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

by Adam LeBor

  But it is a massive and illogical mental leap to claim, as did Helmut Kohl, the German chancellor, in 1996, “The policy of European integration is in reality a question of war and peace in the twenty-first century.”2 Kohl’s statement embodies the technocrats’ belief, reaching back to Jean Monnet and Montagu Norman, that the wise guidance of a managerial and financial elite is all that is needed for Europe to prosper—and to prevent its fractious, ungrateful peoples from reverting to their natural warlike state. The historian Antony Beevor makes a more convincing counterclaim: Western Europe has remained free of wars since 1945, not because of the European Union, but because of democracy. “It is simply a question of governance. Democracies do not fight each other.”3

  The uncomfortable, unspoken truth is that the parallels between the plans of the Nazi leadership for the postwar European economy and the subsequent process of European monetary and economic integration are real. The BIS runs like a thread through both. Funk’s deputy Emil Puhl described the BIS as the “only real foreign branch” of the Reichsbank, because it was the crucial connection of the Reichsbank to the international network of central bankers.4 These connections outlived the war. The BIS helped ensure that the postwar successors to the Reichsbank, the Bank deutscher Länder, and the Bundesbank, would continue to dominate the economies of postwar Europe. The BIS provided the BdL and the Bundesbank with both legitimacy and prestige. The BdL, followed by the Bundesbank, took the Reichsbank’s former place at the governors’ meetings. The BIS gave the Bundesbank an instant network of connections to other central banks and a platform to shape the debate about the postwar European economy. Nor did the personnel change much: Karl Blessing, Schacht’s protégé, worked at the BIS during the early 1930s, transferred to the Reichsbank, oversaw an empire of slave laborers during the war, then returned to the BIS in 1958 as the president of the Bundesbank.

  During the 1930s and ’40s, like the 1980s and ’90s, the politicians laid out the general theory of European unification, while the technocrats—such as Funk—outlined the practical steps. As early as 1940, Arthur Seyss-Inquart, the ruler of the Nazi-occupied Netherlands, called for a new European community “above and beyond the concept of the nation-state,” which would “transform the living space given us by history into a new spiritual realm.”5 The new Europe would benefit from “the most modern production techniques and a continent-wide system of trade and communications developed on a joint basis.” Rapidly increasing prosperity was inevitable “once national barriers are removed.”6

  When Hitler called for the “clutter of small nations” to be removed, Funk readily agreed. “There must be a readiness to subordinate one’s own interests in certain cases to that of the European Community.”7 The Reichsbank president laid out his thoughts in a detailed, eight-page memo called “Economic Reorganization of Europe,” a copy of which is stored in the BIS archive in Basel. The document was translated by Per Jacobssen’s staff and passed to Thomas McKittrick on July 26, 1940.8

  All sorts of slogans were flying around about the “construction and organization of the German and the European economic system after the war,” and the favorite was “European large-unit economy,” noted Funk in his 1940 paper. Such a construct did not yet exist, but “the new European economy must be an organic growth” and will result from “close economic collaboration between Germany and European countries.” The Reichsmark would be the dominant currency, but the currency basis of postwar Europe was of secondary importance to economic leadership. “Given a healthy European economy and a sensible division of labor between the European economies, the currency problem will solve itself because it will then be merely a question of suitable monetary technique.” Here Funk seems to anticipate the arguments of the euro enthusiasts who, fifty years later, claimed that a common currency, if properly constructed in the right economic conditions, could not fail.

  Funk’s analysis and prediction are unsettlingly prescient of the subsequent course of postwar European economic and political history. The Reichsmark would be the dominant currency, and once it had been freed of foreign debt, its currency area must “continue to widen.” Bilateral payments must be transformed into multilateral economic transactions and clearing arrangements, “so that the various countries may enter into properly regulated economic relations with one another through the intermediary of clearing arrangements of this kind”—just as happened with the 1947 Paris agreement on multilateral payments and its successor mechanisms, such as the European Payments Union (EPU).

