Chasing Gold: The Incredible Story of How the Nazis Stole Europe's Bullion (13 page)

On March 9, 1938, Schacht accepted reappointment as head of the Reichsbank first for just one year and then for a normal four-year term. By then he had no illusions about Hitler’s goals or his aggressive military program, but at the same time the central banker enjoyed the trappings of being president of the Reichsbank, where he also had great autonomy. Later that month he agreed to issue the last Mefo bills. At about that same time, Germany had $183.2 million in gold in its vaults, with all but $28.6 million hidden off the official records. Although Schacht had lost a ministry and his plenipotentiary title, he still had what he really wanted: the Reichsbank. With its gilded armchairs, plush carpeting, and Gobelin tapestries, the new central headquarters in the heart of Berlin, which Hitler helped dedicate in 1934, was a showpiece of the Third Reich. Schacht relished the bank’s international prestige and the monthly meetings with other central bankers in Basel. The economic power in Hitler’s Reich, though, was now clearly in the hands of Hermann Göring.
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A handful of central bankers governed the world’s financial system in the years immediately following World War I, handling such crucial issues as war reparations, growth, inflation, as well as the handling of central bank gold. These men, who were responsible in many ways to no one but themselves, ruled the economic world from behind a curtain of silence via their control over credit and the money supply in their countries. The most important of them were Montagu Norman of the Bank of England, Benjamin Strong at the Federal Reserve Bank of New York, and the German Reichsbank’s Hjalmar Schacht.
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There was no convenient place where the central bankers could get together to discuss their common issues and work out shared problems. If the press learned that two of them were meeting somewhere, financial markets immediately assumed that one country or the other was in serious trouble, and a run on some nation’s currency would soon develop. At least as far back as the 1880s, central bankers had talked about establishing a venue where they could routinely exchange information, and the idea gathered strength in the 1920s as the world economy bounced from one crisis to the next. Finally in 1930, the leading economic powers established the Bank for International Settlements in Basel, Switzerland.

Basel is at the crossroads of the Germanic and Latin cultures of Europe. Germany, France, and Switzerland come together there on the banks of the Rhine River, Europe’s most important transportation artery. Since the nineteenth century, Basel had been a major hub of European travel. It even had three train stations, one for each of the French, German, and Swiss national rail networks. The moneymen decided to locate their new organization in Basel because the city of nearly 150,000 inhabitants was international, intimate, and easy to reach. The American financial writer Adam Smith once noted that while the world spoke darkly about the powerful “gnomes of Zurich” who controlled world finance, the gnomes were actually in Basel.

As with many good ideas, the new bank had many parents. One of them was Hjalmar Schacht. As he remembered it happening, the time was the late spring of 1929, and key players of the world economy were meeting in Paris to work out a plan to reschedule the impossible war reparations that Germany faced after World War I.
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Owen Young, a leading American businessman who founded the Radio Corporation of America and was president of General Electric, chaired the conference. One day, Schacht and Young were having a private talk at the swank new Hotel George V, where the meetings were being held. Young stretched out in a stuffed chair smoking a pipe, with his legs sticking out far in front of him. Schacht was pacing the floor at what he called his “quarter-deck speed,” and as so often happened his mind was in overdrive.

Suddenly Schacht tossed out an idea: why not set up an international bank to handle post-war reparation payments and other global financial issues such as the development of colonial countries, which were rich in precious raw materials. The bank could also play a role in managing the world’s gold, the foundation of the world’s financial system. It would be something like an economic League of Nations, except that the national representatives would be the central bankers of a variety of countries. When Schacht finished speaking, Young mulled over the idea without initially responding, but then jumped out of his chair and excitedly said, “You gave me a wonderful idea, and I am going to sell it to the world!” The conference ended on June 7, 1929, following an agreement on the Young Plan to settle German war reparations. The meeting’s expert report also recommended establishing a group of countries to look into a new institution along the lines that Schacht and Young had first discussed in the hotel room.
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The Bank for International Settlements (BIS) was fundamentally an institution to facilitate German war reparations by creating a way to sell Berlin’s post-war bonds. Germany would pay off the huge debt by offering long-term securities, which private banks and financial houses would then buy and earn the profit. Governments demanded upfront lump payments, but financial institutions were willing to let Berlin pay off the debt over time with interest. Everyone would get what they wanted. In addition, the BIS would become the place where central bankers could meet on a regular basis and discuss their common problems, swap their economic outlooks, and if possible coordinate national policies.
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Schacht took a leading role in talks laying out plans for the new organization, suggesting that it be called the International Settlements Bank. On January 20, 1930, the founding members met in The Hague and signed documents establishing the new institution with a slightly altered name: the Bank for International Settlements. By the time the BIS was up and running, however, Schacht had resigned from his post at the Reichsbank because of a conflict with the Berlin government over the Young Plan. He wanted to accept the deal he had struck on war reparations, but the Berlin government rejected it.

While the Europeans were getting closer together, the United States in the wake of the war had become strongly isolationist and did not join international organizations, including the League of Nations (which was ironic, as one of its key founders was President Woodrow Wilson) or this new bank. American financiers, though, clearly saw that they could make money on war reparations and wanted to get in on the game. So while the U.S. Federal Reserve did not become a member, three U.S. banks, J. P. Morgan, First National Bank of New York, and First National Bank of Chicago, invested in the BIS and played a major role in its birth.

