by Adam LeBor
KARL BLESSING, LIKE Hermann Abs, certainly understood when to be helpful. In 1960 the gold spike threatened to undermine the stability of the postwar financial system. The United States and Britain proposed joint operations on the London market to protect the value of both countries’ reserves. Blessing quickly offered to make some of West Germany’s reserves available to the Bank of England. But any coordinated international action would need bilateral agreements, which would necessitate lengthy negotiations with governments. Britain persuaded the United States that there was a much simpler approach to organizing multilateral interventions: through the governors’ meetings at BIS. Between them the countries represented there, as well as the United States, accounted for about 80 percent of the world’s reserves. The BIS staff was not enthusiastic about the idea. As the world pioneer in transnational finance, the BIS was a firm believer in the primacy of market forces. The market was now being shunted aside, wrote one official, “so that the inconvenience of certain financial policies can be avoided.”14
Any such doubts were ignored by the governors. In November 1961 the London Gold Pool (LGP) was set up. The United States, West Germany, France, Italy, Britain, Belgium, the Netherlands, and Switzerland contributed a total of $270 million to the pool. The funds would be used to maintain dollar parity at $35 an ounce, in line with the Bretton Woods agreements. The banks would keep the gold price stable, by buying and selling when necessary. All of the participating banks agreed not to buy gold themselves on the London market while the pool was in existence. The BIS gold cartel was constructed on conditions of complete secrecy. There was not even a formal written agreement. The bankers’ word, and a handshake, was enough to seal the deal. As Coombs noted of the governors’ meetings, “However much money was involved, no agreements were ever signed nor memoranda of understanding ever initialized. The word of each official was sufficient, and there were never any disappointments.”15
The Bank of England carried out the LGP’s monetary transactions, but the BIS was essential to its operations. Every month the Bank of England reported to an experts’ group of officials from BIS member banks and the BIS itself, which met at the BIS.
Eventually, word got out. The story was picked up by The Times (of London), then by The Economist. The LGP was forced to release detailed accounts, which were published in the Bank of England’s quarterly bulletin. For the first five years, the LGP worked. The price in London stayed between $35.04 and $35.20 per ounce. The group of gold experts expanded their briefs to cover the foreign exchange market. The gold pool became the Committee on Gold and Foreign Exchange. It still exists today and is known as the BIS Markets Committee. The committee’s agenda and deliberations remain secret.
THERE WERE TIMES, especially during crises, that the mutual trust engendered over the lunches and dinners in Basel proved crucial in stabilizing the global financial system.
November 23, 1963, was such a day. The assassination of President John F. Kennedy triggered panic selling on the stock market. Coombs was at work at the New York Fed when the news came through. He put aside his shock and horror and focused on the task at hand: the immediate defense of the dollar. Coombs considered banning foreign exchange transactions to prevent panic selling, but such a decision would be slow to implement and would need political support. Immediate action was needed, though, and he decided that closing the foreign exchange market was anyway not feasible. It would send a signal of panic and desperation. There would be a frenzy of selling of both dollars and gold.
The answer, Coombs decided, was for the United States to sell massive amounts of foreign currency to defend the dollar. The question was where could Coombs get it? He had access to only $16 million worth and held none at all of several major European currencies. He could sell gold to cover the purchases. But once news got out that the United States was selling its gold reserves after its president had been assassinated, the dollar would immediately plunge.
The best option was to borrow and sell foreign currency by drawing on the Federal Reserve’s currency swap network. Currency swaps allowed Central Bank A to hold reserves in Central Bank B’s currency (or a third currency), which Central Bank A could draw on, without having to purchase the foreign currency from Central Bank B. This was an excellent solution apart from one small problem: the time difference. No bank could draw on currency swaps without the approval of the partner bank. The president had been shot at 1:30 p.m. Eastern Standard Time, six hours behind Europe. The European governors that Coombs urgently needed to contact had left their offices and were on their way to dinner or home. There were no mobile telephones or Internet. The governors were unreachable.
Coombs now faced the most important decision—or rather, gamble—of his life. If he bet wrong, not just his career would end. He would be remembered as the man who wrecked the dollar at a time of a national crisis. There was no time to consult or get the support of his superiors. A run on the dollar could start at any moment. Could he count on the governors of Europe’s central banks to underwrite the sale by the Federal Reserve of hundreds of millions of dollars’ worth of their currencies without their prior consent or knowledge? For if the sales went ahead, and the governors protested, or refused to authorize the transactions, both he, and the dollar, would be finished. The governors, he decided, would back him.