  Foreign exchange controls could not be abolished in one move or monetary union quickly introduced. The process must be incremental, Funk argued, anticipating the need for a halfway system like the EPU, which liberated non-residents from exchange controls, although they remained in place for citizens. “The problem is not one of free exchange or European monetary union, but in the first place, of a further development of clearing techniques for the purpose of ensuring a smooth course for payments within the countries participating in the clearing.” The conversion rates must be controlled and kept stable. This was also the aim of the Snake in the Tunnel and the European Monetary System, which were, like the EPU, managed or serviced which were, like the EPU, by the BIS.

  An actual monetary union was more complicated, Funk presciently argued, as it demanded “a gradually assimilated standard of living, and even in the future the standard cannot be the same in all the countries participating in the European clearing”—a statement that neatly anticipated the modern disequilibrium between Germany and Greece. But once the European central clearing system was operating, foreign exchange restrictions would be abolished, first for travelers crossing frontiers and then for import trade. There would be a bonfire of regulations that slowed down trade and commerce; Funk wrote, “Meticulous surveillance and all the regulations, which weigh down on the individual business enterprise with a mass of forms, will no longer be necessary.”9

  Funk also predicted, correctly, that the future European currencies would not be linked to gold. The new multilateral monetary system would provide the necessary backing. The deciding factor in trade relations would be the quality of German goods for export, “and in this respect we really need have no anxiety.” German needs would be central to the new European economy. Germany would reach long-term economic agreements with European countries so that they would plan their long-term production on the German market, and there would also be “better outlets for German goods on European markets.”10

  The Nazi leadership welcomed Funk’s plans. In 1942, The German Foreign Ministry created a “Europe Committee,” whose members drafted plans for a German-dominated European confederation. That same year the Berlin Union of Businessmen and Industrialists held a conference at the city’s Economic University, entitled “European Economic Community.” As the writer John Laughland notes, the titles of the speeches delivered at the conference are “eerily reminiscent of modern pro-European discourse.” They include “The Economic Face of the New Europe,” “The Development Towards the European Economic Community,” “European Currency Matters,” and the hardy perennial, still much discussed today: “The Fundamental Question: Is Europe a Geographical Concept or a Political Fact.”11 In June a German official drafted the “Basic Elements of a Plan for the New Europe,” which outlined how the new confederation would work. Much of it sounds very familiar. The section entitled “The Economic Organization of Europe” called for a European customs union, a European clearing center that would stabilize currency rates with the eventual objective of European monetary union, and the “harmonization of labor conditions and social welfare.”12

  Germany’s postwar remodeling of itself as a penitent bastion of democracy was predicted by Heinz Pol. Pol, a former editor of a Berlin newspaper, had fled from the Nazis to the United States. The BIS, wrote Pol, was a central pillar of this policy of expediency: the recognition that the war was lost, and Germany needed to make a deal with Allies that would preserve its dominance of Europe. D
uring the war, both Hermann Schmitz, the CEO of IG Farben, and Kurt von Schröder, the Nazi banker, used their positions as BIS directors to keep channels open to the Allies, wrote Pol in his book, The Hidden Enemy, which was published in 1943. “Since the beginning of this war, both have maintained contacts, through go-betweens, with their business friends in all the countries of the United Nations.”13

  The OSS Harvard Plan documents detailing Thomas McKittrick’s role in negotiating deals with German industrialists confirm Pol’s assertion that the BIS was a contact point for negotiations about Germany’s plans to dominate postwar Europe. Pol’s predictions of how postwar German leaders would rapidly abandon the outward trappings of Nazism still make unsettling reading:

  To obtain a peace, which would leave them in power, they will suddenly flaunt “European spirit” and offer worldwide “co-operation.” They will chatter about liberty, equality, and fraternity. They will, all of a sudden, make up to the Jews. They will swear to live up to the demands of the Atlantic Charter and any other charter. They will share power with everybody and they will even let others rule for a while. They will do all this and more, if only they are allowed to keep some positions of power and control, that is, the only positions that count: in the army—were it even reduced to a few thousand men; in the key economic organizations; in the courts; in the universities; in the schools.14

