The Mathematics of Speculation

Opinion Pieces>The Mathematics of Speculation

Like most Swiss cities, Basel’s landscapes are postcard picturesque. Situated in the northwest of the country, nestled neatly along the banks of the Rhine, it is the third largest city in Switzerland, after Zurich and Geneva respectively, and home to just 175 000 inhabitants. This quiet and unassuming little city was the perfect location for the foundation of the Bank for International Settlements’ (BIS) headquarters in 1930. Overlooking the railway station, the current BIS building takes the shape of a 20-storey circular tower resembling a shiny cooling tower of a power plant, or perhaps more fittingly, a stack of coins.


Today, the BIS is known commonly as the “bank for central banks”, regularly hosting the most powerful heads of central banks from around the world to discuss and set policy and regulations that drastically affect the very core of global finance. Upon establishment, however, the BIS was meant to serve only one very specific purpose. Named after Owen Young – the American industrialist who chaired the Allied Reparations Committee and who concurrently sat on the board of the Rockefeller Foundation – the Young Plan outlined the reparation settlements for Germany after the First World War. As part of the Young Plan, an international agreement was struck at the Hague between Switzerland, Germany, the US, the UK, Japan, Belgium, Italy, and France to set up an apolitical organisation that would facilitate and process German war reparations, as stipulated by the Treaty of Versailles. That organisation was the BIS – the world’s first international financial organisation – with its first day of service commencing on 17 May 1930 in Basel, Switzerland.

To achieve the critically important apolitical status it wished to hold, the founding members of the bank – represented by the heads of central banks of Germany, Britain, France, Italy and Belgium, as well as non-central bank representatives from the US and Japan – each received a share of ownership in the BIS, with an initial share capital of 500 million Swiss francs divided amongst members. This arrangement suited all members except for the US and Japan, who feared that the direct involvement of their central banks in such an international organisation would jeopardise their sovereignty. As a compromise, these two nations were represented by a consortium of major banks from their respective countries, including J.P. Morgan, the First National Bank of New York, and the First National Bank of Chicago, in the case of the US.

Beyond its primary mandate of facilitating German war reparations, the BIS also acted as a bank for central banks, incorporated under Swiss law. The duties of the institution included taking deposits from central banks, buying and selling gold and securities on behalf of members, and acting as a correspondent for central banks. Its special designation as an organisation in the international domain prohibited it from competing with other banks, restricting it from opening accounts for individuals or commercial organisations, owning land besides its headquarters, owning a controlling stake in a company, or issuing its own banknotes. And at the outset, the BIS more or less carried out these duties quite respectably. It only took a few years, however, before the newly-formed organisation reached something of an existential crisis.

In 1931, just a year after the formation of the BIS, war reparations were suspended under the Hoover moratorium and then stopped completely the following year under the Lausanne Agreement, in July of 1932. Just two years after its establishment, the BIS’s primary purpose for existence had become obsolete. But in a swift act of survivalism, the BIS successfully pivoted from its role as facilitator of war reparations to fulfilling to a greater extent its secondary function of being the bank of central banks. One particularly important activity it performed in this respect was arranging the logistical necessities for storing, shipping and recording gold reserve transactions between sovereigns. The BIS was effectively entrusted as an objective bookkeeper, with a supposedly apolitical stance, since it apparently had no specific national agenda at heart.

This useful service would, however, come under far greater scrutiny in 1939, just before the onset of the Second World War. Having added many more central banks as members, the BIS by this stage had become an enormously powerful – and hugely profitable – global organisation. And crucial to its success was maintaining its stringent apolitical stance.

In 1938, Nazi Germany had begun its annexation of Czechoslovakia, and in March of 1939, Hitler marched on and captured the capital, Prague. Before complete control was lost to the Nazis, Czech central bankers managed to ship out most of the nation’s gold reserves for safekeeping in London, in hope that once the war had ended, these riches could be returned to the Czech people. Unfortunately, this was not to be the case. For once power was lost to Hitler, it was relatively simple for the Nazis to force the Czech central bankers – under the threat of death, of course – to order the BIS to allocate their gold reserves to the German central bank, the Reichsbank. Under the guise of stabilising the economic conditions in the newly captured territory, the BIS without much question – as was in line with their apolitical mandate – promptly moved 23 tonnes of Czechoslovakian gold into the BIS account of Germany. This authorised-plunder of national reserves was one of the more chilling events that has ever occurred in the history of banking, but certainly not the only troubling incident stemming from its stringent apolitical, and sometimes amoral, stance.

