened their economy and currency. The nationalists were centralized, authoritarian, well-organized, and united around one ideology—fascism—with one leader: General Francisco Franco. The Republicans were a kaleidoscope of competing creeds: socialism, communism, and anarchism. Numerous local, regional, and revolutionary authorities printed their own banknotes, which had no credible backing. The Republican government did not centralize the issuing of bank notes until autumn 1937. In contrast, the nationalists fought a currency war as well organized as their military campaigns. They declared all Republican banknotes issued since 1936 to be illegal. The only legal tender was to be the notes issued by the nationalists’ own rival Bank of Spain. The Republicans blocked all current and deposit accounts in their zone that had been opened or increased in value since the start of the war. So as Franco’s troops advanced, bank account holders cashed in their savings and quickly spent the money on whatever they could. One bank, Banco Zaragozano, even sent its chairman to the front. As soon as each city fell, he entered the newly captured territories with the military leaders to reorganize the local banks.23
This, as much as the Blitzkrieg, was the real lesson of the Spanish Civil War: the nationalists’ sophisticated fusion of financial and military power. The Nazis would hone this model, using the BIS to underpin their economic empire.
CHAPTER FIVE
AN AUTHORIZED PLUNDER
“The Bank for International Settlements is the bank which sanctions the most notorious outrage of this generation—the rape of Czechoslovakia.”
— George Strauss, Labor MP, speaking in the House of Commons, May 19391
When Nazi Germany annexed the Czechoslovak border province of the Sudetenland in September 1938, it immediately absorbed a good part of the country’s banking system as well as most of Czechoslovakia’s strategic defenses. By then the country’s national bank had prudently transferred most of its gold abroad to two accounts at the Bank of England: one in the name of the BIS, and one in the name of the National Bank of Czechoslovakia itself. (Countries had deposited some of their gold reserves in a sub-account at the BIS account in London to ease gold sales and purchases.) Of the 94,772 kilograms of gold, only 6,337 kilograms remained in Prague. The security of the national gold was more than a monetary issue. The Czechoslovak reserves, like those of Republican Spain, were an expression of nationhood. Carved out of the remains of the Austro-Hungarian Empire in 1918, the Czechoslovak Republic was a new and fragile nation. A good part of the gold had been donated by the public in the country’s early years. Josef Malik, the governor of the national bank, and his fellow Czechs believed that, even as the Nazis’ dismembered their homeland, if the national gold was safe, then something of the country’s independence would endure.
They were wrong. The Czechoslovaks’ faith in the probity of the BIS and the Bank of England was tragically misplaced. The gold was sacrificed, with barely a second thought, to the needs of transnational finance and the Third Reich.
The Nazis’ first demand came in February 1939 when Berlin ordered Prague to transfer just over 14.5 metric tons of gold, supposedly to back the German currency now circulating in the Sudetenland. This was certainly an innovative idea—first invade a neighboring country, annex part of it, and then demand that the newly truncated state supply the gold to pay for the loss of its territory. The following month the question became academic. On March 15 the Wehrmacht marched into Prague. The German protectorate of Bohemia and Moravia was declared, and Czechoslovakia no longer existed. But the gold reserves did. Three days later a Reichsbank official was dispatched to the National Bank of Czechoslovakia and ordered the directors, under the threat of death, to issue two orders. Thanks to diligent detective work by Piet Clements, the BIS archivist, we have a clear picture of what happened next. The first order instructed the BIS to transfer the 23.1 metric tons of Czechoslovak gold held at the BIS account at the Bank of England to the Reichsbank BIS account, also held at the Bank of England. The second order instructed the Bank of England to transfer almost 27 metric tons of gold held in the National Bank of Czechoslovakia’s own account to the BIS’s gold account at the Bank of England.
Malik and his fellow directors hoped that it would be obvious that the instructions had been issued under duress and so would not be implemented. The Nazis had just invaded Czechoslovakia and would obviously target the national gold reserves. But Malik had not reckoned on Montagu Norman. The governor of the Bank of England had no interest in whether Czechoslovakia was free or a Nazi colony. “Political” considerations must not affect the BIS’s transactions. The transfer order, he said, must go through.
