AMEMBER of the Young Committee of 1929, which recommended the creation of a Bank for International Settlements, was asked what the Bank was going to do. "I don't know," he replied. "The important fact is that it exists. Unforeseen opportunities for service in the field of international finance will come to it as time unfolds. The conception is sound; the need is real; only the long future can answer your query."

In some measure this reply holds good today, for the Bank's greatest possibility of usefulness still lies ahead. While its past has been active and fruitful, any continuous, constructive development was necessarily arrested by the outbreak, in the Bank's very infancy, of a world-wide financial crisis. This exercised a cramping effect upon international relations generally, and upon all organizations designed to facilitate them. Yet the six years that have elapsed since the Bank was opened have indicated the direction in which it is to grow and the objects which it must serve. Americans have a primary interest in certain of those objects. It therefore may be opportune to review briefly the purposes for which the institution was created and its record to date in endeavoring to carry out those purposes; and also to state the fundamental task of high import which the Bank is prepared to undertake -- a task which it can probably fulfill with beneficent results to all countries, and especially to ours, if (and perhaps only if) the American monetary authorities determine to take advantage of its facilities, which are at their command.

When the Young Committee gave their reasons for constituting a new banking institution of an international character -- a proposal by no means novel -- they pointed out that the reparation problem on which they were working was primarily financial in its nature and involved the performance of banking functions at several points in the sequence between Germany's initial payments of the proposed annuities and the final distribution of the funds to the receiving Powers. It seemed to them logical, then, that this financial administration be confided to a non-political organization to be created under international sanction, and incidentally empowered to carry out other functions helpful to the world's financial well-being. The Committee said:

In the natural course of development, it is to be expected that the Bank will in time become an organization, not simply, or even predominantly, concerned with the handling of reparations, but also with furnishing to the world of international commerce and finance important facilities hitherto lacking. Especially it is to be hoped that it will become an increasingly close and valuable link in the coöperation of Central Banking institutions generally -- a coöperation essential to the continuing stability of the world's credit structure.

The truth may now be told. There was no imperative need to constitute a bank with a capital of 500,000,000 gold Swiss francs to be guided by a large Board of Directors, made up of all the Governors of the leading central banks of the world and of outstanding personalities appointed by them, who were directed to abandon their normal posts in order to meet at the seat of the Bank "at least ten times a year" -- all for the mere purpose of receiving and distributing the expected German annuities. Far larger payments than those contemplated had been regularly received and efficiently distributed by the Agent General for Reparation Payments, operating through a compact and economical organization. The truth was that the experts seized the occasion of the new reparation adjustment as an excuse to repair a long recognized gap in the international financial fabric. The organization which they proposed had functions not connected with reparations, and these ostensibly secondary functions were, in the inner consciousness of the originators, the predominating motives for its establishment. By some of the members -- in particular those connected with commercial banking -- the institution was envisaged as an instrument for opening up new fields of world trade by means of fresh extensions of credit. The German experts were especially favorable to this conception, because an increasing world commerce and more abundant credit would tend to lighten the reparation burden; whereas, if the Bank did not in fact contribute to such expansion, that eventuality would offer a basis which Germany could seize upon to reopen the reparation agreements, which she at no time considered just. While there was no unanimity about the opportuneness of creating more credit, all the experts agreed that the Bank could fill one obvious hiatus in the financial organization of the world, namely provide a center for central bank collaboration and for coöperation to improve the international monetary mechanism.

So it was that when the statutes of the institution came to be drafted in Baden-Baden the reparation functions were frankly relegated to second place. Article 3 stated:

The objects of the Bank are: to promote the coöperation of central banks and to provide additional facilities for international financial operations; and to act as trustee or agent in regard to international financial settlements entrusted to it under agreements with the parties concerned.

