Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (9 page)

           
— Merle Cochran, an American diplomat who monitored the BIS, in a telegram to the State Department, May 9, 1939
¹

T
he
Berner Tagblatt
newspaper’s revelations about the murky goings-on inside the BIS highlighted the growing questions about the bank’s role and function. Insider trading during the 1930s was often the rule rather than the exception, but there were wider issues at stake. The BIS had been established for three main purposes. The first, and ostensibly the most important, was to manage German reparations payments under the 1930 Young Plan. The second was to facilitate cooperation between central banks. And the third was to act as a bank for central banks. The BIS was barely five years old in 1935, but it had already had lost its primary reason for existence and the second reason was under threat. How long would it be before the third reason—to act as a central bank for banks—was called into question?

The Young Plan had collapsed almost as soon as it was agreed to. The Hoover Moratorium, announced a year later, had paused reparation payments. The 1932 Lausanne Conference had confirmed that Germany’s war debts would be written off. Thus, there were no more reparations payments. The BIS was also the trustee for the loans that Germany had taken out under the Dawes and Young plans to make those reparations payments. But Gemany had stopped using the BIS to repay the Dawes and Young plan loans. Instead
Schacht had blackmailed Germany’s creditors into signing new bilateral agreements. The Reichsbank, a cofounder of the BIS, had broken its legal, financial, and moral obligations with complete impunity and delivered a serious blow to the BIS’s credibility as a neutral interlocutor.

So for what other reasons did the BIS continue to function? It acted as a facilitator of central bank cooperation for countries whose currencies were on the gold or gold exchange standard. (The gold standard valued a national currency at a set amount of gold. The gold exchange standard included the country’s holdings in US dollars and British pounds as part of its national reserves.) The statutes of the BIS assumed that international finance was based on the gold and gold exchange standard and so would continue to grow smoothly and steadily, facilitated by the bank. As Toniolo notes, “The gold standard was embedded in the very DNA of the BIS.”
²
The bank kept its accounts in Swiss gold francs, with each franc worth 0.29 grams of fine gold. But the central banks were losing their enthusiasm for gold. Even Britain had come off the gold standard. By the end of 1932 only seven of the forty-six countries that had been on the gold standard remained, including France, Italy, and the United States, which left the following year.

With no more reparations and the collapse of the gold standard, why did the BIS stay in business? In part—as others who wished to dissolve the bank would find in later years—because it was founded under an international treaty, and its statutes were essentially immutable. Schacht and Norman had designed their bank superbly. It was not possible to close the BIS. In fact, the end of reparations and the collapse of the gold standard proved a boon for the BIS. It allowed the bank to focus on its founders’ intentions: to build a new transnational financial system of large capital movements, free from political or governmental control. Gates McGarrah, the bank’s first president, had explained as much soon after the bank was founded. Writing in
Nation’s Business
magazine, McGarrah admitted that German reparations payments were a “routine operation,” which any trust company could administer.

                 
The conception seems to have formed in the popular mind that the Bank for International Settlements, which began at Basel, Switzerland, May 20, 1930, was organized merely to handle German reparations payments and the so-called inter-allied debt and that its principal operations are concerned with the German debt payments. That is a mistaken, although an understandable, view.

                 
Although the prime reason for the bank’s creation was to administer the monthly sums paid into it by Germany, this duty has already become the smaller side of the Bank’s activities. The handling of the German reparations payments is a routine operation, which any trust company could carry on. Within six months after opening for business the Bank has developed much larger and more important activities and has become a medium of service, which is one of the saving features in a tense world situation. . . .

                 
The Bank is completely removed from any governmental or political control. No person may be a director who is also a government official. The Bank is absolutely non-political and is organised and operated on a basis purely commercial and financial, like any properly managed banking institution. Governments have no connection with it nor with its administration.
³

McGarrah, like every international financier, regarded the Bolshevik Revolution with horror. Yet he and Vladimir Lenin had much more in common than either could know. The BIS president and the Russian revolutionary both understood that the twentieth century would be the bankers’ century. The new mechanisms of transnational capitalism allowed the bankers to send vast sums of money quickly and easily around the world and harvest vast profits from doing so, free from oversight.

The bankers could save a country from collapse and revive its economy—as they did in Germany in the early and mid-1920s, dispatching hundreds of millions of dollars and underwriting the Dawes loan—or they could help send it into a
tailspin, by stopping the flow of cash and then pulling out, as they did at the end of the 1920s.

Massive capital movements were now increasingly common. The BIS, as the bank for central bankers, institutionalized that new power. In the first six months of 1931 the BIS advanced £3 million to the Bank of Spain to stabilize the peseta; gave a credit of 100 million Austrian schillings to the national bank when the Credit Anstalt bank went bust; and advanced $5 million to the Hungarian National Bank and arranged a further $10 million credit for Budapest. A small clique of financiers, unaccountable to any government, most of whom knew each other well, had somehow amassed unprecedented economic and political power. Lenin had understood the rising power of finance capital while he was living in exile in Zürich and working in his epic study of imperialism. “The old capitalism has had its day. The new capitalism represents a transition toward something,” he wrote. “Thus the beginning of the twentieth century marks the turning point at which the old capitalism gave way to the new, at which the domination of capital in general made way for the domination of finance capital.”
⁴

ON JANUARY 5,
1939, almost two months after
Kristallnacht
—the state-sponsored pogrom against Germany’s Jews—Montagu Norman stepped off the train at the Zoologischer Garten station in Berlin and was met by Hjalmar Schacht. Norman was the guest of honor at the christening of Schacht’s grandson, and he was swiftly driven to Schacht’s apartment in the Reichsbank building where the ceremony took place. The baby boy was named Norman Hjalmar. Numerous articles in the German press welcoming Norman to Berlin heightened the friendly atmosphere. The two bankers then traveled to Basel together for the monthly board meeting at the BIS.