Meanwhile, in Basel, Johan Beyen, the Dutch president of the BIS, wavered. Beyen discussed the matter with the BIS’s legal adviser, Felix Weiser. But like Norman, Weiser took the most formalistic approach possible. As long as the paperwork was in order, the monies must go through. Weiser argued, somewhat bizarrely, that there could be no legal grounds to claim that the transfer order had been issued under duress, as such a plea could be brought before a Swiss court only by the persons who had acted under duress. Clearly, the directors of the National Bank of Czechoslovakia were unlikely to travel to Switzerland to present their case. Therefore any decision not to authorize the transfer would be one of BIS policy, rather than administration. The board of the BIS made policy. Thus Beyen would have to consult the board to stop the payment. (This was poor advice for another reason—under the terms of the BIS statutes the Swiss authorities anyway had no jurisdiction over gold transfers between states.)
Beyen was unwilling to take a decision without authorization. But who could he ask? The chairman of the BIS board, Sir Otto Niemeyer, of the Bank of England, was traveling to Egypt and so was incommunicado. At 6 p.m. on March 20, Roger Auboin, the bank’s general manager, told Beyen that the governor of the Bank of France had discussed the matter with London. The Bank of England and the Bank of France would not be taking any action to stop the transfer, because they felt that there were no grounds for action. The BIS transfer order went through.
With London, Paris, and Basel’s compliance, Nazi Germany had just looted 23.1 metric tons of gold without a shot being fired. More than two-thirds of that gold was traded with the Dutch and Belgian national banks and was eventually transported from Amsterdam and Brussels to the Reichsbank’s vaults in Berlin. Czechoslovakia’s diligent planning to safeguard its national gold reserves, together with its misplaced faith in the integrity of the new international financial system, had come to nothing. The second transfer order for the 27 metric tons held in the National Bank of Czechoslovakia’s own account at the Bank of England did not go through. Sir John Simon, the chancellor of the Exchequer, had instructed banks to block all Czechoslovak assets. But Czechoslovak gold held in a BIS account at the Bank of England, it seemed, was not defined as a national asset and was beyond the reach of UK laws.
Norman and Beyen’s decision caused despair and incomprehension in Prague and
uproar in London. The loss of the Czechoslovak gold was all “Norman’s fault,” exclaimed the Daily Herald.2 Paul Einzig, of the Financial News, ran a stream of stories exposing the complicity of both the treasury and the Bank of England in the affair. Einzig demanded to know why the treasury had not stopped the transfer, as it was in clear violation of the law known as the Czechoslovakia Act. Brendan Bracken, a journalist and ally of Winston Churchill, declared in the House of Commons that “the Bank of England after what has happened may no longer be looked on as the safest place in the world and the phrase ‘Safe as the Bank of England’ may no longer apply.”3 Churchill himself demanded to know how the government could urge people to enlist in the military when it was “so butter-fingered that six million pounds of gold can be transferred to the Nazi government.”4
The real villain of the affair was Norman. Beyen, who later served as Dutch foreign minister and as executive director of the International Monetary Fund, was an ineffectual bureaucrat, paralyzed by the idea that he might have to take responsibility for a decision. Norman could have stopped the transfer immediately. He was the governor of the Bank of England, which held the two BIS accounts involved. At the very least he could have asked for the transfer to be referred to the BIS board for a decision, which would also have been a face-saving measure. He chose not to do so. It was clear that war was coming, one that Britain would have to fight. The Nazi invasion of Czechoslovakia had destroyed the last hopes of peace. That country’s gold reserves, held in London, were now a British national security issue.
Yet Norman’s priority was not the best interests of his homeland, but rather the independence of his beloved BIS. Even as the shells were loaded into the German tanks, Norman still believed that for the bankers it could be business as usual. Nothing could interfere with the bankers’ sacred neutrality and gentlemanly trust in one other, not even the coming conflagration with a regime whose evil was now plain to see. The Bank of France had refused to stop the transfer but had also asked Norman to block it. Norman was adamant. There could be no political interference in the operations of the BIS, even, it seemed, when they were ordered at gunpoint.
