by Adam LeBor
Richard Hall returned to the BIS in 1972, rising to become assistant general manager (the equivalent of deputy manager) before his retirement in 1992. Hall had first spent eighteen months at the bank in 1955 and 1956, seconded from the Bank of England to work on the European Payments Union. That era now seemed something from the pages of a dusty history book. “Things like exchange controls and the gold standard had occupied a lot of people’s time then. But the world had changed tremendously between 1956 and 1972, and the BIS had changed with it,” he recalled. The BIS had survived, evolved, and was now certain of its place in the world. “The bank felt more confident. Not only had it survived the immediate postwar problems, but it had gone on to demonstrate its usefulness to central bank governors as a place for coordinating, consultation, and even weeping on each other’s shoulders sometimes about how dreadful these governments are. The central bankers would share their worries and responsibilities and someone else would say, ‘Yes, I have one of those as well, do you have any good ideas for dealing with this?’”3
The BIS commissioned Martin Burckhardt, a local architect, to design a new, custom-built headquarters. Burckhardt drew up a plan for an ultramodern circular tower block with twenty-four floors. The first version was rejected as too high. Even after the tower was shortened, some local residents objected. A city-wide referendum was held, and the building’s supporters won an overwhelming majority—32,000 in favor, while 14,000 voted against.4 The foundation stone was laid in 1973, and the bank moved into its new offices in 1977. The move was essential, said Richard Hall. “Some of the staff had regrets, but others thought it was about time. The old building had its limitations, and we had burst out of it. We needed more space for more people.”
For a staid and secretive organization, the BIS had chosen a surprisingly high-profile headquarters. Where once the entrance to the BIS had been tucked away next to a chocolate shop, the new building, at Centralbahnplatz 2, was eighteen stories high. It loomed almost menacingly over downtown Basel, like a rocket about to take off and launch itself into space. The sunlight glinted off the rows of opaque, bronze-tinted windows. The national flags of member banks stood in a row by the entrance, like a miniature United Nations. The bank’s circular corridors and globular 1970s furniture were very stylish, if not daring, for staid central bankers. Even now, the building, which is still in use, appears to have been transplanted from a 1970s James Bond film, as though a steely eyed villain might suddenly stride down its long, looping corridors and frog-march an unwary visitor into a secret annex.
The veterans of the bank grumbled about the “Tower of Basel” as it soon became known. The BIS was no longer invisible. Tourists gawped, and locals took pride that the world’s most influential bank was now on display for all to see. Fritz Leutwiler, the president of the Swiss National Bank as well as the BIS, did not approve at all. In the old building, Leutwiler knew when the governor of the Bank of England was in the neighboring office, because he could hear him walking down the corridors and opening his door. The building’s prominence infuriated Leutwiler, who like many bankers of his generation believed that the BIS’s affairs were best conducted with as low a profile as possible. “That was the last thing we wanted. If it was up to me, it would never have been built,” he said of the new headquarters.5
The new headquarters were not just stylish, but enjoyed state-of-the-art technology. The BIS managers had realized early on the importance of computers for international finance. They understood that the rapidly globalizing economy would demand ever faster and more secure means of transmitting and storing data. The bank would play a central role in collating, analyzing, and cross-border banking transactions. It provided the secretariat for the G10’s group of computer experts who were developing electronic systems for messaging and automated international payments. The BIS also operated an experimental data bank, which provided macroeconomic data for central banks. All this demanded high levels of security. The BIS’s safety and security features are now standard on government and corporate headquarters, but in 1977 they were ahead of their time. The bank, still protected by international treaty, guards its sovereignty as keenly as its secrecy. Thus the architects, and the bankers, tried to plan for every conceivable eventuality. That meant making the building as self-contained as possible. The Swiss authorities need the permission of the management to enter the premises. By far the best thing was to ensure that there would never be a reason to summon them.
