Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (13 page)

                 
In response, officials of the Federal Reserve Bank went to their gold vault, put in separate drawers the correct amount of gold ingots and put a label or mark on those drawers indicating that they were the property of the French—for all it matters they could just have done so by marking them “with a cross in black paint” just as the Germans did to the stones.
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This event—or arguably non-event—had serious consequences. The French sale of dollars drove the exchange rate down, while the franc strengthened, even though nothing had actually happened. What was the difference, asked Friedman, between “the Bank of France’s belief that it was in a stronger monetary position because of some marks on drawers in a basement more than 3,000 miles away and the Yap islander’s conviction that he was rich because of a stone under the water a hundred miles or so away?”
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Evidently, not very much.

PERHAPS NORMAN AND
Schacht sensed, as they traveled together from Berlin to Basel that January 1939, that this would be the last meeting at the BIS they would attend together. By then Schacht realized that he had created a monster. The German war economy and state spending were out of control.
If things carried on as they were, Schacht and his fellow Reichsbank board members believed, the country would go bankrupt. On January 7, Hitler received a memo signed by all eight members of the Reichsbank board, including Schacht. Uncontrolled expenditure would soon cause the “national financial structure” to collapse, the memo warned. “It is our duty to warn against this assault on the currency.”
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Two weeks after Hitler received the Reichsbank directors’ memo, Schacht was summoned to the Chancellery in Berlin. Hitler handed him the official notification that he was relieved of his position as president. Most of Schacht’s fellow directors resigned. Walther Funk, who also took his place on the BIS board, replaced Schacht. Funk, a former journalist, was an ardent Nazi and had joined the party in 1931. He was the point man for big business and industrialists, including IG Farben, who used him to channel funds to the Nazis, and was also one of Hitler’s key economic advisers. Funk had replaced Schacht as economics minister in 1937, and as Plenipotentiary for the War Economy in 1938, so his appointment as Reichsbank president surprised nobody. What was a surprise was how Funk’s dissolute personal life had not stalled his steady rise through the highest reaches of the Nazi state. Funk was a scruffy drunkard and homosexually active at a time when gay men were sent to concetration camps.

Schacht retreated home to his villa in the Berlin suburb of Charlottenburg for a while, and then set off in March on a trip to India. In July 1939 he returned to Basel where he had a secret meeting with Montagu Norman. Schacht made a bizarre offer to the British government. Fearing for his life, and less protected by Hitler from his enemies in the SS, who had always envied his power over the economy, Schacht proposed that he go to east Asia to report on the economy for Britain. Norman met with Neville Chamberlain and told the prime minister of his friend’s request. Schacht’s offer was met with some bewilderment, but Frank Ashton-Gwatkin, a foreign office official, was dispatched to Italy. He and Schacht spent three days closeted in a luxury hotel above Ancona. Ashton-Gwatkin recalled, “I listened to Schacht’s odd-sounding scheme, and, allowing for the fact
that he was anxious to get as far away from Hitler as possible, I had to confess that I had heard of more promising ventures.” Still, he told Schacht that he would write a report on his proposal and submit it to London.

Schacht then demanded to see what Ashton-Gwatkin had written. The Foreign Office man handed over his notes. Schacht, imperious as ever, informed him, “This won’t do at all.” Schacht rewrote the report and then demanded that the original be destroyed. Ashton-Gwatkin handed over his notes, which Schacht, with great theater, proceeded to set on fire, sheet by sheet and then drop into the toilet. Schacht was less adept as a spy than a banker. The toilet cracked, and water gushed the wet ashes all over the floor. “We spent what seemed to me a long time mopping up the water and fishing for sodden bits of charred paper,” recalled Ashton-Gwatkin. Schacht’s mission never took place.
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Just over a month later, on September 1, Germany invaded Poland.

          
“The business affairs of the bank, which are run on a greatly reduced scale, virtually rest in the hands of Mr. McKittrick, the president of the bank.”

           
— John Gilbert Winant, the US ambassador to Britain, July 1941
¹

M
erle Cochran, the American diplomat whom Henry Morgenthau had dubbed the “unofficial ambassador” to the BIS, had some inside information for the treasury secretary. The main business at the “usual Sunday informal and secret meeting” of the bank’s governors that May 1939 was the appointment of the next president. Johan Beyen, the hapless Dutch incumbent who had handed over the Czechoslovak gold to the Nazis, was due to retire in 1940. There were three main contenders to succeed him: a Dutchman, a Swede, and an American. “Chances are best for the American, so far,” Cochrane reported.
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The American was Thomas McKittrick. On the surface McKittrick seemed a curious choice. He was a lawyer by training with no direct experience of central banking. But that mattered little, for war was coming. All sides already agreed that the financial channels must be kept open during the conflict. In that sense, McKittrick was the perfect candidate. He was citizen of both a neutral country—the United States—and of the world’s newest hinterland—transnational finance.

McKittrick had worked for Higginson & Company, the British subsidiary of Lee, Higginson & Company—a renowned Boston investment house. The bank no longer exists, thanks in part to McKittrick, but in its heyday it was richer and more prestigious than Goldman Sachs and Lehman Brothers. Born in St. Louis, McKittrick had graduated from Harvard in 1911. He moved to Italy where he
worked for the foreign arm of the National City Bank of New York, before joining the US Army in 1918. He was sent to Liverpool, where he was seconded to British military intelligence, to check that there were no spies using the docks to pass in and out of Britain. After the armistice in November, McKittrick was dispatched to France to work with the Allied occupation forces.

