(Content Review) Tower of Basel by Adam LeBor

Synopsis:

LeBor, an ardent anti-banker, presents a strong historical case for the questioning of the role of central bankers in the modern financial system.  Using historical case data dating back to 1920’s Germany, LeBor paints the picture of the Bank for International Settlements (“BIS”) as the caricature of an unaccountable elusive organization serves as a stand-in for central bankers of all stripes.

Summary: 

LeBor begins with an account of the BIS as having been founded following the implementation of the Dawes Plan, the treaty through which German reparations were to be paid out following WWI.  Out of this, the BIS was born.  As Keynes summarized at the time:

“The United States lends money to Germany, Germany transfers its equivalent to the Allies, the Allies pay it back to the United States Government.  Nothing real passes – no one is a penny the worse.  The engravers’ dies, the printers’ forms are busier.  But no one eats less, no one works more” (p. 10).

Under the auspices of settling the accounts of the various countries in the merry-go-round of payments systems involved in WWI reparations, the BIS took shape.  The BIS was chartered under Swiss Law, in Basel, with the following functions:

  • buying, selling, and holding gold
  • buying and selling securities other than shares
  • accepting deposits from central banks
  • opening and maintaining deposits for central banks
  • acting as an agent of or correspondent for central banks
  • entering agreements to act as a trustee or agent in connection with international settlements (p. 21)

From its earliest days, however, the Bank was quickly transformed into a machine for the advancement of German interests, particularly those of the Nazi party.  Names like Hjalmar SchachtHermann Schmitz, and Kurt Baron von Schröder were some of the earliest involved in running the BIS, and all were later tried for war crimes following WWII (p. 35).  These names, and the German-American business connections behind them, feature prominently throughout the book and serve a central role in the operation of the BIS throughout the 20th century.

LeBor then highlights, in a prelude to WWII, how economic warfare had become a component rivaling that of the battlefield.  During the Spanish Civil War, the German-backed nationalist government set up its own national bank which by war’s end produced a rival currency worth three times the Republic’s currency despite a lack of gold reserves (p. 55).  As LeBor points out:

This, as much as the Blitzkrieg, was the real lesson of the Spanish Civil War: the nationalists’ sophisticated fusion of financial and military power.  The Nazis would hone this model, using the BIS to underpin their economic empire.

The BIS, which housed the gold reserves of the various constituent banks, including France, Germany, Austria, and others (notably absent was the U.S. because at the time, U.S. leaders were wary of involvement in oversees commitments), functioned as an international clearinghouse for central banks.  Worth quoting in its entirety is the parallel drawn by LeBor of the BIS method of transaction to that of the islanders of Yap, in Micronesia:

The 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 of 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 (p. 61).

Like the stone quarry of the Yap, the BIS simply earmarked the appropriate gold reserves for each country’s account as they were held in the United States and Britain.

Despite the U.S. not using its allotted shares of its BIS stake, many prominent Americans stood alongside the Germans in shaping BIS policy.  The well-connected John Foster Dulles, along with his younger brother Allen Dulles, stood at the heart of BIS affairs in its early years.  These two, with Thomas McKittrick, largely shaped the German-American connection which kept the bank running during WWII.

In another aside, the author explains how several of these prominent figures were involved in what became known as the “Swedish match scandal” (p. 75).  Here again it is worth quoting the passage:

Wall Street had welcomed [Ivar] Kreuger [the head of the ‘scandal’] 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 Kreuger 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 [emphasis added].

A recurring theme that runs through the book, beside the obvious main point driven home by LeBor that the BIS has numerously served as a tool for German advancement, is that history has shown a failure on the part of the U.S. financial and political elite to forecast the consequences of decisions made on their behalf.  Driven by the decisions of appeasers such as Norman Montagu, U.S. and other Allied financiers allowed Axis powers to advance their interests during the wartime, particularly those of Germany.

