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An inquiry tonight about the Bank for International
Settlements led your secretary/treasurer back into GATA's documentation
archive --
http://www.gata.org/taxonomy/term/21
-- where the bank has
figured prominently over the last year.
First there was GATA's disclosure of the
presentation made to central banks that were recruited for membership in the
BIS during a meeting at the bank's headquarters in Basel, Switzerland, in
June 2008, a presentation advertising BIS services including secret
interventions in the gold market:
http://www.gata.org/node/11012
Then there was Zero Hedge's disclosure of a BIS gold
trader's attempt to remove from his official biography a reference to his
responsibility for those secret interventions:
http://www.gata.org/node/11257
And then there was the discovery by our Dutch
friend, the economist Jaco Schipper
of MarketUpdate.nl, of the memoirs of the late president of the Netherlands
central bank and president of the BIS itself, Jelle
Zijlstra, who wrote that, because of the insistence
of the United States, "Gold is artificially kept at a far too low price":
http://www.gata.org/node/11304
But there was also something else from a bit farther
back -- an extraordinary profile of the BIS by the investigative journalist
Edward Jay Epstein, published in Harper's magazine in November 1983 after
Epstein was given what appears to have been unprecedented access to the bank.
Epstein described the BIS as running practically the whole world financially
in virtual contempt of elected governments and in near-complete secrecy. But
Epstein's references to the bank's involvement in the gold market are of greatest
interest to GATA's work.
Epstein reported that BIS headquarters in Basel has a floor of gold traders
"constantly on the telephone arranging loans of the bank's gold to
international arbitrageurs, thus allowing central banks to make interest on
gold deposits."
Was the only purpose of that trading really just to
earn a little interest on those gold deposits, as that sentence suggests?
The rest of Epstein's essay about the BIS suggests
otherwise.
"The membership of this club," Epstein
writes, "is restricted to a handful of powerful men who determine daily
the interest rate, the availability of credit, and the money supply of the
banks in their own countries. ... It was in the wood-paneled rooms above the
shop and the hotel that decisions were reached to devalue or defend
currencies, to fix the price of gold, to regulate offshore banking, and to
raise or lower short-term interest rates."
Epstein goes on to quote the president of the BIS,
Karl Otto Pohl, then also president of the German Bundesbank,
complaining "about the repetitiousness of the meetings during the 'Basel
weekend.'" Pohl says: "First there is the meeting on the Gold Pool.
Then, after lunch, the same faces show up at the G-10, and the next day there
is the board, which excludes the U.S., Japan, and Canada, and the European
Community meeting, which excludes Sweden and Switzerland."
Of course the "gold pool" with which many
gold market followers are familiar is the London Gold Pool, the mechanism by
which the United States, United Kingdom, and six of their Western European
allies co-ordinated, through the Bank of England,
the dishoarding of their gold reserves to hold the dollar gold price at $35
per ounce from 1961 through March 1968, when the gold pool collapsed:
http://en.wikipedia.org/wiki/London_Gold_Pool
But Epstein is writing 15 years later, interviewing
BIS President Pohl in 1983, so Pohl is talking about another gold pool, one operated by the BIS itself -- only, unlike the
London Gold Pool, entirely in secret.
GATA's gold market rigging litigator, Reginald H.
Howe, targeted the BIS in his groundbreaking lawsuit in U.S. District Court
in Boston in 2000:
http://www.goldensextant.com/
And a month ago GATA consultant Robert Lambourne, a student of the BIS, reported that 41 percent
of the bank's comprehensive income for fiscal 2011-12 came from gold:
http://www.gata.org/node/11502
Of course respectable people in the gold world may
say that the BIS' involvement in the gold market is completely innocent. (To
respectable people, everything is completely innocent, even today as
corruption abounds.) But Epstein concludes that the great value of the BIS to
its member central banks is that of a "convenient cloak" and a
"disguise."
If there was any serious journalism about gold --
or, for that matter, any serious financial journalism at all today -- the BIS
would be a ripe subject, plainly the center of vast and unaccountable power.
