by Adam LeBor
Norman did not express any regret at all over the Czech gold transfer. In fact, he was positively indignant at the very idea that the British government might have some say in the bank’s actions. He wrote, “I can’t imagine any step more improper than to bring government into the current banking affairs of the BIS. I guess it would mean ruin. I imagine the Germans would never have paid any interest to the BIS, and at the board we would have then likely have found the Germans, Italians, and Japs standing together!”5 Norman then lied to Sir John Simon, the chancellor of the Exchequer, albeit with a very telling falsehood. Simon asked Norman if he could not have warned the government that, thanks to the BIS, Germany was about to acquire “large additional financial strength.” Norman told Simon that while the Bank of England held gold for the BIS, it did not know if the gold was actually owned by the BIS or was held by the BIS for other central banks. This was untrue, as Norman later admitted. Norman then made a significant, even shocking, admission. He told Simon that “he was very doubtful that he would have thought it his duty, as Director of the BIS, to make a statement about its transactions to the British government.”6
Norman even wrote to Beyen to clarify the matter and to assure the BIS president where his ultimate loyalties lay in Basel. Norman did not want to publicly correct the minutiae of what was being reported in the press and Hansard, the British parliamentary journal—that the Bank of England did not know whose gold was held in the BIS accounts—as that would expose him. “The difficulty is that if I point out to the Treasury that this is incorrect, I lay myself open to being asked details of BIS transactions, which I do not consider the Treasury are entitled to know.”7 This was little short of treason. As Norman’s compatriots were enlisting in the military, preparing to risk their lives for the freedoms and luxury that he enjoyed, as his country prepared for the war against the Nazis that all knew was coming, Norman blithely announced that his primary loyalty was not to Britain, but to a hyper-privileged, international bank that was not even a decade old.
The mistake of Malik, the director of the National Bank of Czechoslovakia, was to believe that either Norman, Beyen, or indeed any of the BIS management could conceive of any moral or political dimension to their decisions. The world’s most powerful international bankers were not only unwilling to obstruct the Nazi seizure of Czechoslovak—or Austrian—assets. They simply could not conceive of any reason why they should do so. As long as the formalities were observed, the necessary papers were stamped and the gold was re-assigned. Norman’s precious independence for both the Bank of England and the BIS had been bought at a high price—in mountains of gold ingots to pay for steel to build bombs that would soon rain down on London.
THE SAME OBSESSIVE legalism governed the response of the US Federal Reserve to requests from American banks to transfer Czechoslovak assets. On March 16, 1939, the day after German tanks rolled into Prague, Henry Morgenthau, the US Treasury secretary, called George Harrison, the president of the New York Federal Reserve, to say that the principal banks in New York had been asked—voluntarily—not to make any “important or unusual” transactions involving Czechoslovak assets until Monday, March 20, when the situation might become clearer.