At 2 p.m., Coombs instructed the foreign exchange desk to offer 10 million deutschmarks for sale and to inform the bank acting as the Fed’s agent that more such offerings would follow. Eight minutes later the Fed offered substantial amounts of sterling, followed by large holding of Dutch guilders and Swiss francs. Meanwhile, the Bank of Canada had stabilized the US-Canadian dollar exchange rate, and the Fed reciprocated.
At 2:30 p.m. Coombs ordered his officials to inform the market that the Federal Reserve would supply foreign exchange in unlimited amounts to defend the dollar and would call in its entire $2 billion of available credit swaps if necessary. Only then did Coombs report to Alfred Hayes, the president of the New York Fed. Meanwhile, the New York Fed’s telephone operators were searching for the other central bankers. They reached Roy Bridge, of the Bank of England, first. He immediately agreed to help. Bridge told Coombs he could ask for “all that he wanted.” The Bundesbank was equally cooperative. As soon as the Frankfurt foreign exchange market opened on the following Monday, the Bundesbank made sure to show itself as a buyer of dollars. In Bern the Swiss bankers agreed to enlarge the Fed’s credit facility by another $100 million. Coombs’s strategy worked. The stock market recovered. When the markets opened on Monday, the dollar remained stable.
THE BIS WAS going from strength to strength. In 1961 the ten key industrial IMF member states, known as the G10 (which largely overlapped with the membership of the BIS) set up the General Agreement to Borrow (GAB). The G10, plus Switzerland (which did not join the IMF until 1992) put aside $6 billion as a stand-by credit for the IMF. The GAB funds were to be made available if an IMF member was suddenly threatened by short-term capital flight. Two years later, the IMF began a detailed study of the international monetary system. It asked the BIS to provide information on the gold and Eurocurrency markets and central banks’ short-term credit arrangements.16 When the IMF report was published in 1964 it recommended that all G10 central banks send the BIS confidential statistics about their monetary reserves. The BIS, as the depository of this data, could then act as an early warning system if a country’s reserves were being depleted and might need to draw on the GAB. So it seemed only natural that the Sunday evening governors’ dinners at the BIS should be expanded to include Canada and Japan. (The two countries were members of the GAB but did not join the BIS until 1970.) The BIS had effectively relocated one of the most important international meetings of the key IMF members from Washington to Basel.
When in 1964 the central bankers of the European Economic Community set up their Governors’ Committee to coordinate monetary policy, the committee was located not in Brussels, the home of the European project, or Frankfu
rt, the site of the Bundesbank, but at the BIS headquarters. The BIS helpfully provided the Governors’ Committee with the necessary secretarial and administrative support. The following year, in 1965, the BIS even reached agreement on its 1930s investments in Germany—the Young Plan loans. The Reichsbank had serviced the loans and paid interest until the end of the war in April 1945. After a twenty-year break, Germany agreed to resume paying interest on the loans but deferred the capital repayment until 1996.
The deal was brokered by Hermann Abs, who had returned to Deutsche Bank. Like Karl Blessing, Abs had expertly whitewashed his Nazi past. There was no mention of Abs’s role at the bank that organized the plunder of Nazi-occupied countries, or his former position on the board of IG Farben. Abs had been the most powerful commercial banker in the Third Reich and now enjoyed similar status and acclaim in the new West Germany. He was also a welcome guest in the world’s treasuries and chancelleries. Abs sat on the board of so many companies, including Daimler Benz, the Federal Railways, and Lufthansa, that a law, known as “Lex Abs,” was passed limiting the number of positions an individual could hold to ten.
