Sunday, By Henry Lamb
Within 90 days after the devastating stock market crash in October, 1929, the Bank for
International Settlements (BIS) was created in Basel, Switzerland. The two events are not
unrelated, although the expressed purpose for creating the BIS was to facilitate German
reparations after World War I.
Before the bank could be formed, a treaty was negotiated between the countries of Switzerland
and Germany, Belgium, France, the United Kingdom, Italy, and Japan. Known officially as the
Convention Respecting the Bank for International Settlements (January 20, 1930), and
unofficially as "The Hague Agreement," the treaty grants to the bank some highly unusual
privileges: (1). A bank charter which cannot be abrogated, nor amended without agreement from
all parties; and (2). any dispute between the bank and the Swiss Government will be settled by
the Hague.
The bank charter, included as a part of the treaty, provides extraordinary privileges to the bank:
These broad privileges were expanded and redefined in a new agreement between the Swiss
government and the bank in 1987. Article 3 provides that the bank's buildings and lands "shall
be inviolable." The bank has "police powers" over its premises. No Swiss official may enter the
bank's property without permission from the bank. Article 4 of the enhanced agreement provides
"immunity from criminal and administrative jurisdiction" of the Swiss government.
For all practical purposes, the BIS appears to be a sovereign entity operating in Basel,
Switzerland.
What is the Bank for International Settlements?
The Charter was issued to the "Central Banks" of Belgium, France, Germany, Great Britain, Italy,
Japan (withdrew in 1969), and "a financial institution of the United States of America." The
U.S. financial institution is defined as a banking group "including J.P. Morgan & Company; First
National Bank of New York; and the First National Bank of Chicago." It is interesting, and
perhaps significant, that the U.S. Federal Reserve did not participate in this new international
organization, but major private banks were included.
Actual ownership of the BIS was conveyed in the form of 600,000 shares, subscribed at the rate
of 2,500 gold francs per share. (1 gold franc = .29 grams of fine gold, equal to approximately
$1.94). Each central bank owner was given the option of subscribing the shares, or arranging for
their shares to be purchased by private investors. All of the shares allocated to the U.S. financial
institution were acquired by private investors. All shares receive equal dividend distribution, but
only those shares registered to central banks have voting power. The BIS balance sheet on
March 31, 1999 reported paid-up capital to be 66.2 billion gold francs ($131 billion U.S. dollars).
The BIS statutes have been revised over the years. The U.S. Federal Reserve officially joined the
BIS in 1994, and now both Alan Greenspan, chairman of the Fed, and William J. McDonough,
President of the New York Fed, are on the BIS board of directors.
Before examining the function of the BIS, it is helpful to look at what was happening in the
world that prompted the bank's creation.
The world before the BIS
The previous article on the U.S. Federal Reserve System referred to the bank panics of 1907 as
one of the reasons the Fed was created. Actually, the 1907 bank panic was the straw that broke
the camel's back. Throughout the late 1800s, banks experienced similar panics, and the economy
experienced extended periods of relative depression. Many people believed that these periods
of depression were the result of the gold standard. In the United States, and in other countries,
the value of money was tied legally to a fixed weight in gold refined to a specified purity. Paper
money could be issued only in direct relationship to the quantity of gold held in reserve.
World War I, and its aftermath, forced many European countries to abandon the gold standard, at
least temporarily. At the Genoa Conference of 1922, several non-binding resolutions were
adopted which recommended something called the "Gold Exchange Standard (GES)," as a
method to economize on the use of gold. The GES is a system that authorizes central banks to
"create domestic liabilities against foreign currency assets" which are convertible into gold. This
system worked well until 1931, when it collapsed. It was reinstituted after the Bretton Woods
agreements (to be discussed in future articles), and collapsed again in 1971.
Between 1922 and 1928, the U.S. experienced a boom-time, often referred to as "the roaring
20s." The boom was fueled by cheap credit, provided by the Fed, which found its way into the
stock market in the form of "broker call loans" for margin buying of stocks. This meant that by
advancing a small percentage of the stock price, speculators could borrow money to buy stocks,
leaving the stocks with the broker as collateral for the loans.
Call loans were returning 10 to 12 percent interest, more than double the prime rate. Investment
(gold) flowed from London to New York. Montagu Norman, who headed the Bank of England
from 1920 to 1944, controlled the interest rate in London, as the Fed controlled the rate in the
U.S. By 1929, Sir Montagu Norman had seen enough gold flow from England, and sharply
raised interest rates. The U.S. Fed was forced to follow England's lead and raise domestic
interest rates. The easy credit which fueled the broker's call loans evaporated, forcing
speculators to sell their stocks. The stock market peaked on September 3, 1929, and began a fall
which is remembered as the crash of 29, but which didn't bottom out until July of 1932 with a
total loss of 89 percent in value.