By Tuesday, March 21, the situation was as clear as Bohemia’s famed crystal: Czechoslovakia no longer existed. The country had been absorbed into the Third Reich. Harrison called Morgenthau to find out what the US position was. Morgenthau consulted the State Department and told Harrison that the banks and the lawyers should decide for themselves what to do if they were asked to move Czechoslovak funds. On Thursday, John Wesley Hanes, Morgenthau’s undersecretary, called Harrison and asked him to inquire from the New York banks about the deposits they held for the Czech National Bank. The information would be passed to the State Department, which would give it in turn to the Czechoslovak ambassador. Harrison did not agree with the banks’ handing over the information voluntarily. That would not be a good idea, as it might trigger retaliation in Germany against American interests. The treasury should compel the banks to surrender the information rather than request it. And if the Czechoslovak ambassador wanted the information, he could look it up himself, in Thomas Skinner’s Bankers’ Almanac and Yearbook.8
A few days later, on April 1, the New York Federal Reserve received a cable that ordered the transfer of $35,000 from the Czechoslovak National Bank account into the BIS. Harrison wrote Marriner Eccles, the chairman of the Federal Reserve Board, in Washington, DC, and set out the chain of events. The request, he wrote, was “properly tested in every way.” For most observers, the simplest test showed that as Czechoslovakia no longer existed, it was obvious that the request should be blocked. But not to Harrison and Eccles. For them, like Norman in London and Beyen in Basel, the most important thing was to keep the money moving. Harrison could see “no reason, regardless of the possible motive for the transfer, for refusing to honor it.” Even worse, was the possibility that there “might be greater liability on us for refusing to honor the transfer than in honoring the order.”9
The Czechoslovak ambassador thought otherwise. He wrote a letter pointing out that the transfer requests may have been made under duress and asked that such requests not be honored. Ever the bureaucrat, Harrison made sure to guard his back. Just as Beyen had done in Basel, Harrison consulted a lawyer on how to proceed further. The crucial issue was not the Nazi takeover of Czechoslovakia, but the potential risk to the New York Federal Reserve. All drafts against the account of the Czech National Bank’s account were to be honored, provided they were properly drawn and tested. “It is our opinion that there is less risk to the bank in following this procedure than in refusing to honor a draft merely because, as the Czechoslovak minister says, it might or might not have been drawn ‘under duress.’”10
UNUSED TO PUBLIC scrutiny of their decisions, the BIS bankers were taken aback by the depth of the anger against them over the Czechoslovak gold affair. There were recriminations and buck-passing at the BIS board meeting in June that year. Fournier, the governor of the Bank of France, protested that the decision had been taken without consulting the board—which was rich, considering that he had told Beyen that neither the Bank of France nor the Bank of England had any objections to the transfer. Sir Otto Niemeyer, the chairman of the BIS board, defended himself, falling back on the usual excuses. “The Bank had satisfied itself that there was no legal reason why the instructions should not be executed, and the transaction was therefore carried out in the usual manner. There had, in fact, been no alternative but to carry out the instructions received.”11 One director (unnamed) suggested that in future the board should be consulted on “important matters,” as the board was responsible for policy. Niemeyer quickly shot down the proposal. Not surprisingly, Niemeyer wholeheartedly took Norman’s position. As the BIS was an international institution, it could not concern itself with “political questions.” This was nonsense, for the decision to authorize the transfer was profoundly political, executed in a Europe that had never been more politicized and which was about to erupt in war.
Malik left Prague in August 1939 and fled first to Basel, to explain the facts of the Czechoslovak gold transfer to the BIS management before eventually finding refuge in London. There remained the question of the Czechoslovak National Bank’s four thousand shares in the BIS. By the end of that year their status, the bank’s 1939 report noted, had not still “yet been determined.” After the war ended, Malik claimed that he had to dissuade Paul Hechler, the German head of the BIS banking department and Nazi loyalist, from distributing the Czechoslovak BIS shares to the Reichsbank, the Hungarian National Bank, and the national bank of the new Slovak Nazi puppet state (the banks of the three states that now controlled the former Czechoslovak territories). The “plan was then contemplated by him in all seriousness,” Malik wrote.12 In the end, the BIS took a more judicious approach to the Czechoslovak BIS shares than it had toward the country’s gold reserves. After seeking legal advice, the BIS suspended them.
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bsp; But the affair had highlighted the deeply unsettling connections between the Bank of England, the British government, and the BIS. There was a good deal of cross-party feeling in Britain, reported the New York Times, that “the Bank for International Settlements should be liquidated before it furnished any more sinews of war to Germany, and that the odd relationship between the British government and the Bank of England should be re-examined without delay.”13 The New York Times then was able to assume that its readers would understand a classical allusion. The word “sinews” was a reference to an epithet of Cicero, the Roman philosopher, who had said, “The sinews of war are infinite money.” Cicero’s observation was as prescient then as during the late 1930s. But those who wanted the BIS to be liquidated were too late. Thanks to the BIS the “sinews of war” and the flow of near-infinite money were about to be immeasurably strengthened.