The Tower of Basel boasts its own bomb shelter in the basement, a sprinkler system with two backup levels, in-house medical facilities, and lengthy underground corridors to house its archive. Most visitors—apart from central bankers—may not walk anywhere unattended and must call for an escort to walk from room to room. They are not allowed into the staff canteen, which serves lunch every day from 12:30 to 2 p.m, and they must leave the bank at this time. The security guards, who keep a close watch on the building through an extensive CCTV system, will quickly terminate any unauthorized wanderings, and the errant stroller will likely be escorted from the premises. The top floor, which hosts a superb restaurant, is certainly out of bounds, for that is where the governors gather for dinner on Sunday evenings. The aim, said Gunther Schleminger, the bank’s general manager under President Leutwiler, was to provide “a complete clubhouse for central bankers.” The BIS staff also have their own luxurious country club just outside Basel, with tennis courts and a swimming pool.
It takes a certain verve to build an eighteen-story circular block in the middle of one of Switzerland’s most important and historic cities, especially when the organization housed inside is not subject to Swiss jurisdiction. But the BIS has always been a survivor, swiftly adapting to changing circumstances and decisively building itself into the evolving global economy. The new headquarters was a statement—in concrete and tinted glass—that, at the age of thirty-seven, the BIS had come of age. The Tower of Basel, like the bank itself, was nearly invulnerable. Naturally, the high-profile building did not bring any relaxation of the bank’s obsessive secrecy. Passers-by could stare at the building but still had no idea what went on inside. The details of the BIS’s transactions for the central banks, the deliberations of the governors’ meetings, and the bank’s powerful committees remained confidential.
The rapidly globalizing economy, argued the governors, made that confidentiality and trust between the central bankers and the BIS even more crucial. During the Second World War, the BIS had acted as an information channel between the Allies and the Axis. It served the same purpose during the Cold War, as a neutral and extremely comfortable meeting point for the Communist and capitalist worlds. Central bankers from behind the Iron Curtain regularly visited the BIS, not just to obtain credit, but also to draw on the bank’s expertise in the gold and foreign exchange markets. The BIS was always generous to its visitors from behind the Iron Curtain. It covered their travel costs and paid them a per diem in hard currency. Once in Basel, plied with fine food and wine, with some Swiss francs in their pockets, the Eastern Bloc bankers were friendly, loquacious, and a most useful source of economic intelligence.
This worked so well that by 1976 the central bankers of the Eastern Bloc countries even had their own biannual governors’ meetings at Basel, hosted by the BIS. The more the Communists adapted to capitalism, the sooner their system would collapse, the BIS managers believed—correctly as it turned out. Senior BIS officials also regularly visited East European capitals to meet with central bankers. Budapest, where life was much more pleasant than in Warsaw or Bucharest was a favorite. Hungary was often at the center of the BIS’s Cold War intrigue. As the BIS annual report for 1982–1983 primly notes, the BIS and the National Bank of Hungary had a “long-standing business relationship.”
The central European nation was one of the BIS’s earliest members. One of the bank’s first acts was to extend credit to Hungary and several of its neighbors, in 1931. The relationship had endured through the Cold War and by the early 1980s was about to
flower. János Kádár, the Hungarian leader, was tentatively experimenting with limited private enterprise. Kádár’s “Goulash Communism,” as it was dubbed, was being watched with great interest in the West. Hungary’s economy was the most liberal in the region, and the country applied to join the IMF in 1980. Frigyes Hárshegyi, a veteran Hungarian banker, first visited the BIS in 1978. Hárshegyi was then the Hungarian delegate to the International Investment Bank in Moscow, which served the Soviet Union and its socialist allies. At this time Western commercial banks were lending to the socialist countries, but capitalist banking mechanisms demanded a steep learning curve from the East European financiers who were used to operating in a state-controlled economy. The meetings at Basel helped Hárshegyi and his colleagues to understand how a free market banking system worked, he recalled. “The BIS was like a stock exchange of information. The atmosphere was always friendly, avoiding political statements and concentrating on financial and professional questions.”6
But Hungary had a problem. Foreign borrowing had financed Goulash Communism, which had brought social peace by providing work, housing, holidays, and limited travel to the West. By 1982 Hungary owed more than $10 billion in foreign debt, much of it short-term.7 The imposition of martial law in Poland and the subsequent debt crisis together with the parlous state of the neighboring Romanian economy had alarmed investors and the international markets. Even though Hungary was in a completely different situation, with a far more liberal regime and some promising economic indicators, the “regionalization” factor meant that Hungary’s creditors were rushing for the exit. Money was flooding out.