But the bank's acknowledged secret dealings in the gold market may be enough
to establish the general probability of market manipulation.
Epstein's report on the BIS is appended for safety's
sake, lest it disappear from his own Internet site, from which it is copied.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Ruling the World of
Money
By Edward Jay Epstein
Harper's magazine
November 1983
http://www.edwardjayepstein.com/archived/moneyclub.htm
Ten times a year -- once a mouth except in August
and October -- a small elite of well
dressed men arrives in Basel, Switzerland. Carrying overnight bags and
attache cases, they discreetly check into the Euler
Hotel, across from the railroad station. They have come to this sleepy city
from places as disparate as Tokyo, London, and Washington for the regular
meeting of the most exclusive, secretive, and powerful supranational club in
the world. Each of the dozen or so visiting members has his own office at the
club, with secure telephone lines to his home country. The members are fully
serviced by a permanent staff of about 300, including chauffeurs, chefs,
guards, messengers, translators, stenographers, secretaries, and researchers.
Also at their disposal are a brilliant research unit and an ultramodern
computer, as well as a secluded country club with tennis courts and a
swimming pool, a few kilometers outside Basel.
The membership of this club is restricted to a
handful of powerful men who determine daily the interest rate, the
availability of credit, and the money supply of the banks in their own
countries. They include the governors of the U.S. Federal Reserve, the Bank
of England, the Bank of Japan, the Swiss National Bank, and the German Bundesbank. The club controls a bank with a $40 billion
kitty in cash, government securities, and gold that constitutes about one
tenth of the world's available foreign exchange. The profits earned just from
renting out its hoard of gold (second only to that of Fort Knox in value) are
more than sufficient to pay for the expenses of the entire organization. And
the unabashed purpose of its elite monthly meetings is to coordinate and, if
possible, to control all monetary activities in the industrialized world. The
place where this club meets in Basel is a unique financial institution called
the Bank for International Settlements-or more simply, and appropriately, the
BIS (pronounced "biz" in German).
The BIS was established in May 1930 by bankers and
diplomats of Europe and the United States to collect and disburse Germany's
World War I reparation payments (hence its name). It was truly an
extraordinary arrangement. Although the BIS was organized as a commercial
bank with publicly held shares, its immunity from government interference, and
even taxation, in both peace and war was guaranteed by an international
treaty signed in The Hague in 1930. Although all its depositors are central
banks, the BIS has made a profit on every
transaction. And because it has been highly profitable, it has required no
subsidy or aid from any government.
Since it also provided, in Basel, a safe and
convenient repository for the gold holdings of the European central banks, it
quickly evolved into the bank for central banks. As the world depression
deepened in the 1930s and financial panics flared up in Austria, Hungary,
Yugoslavia, and Germany, the governors in charge of the key central banks
feared that the entire global financial system would collapse unless they
could closely coordinate their rescue efforts. The obvious meeting spot for
this desperately needed coordination was the BIS, where they regularly went
anyway to arrange gold swaps and war-damage settlements.
Even though an isolationist Congress officially
refused to allow the U.S. Federal Reserve to participate in the BIS or to
accept shares in it (which were instead held in trust by the First National
City Bank), the chairman of the Fed quietly slipped over to Basel for
important meetings. World monetary policy was evidently too important to
leave to national politicians. During World War II, when the nations, if not
their central banks, were belligerents, the BIS continued operating in Basel,
though the monthly meetings were temporarily suspended. In 1944, following
Czech accusations that the BIS was laundering gold that the Nazis had stolen
from occupied Europe, the American government backed a resolution at the
Bretton Woods Conference calling for the liquidation of the BIS. The naive
idea was that the settlement and monetary-clearing functions it provided
could be taken over by the new International Monetary Fund.
What could not be replaced, however, was what
existed behind the mask of an international clearinghouse: a supranational
organization for setting and implementing global monetary strategy, which
could not be accomplished by a democratic, United Nations-like international
agency. The central bankers, not about to let their club be
taken from them, quietly snuffed out the American resolution.