THE CZECHOSLOVAK GOLD affair also highlighted how the bank’s increasingly sophisticated gold operations were growing in reach and importance. The BIS’s gold trades were a primitive forerunner of today’s globalized economy where vast sums instantly fly back and forth at the touch of a keyboard. The technology available in the 1930s was far more primitive, but the principle of buying and selling assets sight unseen and without taking physical possession is the same. This development of a free gold market between central banks via the BIS was significant. Had all the Czechoslovak gold been held in an account at the Bank of England in the national bank’s own name, rather than at a BIS account, it is doubtful that any would have reached the Reichsbank.
The BIS offered central banks a unique service, one unavailable to private companies or individuals who were not allowed to hold accounts there. The BIS held two kinds of gold deposits: bank deposits and earmarked gold. The first was gold deposited there by central banks. In 1936 this accounted for around 14 percent of deposits. (The actual bars of gold were held at the Swiss National Bank in Bern.) The second category was known as “earmarked” gold—gold that was physically held in another bank but that was credited to the BIS’s account (as the Czechoslovak gold in London had been).
The BIS held collective gold accounts at the Bank of England and the New York Federal Reserve. These accounts were subdivided into subaccounts for central banks, which owned the gold, although the gold was physically stored in London or New York. Neither the Bank of England nor the New York Fed was supposed to know which central bank owned the sub-accounts held in the name of the BIS, although as Norman’s correspondence over the Czechoslovak gold affair shows, they did. So if the Bank of France (sub-account X) wanted to transfer funds to the Bank of Hungary (sub-account Y), the BIS simply instructed the Bank of England to make the necessary deposit from sub-account X to sub-account Y. Earmarked gold, as Toniolo notes, “allowed for cheap and confidential transactions between central banks, as the transfer of property merely entailed a bookkeeping change by the BIS.”14 This was a growth industry for the BIS—in 1935–1936 earmarked gold movements totaled more than 1,121 million Swiss gold francs. By 1938–1939 that sum had increased to more than 1,512 million.
BIS managers and directors were immensely proud of the bank’s innovative, new mechanisms for gold and foreign currency trades. But the principle behind earmarked accounts was not nearly as new as they believed. Few, if any, of the BIS directors had ever heard of the island of Yap, in Micronesia. But centuries ago its inhabitants had invented a similar system, one based on large limestone discs. The discs, known as fei, were quarried on a neighboring island and brought back to Yap by boat. The discs, the islanders decided, represented substantial wealth—enough, for example, to pay for a daughter’s dowry. But the “currency” was extremely heavy and almost unmovable. So it stayed in its place, and only the ownership changed with the agreement of the buyer and seller. In fact the stone did not even need to be present on the island. The locals’ oral tradition tells of one disc that fell off the boat into the sea. Rather like the gold deposits at the BIS accounts in London or New York—or indeed any bank nowadays—the physical existence of the submerged fei was taken as a matter of faith. The islanders simply passed the ownership of the submerged disc back and forth—until 1899 when the Germans arrived and colonized the island of Yap.
The islands’ new rulers demanded that the inhabitants repair the walkways that linked the different settlements. The locals ignored their orders, and eventually the Germans decided that they must be fined. Painting a large black cross on the most valuable fei and declaring them to be the property of the government exacted the fine. It worked. The islanders quickly fixed the paths, the German officials removed the crosses, and the islanders once again had possession of their capital assets.