  Which is precisely what happened, when, after 1945 former Nazis took many of the key positions of “power and control” in the new Germany. Their legacy has proved extremely profitable. Germany now has the largest economy in the European Union and the fourth largest in the world. Greece faces collapse, and Spain is mired in recession, but Germany is booming, with growth rates of 3.7 percent in 2010 and 3 percent in 2011. Much of this success is based, as Funk predicted, on the high quality of German exports. Germany’s total share of world trade is about 9 percent. The country is especially strong in the biotechnology, genetic engineering, and pharmaceutical sectors.

  BASF and Bayer, two of IG Farben’s successor companies, are dominant in their fields. BASF is the world’s largest chemicals company with annual sales of 73.5 billion euros. Bayer, which makes aspirin, employs 112,000 people. Bayer felt no shame about its roots in IG Farben. In 1964 Bayer set up a foundation to honor Fritz ter Meer on his eightieth birthday with a donation of 2 million deutschmarks. Ter Meer had handled IG Farben’s negotiations with Standard Oil and oversaw the building of IG Auschwitz. Found guilty of war crimes, ter Meer was sentenced to seven years imprisonment in 1948. He was freed in 1950 and later joined the supervisory board of Bayer. Bayer’s foundation honoring him was renamed in 2005 and existed until 2007.

  By the early 1990s, Funk’s “European Large-Unit Economy,” perhaps better known as the Eurozone, was clearly in sight. The technical preparations had been going on for decades—at least since 1964, when the Governors’ Committee of European central banks had first met at the BIS to coordinate monetary policy, if not 1947, when the Paris accord on multilateral payments was signed. The positive reception for the 1989 Delors Report, which had been drafted at the BIS and which laid out the plan for EMU, meant that the political momentum was unstoppable.

  In December 1993 Alexandre Lamfalussy stepped down as general manager of the BIS to start work as the director of the European Monetary Institute (EMI), the precursor of the European Central Bank. He would be much missed. “Lamfalussy put the BIS on the map. He was superb, very bright,” said Geoffrey Bell, the founder of the G30 advisory group, an international think tank. “Lamfalussy was a thinker, especially when the bank started to move into intellectual issues such as bank regulation and the general state of the world.”15

  The EMI opened its doors the following month. Lamfalussy did not have far to go: the institute was based at the BIS. The president was charged with a mammoth task: the construction of the first trans-European monetary institution, in preparation for the introduction of the single currency. Nobody was better qualified for the job. Lamfalussy had been at the center of the drive to European monetary unity almost since its inception. The Hungarian economist had once boasted that it was his subordinates who “held the fountain pen” and “prepared the meetings in Basel of a project that was primarily European.”

  After eleven months, in November 1994, the EMI had outgrown the BIS and moved to Frankfurt. Its new home was a skyscraper at Willy-Brandt-Platz, known as the “Eurotower.” The small number of staff that Lamfalussy brought from the BIS was not sufficient. The EMI president had to recruit 150 people in six months, and the network of contacts he had built up over seventeen years at the BIS was invaluable. “I knew everyone, and when I saw that there was a hole in the organization, or that we needed someone . . . I knew exactly who to ask, and I could ask them for everything. It was a phenomenal advantage.” Lamfalussy’s network was also an advantage for the EMI’s governors, he recalled, “because they also knew each other and the staff too.”16

  The Eurotower was forty stories tall, more than double the BIS’s eighteen floors. The size of the Frankfurt skyscraper symbolized its role as the home of an idea that had been nurtured at the BIS but which had now far outgrown its birthplace. Nonetheless, the small, clubbable world of the Tower of Basel was soon replicated there. Back in the 1960s Charles Coombs, of the New York Federal Reserve, recalled that the central bankers at the BIS governors’ meetings frequently did not even need to finish their sentences “because everyone instinctively knew the rest and in an almost uncanny way, a simultaneous realization of the appropriate technical solution.” The EMI president enjoyed the same kind of telepathy with Hans Tietmeyer, the president of the Bundesbank, and Jacques Delors, the president of the European Commission.