After World War II the BIS reemerged as the main clearinghouse
for European currencies and, behind the scenes, the favored meeting place of
central bankers. When the dollar came under attack in the 1960s, massive
swaps of money and gold were arranged at the BIS for the defense of the
American currency. It was undeniably ironic that, as the president of the BIS
observed, "Yhe United States, which had wanted
to kill the BIS, suddenly finds it indispensable." In any case, the Fed
has become a leading member of the club, with either Chairman Paul Volcker or
Governor Henry Wallich attending every "Basel
weekend."
Originally, the central bankers sought complete
anonymity for their activities. Their headquarters were in an abandoned
six-story hotel, the Grand et Savoy Hotel Universe, with an annex above the
adjacent Frey's Chocolate Shop. There purposely was no sign over the door
identifying the BIS, so visiting central bankers and gold dealers used
Frey's, which is across the street from the railroad station, as a convenient
landmark. It was in the wood-paneled rooms above the shop and the hotel that
decisions were reached to devalue or defend currencies, to fix the price of
gold, to regulate offshore banking, and to raise or lower short-term interest
rates. And though they shaped "a new world economic order" through
these deliberations, according to Guido Carli, the
governor of the Italian central bank, the public, even in Basel, remained
almost totally unaware of the club and its activities.
In May 1977, however, the BIS gave up its anonymity,
against the better judgment of some of its members, in exchange for more
efficient headquarters. The new building, an 18-story circular skyscraper
that rises over the medieval city like some misplaced nuclear reactor,
quickly became known as the "Tower of Basel" and began attracting
attention from tourists. "That was the last thing we wanted," Dr.
Fritz Leutwiler, its president, told me, when I
interviewed him in 1983. "If it had been up to me, it never would have
been built." While we talked, he kept his eyes glued to the Reuters
screen in his office, which signaled currency fluctuations around the globe.
Despite its irksome visibility, the new headquarters
does have the advantages of luxurious space and Swiss efficiency. The
building is completely air-conditioned and self-contained, with its own
nuclear-bomb shelter in the sub-basement, a triply redundant
fire-extinguishing system (so outside firemen never have to be called in), a
private hospital, and some 20 miles of subterranean archives. "We try to
provide a complete clubhouse for central bankers ... a home away from
home," said Gunther Schleiminger, the supercompetent general manager, as he arranged a rare
tour of the headquarters for me.
The top floor, with a panoramic view of three
countries -- Germany, France, and Switzerland -- is a deluxe restaurant, used
only to serve the members a buffet dinner when they arrive on Sunday evenings
to begin the "Basel weekends." Aside from those 10 occasions, this
floor remains ghostly empty.
On the floor below, Schleiminger
and his small staff sit in spacious offices, administering the day-to-day
details of the BIS and monitoring activities on lower floors as if they were
running an out-of-season hotel.
The next three floors down are suites of offices
reserved for the central bankers. All are decorated in three colors -- beige,
brown, and tan -- and each has a similar modernistic lithograph over the
desk. Each office also has coded speed-dial telephones that at a push of a
button directly connect the club members to their offices in their central
banks back home. The completely deserted corridors and empty offices, with
nameplates on the doors and freshly sharpened pencils in cups and neat stacks
of incoming papers on the desks, are again reminiscent of a ghost town. When
the members arrive for their forthcoming meeting in November, there will be a
remarkable transformation, according to Schleiminger,
with multilingual receptionists and secretaries at every desk, and constant
meetings and briefings.
On the lower floors are the BIS computer, which is
directly linked to the computers of the member central banks and provides
instantaneous access to data about the global monetary situation, and the
actual bank, where 18 traders, mainly from England and Switzerland,
continually roll over short-term loans on the eurodollar
markets and guard against foreign-exchange losses (by simultaneously selling
the currency in which the loan is due). On yet another floor gold traders are
constantly on the telephone arranging loans of the bank's gold to
international arbitrageurs, thus allowing central banks to make interest on
gold deposits.
