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

by Adam LeBor

  Just over a month later, on September 1, Germany invaded Poland.

  CHAPTER SIX

  HITLER’S AMERICAN BANKER

  “The business affairs of the bank, which are run on a greatly reduced scale, virtually rest in the hands of Mr. McKittrick, the president of the bank.”

  — John Gilbert Winant, the US ambassador to Britain, July 19411

  Merle Cochran, the American diplomat whom Henry Morgenthau had dubbed the “unofficial ambassador” to the BIS, had some inside information for the treasury secretary. The main business at the “usual Sunday informal and secret meeting” of the bank’s governors that May 1939 was the appointment of the next president. Johan Beyen, the hapless Dutch incumbent who had handed over the Czechoslovak gold to the Nazis, was due to retire in 1940. There were three main contenders to succeed him: a Dutchman, a Swede, and an American. “Chances are best for the American, so far,” Cochrane reported.2

  The American was Thomas McKittrick. On the surface McKittrick seemed a curious choice. He was a lawyer by training with no direct experience of central banking. But that mattered little, for war was coming. All sides already agreed that the financial channels must be kept open during the conflict. In that sense, McKittrick was the perfect candidate. He was citizen of both a neutral country—the United States—and of the world’s newest hinterland—transnational finance.

  McKittrick had worked for Higginson & Company, the British subsidiary of Lee, Higginson & Company—a renowned Boston investment house. The bank no longer exists, thanks in part to McKittrick, but in its heyday it was richer and more prestigious than Goldman Sachs and Lehman Brothers. Born in St. Louis, McKittrick had graduated from Harvard in 1911. He moved to Italy where he worked for the foreign arm of the National City Bank of New York, before joining the US Army in 1918. He was sent to Liverpool, where he was seconded to British military intelligence, to check that there were no spies using the docks to pass in and out of Britain. After the armistice in November, McKittrick was dispatched to France to work with the Allied occupation forces.

  He returned to New York in 1919 and started work at Lee, Higginson. McKittrick’s foreign experience in Italy and France made him unusual in the more parochial world of American bankers. He was sent to London in 1921 to work for the company’s British wing, and was made a partner in charge of foreign operations for both London and New York. Although McKittrick was a lawyer rather than a banker by training, he soon found his way around the City of London and built up an impressive network of contacts with international connections. Much of his time was spent working on German loans and investments, including the Dawes Plan German External Loan of 1924, which had been arranged by John Foster Dulles and Sullivan and Cromwell. McKittrick became a kind of honorary Englishman, regarded in Europe as an envoy from the City, complete with a butler who ironed his copy of The Times before he read it. “I was leading the life of an Englishman,” he later recalled. “My associates were all British, and toward the end of that time I was frequently spoken to by people who assumed I was British.”3

  McKittrick had come to the BIS in 1931 when he joined the German Credits Arbitration Committee, which adjudicated over any disputes of credits granted to German private banks. The other two members were Marcus Wallenberg, of Sweden’s Enskilda Bank and Franz Urbig, the chairman of the Deutsche Bank supervisory board. Wallenberg and his brother, Jacob, were two of the most powerful bankers in Europe. The Wallenberg family enjoyed a network of lucrative connections to bankers in London, Berlin, and Wall Street. During the Second World War, the Wallenberg brothers would use Enskilda Bank to play both sides, always making sure to harvest enormous profits along the way. Their relative, Raoul, would later save tens of thousands of Hungarian Jews during the Holocaust before disappearing into the Soviet gulag, abandoned by his uncles.

  McKittrick had long been a good friend of Allen Dulles, whom he had first met when Dulles was working at the American Legation in Bern and Dulles assisted him with a visa matter. McKittrick well understood that Sullivan and Cromwell offered an entrée in the covert world where politics and diplomacy met transnational finance. In September 1930 McKittrick wrote to a colleague, “We are seriously considering throwing some legal work to Sullivan and Cromwell in order to get benefit of Dulles services in many directions.”4 McKittrick also arranged short-term loans to the German government. McKittrick’s German loans were watched appreciatively at the BIS and Sullivan and Cromwell. In October, Gates McGarrah, the BIS president, wrote to John Foster Dulles expressing how glad he was that the “Lee Higginson [German] credit got itself through.”5

  So were McKittrick and his partners at Lee, Higginson. At least something was going right, for the firm had become embroiled in the affairs of one of the greatest swindlers in history, Ivar Kreuger, a Swedish industrialist. Kreuger had built up a fortune—on the simple safety match—that would now be worth billions.

