Bank for International Settlements

Based on Wikipedia: Bank for International Settlements

In the summer of 1927, four of the most powerful bankers in the world gathered at a private home on Long Island. Montagu Norman, the enigmatic governor of the Bank of England, had brought together his friend Benjamin Strong from the Federal Reserve Bank of New York, Hjalmar Schacht of the German Reichsbank, and Charles Rist, vice governor of the Bank of France. The Bank of Italy had hoped for an invitation but wasn't included.

They were plotting something unprecedented: a club for central bankers.

Not a loose network of gentlemen's agreements and emergency telegrams, but something permanent. An institution that would sit above nations, immune to their laws and their wars, serving as a kind of supreme coordinator for the world's money. Within three years, their vision would become the Bank for International Settlements—the oldest international financial institution still in existence, and one of the most powerful organizations most people have never heard of.

The Ancient Art of Central Bank Cooperation

The idea of central banks helping each other out didn't begin in that Long Island parlor. It stretches back nearly two centuries, and the story reveals something fundamental about how money actually works.

In 1825, the Bank of England was facing a bank run—that terrifying moment when depositors lose confidence and everyone tries to withdraw their money at once. No bank keeps enough cash on hand to pay everyone simultaneously; that's not how banking works. The Bank of England needed gold, and it needed it fast.

The solution came from an unlikely source: the Bank of France. Facilitated by the Rothschild banking family, France lent England four hundred thousand pounds in gold coins. This was remarkable. These were rival powers, often at war within living memory, and yet their central banks recognized a shared interest in monetary stability that transcended national competition.

The Bank of England borrowed from France again in 1836 and 1839, from the Hamburger Bank as well, and then returned the favor in 1847 when France needed help. A pattern was emerging: central banks, whatever the politics of their governments, had a mutual interest in each other's survival.

Things got more complicated in 1860 when the American Civil War disrupted international trade and finance. The Bank of France entered into a series of "swap agreements in specie"—essentially promises to exchange gold on demand—with the Bank of England, the State Bank of the Russian Empire, and De Nederlandsche Bank. Contemporary observers called it "the war of the banks," though the conflict was more bureaucratic than martial, arising from friction between Paris and London over the terms of their arrangement.

Dreams of a World Currency

These ad hoc arrangements worked, but some thinkers wanted something more systematic. In 1892, at a conference in Brussels, a German academic named Julius Wolff proposed something radical: an international currency that would be issued by an institution based in a neutral country, used specifically for emergency lending to national central banks. The following year, French economist Raphaël-Georges Lévy suggested establishing an international central bank in Bern, Switzerland.

These ideas went nowhere at the time. But they planted seeds.

The real breakthrough in central bank cooperation came, ironically, from the catastrophe of the First World War. Among allies, formalized cooperation advanced at an unprecedented pace. In 1916, the Bank of England and Bank of France made agreements on bilateral lending and—this detail feels almost quaint now—established a direct telegraph line between their offices to facilitate communication. Similar agreements linked them to the Federal Reserve Bank of New York, and in 1917 the Bank of Italy opened an office in New York.

War, it turned out, was excellent training for international monetary coordination.

The Reparations Problem

The Treaty of Versailles, which ended the First World War in 1919, created an impossible situation. Germany was required to pay reparations to the victorious powers, but the amounts were staggering and the mechanisms for payment were unclear. How exactly does a defeated nation transfer vast sums to its former enemies without destabilizing everyone's currency in the process?

A Reparation Commission was established in January 1920 to figure this out. Conferences followed—at Spa in July 1920, London in March 1921. When Germany fell behind on payments, France occupied the industrial Ruhr region in January 1923. The whole system was lurching from crisis to crisis.

The Dawes Plan, approved at yet another London conference in July and August of 1924, finally created some breathing room. Named after American banker Charles Dawes (who would win the Nobel Peace Prize for his efforts), the plan restructured German payments into something more manageable. The diplomatic atmosphere warmed enough that by September 1925, Montagu Norman was openly discussing his vision of what he called "a private and eclectic Central Banks' Club, small at first, larger in the future."

Hence the Long Island meeting in 1927. A second gathering was planned for Algeciras, Spain, but Benjamin Strong's health was failing. He died in October 1928, never seeing the institution he helped conceive.