Occasionally there is an extraordinary situation,
such as the decision to sell gold for the Soviet Union, which requires a
decision from the "governors," as the BIS staff calls the central
bankers. But most of the banking is routine, computerized, and riskless.
Indeed, the BIS is prohibited by its statutes from
making anything but short-term loans. Most are for 30 days or less that are
government guaranteed or backed with gold deposited at the BIS. The profits
the BIS receives for essentially turning over the billions of dollars
deposited by the central banks amounted to $162 million last year.
As skilled as the BIS may be at all this, the
central banks themselves have highly competent staffs capable of investing
their deposits. The German Bundesbank, for example,
has a superb international trading department and 15,000 employees -- at
least 20 times as many as the BIS staff. Why then do the Bundesbank
and the other central banks transfer some $40 billion of deposits to the BIS
and thereby permit it to make such a profit?
One answer is of course secrecy. By commingling part
of their reserves in what amounts to a gigantic mutual fund of short-term
investments, the central banks created a convenient screen behind which they
can hide their own deposits and withdrawals in financial centers around the
world. And the central banks are apparently willing to pay a high fee to use
the cloak of the BIS.
There is, however, another reason why the central
banks regularly transfer deposits to the BIS: They want to provide it with a
large enough profit to support the other services it provides. Despite its
name, the BIS is far more than a bank. From the
outside, it seems to be a small, technical organization. Just 86 of its 298
employees are ranked as professional staff. But the BIS is
not a monolithic institution. Artfully concealed within the shell of an
international bank, like a series of Chinese boxes one inside another, are the
real groups and services the central bankers need -- and pay to support.
The first box inside the bank is the board of
directors, drawn from the eight European central banks (England, Switzerland,
Germany, Italy, France, Belgium, Sweden, and the Netherlands), which meets on
the Tuesday morning of each "Basel weekend." The board also meets
twice a year in Basel with the central banks of other nations. It provides a
formal apparatus for dealing with European governments and international
bureaucracies like the IMF or the European Economic Community (the Common
Market). The board defines the rules and territories of the central banks
with the goal of preventing governments from meddling in their purview. For
example, a few years ago, when the Organization for Economic Cooperation and
Development in Paris appointed a low-level committee to study the adequacy of
bank reserves, the central bankers regarded it as poaching on their monetary
turf and turned to the BIS board for assistance. The board then arranged for
a high-level committee, under the head of banking supervision at the Bank of
England, to preempt the issue. The OECD got the message and abandoned its
effort.
To deal with the world at large, there is another
Chinese box called the Group of Ten, or simply the "G-10." It
actually has 11 full-time members, representing the eight European central
banks, the U.S. Fed, the Bank of Canada, and the Bank of Japan. It also has
one unofficial member: the governor of the Saudi Arabian Monetary Authority.
This powerful group, which controls most of the transferable money in the
world, meets for long sessions on the Monday afternoon of the "Basel
weekend." It is here that broader policy issues, such as interest rates,
money-supply growth, economic stimulation (or suppression), and currency
rates are discussed -- if not always resolved.
Directly under the G-10, and catering to all its
special needs, is a small unit called the "Monetary and Economic
Development Department," which is, in effect, its private think tank. The head of this unit, the Belgian economist Alexandre Larnfalussy, sits in
on all the G-10 meetings, then assigns the appropriate research and analysis
to the half dozen economists on his staff. This unit also produces the
occasional blue-bound "economic papers" that provide central
bankers from Singapore to Rio de Janeiro, even though they are not BIS
members, with a convenient party line.
For example, a recent paper called "Rules
versus Discretion: An Essay on Monetary Policy in an Inflationary
Environment," politely defused the Milton Friedmanesque
dogma and suggested a more pragmatic form of monetarism. And last May, just
before the Williamsburg summit conference, the unit released a blue book on
currency intervention by central banks that laid down the boundaries and
circumstances for such actions. When there are internal disagreements, these
blue books can express positions sharply contrary to those held by some BIS
members, but generally they reflect a consensus of the G-10.
