Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (5 page)

On April 19, 1929, Lord Revelstoke suddenly died. The Young Conference was adjourned. All sides finally reached agreement on June 7. Germany would pay almost $29 billion, over fifty-eight years. Control of German economic policy was returned to Berlin. A new bank would administer the payments. Schacht wrote of its birth: “In the meantime my idea of a Bank for International Settlements had met with such enthusiastic response from all those taking part in the Young Conference that soon there was not one among them who would not have liked to claim the suggestion as his own.”
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As the delegates signed the final version, the curtains in the meeting hall caught fire.

The Young Plan was accepted in principle at the First Hague Conference, and seven committees were set up to work out the technical details. At Schacht’s suggestion, the seventh, the Organization Committee, gathered in Baden-Baden. This was the most important committee, and it was responsible for drafting the statutes of the new bank and its relations with the host country, which would regulate its legal status. The delegates argued about governance, the role of the directors and managers, and even the official language of the new bank’s statutes. It was eventually agreed that both the French and English texts would be authentic. The bank would hold central banks’ gold and convertible currency deposits. These deposits could be used to settle international payments without having to either physically move the gold between banks or trade the currency through foreign exchange markets. The BIS would be an international clearinghouse for central banks, the world’s first. And with the broad outline settled, the next question was where the new bank should be located. Montagu Norman and the British government pushed for London. France objected, on principle, and argued that the new bank should be located in a small country. There was some talk of Amsterdam, and finally the delegates settled on Basel, Switzerland, which was conveniently located on several international railway lines and on the borders of France and Germany.

MEANWHILE IN LONDON,
Walter Layton, the editor of
The Economist
, was still grappling with the new bank’s constitution. The key point, as Layton recalled, was to “work out some form of words that would place the bank beyond
the reach of governments.” Layton “struggled hopelessly” and then told Norman that he had failed.

“Why do you insist it can’t be done?” Norman demanded, annoyed.

“Because it’s the right of every democratic government to reserve its freedom of action,” Layton replied—an argument that would resonate through the decades.
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Layton admitted defeat. The constitution was eventually drafted by one of the many committees set up to establish the BIS. But Norman was victorious: the bank’s statutes, still extant today, enshrined its absolute independence from interfering politicians and governments. As for Schacht, chastened and unhappy about the reparations demands of the Young Plan, he traveled to the spa of Marienbad, in Czechoslovakia, to spend time with his wife, Luise. Narrowminded, rigid, and intensely Prussian (as he later described her), Luise met him at the train station. She shouted, “You should never have signed.”

But Schacht, and Montagu Norman, had their bank.

          
“The hangover of secrecy was, indeed, so strong that the attendants would not permit a look into that sacred room even after all the directors had left.”

           
— Clarence K. Streit, on the BIS boardroom after the directors’ meeting, writing in the
New York Times Magazine
, July 1930

I
n September 1930, a few months after the BIS opened for business, an American lawyer named Allen Dulles sat down in his office at 37 Rue Cambon, in Paris, to write a letter to Leon Fraser. Fraser, a fellow American, was also a lawyer. A former reporter for the
New York World
newspaper, Fraser had served as general counsel for the execution of the Dawes Plan and had taken part in the negotiations at Baden-Baden on the structure of the BIS. Fraser was now a board member of the BIS and the bank’s alternating president.

Dulles was confident that his request, which was simple enough, would be granted. After all, he was a scion of one of the most powerful families in the United States. His uncle, Robert Lansing, had served as secretary of state, as had his grandfather, John W. Foster. Born in 1893, in Watertown, New York, Dulles had graduated from Princeton University and joined the US Foreign Service. He was posted to Vienna, Austria, until the United States entered the war in 1917, when he moved to Bern, Switzerland, to work as a junior intelligence officer at the US Legation. Neutral Switzerland, home to squabbling émigrés, businessmen, and revolutionaries, provided a bountiful harvest of information. “It is almost impossible to stop for any length of time in Switzerland,” Dulles wrote, “without coming into contact with questionable characters. Bern is just full of agents and representatives of all nationalities.”
¹

Dulles relished the world of shadows. Even as a precocious schoolboy, he had shown an insatiable appetite for intrigue and geopolitics. He wrote his first book at the age of seven.
The Boer War
was short treatise on how the Boers, the Dutch settlers, had first claim on southern Africa, as they had arrived there before their British overlords. (Montagu Norman, who fought in the Second Boer War, at the start of the twentieth century, might have disagreed.) Seven hundred copies were privately printed and sold at fifty cents each, with the proceeds being donated to a Boer charity.

