Edward Jay Epstein: The BIS, ruling the world of money


9:50p ET Wednesday, June 5, 2002

Dear Friend of GATA and Gold:

Thanks to Sean Corrigan of Capital Insight in Britain
for sending along this 1983 Harper's magazine
article by Edward Jay Epstein about the Bank for
International Settlements. While the essay is almost
20 years old, it has just as much relevance today,
when the world's big economic decisions continue
to be made by an unelected few behind closed
doors. Note particularly how the rigging of the gold
price by the BIS is acknowledged in this essay.
Has anything changed, and can anyone square
any of this with simple democracy?

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Ruling the World of Money

By Edward Jay Epstein
Harper's Magazine, 1983

Ten times a year -- once a month except in
August and October -- a small group 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,
D.C., 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 kilometres
outside of 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

The BIS was originally 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 taxes 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 Thirties
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 clearing house: 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 clearing house 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 defence of the American currency. It
was undeniably ironic that, as the president
of the BIS observed, "the 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

"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."

Originally, the central bankers sought
complete anonymity for their activities.
Their headquarters were in an abandoned six-
storey 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 (as Guido Carli, then the
governor of the Italian central bank, put
it), the public, even in Basel, remained
almost totally unaware of the club and its

In May 1977, however, the BIS gave up its
anonymity, against the better judgement of
some of its members, in exchange for more
efficient headquarters. The new building, an
eighteen-story-high 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, current president of both the BIS
and the Swiss National Bank, explained to me
while watching currency changes flash across
the Reuters screen in his office. "If it had
been up to me, it never would have been

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 twenty miles of
subterranean archives. "We try to provide a
complete clubhouse for central bankers ... a
home away from home," said Gunther
Schleiminger, the super-competent 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 ten 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

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 eighteen 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 arbitragers, thus allowing
central banks to make interest on gold

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 staff 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

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 create a
convenient screen behind which they can hide
their own deposits and withdrawals in
financial centers around the world. For
example, if the BIS places funds in Hungary,
the individual central banks do not have to
answer to their governments for investing in
a communist country. And the central banks
are apparently willing to pay a high fee to
use the cloak of the BIS.

There is, however, a far more important
reason why the central banks regularly
transfer deposits to the BIS: they want to
provide it with a large 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 Yugoslavia, Poland, Hungary,
and other Eastern-bloc 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 eleven
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 Lamfalussy, 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

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 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 from the previous group]." 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," as he put

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
ten 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. Phl 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

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 U.S. 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 told me, "I have no use for
politicians. They lack the judgement 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. For this reason,
there was considerable apprehension last
spring that Paul Volcker would be replaced by
a supply-side ideologue like Beryl Sprinkel,
and considerable relief when he was
reappointed for another term. 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 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 last year, for
instance, 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 nights 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
fix of $1.85 billion 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 -- at least
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-
equalization fund and $325 million from the
Fed's coffers; the remaining $925 million
mainly from the 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

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.

On August 31 of this year, Mexico repaid the
BIS loan. But the bailout was only a
temporary, if not pyrrhic, victory. With the
multibillion-dollar debts of a score of other
countries -- including Argentina, Chile,
Venezuela, Brazil, Zaire, the Philippines,
Poland, Yugoslavia, Hungary, and even Israel
-- hanging like so many swords of Damocles
over its sacred monetary system, the inner
club has "no choice," as Leutwiler has
concluded, but to remain a crisis manager.
This new role has created considerable
concern among the outer circle, and even in
the Bank of England, since the members who
don't entirely share the mentality of the
inner club want the BIS to remain primarily a
European institution.

"Let the Fed worry about Brazil and the rest
of Latin America -- that is not the job of
the BIS," a blunt representative of the Bank
of England, definitely not part of the inner
club, told me. Others at the BIS have argued
that it does not have the experience or
facilities to become "a mini-IMF -- putting
out fires around the world," as one staffer
described it.

To mollify such dissent on the periphery,
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.

The next meeting of the inner club is Monday,
November 7.


Edward Jay Epstein is the author of "The Rise
and Fall of Diamonds," "Legend: The Secret
World of Lee Harvey Oswald," and "News From
Nowhere." He also has written a book on
international deception.