The statutes, which gave the Bank wide banking powers, but expressly forbade the issue of currency or the granting of any loans to governments, and precluded any participation of governments in the direction of the institution, were made international law by The Hague Treaties of 1930, and Swiss municipal law by an act of the Swiss Parliament in the same year. In each case unprecedented immunities from expropriation or seizure in times of peace or war were extended to the property and assets of the Bank, as well as to the deposits or gold entrusted to it. While formally created by governments, the institution was in fact a creature of central banks, because some twenty-four national banks of issue acquired nearly all its capital stock or exercised the shareholders' voting rights, and because the Governors of the central banks of the major countries were ex officio permanent members of the Board of Directors. The divorcement from diplomatic interference or government domination was complete. This independence gave the Bank freedom to deal with monetary and financial questions on their own intrinsic merits. In the same manner that politics were successfully excluded from the Bank's management, so, too, the Bank followed the usual custom of central banks by indulging in the least possible publicity. The absence of a press representative and the rather uncommunicative nature of the rare communiqués were the despair of journalists. Though in many respects this was highly useful, it also goes to explain, perhaps, why many popular errors about the institution prevail today. For example, in the United States it is erroneously imagined that the Bank had responsibilities, or major functions, in connection with the payment (or non-payment) of the war debts to America; or that it was only a reparation vehicle; or that there was some kind of organic affiliation between it and the League of Nations; or that participation in the Board of Directors on the part of the American monetary authorities, in order to maintain contact between the central banks and to benefit from the resultant exchange of information and counsel, might embroil us in European diplomacy. Everyone of these ideas is illusory. The Bank at Basle has no affiliation with the League of Nations or with any governmental organization; at no time was it charged with the collection, much less the payment, or the "international settlement," of the war debts to America -- a transfer problem upon which its attitude was always one of scientific objectivity; at no time has it permitted its deliberations or action to pass the proper scope of business and banking operations, nor has it at any time dabbled in diplomacy. The erstwhile reparation functions have long fallen into desuetude, and the revival of them, even on some attenuated scale, seems remote indeed.

What, then, have been the principal activities of the Bank, and whither is it tending today? Let us first summarize the reparation work. The institution opened May 17, 1930. One of its early corporate acts was to execute an agreement with the Creditor Powers pursuant to which it was to receive the graduated annuities payable by Germany in an average amount of 2,000,000,000 Reichsmarks, and distribute them according to an agreed schedule among the respective Powers. The Bank, as agent for certain Powers, was to "mobilize," as opportunity offered, some portions of the annuity -- that is to say, float public loans to be served and amortized by the annuity income. In June 1930 the German Government International 5½ percent Loan was placed upon nine national markets, the Bank acting as Trustee for the bondholders. The Bank also became fiscal agent for the trustees of the Dawes Loan and took over from the Agent General for Reparation Payments the funds remaining in his hands, as well as the fiscal management of "deliveries in kind," a system under which Germany met a part of its obligations by the delivery of commodities or the installation of public works. As compensation for services and as an inducement to secure subscriptions for the Bank's cumulative 6 percent capital stock, the Creditor Powers and Germany agreed to maintain "minimum deposits," without interest, equalling 230,000,000 Swiss gold francs. In addition, the Powers usually left with the Bank, at interest, part of the reparation funds received each month until such time as they were required to be withdrawn for their own interlocking war debt disbursements, or for payments to the United States.

A year had barely elapsed, during which the reparation machinery operated without a creak, before the catastrophic conditions which developed in Germany and Central Europe were publicly disclosed -- and indeed accelerated -- through the Hoover moratorium proposal of June 20, 1931. This in effect advised the suspension of the transfer of the German annuities (except so much thereof as was required for the service of outstanding international loans), and the postponement of all inter-governmental debts for a period of twelve months. Paradoxically enough, the Bank's greatest helpfulness in the reparation field began precisely when the payments were interrupted by economic events. Thanks to its business organization and its impartial attitude, it was able to serve as the focus for the international deliberations which ensued but which would have marched haltingly under the customary diplomatic procedure. A series of meetings at Basle quickly produced the first "Standstill Agreement" concerning the maintenance of short term bank credits in Germany, and the report of the Advisory Committee provided for by the Young Plan against the contingency of transfer difficulties. The Committee, emboldened by the growing chaos, went beyond its limited formal powers and recommended in substance a reconsideration of the whole reparation problem. "Inspired," it said, "by the principles laid down in the report of the Committee convoked by the Bank for International Settlements," the Lausanne Agreement of July 1932 brought an historic epoch to a close by the abrogation of practically all of the existing agreements concerning reparation payments, and by prolonging, in fact indefinitely, the provisions for suspension of transfer which were the outcome of the Hoover proposal. In consequence, the Bank received for only approximately a year of its existence the anticipated reparation payments; and its principal efforts in that connection related to their orderly interment. While the Lausanne Agreement did propose a mild substitute for the indemnity régime, and, of course, insisted upon the continued full service of all loans in the hands of the public, the German Government later determined (unfortunately for its good credit), to permit both the Dawes and Young loans to go into partial default and to effect their amended service outside of the Trustees. This final débâcle left the Bank without any vestiges of its reparation inheritance, except the non-interest-bearing minimum deposits which the governments had contracted to maintain and which continue to assure the institution's financial independence.