  Wall Street had welcomed Kreuger with open arms and checkbooks. Thanks to McKittrick and his colleagues, Kreuger’s reputation had preceded him. The London Higginson partners told their American colleagues that Kreuger had already made them a fortune. But it was a fortune built on fraud. Kreuger had constructed a massive Ponzi scheme that demanded a never-ending stream of new investors to pay their predecessors. In 1931 one of the brokers at Lee, Higginson wrote to Kreuger that some of his bank creditors would like more information about the company and how it worked. The broker asked Krueger to explain what he meant by “loans secured by real-estate mortgages,” which was an eerie precursor of the bundled mortgages that triggered the subprime meltdown in 2007.

  What Kreuger meant was that he could no longer pay his creditors. He frantically tried to arrange a bailout with Sosthenes Behn of ITT. Behn wrote a check for $11 million on the condition that Price Waterhouse, the accounting firm, could check Kreuger’s finances. It did, and it quickly found a hole of $6 million. Kreuger’s empire began to collapse. ITT wanted its money back. Kreuger returned to Europe in March 1932 to meet his bankers, but he made it only as far as his apartment on Avenue Victor Emmanuel III in Paris. There, according to most accounts, he lay down on his bed and shot himself in the heart. Lee, Higginson, the venerable Boston bankers who had backed Kreuger for a decade, went bust. The partners were ruined. “I suddenly knew we had all been idiots,” an anonymous source told investigators. But McKittrick kept his job at the bank’s London branch, as well as his position as vice chairman of the BIS’s German Credits Arbitration Committee. It seems there were no recriminations or questions in Basel about McKittrick’s judgment—or lack of. McKittrick himself later claimed that he had been selected as president of the BIS without his knowledge or participation. In March 1939, he recalled, “People began whispering—primarily on the continent—‘we hear that you’re going to BIS as president.’ And that continued. The normal grapevine operation.” The following month Charles Dalziel, McKittrick’s fellow partner at Higginson & Co., told him that “he had heard on an unquestionable basis that I was going to be offered the presidency in the BIS and he wanted me to know that I would make a great mistake if I didn’t accept it.”6 Sir Otto Niemeyer, the chairman of the BIS board, made the formal offer in May. McKittrick readily accepted. At first the State Department refused to allow McKittrick to travel to Europe, but after what McKittrick later described as the “principal European countries,” doubtless including Britain, applied sufficient pressure, he was allowed to leave. McKittrick moved to Basel and started work in January 1940 on an annual salary of SF175,000 (US$40,000). He immediately traveled to Berlin, Rome, London, and Paris to meet the German, Italian, British, and French BIS directors and central bankers.

  But before McKittrick moved from London to Basel he had another task: to help Hitler’s former propaganda chief get released from a British prison camp. In October 1939 Ernst Hanfstaengel’s lawyers asked McKittrick to provide a character reference for their client. Hanfstaengel, a Harvard graduate, had lived in New York and was well connected in America
n high society. He returned to Germany to become one of Hitler’s earliest backers. Hanfstaengel lent the Nazi party $1,000 dollars during its early years—an enormous sum during the Weimar hyperinflation—which paid for the publication of the Völkischer Beobachter, the party newspaper. Appointed foreign press chief in 1931, Hanfstaengel’s job was to present a moderate, sophisticated face to journalists. However his eccentric mannerisms, dry sense of humor, and close connection to Hitler made him enemies, and he fled in 1937. Hanfstaengel’s detention as an enemy alien was especially badly timed, explained his lawyers, as he had just signed a contract with an American magazine to write a series of articles about his relations with Hitler—at one dollar a word. McKittrick replied that he would do all he could. McKittrick was ready to declare that the former Nazi spin doctor would not act against British interests if he were set free—although it is unclear how McKittrick could know this.7 Hanfstaengel was duly released and returned to the United States, where he compiled psychological profiles of Nazi leaders for American intelligence.

