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Category: Soap Box

Soapbox: Money’s future?

If the Bank for International Settlements (BiS) didn't exist would we need to invent it? The explicit mission of the BiS is to act as the banker of th...

5 July 2022

Gary Mead

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If the Bank for International Settlements (BiS) didn’t exist would we need to invent it? The explicit mission of the BiS is to act as the banker of the world’s central banks in their “pursuit of monetary and financial stability”. That individual central banks don’t seem very good at achieving “financial stability” – inflation has spread like a wildfire, ranging from almost 17% in Latvia to more than 73% in Turkey, both of whose countries central banks are members of the BiS – is unfortunate and cannot be blamed on the BiS. The BiS aids but does not control individual national central banks.

The BiS is a peculiar institution, with an interesting history. It is “essentially the most important bank you’ve never heard of”, according to Adam LeBor, whose 2013 book The Tower of Basel remains an excellent guide to the BiS. It was established in 1930, intended to be an apolitical organization, the result of an agreement between Belgium, France, Germany, Italy, the UK, the US and Switzerland, and was based in Basel, Switzerland – still its home. Its founders were Montagu Norman, then governor of the Bank of England (BoE) and Hjalmar Schacht, then president of Germany’s Reichsbank and the man who served Adolf Hitler as the Reichsbank’s president during 1933-39. The bank’s original task was to facilitate the war reparation payments that had been imposed on Germany by the 1919 Treaty of Versailles – payments that were strongly opposed by Schacht. That task soon ran into the sand; such payments were abolished by the 1932 Lausanne Agreement.

Schacht was joined on the board of the BiS by various Nazi-sympathising German industrialists. The BiS’s bankers “may not have been immoral… but they were certainly amoral… they believed that financial considerations existed in a vacuum, away from troublesome politics and national interests. Ethical considerations of right and wrong simply did not exist in their universe”, writes Lebor. A 1943 article in Bankers Magazine claimed that where Nazi activities were concerned, the bank’s annual reports showed “emotionless neutrality [that would] do credit to a visitor from Mars”. Nazi takeovers of Jewish businesses, for example, were referred to as “…changes in ownership of private enterprises due to the Aryanization of private firms”. Tried at the Nuremberg war crimes trials for ‘crimes against peace’, Schacht was acquitted despite objections from the Soviet Union.

In 1939, the BiS sullied its reputation by facilitating the Nazi looting of Czechoslovakia’s gold. Germany annexed the Sudetenland province of Czechoslovakia in 1938, and Czechoslovakian leaders then transferred much of the country’s gold to two accounts at the Bank of England for safekeeping. One account was in the name of the BIS, the other in the name of the National Bank of Czechoslovakia itself. Germany invaded Czechoslovakia, which ceased to exist in 1939. The Reichsbank immediately demanded the National Bank of Czechoslovakia (NBC) order the gold in its BIS account transferred to Germany, and that the Bank of England transfer the 27 metric tons of gold in the NBC account there to Germany. The BIS transfer order went through and Germany got 23.1 tonnes of Czech gold to finance its war effort.

Despite the BiS taking looted Nazi gold during the war it survived and grew in the years after the war. Officials in Washington and Europe who wanted the BIS to be shut down after its closeness to the Nazi regime were thwarted. At the Bretton Woods Conference in 1944, where plans for the post-war monetary system were developed, Norway, the U.S. and others worked to have the BIS dismantled.

It has since focused its intention on “fostering cooperation” between its member central banks, and has grown to 63 members (at the last count). The Bank has a remarkable legal immunity – article 3 in its charter states that “the buildings or parts of building and surrounding land… shall be inviolable. No agent of the Swiss public authorities may enter therein” without being invited by the bank’s president. The BiS maintains tight secrecy over its meetings and dealings. For years it didn’t even bother to put a sign on its door. For many, this supremely secretive club has outlived its usefulness. Indeed the 1944 Bretton Woods conference recommended it should be liquidated “at the earliest possible moment” – but that decision was officially reversed in 1948. That autonomy continues.