Over a bratwurst-and-beer lunch on the top floor of
the Bundesbank, which is located in a huge concrete
building (called "the bunker") outside of Frankfurt, Karl Otto
Pohl, its president and a ranking governor of the BIS, complained to me in
1983 about the repetitiousness of the meetings during the "Basel
weekend."
"First, there is the meeting on the Gold Pool.
Then, after lunch, the same faces show up at the G-10, and the next day there
is the board which excludes the U.S., Japan, and Canada, and the European
Community meeting which excludes Sweden and Switzerland." He concluded:
"They are long and strenuous -- and they are not where the real business
gets done." This occurs, as Pohl explained over our leisurely lunch, at
still another level of the BIS: "a sort of inner club."
The inner club is made up of the half dozen or so
powerful central bankers who find themselves more or less in the same
monetary boat. Along with Pohl are Volcker and Wallich
from the Fed, Leutwiler from the Swiss National
Bank, Lamberto Dini of
the Bank of Italy, Haruo Mayekawa
of the Bank of Japan, and the retired governor of the Bank of England, Lord
Gordon Richardson (who had presided over the G-10 meetings for the past 10
years). They are all comfortable speaking English; indeed, Pohl recounted how
he has found himself using English with Leutwiler,
though both are of course native German-speakers. And they all speak the same
language when it comes to governments, having shared similar experiences.
Pohl and Volcker were both undersecretaries of their respective treasuries;
they worked closely with each other, and with Lord Richardson, in the futile
attempts to defend the dollar and the pound in the 1960s. Dini
was at the IMF in Washington, dealing with many of the same problems. Pohl
had worked closely with Leutwiler in neighboring
Switzerland for two decades. "Some of us are very old friends,"
Pohl said. Far more important, these men all share the same set of
well-articulated values about money.
The prime value, which also seems to demarcate the
inner club from the rest of the BIS members, is the firm belief that central
banks should act independently of their home governments. This is an easy
position for Leutwiler to hold, since the Swiss
National Bank is privately owned (the only central bank that is not
government-owned) and completely autonomous. ("I don't think many people
know the name of the president of Switzerland -- even in Switzerland,"
Pohl joked, "but everyone in Europe has heard of Leutwiler.")
Almost as independent is the Bundesbank; as its
president, Pohl is not required to consult with government officials or to
answer the questions of Parliament -- even about such critical issues as
raising interest rates. He even refuses to fly to Basel in a government
plane, preferring instead to drive in his Mercedes limousine.
The Fed is only a shade less independent than the Bundesbank: Volcker is expected to make periodic visits
to Congress and at least to take calls from the White House -- but he need
not follow their counsel. While in theory the Bank of Italy is under
government control, in practice it is an elite institution that acts
autonomously and often resists the government. (In 1979 its then governor,
Paolo Baffi, was threatened with arrest, but the
inner club, using unofficial channels, rallied to his support.) Although the
exact relationship between the Bank of Japan and the Japanese government
purposely remains inscrutable, even to the BIS governors, its chairman, Mayekawa, at least espouses the principle of autonomy.
Finally, though the Bank of England is under the thumb of the British
government, Lord Richardson was accepted by the inner club because of his
personal adherence to this defining principle. But his successor, Robin
Leigh-Pemberton, lacking the years of business and personal contact, probably
won't be admitted to the inner circle.
In any case, the line is drawn at the Bank of
England. The Bank of France is seen as a puppet of the French government; to
a lesser degree, the remaining European banks are also perceived by the inner
club as extensions of their respective governments, and thus remain on the
outside.
A second and closely related belief of the inner
club is that politicians should not be trusted to decide the fate of the
international monetary system. When Leutwiler
became president of the BIS in 1982, he insisted that no government official
be allowed to visit during a "Basel weekend." He recalled that in
1968 U.S. Treasury undersecretary Fred Deming had been in Basel and stopped
in at the bank. "When word got around that an American Treasury official
was at the BIS," Leutwiler said, "bullion
traders, speculating that the United States was about to sell its gold, began
a panic in the market."