  McKittrick was not a Nazi, but he was certainly a friend of the new Germany and, like many in his social and business circles at that time, had an ambivalent attitude toward Jews. In November 1938, two weeks after Kristallnacht, he used his contacts to help Rabbi Israel Mattuck, of the Liberal Jewish Synagogue in London. McKittrick introduced Rabbi Mattuck to the US Consul General in London to try and help arrange the immigration of German Jews. Mattuck wrote a grateful note thanking McKittrick “most heartily.” The meeting had been very useful. “As a result, I hope that I may, by means of a fund that we have here, help at any rate a few German Jews to find a way of escape.”8 Later on, during the war, in August 1942, Paul Dreyfus, a Basel banker, asked McKittrick to write a letter of introduction to Leland Harrison, the American ambassador to Switzerland. McKittrick obliged but made his feelings about Dreyfus clear in a separate letter to Harrison. “He is, as you will surmise, a Jew, but a good sort who is doing everything he can to help his unfortunate countrymen.”9

  THE OUTBREAK OF war brought existential choices for the BIS’s management. There were three options: liquidate the bank, downsize and become dormant until the end of hostilities, or remain as active as possible within the bounds of the declared policy of “neutrality.” The directors were unanimous—and already thinking ahead of the needs of transnational capital: the BIS must be kept going to assist with postwar financial reconstruction. McKittrick gave an undertaking to the Swiss authorities that all staff would not “undertake political activities of any sort whatsoever on behalf of any governments or national organizations.” Any such departures, he noted in a memo to staff, would be “particularly regrettable at present when special privileges are being sought on behalf of the bank and its staff.”10 A safe passage home would be arranged for anyone who wanted to leave.

  The BIS declaration of neutrality meant the following: the bank would not grant credit to central banks of belligerent countries; it would, when operating on neutral markets, ensure that belligerents did not profit from such operations; it would not carry out any transactions, either direct or indirect, between countries at war with each other; it would not sell assets in one country to make a payment to another if they are at war, and it would not hold assets of one belligerent country secured against another. Badly burned by the Czechoslovak gold affair, the BIS said it would not make decisions implying recognition of what it delicately called “territorial changes not universally accepted.” When the central bank of the German Protectorate of Bohemia and Moravia (the illegitimate Nazi regime ruling Czechoslovakia) requested the transfer of its remaining gold held at the BIS to the Reichsbank, it was blocked. When the Belgian government in exile proclaimed that the National Bank’s official seat was in London, the Nazi occupation regime responded that the bank’s headquarters were in Brussels. The BIS said it was neutral and would not recognize either. The Belgian vote on the board of directors remained unused. The BIS took the same position with regard to Yugoslavia, when faced with competing claims from Belgrade and London.

  The bank’s declarations of neutrality soon proved worthless. McKittrick and the rest of the bank’s management turned the BIS into a de facto arm of the Reichsbank. This was not a result of inertia, passivity, or bureaucratic sloth. It followed from a series of deliberate policy decisions. The BIS carried out foreign exchange deals with the Reichsbank. It accepted looted Nazi gold until the final days of the war, when even neutral countries such as Sweden had begun to refuse it. It recognized the forcible incorporation of occupied countries, including France, Belgium, Greece, and the Netherlands, into the Third Reich. By doing so, it also legitimized the role of the Nazi-controlled national banks in the occupied countries in appropriating Jewish-owned assets. The BIS allowed the Nazi occupation regimes to take ownership of BIS shares, so that the Axis block held 67.4 percent of the bank’s voting stock. Board meetings were suspended, but Annual General Meetings continued. Shareholder banks voted by proxy. The case of Poland is telling. In April 1940, Leon Baranski, the Polish representative to the BIS, asked for the government in exile in London to take control of the Polish shares. McKittrick refused. He told Baranski that he did not want to have to issue a ruling, but if he was forced to, the “result may necessarily be an adverse decision” for Poland. McKittrick was determined to avoid raising “a question of this sort,” for “once political discussion gets underway, even without publicity, one never knows where it will end.”11