János Fekete, a senior official of the Hungarian National Bank, was charged with persuading the BIS to help. He had excellent contacts at the BIS and regularly attended meetings there. Fekete was optimistic that Hungary would be allowed to join the IMF, and indeed the country would not have applied without positive signals from the fund’s Washington headquarters. IMF membership would anchor Hungary firmly in the global financial system, instead of the Soviet make-believe equivalent. But the fund moved slowly, and Hungary’s creditors were pressing hard. The legendary ingenuity of Hungarians was being tested to the limit. The Hungarians have brought the world numerous inventions, from the ballpoint pen to nuclear weapons. Indeed they are famed for being so wily that the old joke defines a Magyar as “someone who enters a revolving door behind you but comes out in front.” Fekete proved similarly inventive.
Hungary desperately needed funds, Fekete explained to Fritz Leutwiler, but lacked sufficient foreign exchange or gold reserves. The Hungarian banker suggested that the BIS organize a bridging loan, until Hungary could join the IMF and apply for financial assistance. The BIS loan would be returned as soon as Hungary was in the IMF and received its first credit. Leutwiler was minded to look sympathetically on Fekete’s request. Leutwiler understood that the regionalization approach, which equated comparatively liberal and forward-looking Hungary with totalitarian Romania or Poland, languishing under the rule of the generals, showed poor judgment. Hungary, and Fekete, were old friends of the BIS. The BIS was always very helpful, says Hárshegyi, Fekete’s former colleague. “They saw that this was a short-term crisis and that Hungary’s economic philosophy was always to service its debts.”8
Once again, the personal connection proved crucial. Leutwiler called Jacques de la Rosière, the managing director of the IMF, in Washington. The BIS president wanted to know two things. How was Hungary’s membership application progressing? And would Budapest be likely to receive IMF assistance?
With hindsight, a lot was riding on this telephone call, probably more than either Fekete or Leutwiler realized. Had de la Rosière signaled that Hungary’s IMF membership application was not likely to be approved, or even just that it was stalling, Leutwiler would likely have politely ushered Fekete from his office with no firm commitment to help. The capital exodus from Budapest would have continued, the economy would have faced collapse, and the country’s tentative experiments with the free market would doubtless have ended. The reformers within the Hungarian politburo would have been weakened and the hard-liners, who opposed what they saw as dangerous capitalist experiments, been greatly strengthened.
Such a course of events would certainly have been “regionalized.” The defeat of the Hungarian liberals would likely have been mirrored across the Soviet bloc, perhaps even in Moscow, where Hungary was regarded as a licensed wild card, able to test the capitalist waters in ways the Soviet Union could not. De la Larosière was able to reassure Leutwiler: Hungary would soon be a member and qualify for financial assistance. Thus reassured, Leutwiler agreed to Fekete’s request for a bridging loan. In March and May 1982 the BIS arranged two loans to Hungary for a total of $210 million, and a further $300 million followed in September. By the end of the year, Hungary had joined the IMF. The fund’s board approved a credit line of $520 million. Hungary repaid its debt to BIS.