But like other grand creations whose original purpose has either disappeared or been wrecked, the puzzle must be – what really is the point of the BiS, apart from providing another international financial talking shop? Some members of this exclusive club fall foul of its protocols, rather like turning up at a London club without wearing the appropriate clothes. Thus the BiS membership of Russia’s central bank was suspended in March this year, after Russian tanks swept across the border with Ukraine.

Today it employs around 1,300 people on salaries which are exempt from national taxation, and who enjoy a range of enviable perks. The bank reports its holdings by Special Drawing Rights (SDRs, the currency basket defined by the international Monetary Fund) which this year amounted to SDRs 348 billion – including 102 tonnes of gold.

Money’s future

The BiS publishes an annual economic report. This year’s takes a look at inflation. On the dominant geo-political event so far this year – Russia’s invasion of Ukraine – the message is predictably downbeat: “this shock is inherently stagflationary”. As for the inflationary spike the world is experiencing, the report says “just like most observers, we at the BiS did not quite anticipate the strength and persistence of the surge”. Most observers, that is, who ignored the $14 trillion spending to fend off a Covid-19-driven global recession by the G20 group of countries, an intergovernmental forum which has as its main objective “policy coordination between its members in order to achieve global economic stability”. In fact, we live in a world filled with the acronyms of organisations that are pretty much dedicated to the same thing – and yet that thing, stability, has eluded all of them.

The simplest guide to economics tells us that if more of X is produced, then X becomes cheaper. In global terms, this X is money – trillions have been given away by governments in the name of ‘support’ and have resulted in inflation – too much money in search of too few goods. This money tsunami then ran into supply-chain issues (mainly from Asia), weather woes (such as frost and drought in Brazil, a globally important agriculture producer) and the Ukraine war – all of which have exacerbated, not created, this inflation.

As well as inflation, 2022’s BiS annual report also discusses the “future monetary system”. No surprises here, either – the bank comes down heavily against the “crypto universe” and strongly in favour of “a system grounded in central bank money” which can (it avers) “sustain a virtuous circle of trust and adaptability”. Cryptocurrency users are seen as lacking in awareness of the risks involved, such as hacks, scams, and insufficient regulatory oversight: “the crypto sector provides a glimpse of promising technological possibilities, but it cannot fulfil all the high-level goals of a digital monetary system” it says.

It is disappointing to read the BiS’s “vision” of the future monetary system, simply because it actually is no vision, but is just more of what we have had – “central banks are uniquely positioned to provide the core of the future monetary system, as one of their fundamental roles is to issue central bank money (M0), which serves as the unit of account in the economy. From the basic promise embodied in the unit of account, all other promises in the economy follow”. Some very pretty graphics are crafted in the report to support its basic message – Central Bank Digital Currencies (CBDCs) are the future, for all the reasons that are regularly trotted out – financial ‘inclusion’, cost-cutting, speedier international payments, and greater cross-border integration. The suspicion is that the fact that “a full 90% of central banks” are embarked on CBDC plans is an extra stimulus – who wants to be left out of the party?

The report concludes: “Every time households and businesses make payments… they place their trust in the safety of money and payment systems as a public good. Retaining this trust is at the core of central bank mandates”. Trust is hard-won but easily lost. Central banks in the US, the UK and the Eurozone have been behind the curve regarding inflation and have been astonishingly lavish in the creation and distribution of fiat money. Curbing that inflation will require the kind of tough measures that will throw the world into recession – requiring a return to easy money, and thus the cycle will start again a year from now. The central banker’s club needs shaking up. Private cryptocurrencies have launched an inchoate assault on government-issued fiat currency; but it’s evident from what the BiS says that the central bankers of the world will not permit this monetary revolt to wrest control from them.

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