McKittrick remained head of the BIS even after the U.S. signed the Lend-Lease program, effectively ending their neutrality.  Despite this, he was allowed to remain head of the BIS, a sure sign that Germany found his acquiescence suitable to their needs, as they could have opted to have a neutral country’s banker serve at the helm.  However, as LeBor points out, the Nazi’s used the BIS to shuttle stolen gold and other means of payment to the rest of the world.  Gold shipments from Bern to Bulgaria, as well as gold exchanges with Turkey (neutral, but traded heavily with Germany), and gold smuggled from Germany to the Swiss National Bank (SNB) constitute some of the transactions the BIS took in accordance with German military and economic interests during the wartime era (p. 87).

Chapter 8, “Arrangement with the Enemy,” goes on to detail how, utilizing the strong wartime connection between Stockholm and Berlin, the U.S. implemented the “Harvard Plan.”  The plan’s primary objective was to win over the German financial and political elite by appealing to the profit motive which could be realized after the war (p. 119).  This arrangement, which played itself out just a few years later, manifest itself in the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF), both of which operate today.

Chapter 9, “United States to Europe: Unite or Else,” describes the structures set up in post-war Europe to facilitate reunification.  Beginning with the Marshall Plan, the U.S. began a path of greater involvement with Europe.  Although the BIS did not directly distribute the Marshall Plan funds (as the U.S. still was not technically a member), it did “advise” on many of the mechanisms of distribution.  During this time the OECD and World Bank were also constructed, both of which the BIS was at least tangentially related to in some form or another.

Chapter 10, “All is Forgiven,” repeats the theme set forth by the Harvard Plan.  Indeed, German bankers who would otherwise have been charged with war crimes, and whose involvement in the war effort was substantial, were allowed to participate in the new economic order of Europe.  The Reichsbank was abolished, replaced with the Bank deutscher Länder (BdL).  Most of those who had served in some capacity during the war were given positions with the new bank, which itself was the precursor to the Deutsche Bundesbank prior to the ECB’s creation.  Germany’s plans for a postwar European economic order were laid out in the Red House Report (p. 155).  Below is the author’s summary of the events:

As the Allies advanced on Germany, the Nazis stepped up their plans for the postwar era. On August 10, 1944, an elite group of industrialists gathered at the Maison Rouge Hotel in Strasbourg, including representatives of Krupp, Messerschmitt, Volkswagen, and officials from several ministries.  Also in attendance was a French spy, whose report reached headquarters of the Allied invasion force, from where it was forwarded to the State Department and the Treasury.  The account of the meeting is known as the Red House Report.

Germany had lost the war, the Nazi industrialists agreed, but the struggle would continue along new lines.  The Fourth Reich would be a financial, rather than a military imperium.  The industrialists were to plan for a “postwar commercial campaign.”  They should make “contacts and alliances” with foreign firms but ensure that this was done without “attracting any suspicion.”  Large sums would have to be borrowed from foreign countries.  Just as in the prewar era, the US connection and links to chemical firms, such as the American Chemical Foundation, were essential to expanding German interests.  The Zeiss lens company, the Leica camera firm, and the Hamburg-American line had been “especially effective at protecting German interests abroad.”  The firms’ New York addresses were passed around the meeting.

This continues on page 156:

US Treasury officials were closely watching this massive export of German capital, much of which was going to South America…Harry Dexter White told a meeting of Treasury officials in July 1944 during the Bretton Woods conference. …’They bought estates and industries and corporations, and there is evidence that German corporations have been buying into South American corporations in the expectation of being able to re-establish themselves there after the war.’ …The Treasury officials also discussed the BIS at the same meeting, noting that out of twenty-one board members and senior officials, sixteen were ‘representatives of countries that are either now our enemies, or are occupied,’ including Walther Funk and Hermann Schmitz [emphasis added].

It is at this point that LeBor begins outlining the many German connections to the postwar European economic order.