But the future director of the CIA did not always know how to assess a potential source. He later loved to recount the story of how one day in April 1917 the telephone rang at the US Legation in Bern. Dulles took the call. A Russian émigré leader urgently wanted to meet with an American diplomat. Dulles refused, as he wanted to play tennis instead. The next day the man who had telephoned left Switzerland on a sealed train for the Finland Station—a railway station in St. Petersburg, Russia. The city would later be renamed Leningrad in his honor. From Bern, Dulles was dispatched to Paris, as part of the US team at the 1919 Paris Peace Conference. Officially, he was included as a member of the commission drawing up the boundary of the new state of Czechoslovakia. In fact, Dulles was running the American diplomatic intelligence operation for central Europe and courting and monitoring its émigrés, exiles, and revolutionaries.

By 1930, when Dulles wrote to Leon Fraser, Dulles had left the Foreign Service. He and his brother, John Foster Dulles, became partners at Sullivan & Cromwell—the most powerful law firm in the United States, if not the world—headquartered at 48 Wall Street, in New York. Allen Dulles ran Sullivan & Cromwell’s office in Paris and knew Hjalmar Schacht well. In Paris in 1919, Dulles had learned about diplomacy. And in Paris in 1930, he would learn about the world of high finance and the BIS. Dulles, wrote biographer Peter Grose, was “plunged into a realm where sovereign frontiers were transparent and the trappings of democracies seldom allowed to penetrate. Like beguiled readers of Eric Ambler or Graham Greene, Allen discovered that only a thin line divided respectable high finance from a shadowy underworld.”
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While Montagu Norman and Hjalmar Schacht had exploited the chaos around the German reparations question to finesse the world’s leading powers into creating the BIS, the Dulles brothers used Europe’s disorder to broker deals and monetary instruments to refinance Germany that were so complex that few outside their offices at Sullivan & Cromwell could understand them.

Much of this web was connected to the BIS, via the Dulles brothers and their friends on Wall Street and in London and Germany. New York banks had led the way during the 1920s in raising money for Germany, and the City of London had also provided significant funds. Foremost among the British banks was J. Henry Schröder, the London operation of the well-established German banking firm of the same name that was based in Hamburg. Schröder, in London, set up a trust to invest in numerous German firms, including IG Farben, Siemens, and Deutsche Bank. Frank Tiarks, who was a partner in the London branch of Schröder, set up a subsidiary in New York, called Schrobanco. It opened for business in October 1923 and was an instant success. The president of Schrobanco was an American banker named Prentiss Gray, who was a close friend of John Foster Dulles’s, whom Gray had met at the Paris Peace Conference. Schröder’s historic German connections and contacts made that country a natural focus of Schrobanco’s. The company quickly became one of the leading agents for doing business in Germany and later, for processing loans under the Dawes and Young reparations plans. Among Schrobanco’s shareholders were a number of German, Swiss, and Austrian private banks, which included, naturally, the Hamburg branch of J. Henry Schröder, as well as a bank called J. H. Stein of Cologne. One of J. H. Stein’s partners, who was a scion of the Schröder dynasty, would later join the board of the BIS and use J. H. Stein to funnel money from German industrialists to Heinrich Himmler’s personal slush fund.

Frank Tiarks was a director of the Bank of England and a close colleague of Montagu Norman. Tiarks had his eye on an American financier named Gates McGarrah, whom Tiarks wanted to recruit to the board of Schrobanco. McGarrah, whom Tiarks described as “one of the most important American bankers,” was a director of the Federal Reserve Bank of New York. He also had excellent
connections in Germany—he had represented the United States at the Reichsbank when it was held under international control. McGarrah stayed on the Schrobanco board until 1927 when he returned to the Federal Reserve Bank of New York as chairman. He stayed there until 1930—when he was appointed the first president of the BIS. As for Schrobanco, its complicated German investments were in good hands: the bank’s lawyer was Allen Dulles. The links were so close that in 1929 Schrobanco moved into spacious new offices at 48 Wall Street—the same building that housed Sullivan & Cromwell.