Except for the annual meeting in June (called
"the Jamboree" by the staff ), when the
ground floor of the BIS headquarters is open to official visitors, Leutwiler has tried to enforce his rule strictly.
"To be frank," he said, "I have no use for politicians. They
lack the judgment of central bankers." This effectively sums up the
common antipathy of the inner club toward "government muddling," as
Pohl puts it.
The inner-club members also share a strong
preference for pragmatism and flexibility over any ideology, whether that of
Lord Keynes or Milton Friedman. Rather than resorting to rhetoric and
invoking principles, the inner club seeks any remedy that will relieve a
crisis. For example, earlier this year, when Brazil failed to pay back on
time a BIS loan that was guaranteed by the central banks, the inner club
quietly decided to extend the deadline instead of collecting the money from
the guarantors. "We are constantly engaged in a balancing act -- without
a safety net," Leutwiler explained.
The final and by far the most important belief of
the inner club is the conviction that when the bell tolls for any single
central bank, it tolls for them all. When Mexico faced bankruptcy in the
early '80s the issue for the inner club was not the welfare of that country
but, as Dini put it, "the stability of the
entire banking system." For months Mexico had been borrowing overnight
funds from the interbank market in New York -- as every bank recognized by
the Fed is permitted to do -- to pay the interest on its $80 billion external
debt. Each night it had to borrow more money to repay the interest on the
previous night's transactions, and, according to Dini,
by August Mexico had borrowed nearly one quarter of all the "Fed
Funds," as these overnight loans between banks are called.
The Fed was caught in a dilemma: If it suddenly
stepped in and forbade Mexico from further using the interbank market, Mexico
would be unable to repay its enormous debt the next day, and 25 percent of
the entire banking system's ready funds might be frozen. But if the Fed
permitted Mexico to continue borrowing in New York, in a matter of months it
would suck in most of the interbank funds, forcing the Fed to expand
drastically the supply of money.
It was clearly an emergency for the inner club.
After speaking to Miguel Mancera, director of the Banco de Mexico, Volcker immediately called Leutwiler, who was vacationing in the Swiss mountain village
of Grison. Leutwiler realized that the entire
system was confronted by a financial time bomb: Even though the IMF was
prepared to extend $4.5 billion to Mexico to relieve the pressure on its
long-term debt, it would require months of paperwork to get approval for the
loan. And Mexico needed an immediate $1.85 billion loan to get out of the
interbank market, which Mancera had agreed to do.
But in less than 48 hours, Leutwiler had called the
members of the inner club and arranged the temporary bridging loan.
While this $1.85 billion appeared in the financial
press to have come from the BIS, virtually all the funds came from the
central banks in the inner club. Half came directly from the United States --
$600 million from the Treasury's Exchange Stabilization Fund and $325 million
from the Fed's coffers; the remaining $925 million mainly from deposits of
the Bundesbank, Swiss National Bank, Bank of
England, Bank of Italy, and Bank of Japan, deposits that were specifically
guaranteed by these central banks, though advanced pro-forma by the BIS (with
a token amount advanced by the BIS itself against the collateral of Mexican
gold). The BIS undertook virtually no risk in this rescue operation; it
merely provided a convenient cloak for the inner club. Otherwise, its
members, especially Volcker, would have had to take the political heat
individually for what appeared to be the rescue of an underdeveloped country.
In fact, they were true to their paramount values: rescuing the banking
system itself.
Inner-club members publicly pay lip service to the
ideal of preserving the character of the BIS and not turning it into a lender
of last resort for the world at large. Privately, however, they will
undoubtedly continue their maneuvers to protect the banking system at
whatever point in the world it seems most vulnerable. After all, it is
ultimately the central banks' money at risk, not the BIS's. And the inner
club will also keep using the BIS as its public mask, and pay the requisite
price for the disguise.
* * *
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