Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (27 page)

The 1980 Annual General Meeting. After fifty years of existence, the bank had made itself an essential pillar of the global economy. (Courtesy BIS)

The Governing Council of the European Central Bank in January 2013. The ECB, like its parent bank the BIS, is protected by an international treaty, and remains opaque and unaccountable. (Courtesy ECB)

          
“I say no permanent solution of the German problem seems possible without an effective European union.
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— John McCloy, US High Commissioner for Germany, speaking in London in 1950

W
ith the United States supplying the money through the Marshall Plan and the BIS providing the financial and technical expertise, the drive toward a united Europe was unstoppable. In October 1949, Paul Hoffman, the head of the ECA, which administered the plan, gave a definitive speech in Paris. He called for the expanding western European economies to integrate economically, set up a continent-wide free market, and to coordinate their “national, fiscal, and monetary policies.”
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This meant that governments should harmonize their spending and taxation as well as national interest rates: in other words, to move toward a United States of Europe.

Per Jacobssen, the BIS’s influential economic adviser, agreed. Jacobssen believed the new European economies should be based on the free market. The era of autarky, state controls, and price restrictions was over. The ideal mix was an economy with about 80 percent in the private sector. The priority should be financial reconstruction and rebuilding trade and payments systems. Political and economic freedom would ensure prosperity, and welfare provision had to be made compatible with the market economy.
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Jacobssen also favored a federal solution for postwar Europe. During the war he had often met with Allen Dulles and British diplomats to persuade them of the merits of supra-nationalism, albeit with a maximum of power left at state level.
In 1946 he went public with his idea. Jacobssen gave a talk at Gettysburg College in Pennsylvania with the grandiose title of “The Re-Education of Europe.” The German problem could be solved only as part of the European problem. Postwar Europe would flourish through diversity, but a new loyalty was needed, one which superseded mere national fidelity.
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Just as in the 1930s, the technocrats believed they knew best, although their ambitions were far more grandiose: the imposition of a new transnational financial, economic, and political structure, whether the people of Europe wanted it or not.

Marshall aid came at a price: remodeling European societies on the American model of consumerism and consumption. Hoffman’s propaganda arm produced pamphlets, posters, leaflets, radio programs, and even traveling puppet shows that extolled the American lifestyle. The American dream—a house in the suburbs, a car, and numerous household appliances—was projected as a near-guaranteed benefit of American-style freedom.
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The key to this was increased productivity on American-style production lines in a transnational free market.

For that to happen, and for the money to flow freely, new mechanisms of international payment had to be constructed, with the BIS at the center. This had started in 1947, when France, Italy, Belgium, the Netherlands, and Luxembourg had signed the Paris accord on multilateral payments, which was managed by the BIS. That was followed a year later by the Agreement for Intra-European Payments and Compensation, signed by sixteen European governments, the representatives of the French and British-American occupation zones of Germany, and the short-lived Free Territory of Trieste, which soon became part of Italy. The United States wanted the process to be speeded up. Washington pushed the European central banks to construct a comprehensive, multilateral payments system, recalled Alexandre Lamfalussy, the BIS general manager between 1985 and 1993, demanding, “For the love of God stop being bilateral and start being multilateral.”
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Europe obeyed, swayed in part by a dedicated grant of $350 million of Marshall Plan funds to set up the European Payments Union. Established in 1950, at a single stroke the EPU removed the thicket of regulations governing European trade. EPU member states all agreed to accept each other’s currencies for export payments.
Bilateral balances were offset against a central fund, so all debts and credits were owed or received from the EPU. Eighteen countries signed up: all of Western Europe (excluding Scandinavia), Greece, Iceland, Switzerland, Britain, and Turkey. The BIS was appointed agent to the EPU. It managed its banking, kept its accounts, and controlled its funds.
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The EPU “was the European Union of payments,” said Lamfalussy. (The EPU applied to non-residents. Currency controls remained in place for residents.)

During the early 1950s Richard Hall worked at the Bank of England, helping to compose the briefing documents for the governor on his regular visits to the BIS. In 1955 Hall was seconded to the BIS to work on the EPU’s monthly settlements and reports. There was no discussion about the BIS’s wartime record, he recalled. “One of the BIS’s finest achievements, for which it deserves no credit, was surviving the war. That was thanks to Maurice Frere, the Belgian banker who had lobbied hard for the BIS in Washington. He said that the BIS should not be got rid of because it might come in handy some time. Nobody in Basel was bothering their consciences about what the bank did during the war. It was the most sensible thing to do at the time. It was not a question of covering things up, it was really not high on anyone’s list of priorities. They were trying to get on with the business of reconstruction and restoring the conditions so that trade and payments could now take place.”
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The BIS itself remained ambiguous about the EPU. It regarded the multilateral payment mechanisms as slow and unwieldy.
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The bank preferred free trade and currency convertibility. But, politically, the EPU was invaluable for the BIS. Thanks in large part to the EPU, the bank’s future was assured. The BIS and the European integration project were locked into each other. The BIS was the only institution capable of handling the complicated technical processes demanded by economic integration. At each step on the road to a united Europe, the BIS would be there.