ALLEN DULLES HAD
a simple request for Leon Fraser that autumn of 1930. His sister, Eleanor Lansing Dulles, had received a scholarship from Harvard University to write a book about the BIS. Eleanor Dulles was a well-regarded academic and currency expert, who had previously written a book about the French franc. Allen Dulles wrote, “Anything you can do for her would be greatly appreciated, and I can assure you she is a very discreet person.”
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Like her brothers, Eleanor Dulles also had easy access to the world’s most powerful bankers and financiers.

Allen Dulles’s letter was not the first Fraser had received that asked him to assist Eleanor. Owen Young had written in May of that year. And Gates McGarrah, the BIS president, was also getting letters about Eleanor Dulles. Paul Warburg, the eminent banker, had written to McGarrah from the headquarters of M. M. Warburg at 40 Wall Street, in New York. Warburg explained that Eleanor was a “sister of my good friend John Foster Dulles, whose name is well known to you as a writer on international questions and whom you undoubtedly know personally.”
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Jackson Reynolds, president of the First National Bank of New York, who had chaired the BIS Organization Committee in Baden-Baden, wrote to McGarrah from 2 Wall Street. He asked McGarrah to assist Miss Dulles—especially as she was the sister of Reynolds’ friend, John Foster Dulles.

There were few, if any, people in the United States then with a more powerful and influential set of friends than John Foster Dulles, who served as legal counsel to the US delegation at the Paris Peace Conference, where he had specialized in German war reparations. His time in Paris gave him a privileged insight into the
workings of international finance and diplomacy and a network of coveted contacts. Dulles’s client list during the 1920s read like a who’s who of American finance: J. P. Morgan; Kuhn, Loeb & Co.; Harris, Forbes & Co.; Brown Brothers; W. A. Harriman; and Goldman Sachs. Dulles arranged tens of millions of dollars’ worth of loans to clients, including to the cities of Munich, Frankfurt, Nuremberg, Berlin, and Hanover, and to the Union of German Mortgage Banks, the Berlin City Electric Company, Hamburg Street Railways, and the State of Prussia. Dulles also worked on the Dawes Plan German Loan in 1924 and the German Government International Loan of 1930 that had been instigated by the Young Committee.
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Wall Street in the 1920s was possessed by a near-mania to lend to Germany. In 1923 American banks and finance houses sent abroad $458 million in long-term capital. By 1928 that sum had risen to $1.6 billion. The German credit bubble reached ludicrous extremes. A small village in Bavaria, which needed around $125,000, was persuaded to borrow $3 million.
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But the real significance of this flow of capital was not just financial. The bonds between the American bankers, businessmen, and industrialists, and their German counterparts, would prove far more durable than the doomed Weimar Republic, and even the Third Reich. With the BIS as the central point of contact, these links would endure during the Second World War and reshape Europe after 1945.

Allen Dulles returned to Bern during the Second World War, as a far more experienced, powerful, and influential spymaster, harvesting much information through his assets at the BIS. John Foster Dulles went on to become US Secretary of State for the Eisenhower administration during the 1950s at the height of the Cold War. The Dulles brothers would help ensure that Nazi bankers, businessmen, and industrialists—many of whom should have been tried for war crimes—were seamlessly integrated back into powerful positions in the new Federal Republic of Germany.

FOR HJALMAR SCHACHT
and Montagu Norman, January 20, 1930, was a date to savor: they had created a bank beyond the reach of either national or international law. On that date the governments of the United Kingdom,
France, Germany, Belgium, Italy, Japan, and Switzerland signed an extraordinary document. The Hague Convention guaranteed that the BIS would be the world’s most privileged and legally protected bank. Its statutes, which remain in force to this day, essentially make the BIS untouchable. Article 10 of the BIS Constituent Charter noted,