He returned to New York in 1919 and started work at Lee, Higginson. McKittrick’s foreign experience in Italy and France made him unusual in the more parochial world of American bankers. He was sent to London in 1921 to work for the company’s British wing, and was made a partner in charge of foreign operations for both London and New York. Although McKittrick was a lawyer rather than a banker by training, he soon found his way around the City of London and built up an impressive network of contacts with international connections. Much of his time was spent working on German loans and investments, including the Dawes Plan German External Loan of 1924, which had been arranged by John Foster Dulles and Sullivan and Cromwell. McKittrick became a kind of honorary Englishman, regarded in Europe as an envoy from the City, complete with a butler who ironed his copy of
The Times
before he read it. “I was leading the life of an Englishman,” he later recalled. “My associates were all British, and toward the end of that time I was frequently spoken to by people who assumed I was British.”
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McKittrick had come to the BIS in 1931 when he joined the German Credits Arbitration Committee, which adjudicated over any disputes of credits granted to German private banks. The other two members were Marcus Wallenberg, of Sweden’s Enskilda Bank and Franz Urbig, the chairman of the Deutsche Bank supervisory board. Wallenberg and his brother, Jacob, were two of the most powerful bankers in Europe. The Wallenberg family enjoyed a network of lucrative connections to bankers in London, Berlin, and Wall Street. During the Second World War, the Wallenberg brothers would use Enskilda Bank to play both sides, always making sure to harvest enormous profits along the way. Their relative, Raoul, would later save tens of thousands of Hungarian Jews during the Holocaust before disappearing into the Soviet gulag, abandoned by his uncles.

McKittrick had long been a good friend of Allen Dulles, whom he had first met when Dulles was working at the American Legation in Bern and Dulles assisted him with a visa matter. McKittrick well understood that Sullivan and Cromwell offered an entrée in the covert world where politics and diplomacy met transnational finance. In September 1930 McKittrick wrote to a colleague, “We are seriously considering throwing some legal work to Sullivan and Cromwell in order to get benefit of Dulles services in many directions.”
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McKittrick also arranged short-term loans to the German government. McKittrick’s German loans were watched appreciatively at the BIS and Sullivan and Cromwell. In October, Gates McGarrah, the BIS president, wrote to John Foster Dulles expressing how glad he was that the “Lee Higginson [German] credit got itself through.”
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So were McKittrick and his partners at Lee, Higginson. At least something was going right, for the firm had become embroiled in the affairs of one of the greatest swindlers in history, Ivar Kreuger, a Swedish industrialist. Kreuger had built up a fortune—on the simple safety match—that would now be worth billions.

Wall Street had welcomed Kreuger 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 Krueger 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.

What Kreuger meant was that he could no longer pay his creditors. He frantically tried to arrange a bailout with Sosthenes Behn of ITT. Behn wrote a check for $11 million on the condition that Price Waterhouse, the accounting firm, could check Kreuger’s finances. It did, and it quickly found a hole of $6 million. Kreuger’s empire began to collapse. ITT wanted its money back. Kreuger returned to Europe in March 1932 to meet his bankers, but he made it only as far as his
apartment on Avenue Victor Emmanuel III in Paris. There, according to most accounts, he lay down on his bed and shot himself in the heart. Lee, Higginson, the venerable Boston bankers who had backed Kreuger for a decade, went bust. The partners were ruined. “I suddenly knew we had all been idiots,” an anonymous source told investigators. But McKittrick kept his job at the bank’s London branch, as well as his position as vice chairman of the BIS’s German Credits Arbitration Committee. It seems there were no recriminations or questions in Basel about McKittrick’s judgment—or lack of. McKittrick himself later claimed that he had been selected as president of the BIS without his knowledge or participation. In March 1939, he recalled, “People began whispering—primarily on the continent—‘we hear that you’re going to BIS as president.’ And that continued. The normal grapevine operation.” The following month Charles Dalziel, McKittrick’s fellow partner at Higginson & Co., told him that “he had heard on an unquestionable basis that I was going to be offered the presidency in the BIS and he wanted me to know that I would make a great mistake if I didn’t accept it.”
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Sir Otto Niemeyer, the chairman of the BIS board, made the formal offer in May. McKittrick readily accepted. At first the State Department refused to allow McKittrick to travel to Europe, but after what McKittrick later described as the “principal European countries,” doubtless including Britain, applied sufficient pressure, he was allowed to leave. McKittrick moved to Basel and started work in January 1940 on an annual salary of SF175,000 (US$40,000). He immediately traveled to Berlin, Rome, London, and Paris to meet the German, Italian, British, and French BIS directors and central bankers.

But before McKittrick moved from London to Basel he had another task: to help Hitler’s former propaganda chief get released from a British prison camp. In October 1939 Ernst Hanfstaengel’s lawyers asked McKittrick to provide a character reference for their client. Hanfstaengel, a Harvard graduate, had lived in New York and was well connected in American high society. He returned to Germany to become one of Hitler’s earliest backers. Hanfstaengel lent the Nazi party $1,000 dollars during its early years—an enormous sum during the Weimar hyperinflation—which paid for the publication of the
Völkischer Beobachter
, the party newspaper.
Appointed foreign press chief in 1931, Hanfstaengel’s job was to present a moderate, sophisticated face to journalists. However his eccentric mannerisms, dry sense of humor, and close connection to Hitler made him enemies, and he fled in 1937. Hanfstaengel’s detention as an enemy alien was especially badly timed, explained his lawyers, as he had just signed a contract with an American magazine to write a series of articles about his relations with Hitler—at one dollar a word. McKittrick replied that he would do all he could. McKittrick was ready to declare that the former Nazi spin doctor would not act against British interests if he were set free—although it is unclear how McKittrick could know this.
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Hanfstaengel was duly released and returned to the United States, where he compiled psychological profiles of Nazi leaders for American intelligence.