To the sophisticated financiers of the twentieth century, such an episode would have seemed charming but irrelevant. But as Milton Friedman later noted, it was very relevant indeed. Neither gold nor stone discs have any inherent value. Their worth is completely arbitrary, the worth that we give them. The painting of the Yap islanders’ stone discs had precise parallels in 1932 when the Bank of France decided to sell its dollars. The bank feared that the United States would not adhere to the traditional gold standard at $20.67 for an ounce of gold. It asked the Federal Reserve of New York to use its dollars held there to buy gold. As it was expensive and risky to ship the gold across the Atlantic, the Bank of France asked the New York Fed to simply store the Bank of France’s newly acquired gold at its account there. Friedman described what happened next:
In response, officials of the Federal Reserve Bank went to their gold vault, put in separate drawers the correct amount of gold ingots and put a label or mark on those drawers indicating that they were the property of the French—for all it matters they could just have done so by marking them “with a cross in black paint” just as the Germans did to the stones.15
This event—or arguably non-event—had serious consequences. The French sale of dollars drove the exchange rate down, while the franc strengthened, even though nothing had actually happened. What was the difference, asked Friedman, between “the Bank of France’s belief that it was in a stronger monetary position because of some marks on drawers in a basement more than 3,000 miles away and the Yap islander’s conviction that he was rich because of a stone under the water a hundred miles or so away?”16 Evidently, not very much.
PERHAPS NORMAN AND Schacht sensed, as they traveled together from Berlin to Basel that January 1939, that this would be the last meeting at the BIS they would attend together. By then Schacht realized that he had created a monster. The German war economy and state spending were out of control. If things carried on as they were, Schacht and his fellow Reichsbank board members believed, the country would go bankrupt. On January 7, Hitler received a memo signed by all eight members of the Reichsbank board, including Schacht. Uncontrolled expenditure would soon cause the “national financial structure” to collapse, the memo warned. “It is our duty to warn against this assault on the currency.”17
Two weeks after Hitler received the Reichsbank directors’ memo, Schacht was summoned to the Chancellery in Berlin. Hitler handed him the official notification that he was relieved of his position as president. Most of Schacht’s fellow directors resigned. Walther Funk, who also took his place on the BIS board, replaced Schacht. Funk, a former journalist, was an ardent Nazi and had joined the party in 1931. He was the point man for big business and industrialists, including IG Farben, who used him to channel funds to the Nazis, and was also one of Hitler’s key economic advisers. Funk had replaced Schacht as economics minister in 1937, and as Plenipotentiary for the War Economy in 1938, so his appointment as Reichsbank president surprised nobody. What was a surprise was how Funk’s dissolute personal life had not stalled his steady rise through the highest reaches of the Nazi state. Funk was a scruffy drunkard and homosexually active at a time when gay men were sent to concetration camps.
Schacht retreated home to his villa in the Berlin suburb of Charlottenburg for a while, and then set off in March on a t
rip to India. In July 1939 he returned to Basel where he had a secret meeting with Montagu Norman. Schacht made a bizarre offer to the British government. Fearing for his life, and less protected by Hitler from his enemies in the SS, who had always envied his power over the economy, Schacht proposed that he go to east Asia to report on the economy for Britain. Norman met with Neville Chamberlain and told the prime minister of his friend’s request. Schacht’s offer was met with some bewilderment, but Frank Ashton-Gwatkin, a foreign office official, was dispatched to Italy. He and Schacht spent three days closeted in a luxury hotel above Ancona. Ashton-Gwatkin recalled, “I listened to Schacht’s odd-sounding scheme, and, allowing for the fact that he was anxious to get as far away from Hitler as possible, I had to confess that I had heard of more promising ventures.” Still, he told Schacht that he would write a report on his proposal and submit it to London.
Schacht then demanded to see what Ashton-Gwatkin had written. The Foreign Office man handed over his notes. Schacht, imperious as ever, informed him, “This won’t do at all.” Schacht rewrote the report and then demanded that the original be destroyed. Ashton-Gwatkin handed over his notes, which Schacht, with great theater, proceeded to set on fire, sheet by sheet and then drop into the toilet. Schacht was less adept as a spy than a banker. The toilet cracked, and water gushed the wet ashes all over the floor. “We spent what seemed to me a long time mopping up the water and fishing for sodden bits of charred paper,” recalled Ashton-Gwatkin. Schacht’s mission never took place.18