When Per Jacobssen died in 1963 after just seven years at the IMF, Abs became a founding sponsor of the Per Jacobssen Foundation. The list of his cosponsors reads like a roll call of the transnational financial elite and includes some familiar names, such as Eugene Black, the former president of the World Bank; Marcus Wallenberg, tutor to Thomas McKittrick and vice chairman of Enskilda Bank; Roger Auboin, the former general manager of the BIS; Rudolf Brinckmann, the veteran BIS director; Jean Monnet, the architect of European unity; and Marius Holthrop, the BIS president. Abs died in 1994 at the age of ninety-two, garlanded with honors and acclaim. A gushing obituary in the Independent newspaper, a normally skeptical British publication, acclaimed him as the “outstanding German banker” of his time. Which was true enough, as Abs had embodied a century of German banking, although not in the adulatory sense that the writer had envisaged.17
ALWAYS QUICK TO adapt to changing circumstances, the BIS spotted a new opportunity during the 1960s. The continuing drain on Britain’s economy of its empire and the country’s general economic malaise made sterling increasingly vulnerable. But sterling was also a reserve currency, especially across Britain’s current and former dominions. Thus sterling, like the price of gold, had to be stabilized. The BIS was not a lender of last resort, but it could arrange loans to troubled central banks. In June 1966 a group of European central banks, the New York Federal Reserve, and the BIS agreed to make around $1 billion available to the Bank of England to defend sterling. This was significant, not just because of the sums involved, but because the BIS was its center. All the monies involved, apart from French and American funds, would be paid through a single account at the BIS. The bank was now coordinating a long-term strategic rescue of one of the world’s reserve currencies.
However opaque the governors’ meetings were, they were a more edifying spectacle than the farcical and very public scenes at the November 1968 G10 conference in Bonn. With the franc and sterling under pressure, and German reserves up by $4 billion, the conference was always going to be difficult.
This time the finance ministers were in charge. The bankers were banished to the lounges and corridors. Paris and London pressed for a devaluation of the mark, but Germany resisted. Roy Jenkins, the British finance minister, mentioned that the governors’ meeting at Basel had favored revaluation of the mark. Karl Schiller, the German economics minister, rounded on Karl Blessing, the president of the Bundesbank. He demanded to know on what authority Blessing had discussed the national currency value with foreign officials, as though unaware that such discussions had been taking place at Basel since the BIS was established in 1930, and indeed were one of the main reasons for its existence. Schiller demanded that Jelle Zijlstra, the BIS president, provide him with a full report on the Basel governors’ meeting. Zijlstra politely told him to “go to hell.”
Excluded from the discussions, the governors spent their time playing Ping-Pong, drinking champagne and hunting down an ever-shrinking supply of canapés, all of which were encased in aspic. At one stage Charles Coombs and the governor of the Bank of France eyed a single frankfurter on a waiter’s tray. They agreed to divide it. Outside the conference center, hordes of television crews and reporters were besieging the building, while German protestors angrily demanded that those inside “save the mark.” In fact, it was the French franc that needed to be saved, and the general consensus was that the currency would need to be devalued by around 11 percent.
Zijlstra went into action. He convened an emergency governors’ meeting over lunch on Friday to see what support could be raised for the franc. It was an impressive performance. Zijlstra secured a pledge of $2 billion within half an hour. In the event, Charles de Gaulle, the president of France, decided that the franc would not be devalued. He introduced stringent exchange controls and other monetary restrictions. They worked until spring 1969, when French reserves began to drain away once more. Fresh attacks followed. The franc was finally devalued in August 1969, by 11.1 percent, just as had been discussed in Bonn.
IN DECEMBER 1969, Karl Blessing retired. His friends and admirers held a gala dinner in his honor. Blessing told those assembled—many of whom, like him, had airbrushed their past of inconvenient episodes—that “monetary discipline” had always been the center-point of his banking career. The Nazi regime, which he had loyally and enthusiastically served for all of its twelve years of existence, was smoothly dismissed. “We lived until 1945, or, rather, until 1948, with this many-headed, never-loved monster of the Reichsmark, going downhill all the time.”18 Blessing planned, he said, to spend much of his retirement in the south of France.
The following year, in 1970, McKittrick passed away at a nursing home in New Jersey at the age of eighty-one. The New York Times ran a glowing story about the “world financier,” as it described him. McKittrick had stayed at the Chase National Bank until he retired in 1954. He later headed a World Bank mission to India. The former BIS president had been decorated by Belgium, Italy, and Romania, the article noted. McKittrick’s secret deals with Nazi industrialists, his friendship with Emil Puhl and the BIS’s acceptance of looted Nazi gold were not mentioned.