Chapter 11, “The German Phoenix Arises,” begins with the establishment of the European Payments Union (EPU) in 1950, which was ultimately the precursor to the EMU.  The BIS was the “agent” of the EPU, managing banking, controlling funds, and keeping accounts.  This represents the other point central to LeBor’s premise: that the BIS has morphed over time as its responsibilities have dried up, finding a way to make itself useful after its stated purpose has been outlived.

During the Bretton-Woods era, the U.S. was having difficulties keeping the USD pegged to gold at $35/oz.  In order to keep the system afloat, the BIS was used as the staging ground for the London Gold Pool (p. 188).  Despite the fact that there was no written agreement, the central banks of numerous countries colluded to keep the price of gold stable in order to preserve the currency system established decades earlier.  This meeting took place in what is now known as the BIS Markets Committee, which to this day does not post an agenda, take notes, or publish minutes of its meetings.

Included in these affairs are:

  • Price stabilizing measures enacted immediately following the Kennedy assassination, where the U.S. (on order of Charles Coombs) borrowed millions in foreign credit without any prior consultation of the foreign states to ensure international credit markets would remain sound (p. 190).
  • Financial aid to Hungary, allowing it to meet the financial obligation necessary to join the IMF (p. 203).
  • Coordination with Paul Volcker to extend credit to Mexico in 1982 during the “Tequila Crisis” (p. 207).

Bringing the story to the present day, LeBor tells of how the BIS oversaw the transition of the EPU to the European Monetary Agreement, as well as the agent for the European Monetary Cooperation Fund, which was ultimately parlayed into the European Union.  Largely a product of central bankers, the decisions of the Delors Committee laid the groundwork for the current economic framework in Europe.  Of course, these mechanisms were what the German political and economic elite had had in mind all along, as LeBor goes on to point out:

[Walther] Funk was released from Spandau Prison in Berlin the same year and died in 1960, but his pan-European plan for a continent free of trade and currency restrictions lived on and flourished. …In 1992 twelve European countries signed the Maastrict Treaty, which brought the European Union into existence (p. 219).

…To point out the any similarities between the Nazis’ postwar economic plans for Europe and today’s European Union is to risk ridicule and invective.  The European integration project has, for many, become and untouchable truth, an article of faith in the world’s inexorable progress toward a brighter and more secure future (p. 220).

…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 (p. 220).

…Funk’s deputy Emil Puhl described the BIS as the “only real foreign branch” of the Riechsbank (p.220).

…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.” …The Reichsbank president [Funk] 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.

Given the supporting evidence of Nazi-BIS ties, it comes as little surprise to readers by books’ end that many of the German aims were near-universally realized.  LeBor continues:

The Reichsmark would be the dominant currency [according to Funk], 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 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.

…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).

It is in this chapter (chapter 14, “The Second Tower”), that LeBor makes his case for the BIS as the instrument that projected German control on the postwar European economy.  Of course, with such strong ties to both the Nazi party and the alphabet soup of European economic arrangements in the 1950’s and onward, the BIS was centrally located to serve this purpose.  LeBor continues on page 222:

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” [emphasis added].

As accurate as Funk’s assessment seems to be, LeBor makes the case that it is a damning indictment of the BIS, and the technocratic leaders of postwar Europe.  Despite the war raging in Europe on the battlefield, German leaders were already planning ahead to a postwar Europe where Germany would secure a place as an economic hegemon.  As he writes on page 223:

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.” In June a German official drafted the “Basic Elements of a Plan for the New Europe,” which outlined how the new confederation would work.

LeBor finishes by taking the book up to the present day, complete with the BIS’s role in modern affairs.  Although these stand out, they warrant a discussion all their own.  Germany has long had a history of manipulating the Eurozone to its own advantage, and indeed many scholars foresee an end of the ill-fated attempt at European economic unity.  However, an equally compelling story exists where the BIS plays only a periphery role, but sinister motives and German economic dominance feature heavily in the narrative…

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