The Young Committee and the Birth of a Bank

The final push came from an unexpected direction: a deadline for France to repay its bilateral debt to the United States. This created urgency for a comprehensive settlement of German reparations, leading to the formation of a Committee of Experts chaired by American banker Owen D. Young.

The Young Committee first met at the Bank of France on February 9, 1929. Over the next four months, across twenty-eight sessions ending at the Hotel George V in Paris, representatives from Belgium, France, Germany, Italy, Japan, the United Kingdom, and the United States hammered out the details. The participating countries were a who's who of global finance, and they quickly recognized that managing reparations required something more permanent than a series of conferences.

The need for a jointly governed bank emerged from a practical problem: information asymmetry. No single country trusted the others enough to believe that commitments would be met without some kind of neutral overseer. A bank owned by all the participating central banks could overcome this trust deficit, help creditors act collectively, and—crucially—facilitate the reinvestment of German payments back into the German economy.

On February 23, 1929, Belgian banker Émile Francqui presented the first draft concept. It was amended with suggestions from Bank of France governor Émile Moreau. A few days later, Hjalmar Schacht sent a memo to Young using the name "International Settlements Bank" for the first time.

Young quickly summoned reinforcements from America—Warren Randolph Burgess, Shepard Morgan, and Walter W. Stewart—who sailed promptly to Paris. On March 7, they presented a compromise text that formed the basis for everything that followed.

A Bank Unlike Any Other

The bank that emerged from these negotiations was something genuinely new under the sun. It would serve three distinct purposes:

• As a trustee, receiving, managing, and distributing German reparation payments
• As a bank, facilitating German transfers by issuing bills, notes, and bonds
• As an international organization, serving national central banks by taking their deposits, granting them credit, and carrying out currency and gold transactions on their behalf

Crucially, it would rely on nonpolitical staff located in a country not directly involved in the reparations disputes. This last requirement immediately narrowed the options for where to put it.

There was considerable debate about whether the bank should also promote economic growth and trade—essentially playing the role that the World Bank would later assume. Schacht advocated for this expanded mission, but France and commercial bankers opposed it, arguing that such lending could be inflationary and would create unfair competition for private-sector lenders.

The United States posed a peculiar challenge. Political positions within the Herbert Hoover administration made it impossible for Federal Reserve officials to be formally involved. Yet everyone recognized that the project would fail without American participation. The solution was characteristically American: major figures from the U.S. financial world would participate personally, acting in close cooperation with the Federal Reserve Bank of New York while maintaining the fiction of private involvement. Owen Young and J.P. Morgan Jr. used their leverage to ensure that Americans would hold leadership positions when the bank opened.

Finding a Home

The Bank for International Settlements concept was formally agreed upon at the Hague conference in August 1929. Then came the detail work—drafting the Charter, Statutes, Trust Agreement, and Convention governing relations with the host country. A special Organisation Committee chaired by Jackson Reynolds, president of the First National Bank of New York, met at the discreet Hôtel Stéphanie in Baden-Baden from October 3 to November 13, 1929.

The work was intense, and tragedy struck during the proceedings. Léon Delacroix, the former Belgian prime minister who had been an early champion of the project, died of a heart attack.

The committee had to reconcile fundamentally different visions for the institution. Italy's Alberto Beneduce and Montagu Norman wanted it to be purely a creation of central banks—a private club for monetary authorities. Schacht and UK Chancellor Philip Snowden pushed for something grander: a supranational development bank with policy tasks like promoting world trade.

Even the official language became contentious. The committee eventually endorsed French.

But the biggest fight was over location. Several delegates favored London, which made geographic and financial sense. The French vetoed it. They proposed Brussels instead. The British vetoed that. Amsterdam failed to gain sufficient support. Finally, a consensus emerged around Basel, Switzerland—a city that combined neutral country status with excellent railway connections.

The founding documents were approved at the second part of the Hague conference on January 20, 1930, with only minor changes from the Baden-Baden drafts. One addition: English joined French as an official language.

Rome, February 1930

The Swiss Federal Council approved the Convention and Charter on February 26, 1930, giving them the force of law. That same day and the next, the governors of the founding central banks gathered in Rome to formally approve and sign the statutes.

Rome was chosen out of consideration for Bonaldo Stringher, governor of the Bank of Italy. He was both the most senior member of the group and in poor health—he would pass away in December of that year. Stringher chaired the meeting.