Unbeknown to him, Leutwiler had set in motion a series of events that would soon help to redraw the map of Europe. The backing of the BIS and the IMF sent a powerful signal that the Fund, and the BIS and its shareholders—other central banks—had faith in the Hungarian leadership’s plans for reform. The Hungarian reformers further liberalized the country’s economy. Private entrepreneurs began to push the limits of freedom, and foreign investors looked at Hungary with renewed interest. Hungary’s international bankers, like Hárshegyi and Fekete, already saw the deficits of the socialist system. Their visits to Basel only reinforced their understanding of its profound inefficiencies and stultifying effect on business. The central banks in the socialist bloc had very different functions to their capitalist counterparts. The Hungarian National Bank was a state commercial bank, supplying credit and financing foreign trade. The Basel meetings were also valuable tutorials in how to turn a socialist state bank into a traditional central bank, responsible for controlling the money supply and controlling interest rates.
By the late 1980s, even the old guard realized that the one-party state did not work. The Hungarian leader Kádár resigned, and negotiations began for a peaceful transition to democracy. The Iron Curtain was first opened in Hungary, three months before the Berlin Wall was breached. One day in August 1989 tens of thousands of East German refugees gathered on the Hungarian-Austrian frontier. By then it was clear that Communism was dying. As they surged forward, the border guards stood by and let them through. By the end of the year the entire Soviet bloc had collapsed. The BIS had played an important role in this process. The bank’s bridging loan had reinforced international confidence in the Hungarian reformers, which in turn had boosted their political standing at home, which had weakened the grip of the Communist party and allowed the opening of the Iron Curtain. That in turn triggered a domino effect across the region and accelerated the collapse of the one-party system.
The Soviet Union itself was less welcome in Basel. Part of the problem was that Moscow still claimed ownership of the gold holdings of the Baltic States—Latvia, Lithuania and Estonia—which Thomas McKittrick had refused to hand to the Soviets back in 1940. By 1980 the three states no longer existed and had been absorbed into the Soviet Union. But the gold did exist, and the Russians wanted it. The Soviet Union continued to inquire about membership possibilities during the 1960s, but the bank remained steadfast. The BIS continued, correctly, to keep possession of the Baltic reserves—and was duly vindicated when the three Baltic States regained their independence in 1991 and the Soviet Union collapsed. The Bank of Russia was finally admitted in 1996.
Mexico too was on the brink of going bust in 1982—and taking the international banking system down with it. Mexico was saddled with an $80 billion external debt. In order to meet its obligations, Mexico had been borrowing overnight funds in New York to pay the interest. But the loans were eating themselves: each day Mexico had to borrow more to pay the interest on the previous day’s loans. The Mexican economy was in danger of entering a death spiral. The IMF was prepared to loan
Mexico $4.5 billion, but the fund moved slowly, and the paperwork might take months to be approved. Here, too, the BIS connection helped save the country. Paul Volcker, the chairman of the US Federal Reserve, and Fritz Leutwiler, the BIS president, organized a rescue package.9
Back in 1968 when Jelle Zijlstra, the BIS president, had sought to secure the French franc at the Bonn IMF conference, he managed to secure pledges of $2 billion over lunch. Volcker and Leutwiler took slightly longer, although their mission was slowed by the fact that the bankers were not gathered around a single table, as they had been in 1968. As with Hungary, the BIS financing was not intended as a substitute for the IMF rescue package but would be a temporary stopgap, until the IMF loans were authorized.
Volcker’s initial suggestion of $1.5 billion was bumped up to $1.85 billion, with $925 million from the Federal Reserve, and the remainder to come from the central banks would be channeled through the BIS. Similar arrangements soon followed for Brazil, Argentina, and Yugoslavia. These arrangements suited everyone involved. The rescue packages were presented as BIS-led. The bank had arranged the loans, but the United States and the other G10 countries made the actual funds available. The rescue packages carried substantial political risks for the participating central banks, especially the Federal Reserve. But the central role of the BIS internationalized the bailout.