Throughout the Second World War, carefully selected Nazi delegates, handpicked by Hitler himself, sat on the board of the BIS as German representatives. This included several high-ranking Nazi officials who occupied prominent positions on the board of directors and were influential in some of the most important decisions made by the BIS during the war. One such delegate was the President of the Reichsbank, Walther Funk. Funk was a director of the BIS between 1933 and 1945 and after the war, he was found guilty at the Nuremberg trials of several crimes against humanity. After the trials, Funk was sentenced to life in prison and eventually died of diabetes in Dusseldorf at the age of 70.

Funk’s crimes included facilitating the confiscation of property and possessions from German Jews through laws such as the Reich Flight Tax, which forcefully allowed the State to claim all property and assets of Jews fleeing the country. And whilst Funk was not an SS officer – some of whom directly ordered the extraction of gold teeth from the mouths of Jews in concentration camps – he was receiving gold into the Reichsbank throughout the course of the war. As such, he gained the chilling nickname the “Banker of Gold Teeth”.

Whilst in theory, the Board of Directors decided that no meetings would be held and no agendas set during the war, the BIS did stay open and continued to operate. Even more disturbingly, many historians have noted that not only did it continue to operate in these most uncertain and treacherous times, but the BIS de facto facilitated the laundering of Nazi looting to fund the continued payment of its Young Plan debts. As was later admitted by Thomas McKittrick, the Harvard-educated American who served as President of the BIS from 1940 to 1943, the BIS did indeed receive payment from the Reichsbank in gold that was later revealed to be stolen from the reserves of Belgium and the Netherlands. It was also highly likely that a portion of the repayments originated from confiscated Jewish property.

After the Second World War, the BIS slowly grew in size and importance as banking became more globalised and complex. In the last few decades, following numerous financial shocks and crises, such as the Asian crisis of 1997, the Russian crisis of 1998, and the global financial crisis of 2007/2008, the BIS has become the most powerful organisation in the world in terms of setting banking policy and in maintaining its self-proclaimed mission, “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”

Today, the BIS is the facilitator of six key committees that focus on various areas of central bank cooperation and policymaking. These are the Committee on the Global Financial System, the Committee on Payments and Market Infrastructures, the Markets Committee, the Central Bank Governance Forum, the Irving Fisher Committee on Central Bank Statistics, and the Basel Committee on Banking Supervision (BCBS). The last of these is concerned with the development of global regulatory standards for banks with the aim of strengthening micro- and macroprudential supervision, promulgated throughout the banking world via the Basel Accords. These specify in minute detail the regulatory, supervisory and practical working standards that banks must uphold.

Despite its power and significance in the modern financial landscape, many outside of the world of banking still do not know that the BIS lies at the centre of our Western capitalist free-market system. For many decades now, the BIS has essentially controlled the entire world of finance and economics – having been, and remaining to this day, the facilitator of the most exclusive meetings of the most powerful central bankers from around the globe, with its 60 members constituting 95 percent of global GDP.

The worrying reality that is highlighted in considering the history of the BIS is that its stringent obedience to the fundamental concept of political neutrality has severe moral shortcomings when adopted to the extent it has been. As the facilitation of Nazi looting during the Second World War by the BIS emphasises: when an apolitical financial institution forgoes a moral grounding for an extreme stance of objectivity, it opens itself up – whether willingly or unwillingly – to be used as a tool for inflicting unjust and immoral acts.

In the wider context of banking and finance, the same could be said of the massive multinational financial institutions that exist in our ever-more digital, globalised and distinctly non-national financial system. Like the BIS, these international behemoths are intentionally granted power greater than any one nation’s authority, for the explicit purpose of tackling challenges of a global, cross-border nature, such as terrorist funding and money laundering, as well as helping banks put in place intricate and complex global banking and finance standards. In creating and empowering these supra-national organisations that are above any national law, however, it is imperative to remember that, as such, they will lack a grounding in any particular moral or ethical system and could inadvertently behave just as the BIS did during the Second World War.

This article is from the Monocle Quarterly Journal, A Short History of Banking. Visit our "Journals" section to read the full issue.