  When Europe’s most powerful bankers and politicians came to Frankfurt to discuss the single currency project, Lamfalussy sat at the head of the table. “When Tietmeyer or Delors . . . would put up his hand to ask a question, I would know exactly what he would ask, and he also knew that I would know exactly what he wanted to ask. It was enough just to look at them and I knew what they wanted to talk about because I knew what they thought.”17

  THE DEPARTURE OF the EMI for Frankfurt left a void at the BIS. The long, looping corridors were quieter, the air of excitement that the bank was at the center of the most ambitious monetary project in European history had dissipated, and the chatter in the staff restaurant was more subdued. Even the Governors’ Committee, which had met at the BIS since 1964, was gone. The committee’s members—the governors of the European Central Banks—now formed the council of the EMI.

  Once again, the BIS faced an existential crisis: Did it still need to exist? The bank was certainly still profitable. The accounts for the year ending March 1995 showed a net profit of 162.4 million gold francs. But if the BIS had no international role, it would be increasingly difficult to justify its existence and the extensive legal privileges that helped guarantee those profits. The bank had a new manager, Andrew Crockett, a British economist who had worked for the IMF from 1972 to 1989. Crocket came to the BIS in 1994 from the Bank of England, where he had spent four years as an executive director. There he could observe firsthand the after-effects of the “Big Bang,” the 1986 deregulation of the City of the London.

  Until the Big Bang, the Square Mile had been still a clubby, comfortable place of old school tie connections and long lunches, where Montagu Norman would have felt at home. That world vanished almost overnight. Wall Street investment banks poured into the Square Mile, bringing aggressive new tactics. The 1933 Glass-Steagall Act, which separated investment banking and deposit taking, was still in force in the United States. London, newly unburdened from cumbersome regulations, offered fabulous opportunities, heightened by the rapid growth of computer technology, which accelerated trading. The BIS gave the Big Bang a cautious welcome. “It was feared that if nothing was done, the Stock Exchange would be unable to compete with foreign institutions and business would move abroad,” the BIS noted in its 1987 Annual Report.18 Th
e changes had brought a “major inflow” of capital to British and foreign banks, the BIS noted, but had highlighted the importance of Chinese walls within firms to avoid conflicts of interest. The Chinese walls however, soon crumbled under the tsunami of money. The city firms’ new American partners often had few qualms about conflicts of interest. They advised a company on a merger, and then sold the new shares.

  Some said that the BIS job was Crockett’s consolation prize for his failure to get the top job at the IMF. Either way, he had not joined the BIS to see it fade away. Crockett’s international background brought valuable perspective to what could still be a cozy and parochial institution. Crockett understood that the establishment of the EMI marked the end of an era for the BIS. The bank was sixty-four years old, of pensionable age. Its original mission, of managing German reparations payments from the First World War, had long faded away, the details of the arcane disputes preserved in dusty files in the bank’s archives.

  Suddenly the BIS looked like an anachronism, a hangover of the era of credit controls and currency restrictions in a global economy that was ever more interlinked, dynamic, and faster moving. Small, unimportant countries such as Belgium and the Netherlands sat on the board, but where were the central banks of China, Brazil, Saudi Arabia, and Russia? True, Japan, Canada, and Turkey had joined, but many, especially in the United States, regarded the bank as a thoroughly Eurocentric institution. William White, from the Bank of Canada, joined the BIS in May 1995 as head of the Monetary and Economic Department, the bank’s research arm. “When I arrived, people were asking what is the BIS going to do after the euro? It was a legitimate question. It was a very heavily European organization. Once the EMI was set up, all the Euro stuff was going to get done somewhere else.”19