As Europe slid inexorably to war, British journalists and politicians were asking increasingly pointed questions about the close ties between Norman and Schacht. The Reichsbank president had been in London just before Christmas and had visited Norman at home. What had been discussed? The
News Chronicle
newspaper, for example, suspected that Norman might be an envoy,
not just for the Bank of England, but for the pro-appeasement government, led by Prime Minister Neville Chamberlain. Why had he gone? What was Norman saying to the Nazi leaders in Berlin?
⁵
The newspaper demanded to know. Ernest Bevin, a powerful trade union leader, also wanted answers. “One cannot enter into financial arrangements between these great central banks involving the economic life of the respective countries, without it having a direct reaction on the liberties and rights of the people,”
⁶
he thundered—sentiments that are as true today as in 1939.

Bevin and the journalists were right to be suspicious of Norman’s relationship with Schacht. The Reichsbank president, more than anyone else, had rebuilt Germany, a country that would soon be at war with Britain. Schacht had wrought a miracle—a centrally planned economy that was not ravaged by inflation, a worthless national currency, or unemployment. In the six years since Hitler had taken power, unemployment had been reduced from six million to around three hundred thousand. Armies of the jobless were diverted to massive programs of public work—building the new network of motorways, gigantic public buildings, and planting forests. Arms production was soaring. Trade unions no longer existed and were replaced by the state-run German Labor Front (DAF). The work-shy, along with Jews, leftists, and others viewed as undesirables were dispatched to concentration camps.

Germany adored its miracle maker. In January 1937, on the occasion of his sixtieth birthday, Schacht had stood for four hours receiving hundreds of guests. Hitler himself sent a personal message praising him. Schacht told Hitler’s adjutant, who had brought the message, “Tell the Führer that he has no more loyal co-worker than I.” Schacht’s admirers believed, correctly, that without him, Germany would still be weak, poor, and, worst of all, humiliated. “Every branch of German finance, commerce, industry, and society and the armed forces was represented. There were bankers, manufacturers, merchants of all grades, big and little,” the
New York Times
reported. Hitler gave Schacht a painting by Carl Spitzweg, a German romanticist painter. Montagu Norman sent a mahogany clock.
⁷

Schacht’s real job was to prepare Germany for war. In his correspondence with Hitler, Schacht repeatedly emphasized the importance of the armaments program. In May 1935 he wrote,

                 
The following comments are based on the assumption that the accomplishment of the armament program in regard to speed and extent, is the task of German policy, and that therefore everything else must be subordinated to this aim, although the reaching of this main goal must not be imperiled by neglecting other questions.
⁸

That same month Hitler appointed Schacht General Plenipotentiary for the War Economy. For all his old-world manners and elegant appearance, Schacht was a state-sanctioned crook, licensed by Hitler to tear up contracts, steal, extort, and fiddle the Reichsbank’s books, which was why he got the job. Schacht funded rearmament by inventing a piece of financial chicanery known as the “MEFO” bill, which allowed the state to illegally borrow billions of Reichmarks from the Reichsbank—a policy Schacht later described as “daring.” He hijacked the blocked funds of foreign depositors in the Reichsbank. He requisitioned German residents’ foreign currency holdings and ruled that all foreign currencies received as payments for exports must be sold to the Reichsbank. He fiddled the capital markets so that foreign firms could not compete on equal terms with German competitors. He could outsmart anyone, even the wily Jews, proclaimed Hitler:

                 
Before each meeting of the International Bank at Basel, half the world was anxious to know whether Schacht would attend or not, and it was only after receipt of the assurance that he would be there that the Jew bankers of the entire world packed their bags and prepared to attend. I must say that the tricks Schacht succeeded in playing on them really provide that even in the field of sharp finance a really intelligent Aryan is more than a match
for his Jewish counterparts. In spite of his ability I could never trust Schacht for I had often seen how his face lit up when he had succeeded in swindling someone out of a hundred mark note.
⁹

Schacht was a creature of his time. The dreams of the internationalists who believed that the BIS, like the League of Nations, would engender global peace and harmony were dead. Invasion, annexation, and mass murder were the new tools of international empire building. The Third Reich was rising and would last a thousand years, proclaimed Hitler. Austria had been forcibly incorporated into the Third Reich in the Anschluss of March 1938—with little objection from its citizens. Italy had invaded Abyssinia (now Ethiopia) and was dropping poison gas on defenseless civilians. Japan was laying waste to Manchuria, having murdered hundreds of thousands during the Rape of Nanking in 1937. Neville Chamberlain, the British prime minister, had signed the Munich agreement that ceded the Sudetenland, a province of Czechoslovakia, to Germany. The Spanish civil war, with its flattened, charred cities, its savage brutality and atrocities, was a precursor of Europe’s fate.

Yet even as he rebuilt Germany’s economy, Schacht must have asked himself if the price was really worth paying. He did not believe in the Nazis’ ideas of racial supremacy and refused to join the party. Rather, he was an authoritarian national conservative. He had made a deal with the devil to see his homeland rise again from, as he saw it, the humiliation of the Treaty of Versailles and the penurious obligations of the Dawes and Young plans. Like many Germans of his class, Schacht tried to rationalize the Nazis’ brutality and anti-Semitism until the contradictions could be borne no longer. In the summer of 1938, he turned to his partner at an elegant dinner in Berlin and asked, “Madam, how could I have known that we have fallen into the hands of criminals?” He might have been addressing the question to himself, for after five years of Nazi rule the answer was there in front of him—if he had chosen to look.