The Bank for International Settlements was formally created on February 27, 1930. It had taken barely a year to go from concept to reality—an astonishing pace for international institution-building.

The bank moved quickly. Even before the Rome meeting, the Organisation Committee had secured a two-year lease on a convenient building in Basel: the former Grand Hôtel et Savoy Hôtel Univers, located across the street from the Basel railway station. By mid-April, staff were already working on the bank's behalf from Paris. The board members held their first informal meeting in Basel on April 22-23, 1930, adopting the bank's statutes and unanimously electing Gates McGarrah, an American banker, as the first President of the BIS.

The bank opened its doors in Basel on May 17, 1930, ready to process the first German annuities under the Young Plan that were due in June.

A Unique Legal Creature

The legal status of the Bank for International Settlements was unlike anything that existed before. It combined features of a private company with those of a public international organization in ways that still make legal scholars scratch their heads.

On one hand, it was a limited-liability company incorporated under Swiss law. Its shares could be held by individuals and non-governmental entities. It looked, on paper, like a particularly exclusive private bank.

On the other hand, the rights of voting and representation at the bank's General Meeting were exercised exclusively by the central banks of countries where shares had been issued. The private shareholders had no say in governance. The BIS possessed what lawyers call "de facto international legal personality"—it could act on the world stage as if it were a country.

Most remarkably, the bank was exempted from Swiss taxation and banking supervision, and its senior management enjoyed diplomatic status. The Charter contained a clause that reads like something from a treaty with an alien civilization:

"The Bank, its property and assets and all deposits and other funds entrusted to it shall be immune in time of peace and in time of war from any measure such as expropriation, requisition, seizure, confiscation, prohibition or restriction of gold or currency export or import, and any other similar measures."

In other words, no government could touch it. Not in peacetime, not in wartime. Its gold and currency could not be seized, frozen, or restricted. It existed in a kind of legal hyperspace, present in Switzerland but not entirely subject to Swiss law.

The Board of Directors

The inaugural BIS Board of Directors had sixteen members, representing the curious mixture of central bankers and private financiers that characterized the institution from its birth.

The governance structure was complex. Under the Statutes, the governor of each founding central bank was automatically a member of the Board—what lawyers call "ex officio" membership. Each governor also had the right to appoint a second Board member. France and Germany each had the additional right to appoint a third member for the duration of the Young Plan. The Board could theoretically appoint up to nine additional directors, though in practice during the BIS's early decades, only the Dutch, Swedish, and Swiss central bank governors joined.

This meant the bank was governed by the people who ran the world's money supply—not by politicians, not by elected officials, but by the technocrats who actually operated the machinery of international finance.

An Institution in Search of a Purpose

Here is the great irony of the Bank for International Settlements: the task for which it was created—facilitating German war reparations—became obsolete almost immediately.

The bank opened in May 1930. The following month, the first German payments were processed smoothly. But the global economy was already sliding into what would become the Great Depression. In 1931, President Hoover proposed a one-year moratorium on all war debts and reparations. In 1932, the Lausanne Conference effectively ended German reparations altogether.

The BIS had been built to solve a problem that no longer existed.

And yet it survived. It survived because the other functions—serving as a bank for central banks, providing a forum for monetary cooperation, facilitating international transactions in gold and currency—turned out to be enormously valuable in their own right. The reparations work had been the political justification for creating the institution, but the real utility lay in the infrastructure it provided for central bank coordination.

The club that Montagu Norman had envisioned in 1925 now had a permanent home, a legal charter, and immunity from the governments whose currencies it helped manage. In the decades to come, it would play roles in managing the aftermath of the Second World War, coordinating the Bretton Woods system, responding to the oil shocks of the 1970s, and developing the banking regulations that govern global finance to this day.

The Bank for International Settlements remains headquartered in Basel, with representative offices in Hong Kong and Mexico City. It is still owned by member central banks. It still provides banking services—but only to central banks and other international organizations. Private individuals and corporations cannot hold accounts there.

It is, in essence, exactly what those four bankers imagined on Long Island in 1927: a private and eclectic Central Banks' Club. Small at first, larger now—but still, fundamentally, a club where the people who control the world's money can coordinate their actions away from public view and democratic accountability.

Whether that's a good thing or a troubling one depends very much on whom you ask.