  While Nazi territorial annexations were accepted, Soviet ones were not. In June 1940 the Red Army invaded Latvia, Lithuania, and Estonia. The Soviets ordered the three central bank governors to instruct the BIS to transfer their gold reserves to the Soviet Union’s state bank. The parallel with the Czechoslovak gold was clear—but the outcome was very different. The BIS’s management, as legalistic as ever, argued that the bank had to accept the instructions. But this time the president refused. “I had to fight my whole management—particularly my legal adviser, saying that we had to accept these instructions and turn the gold over to the Russians. But I just couldn’t do it,” McKittrick recalled.12

  Instead, McKittrick commissioned an outside legal opinion from Professor Dieter Schindler of Zürich University. Schindler argued that neither the governors nor the banks of the Baltic States were free agents, but had probably acted under the instructions of the Soviets. He quoted Article 10 of the BIS charter, which prohibited coercive measures against depositors. Thus, Schindler argued, it was the duty of the BIS management to “resist, as far as lies in their power” any attempts by governments to interfere with the BIS’s assets. McKittrick was vindicated. He sent a copy of Schindler’s memo, which was accepted by the bank management, to Merle Cochran. The BIS president asked him to keep Schindler’s legal opinion confidential. “My one serious concern is that it should not get into the press. After the damaging campaign of publicity regarding the Czech gold, it is of the greatest importance to the BIS to remain in the background at this time.”13

  UNTIL THE OUTBREAK of war, the BIS was a congenial place to work. The staff were well paid, intelligent, and cosmopolitan in their outlook. The BIS, like the League of Nations, was an international oasis. Managers regularly traveled to meet their counterparts in London, Paris, Berlin, and other capitals. The governors’ meetings were the high point. Some of the most powerful people in the world traveled to Basel, sprinkling the staid BIS with a little stardust. The staff enjoyed the glamour, the sense of being on the inside track, and the social whirl of dinners, receptions, and teas.

  That idyll ended with the fall of France in May 1940. Axis-controlled territory now surrounded Basel on two sides where the borders reach almost to the city limits. Bank officials worked to a backdrop of gunfire. The Swiss authorities feared a German invasion and made plans to evacuate the city. Meanwhile, McKittrick’s patrons in London were keeping a very close watch on their protégé. The BIS president was in regular contact with Sir Frank Nelson, the British consul in Bern. Nel
son, who was an experienced international businessman, later became chief of the Special Operations Executive, the British wartime sabotage organization. One day, around May 20, as tension soared, Nelson called McKittrick at home at 7 a.m. The British diplomat told him, “Things look very bad indeed. They couldn’t look worse.” Nelson explained that he must be able to reach McKittrick at any time. He told him, “Don’t go out without telling somebody where you are going, and don’t leave the next place without telling me where you’re going.”

  At 7 p.m. that evening, McKittrick had returned home when Nelson called again. He instructed the BIS president to evacuate all French and British staff from Basel immediately. The Nazi invasion was imminent, expected to commence at any moment. McKittrick returned to the bank’s headquarters and summoned his senior staff, including Roger Auboin, Rafaele Pilotti, and Paul Hechler. They contacted as many French and British employees as they could. Hechler then told McKittrick, “You’re the only man who alone can dispose of the assets of this bank. I think you’re the most important man for us to get out of Basel.” McKittrick agreed and quickly abandoned his colleagues. He called his chauffeur, and went home and grabbed some clothes. The chauffeur, McKittrick recalled, “didn’t pack them but stuffed them into the car.” They headed for Bern and were stopped on route fourteen times by Swiss soldiers or police.14

  The German invasion of Switzerland never happened. Swiss francs, Swiss banks, and the BIS were far more use to the Third Reich than another stretch of mountainous territory, where a stubborn, hardy population would have likely waged guerilla warfare against the Nazis. The BIS relocated to Château d’Oex, in the southwest of the country. McKittrick and Per Jacobssen moved into the Chateau de Rougemont, kindly loaned by its American owner. The rest of the staff had to make do in the village. There were few decent houses, schooling was basic, and the village was tiny. By the end of the autumn, as the war ground on, relations between the different nationalities were near-poisonous. Morale was collapsing, recalled McKittrick. “There was only one movie house in town, and if a Frenchman and his wife went to the movies, and a German and his wife went to the movies, and they walked into each other, it was an embarrassment for all concerned.”15