Montagu Norman had died in 1950, but Hjalmar Schacht continued roaming the world. Asian and Arab countries had no interest in his tainted history and welcomed his expertise. But others remembered. Around 1960 Schacht met with Sigmund Warburg because Schacht wanted Warburg to take a stake in a banking operation in the Philippines. The encounter was heavy with things unsaid. Schacht was unusually nervous, and his speech was repeatedly punctuated with the phrase “in short.” Warburg listened politely and promised to think over Schacht’s idea, but he never followed up.19 Schacht finally retired in 1963 and lived in Munich with his second wife, Manci. He died in 1970 after he slipped and badly hurt himself while trying to put on his formal dinner trousers.
Blessing’s retirement was short. In April 1971, at the age of seventy-one, he suffered a heart attack while on holiday in Orange, in France. Even in death, the myths and lies endured. The New York Times marked Blessing’s passing with an article as laudatory as its summary of McKittrick’s career. After Blessing left Unilever, the Times noted, he had “held various less exposed positions in the mineral oil industry.”20 As for the slave laborers, leased for a few zlotys a day from the SS before being worked to death or executed at Kontinental-Öl’s network of concentration camps, it was as if they had never existed.
CHAPTER THIRTEEN
THE TOWER ARISES
“To be frank, I have no use for politicians. They lack the judgment of central bankers.”
— Fritz Leutwiler, BIS president and chairman of the board, 1982–19841
By 1970 Rudolf Brinckmann had served on the BIS board for almost two decades. But his membership in the world’s most exclusive club had not made the German banker any more amenable to settling the bitter dispute with the W
arburgs over the name and ownership of the bank they both claimed. Eric Warburg, now seventy years old, remained a partner in Brinckmann, Wirtz & Co. He still went to work each morning to the building, which had once belonged to his family and which he felt was rightly theirs. Warburg and Brinckmann both attended the bank’s morning meeting, then ignored each other for the rest of the day. The whole situation, Warburg said, was “unbearable.”
The Warburgs suggested that the bank be renamed M. M. Warburg, Brinckmann & Co. The BIS director offered Brinckman, Wirtz–M. M. Warburg & Co., and so it went on. But Brinckmann could feel that Germany’s bankers were turning against him. Hermann Abs described the imbroglio as a scandal. But it may have been Jacob Wallenberg, of the Swedish banking dynasty, who finally forced Brinckmann to change his mind. On a visit to the bank’s Hamburg headquarters, Wallenberg told Brinckmann that when he had first come to the building, in 1913, the name of the firm was “M. M. Warburg & Co, and not, as today, Brinckmann, Wirtz & Co.”
Brinckmann finally surrendered in 1969, and the bank was renamed M. M. Warburg–Brinckmann, Wirtz & Co. The following year, he stepped down from the board of the BIS. Brinckmann retired from his, that is, the Warburgs’, newly renamed bank on the last day of December 1973, at the age of eighty-four. Their battle won, the Warburgs proposed that the bank hold a farewell reception for Brinckmann at the Hamburg branch of the Bundesbank. The gala event was planned for January 2 the following year. The two sides planned a gracious closure, both of Brinckmann’s career and of a long and often turbulent relationship that had spanned five decades. But it was not to be. As Eric Warburg and Rudolf Brinckmann walked toward the Bundesbank building, Brinckmann suddenly gasped for air, collapsed, and died.2
THE PASSING OF Brinckmann, like that of Hjalmar Schacht and Karl Blessing, marked the end of the postwar era, the transition to the modern, globalized, economy and the rise of the new generation of central bankers. Money moved faster, markets reacted quicker, and countries were now interconnected in ways that would have seemed inconceivable when the BIS was founded in 1930. Its headquarters, at the former Grand Hôtel et Savoy Hôtel Univers, at Centralbahnstrasse 7, had served the central bankers well for several decades. But it had been built as a hotel, not as the headquarters of an international bank that was rapidly growing in power and influence and which stood at the heart of the European integration project. In 1958 the BIS employed 158 staff. By 1971 that number had grown to 237. The bank’s membership was steadily expanding, as was the bank’s growing global reach. The national banks of Spain, Portugal, Iceland, South Africa, Turkey, Canada, Australia, and Japan had all joined. BIS membership was now a point of pride for the newly emerging economies. The monthly governors’ meetings needed to cater not just to the central bankers, but to the legions of assistants, staff, and junior officials who invariably accompanied the governors.