Bank for International Settlements

One Bank to Rule Them All: The Bank for International Settlements

The Bank for International Settlements (BIS) is an organization that is shrouded in mystery, mainly due to the fact that the majority of people don’t even know of its existence. According to the BIS itself, the main purpose of the Bank is to “to promote the cooperation of central banks and to provide additional facilities for international financial operations” and “act as trustee or agent in regard to international financial settlements entrusted to it under agreements of the parties concern.”[1] This means that the BIS is to have the central banks work with one another to facilitate international operations and to oversee any international financial settlements.

The Bank has a Board of Directors, which “may have up to 21 members, including six ex officio directors, comprising the central bank Governors of Belgium, France, Germany, Italy, the United Kingdom and the United States. Each ex officio member may appoint another member of the same nationality. Nine Governors of other member central banks may be elected to the Board.”[2] BIS also has a management wing in the form of a General and Deputy General Manager, both of whom are responsible to the board and supported by Executive, Finance, and Compliance and Operational Risk Committees.[3]

However, its purpose has changed and evolved over the decades, however, it has always been a club for central bankers, yet in many ways it can aid some countries more than others.

The origins of the BIS lie in the United States, specifically New York City. The individuals involved were international bankers who, despite past differences, “worked together to establish a world financial order that would incorporate the federal principle of the American central banking system.”[4] Specifically among them were people such as “Owen D. Young, J. Pierpont Morgan, Thomas W. Lamont, S. Parker Gilbert, Gates W. McGarrah, and Jackson Reynolds, who, in conjunction with the Federal Reserve Bank of New York, sought to extend the principle of central bank cooperation to the international sphere.”[5]Before delving any further into the creation of the Bank, it is necessary to examine some of the more notable of these individuals to better understand why they would be involved in the creation of an international bank.

Owen D. Young was already in good with the US government as he, “with the cooperation of the American government and the support of GE, organized and became chairman of the board of the Radio Corporation of America” and “in subsequent years he engineered a series of agreements with foreign companies that divided the world into radio zones and facilitated worldwide wireless communication”[6] Young had a strong belief that global radio service and broadcasting were important for the advancement of civilization. In 1922, Young became chairman of General Electric, and along with GE President Gerard Swope, “urged closer business-government cooperation and corporate self-regulation under government supervision.”[7]

During the 1920s, Young became involved in international diplomacy as the foreign affairs spokesman for the Democratic Party. At the behest of then-Secretary of State, Charles Evan Hughes, Young and Charles Dawes, a banker, were recommended to the Allied Reparations Commission in order to deal with the breakdown in Germany’s reparations payments following the First World War.The Commission resulted in the Dawes Plan which allowed for “Germany’s annual reparation payments would be reduced, increasing over time as its economy improved; the full amount to be paid, however, was left undetermined. Economic policy making in Berlin would be reorganized under foreign supervision and a new currency, the Reichsmark, adopted.”[8] Young viewed improving the world financial structure as important to “the very survival of capitalism” and furthermore he “sought rather the ‘economic integration’ of the world which would prepare the way for ‘political integration’ and lasting peace.”[9]

John Piermont Morgan, Jr. was already ensconced in the world of international banking, having inherited the JP Morgan Company from his father. During World War One, the House of Morgan worked hand-in-hand with the British and French governments, engaging in a number of tasks such as floating loans for the two countries, handling foreign exchange operations, and advising officials of each respective country.[10]

Both these individuals were heavily involved in politics and banking therefore had a personal interest in the creation of a global bank. It should be noted, this fits into the US government’s own policies as they wanted to “[keep] aloof from the political entanglements in Europe while safeguarding vital American interests by means of unofficial observers or participants.”[11] The Federal Reserve also was interested in the creation of the BIS as it would “[promote] both the ascendancy of New York City in world banking and the reconstruction of a stable and prosperous Europe able to absorb American exports.”[12]

This idea of an international bank didn’t occur in a vacuum. The creation of the bank “was inextricably tied to the problem of German reparations in the context of Germany’s overall debt burden during the 1920s.”[13] A slowdown in international lending to Germany began in 1928 as markets became extremely worried about the internal politics of the Weimar Republic. Due to the breakup of a center coalition government and the Social Democrats needing support from right-wing parties, the political situation began to fall apart with “government stability [being] threatened whenever budget debates exposed the basic social divide of unemployment insurance and increased industrial taxation on the one hand versus spending austerity and tax cuts on the other.”[14] The budget problems came on the heels of the Reparations Committee having determined that Germany’s total reparations came to $33 billion, which was twice the size of the country’s total economy in 1925. As long as foreign capital kept coming into Germany, things were fine, however as was aforementioned, that situation changed in 1928.

Between February 1929 and January 1930, negotiations were made to reschedule Germany’s reparations payments. “These negotiations were initiated by central bankers and private actors, who were the first to link problems in the capital market with the need to reorganize Germany’s financial obligations.”[15] Thus, it should be no surprise that many of the main individuals involved in the creation of the BIS were central bankers or engaged in international affairs/finance to some extent.

The idea for an international bank had already been explored to some extent by people such as John Mayard Keynes[16], however the idea truly took off during the Young Conference in 1929 when the Allies were attempting to deal with Germany’s reparations debts for World War One. Belgian delegate Emile Franqui bought up the possibility of having a settlement organization to administer the reparations agreement and the very next day, Hjalmar Schacht, president of the Reichsbank and chief German representative at the conference, presented a proposal to establish such an organization to as a direct financier of global economic development and trade. The bank would act as a lender to the German central bank in case the Germany currency weakened and the government found itself unable to make the reparations payment. In addition, it would give steps for how to proceed in the case of German default as if “Germany did not resume payments within two years, the BIS would propose revisions collectively for the creditor governments (which would only go into effect with their approval)” and “the bank was responsible for surveillance and informing the creditor countries about economic and financial conditions in Germany.”[17]

 

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