Switzerland offered to provide a home for the new organization in Basel as well as an attractive array of tax and legal perks for its future staff. The first official meeting of the bank’s board of directors took place in Basel on May 12, 1930. The bank started with capital of 500 million Swiss gold francs, and its headquarters was to be located in the city’s old Grand Hôtel et Savoy Hôtel Univers. It was an ideal location: far from the prying press in Paris or London, but just a few steps from Basel’s main train station, which provided good access to European capitals. The BIS signed a two-year lease on the hotel, but ended up staying there for forty-seven years. It also quickly grew to a staff of 100 made up largely of economists.
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The central bankers easily slipped into a routine of holding monthly, weekend meetings ten times a year. They enjoyed the informal sessions and camaraderie so much that they were soon stretching their visits from Thursday to Monday. Since the U.S. was not in the club, no Federal Reserve representatives were present. American bankers, though, were on the board, and diplomats from the U.S. embassy in Paris traveled to Basel each month to roam the corridors and sent cables back to Washington reporting on the talk of the international financial and political world.

The epicenter of world finance in those days was still London, which was colloquially known as The City. The personification of that money power was Montagu Norman, the governor of the Bank of England, whom one biographer described as “a strange and lonely man.” In addition to being a giant of global finance, he was also a hero of the Boer War and a lover of classical music. He hired string quartets to perform at his home for him alone. With his spade beard and flowing cape, Norman ruled the world of money with panache and cultivated aloofness. A 1929 cover story in
Time
magazine called him the “Paladin of Gold,” and in Basel he was always referred to respectfully as Mr. Governor. In the early years, the BIS was essentially Norman’s club, and he rarely missed a meeting. He called the bank his “spiritual home away from home,” and developed many close friendships. On Monday afternoons after the official weekend events were over, Norman regularly had tea with BIS economist Per Jacobsson’s British-born wife Violet. The banker always arrived dramatically via a back road with his cape flowing behind him.
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When Hjalmar Schacht returned to his old job as president of the Reichsbank in early 1933, he was delighted to rejoin the Basel meetings. Given Hitler’s aggressive foreign policy, the German was a big draw at the weekend sessions. Some governors even checked to make sure he was coming before they committed to attending. Other central bankers and visiting American diplomats pumped him for both the latest Berlin rumors and what Hitler was thinking. Schacht loved being the center of attention and dished out just enough gossip to retain everyone’s attention, but held back the last bit of information, to keep them wanting more. When he got back home, he told the Führer about the discussions. Hitler bragged at one of his staff lunches, “I must say that the tricks Schacht succeeded in playing on them proves that even in the field of sharp finance a really intelligent Aryan is more than a match for his Jewish counterpart.”
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The BIS attracted top executives from the world of finance. American Gates W. McGarrah resigned as chairman of the New York Federal Reserve Bank to become the first head of the organization, even though the U.S. government was not an official member. Other early presidents included the American Leon Fraser, a legal expert on reparations, as well as Dutch bankers Leonardus Trip and J. Willem Beyen. None of them, however, stayed in the job for long.

The bank quickly earned a reputation for having a multinational stable of the world’s top economists. The most famous was the Swede Per Jacobsson, who at the age of thirty-seven became the organization’s first head of the Monetary and Economic Department. He had earlier worked at the League of Nations. Karl Blessing, another rising star in economics also worked in Basel during the early days. Later Jacobsson served as managing director of the International Monetary Fund, and Blessing became a member of Schacht’s Reichsbank board and was president of the West German Bundesbank in the 1950s and 1960s.

While journalists were not initially welcome at the Basel meetings, they nonetheless started showing up soon after the BIS was founded. For a while there was a ban on conversations between bankers and the press. As a result, reporters resorted to writing stories with lots of atmospherics about how Germany’s Dr. Schacht, for example, had an expression of disappointment—or joy—on his face after he left a meeting in the suite of Britain’s Governor Norman. So much misinformation was being published that the BIS finally gave up and began holding an off-the-record press conference after each meeting. Information was still heavily guarded, though, so these press conferences usually produced little news.

The BIS came into existence at an ominous time in world economics. The already weak world financial system had collapsed completely following the Wall Street crash of October 1929. Britain, Germany, and the U.S. now had combined unemployment of 10 million. No one seemed to have any good ideas about how to get out of the collective mess. In December 1930, John Maynard Keynes wrote in an article that appeared simultaneously in both Britain and the U.S., “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.”
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The leaders of the world central banks, though, never wavered in their support for the continuing role of gold. It was their anchor in troubled times. BIS President Beyen later wrote that the BIS was designed to be “the guardian of the gold standard.” In fact, both before and during the war, it was the largest channel for gold transactions in Europe. Bullion was the top-of-the-mind concern of central bankers, who nervously saw their national holdings swinging wildly as countries and investors looked around for economic shelter. It was a time of great turmoil in the global economy. All the major countries were in chaos because of the worldwide depression. Nations spent heavily in hopes of ending the downturn, which led to deficit spending and raised questions about the stabilities of their currencies. The result was global instability. The U.S. in 1930 enjoyed an influx of some $300 million in gold, but between the end of September and the end of October 1931 it lost $755 million. Paris saw its gold increase by $500 million in 1930 and another $1 billion in early 1931. Britain, on the other hand, suffered sharp drops in its reserves, and Germany’s bullion almost disappeared. Germany’s Karl Blessing, who was then on the BIS staff, wrote in a memo on April 8, 1930, that the BIS should “manipulate the gold value in such a way that international price levels remain as stable as possible.”
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As the worldwide depression grew worse, countries began leaving the gold standard. Germany was the first major nation to depart from it in July 1931, followed in September by Britain and a host of small countries. Eventually some twenty-five British Commonwealth countries from Canada to India joined Britain in dropping the link to gold. The U.S. left in March 1933, and Italy in May 1934. Soon only France, Switzerland, Belgium, and Holland were still on the bullion standard, and none of them allowed their citizens to exchange their paper currency for gold.