The political games played by the world's most influential central banks during the 1920s,
resulted in global depression during the 1930s. Financial warfare between and among central
banks, some state-controlled, some private, had created economic devastation. The Bank of
International Settlements was envisioned as a mechanism to promote cooperation among central
banks and prevent future warfare. The Warburgs and Rothschilds, and others had dreamed of
such a facility for most of the young century. The defeat of Germany, and the demand for
reparation provided the excuse to create it in January, 1930. Operations began five months later.
How the BIS functions
The BIS is the world's oldest international financial institution. It is not officially a part of the
United Nations, but is used extensively by the United Nations. It is not under the control of any
nation. It is owned and controlled by its shareholders, all 45 of which are central banks.
The bank is governed by an annual meeting of the members, usually held on the second Monday
in June. The Board of Directors consists of the heads of the central banks of Belgium, France,
Germany, Italy, the United Kingdom, and (since 1994) the Chairman of the U.S. Federal Reserve.
The board also appoints "not more than nine" additional members from other member banks.
The board elects its chairman who also serves as president of the BIS and is responsible for the
day to day operations of the bank.
The Bank for International Settlements is a world central bank, expressly for central banks of the
world. It provides services to its member banks quite similar to the services provided by the
Federal Reserve System to its member banks. In the global financial community, there is another
problem the BIS was designed to help solve: foreign exchange.
For example, when a merchant
in Japan bought American goods, the Japanese merchant had to find U.S. dollars to pay for the
shipment. American merchants had little use for Japanese yen. This "exchange" problem was a
significant barrier to trade that the BIS hoped to
solve. Participating central banks deposit their own currency in the
BIS. Transactions cleared through the BIS can be completed using the
currency preferred by the recipient. Presently, nearly 120 central banks have
more than $112 billion on deposit at the BIS.
The BIS was created for central banks, designed to work for the commercial banking community.
The bank cannot make advances to governments, or open accounts in the name of any
government.
During World War II, however, the BIS was unable to remain free of government influence. In
fact, the extent of BIS involvement in Hitler's activities was not known until 1997. Thomas
McKittrick, an American, was president of BIS during the war. Germany's Reichsbank, a BIS
founder, was the intake point for the loot Hitler confiscated from his victims. The BIS converted
the loot to currency to finance Hitler's war machine. After the war, McKittrick went to work for
Rockefeller's Chase Manhattan Bank. (Interesting details of this period of the BIS history are
available at http://www.ess.uwe.ac.uk/documents/eleven.htm).
At the Bretton Woods conference in 1944, Norway tried to force liquidation of the BIS, but
failed. Even though the Bretton Woods conference produced the International Monetary Fund
(IMF) and the World Bank (to be discussed in subsequent articles), the BIS continued to function
and has become a vital, cooperating part of the global financial mechanism. Under what is
known as the General Agreements to Borrow (GAB) of 1962, the BIS actually supplies funds to
the IMF. The BIS is also useful in facilitating events such as the rescheduling of Brazil's
national debt in 1994, by acting as the "collateral agent" to hold and invest collateral offered by
Brazil to secure loans.
The BIS was also instrumental in the implementation of the Maastricht Treaty on the European
Union by providing financial services which led to the creation of the Euro.
Much has been written about the activities, real and supposed, of the BIS. Because their records
are inviolable, and because their charter and the Hague Agreement give them sovereignty, factual
verifiable, information is rare. The BIS, itself, produces volumes of information, mostly about
economic trends and the performance of economies. The BIS is suspected of being the world's
crossroads of financial activity- both legal and illegal.
The BIS is important because much, if not most of the world's international currency exchange
flows through it. It is the pipeline through which the fuel for the world's economy flows. With
very little tinkering, it could be the collection point for the "Tobin Tax," the long-awaited tax on
currency exchange to finance the United Nations. Even though the BIS is not an agency of the
United Nations, it is not difficult to imagine an agreement in which the BIS agrees to collect a tax
in exchange for continued freedom to operate as a private institution, accountable to no higher
power.
Copyright (C) 2000 Freedom.org, All rights reserved
January 28,
2001
Global financial mechanisms - part II
Bank for International Settlements