In 1951, France, West Germany, Italy, and the Benelux states signed the Treaty of Paris, establishing the European Coal and Steel Community (ECSC). The ECSC created a common market for coal and steel. This dry-sounding
construct was, in fact, a profoundly significant development. The coal and steel market was now regulated by the ECSC’s governing authority, which meant that the ECSC was a supranational institution, with regulatory powers over its members. For Jean Monnet, the architect and president of the ECSC, the new institution had transcended the old idea of the nation-state. The establishment of the ECSC set a pattern that would be followed for decades, one which still continues today. The removal of national sovereignty was always presented as an economic or technical measure, rather than the profoundly political process that it actually was.

Monnet was an early adopter of the idea of rule by technocrats. The French economist and diplomat was a veteran of the era that had brought forth the BIS: the post-1918 settlement. Born in 1888 to a family of Cognac merchants, Monnet worked for a while for the family firm, spending time in the City of London. During the war he coordinated British and French shipping to maximize their efficiency. In 1919 Monnet attended the Paris Peace Conference as an assistant to the French commerce minister. The carnage of the First World War had turned Monnet, like many of his generation, into a convinced internationalist. Monnet helped found the League of Nations and was appointed deputy secretary-general. But the League’s slow and cumbersome decision making and the need to help his family business, which was in difficulties, pushed Monnet back to commerce.

Nowadays, Monnet is spoken of in reverential terms as the “Father of the Europe Union.” Monnet’s ideas, which for many in Europe are now regarded as near-holy, have shaped our world and look set to do so for generations. His memory endures in buildings, scholarships, awards, and fellowships, including the Jean Monnet Center for International and Regional Economic Law and Justice at the New York University School of Law. Monnet’s ideas have generated a whole new academic discipline: European integration studies. More than 785 universities in 72 countries offer the Jean Monnet Program, taught by 1,650 professors to 25,000 students a year.
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But who were the formative influences on Monnet’s thinking? The answer lies not in Paris, Brussels, or war-ravaged Europe, but in Wall Street, where Monnet worked during the 1920s and ’30s.

Monnet’s hidden history brings us back to some familiar and powerful
names. Curiously—or perhaps not, considering the small world of the global financiers in the early twentieth century—Monnet was connected to John Foster Dulles and Sullivan and Cromwell; to John McCloy, then a partner in the Cravath law firm, which represented General Aniline and Film, IG Farben’s American subsidiary, and even to Ivar Kreuger, the Swedish match king and con man.

Monnet met John Foster Dulles at the 1919 Paris Peace Conference, and the two men became close friends. They shared a similarly elitist view of the world, a disdain for democratic accountability, and an enthusiasm for making money. Dulles’s extensive network of high-level contacts would prove extremely useful to Monnet over the next decades. During the 1920s, Monnet managed Blair & Company, an American finance house. Blair & Co. was represented by the Cravath law firm where John McCloy was a partner, and Monnet and McCloy became close friends. Blair & Co., like many investment houses of the time, was thoroughly corrupt and routinely carried out insider trading operations. Under Monnet’s leadership, it kept a preferred list of fifty-eight clients who were brought in on profitable deals.
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Monnet also worked with Dulles and several American banks, including Chase, on the stabilization of the Polish economy, which gave him an early understanding of the power of transitional finance to make or break a country’s economy. When Blair & Co. was incorporated into the Bank of America, Monnet moved to San Francisco to run the new subsidiary. The firm’s shares plummeted in the crash of 1929, and Monnet returned to Europe.
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After Kreuger, the Swedish match king and con man, went bust, John Foster Dulles sent Monnet to Stockholm to protect the interests of Kreuger’s American creditors. In 1933, bored with Sweden, Monnet moved to China to help the government set up the Chinese Development Corporation, to develop communications and infrastructure. Monnet then returned to the United States and moved into a large apartment at Fifth Avenue and 92nd Street.
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John Foster Dulles then suggested that Monnet—whom he described as “one of the most brilliant men I know” and “an intimate friend”
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—go into business with another close friend of his, a banker called George Murnane.

In fact Monnet and Murnane had known each other since the First World War, when Murnane had worked for the American Red Cross in France. Murnane was a partner in Lee, Higginson—the Boston investment firm that had financed Kreuger and for whose London branch Thomas McKittrick worked. “I have long felt that they would make an ideal combination,” Dulles wrote of Monnet and Murnane. The two men agreed to set up a new international finance house, using Dulles’s legal services. At this time Sullivan and Cromwell was making so much money, especially from its business in Germany, that Dulles suggested the law firm invest in his friends’ new company, Monnet, Murnane & Company. Sullivan and Cromwell put up $25,000, and Dulles invested another $25,000 of his own money.
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Monnet focused on business in France and China, and Murnane looked after Solvay & Cie, the Belgium chemical firm that was a partner of IG Farben. Dulles was the lawyer for Solvay & Cie’s American subsidiary.

When the Second World War broke out, Monnet put his contacts and belief in international cooperation to good use. He was sent to London to oversee British and French arms production. From there he went to the United States, where he coordinated arms and aircraft purchases and encouraged American manufacturers to boost their output. Monnet met his “intimate friend” John Foster Dulles whenever he could. The two men shared a common vision for postwar Europe, one now being articulated by decision makers from Basel to Berlin and Washington, DC. There could be no return to the prewar system of nation-states, Dulles wrote in 1941:

           
We should seek the political reorganization of continental Europe as a federated commonwealth. There must be a large measure of local self-government along ethnic lines. This can be assured through federal principles, which in this respect are very flexible. But the reestablishment of some twenty-five wholly independent sovereign states in Europe would be political folly.
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