Long prior to these events, and indeed from the first moment of the Bank's existence, the management had pursued a conscious policy of subordinating its functions in connection with reparations to the more constructive tasks of promoting central bank coöperation and of providing new financial facilities. This work fell into three chronological periods, marked each by a different emphasis. The first period, that of organization and experimentation in new methods of central bank collaboration, terminated almost simultaneously with the crash of the Austrian Kredit-Anstalt in May 1931. The second, that of supplying emergency help and of adaptation to a rapidly changing world, opened with the advances promptly granted to the Austrian National Bank, and closed during the summer of 1932, when the Bank began publicly to stress the necessity of an improved international monetary standard and outlined the conditions precedent thereto. The third period, that of study and examination as how best the Bank could facilitate the smoother working of a restored monetary mechanism based on gold, began with the preparations for the ill-fated London Monetary and Economic Conference, and is still continuing. Through all three periods, of course, the Bank proceeded with its routine business operations as a central bank of central banks -- effecting clearings between them of their foreign exchange payments, receiving, holding and transferring gold, and granting seasonal credits to various banks of issue. Deposits from private banks or from individuals were never accepted, firstly, to avoid competition with existing private institutions, and secondly, to discourage efforts at hoarding.

During the first formative year the Bank had many aims in the monetary field. It endeavored, for example, to secure the concentration with it of the foreign exchange reserves of central banks. The aim here was to correct one of the worst evils of the "gold exchange standard," and to bring about the gradual establishment of what would amount to an International Foreign Exchange Equalization Fund, to regulate the international exchanges in somewhat the same way (though with broader objectives) that some national exchanges are now regulated by national stabilization funds. The Gold Exchange Standard -- propagated, but not invented, at Cannes -- had the great demerit of stimulating the pyramiding of credit and was one of the many factors contributing to the financial crisis. Perceiving this danger, and that it could be avoided by keeping these balances concentrated with central banks, where credit creation could be avoided or controlled, the Bank acquired about 1,000,000,000 Swiss francs (at the peak) of these reserves. It was preparing to use them, together with its paid-in capital and long term deposits, as an exchange stabilization fund, when forces supervened which were too powerful to be offset by such relatively feeble weapons.

But the threat presented by the uncontrolled short term balances of central banks was not the only fault in the international monetary situation which the Bank observed, and against which it raised storm signals before the collapse came. Essential to the coöperation of central banks is the procurement of factual data, the analysis of the economic and financial facts found, the exchange of information, and consultation as to the steps which may be usefully taken when symptoms of danger appear. Although the machinery of collaboration was far from being fully developed, the monthly meetings of the Governors, involving frank discussion of their individual as well as common problems, formed an important point of departure; so that when the fiftieth session was held it was not surprising to observe that more than half the Governors had never missed a single meeting and that the few lapses of the remainder were accounted for by absence from Europe. At an early gathering the Board recognized the danger in the volume of short term balances floating from one market to another, urged the transference of these funds into the intermediate credit field or into long term investments, and recommended a general reduction in interest rates. A committee investigated with some degree of success the intermediate credit possibilities. Another committee suggested the creation of a new, debenture-issuing International Credit Bank with a large capital, to promote the long term investment market and serve as a kind of International Reconstruction Corporation. This suggestion failed of adoption because those expected to supply the new capital (the French in particular) felt that the current of adverse events was flowing so quickly that any such correctives were likely to prove abortive.

Simultaneously with these activities, the Bank was experimenting in making improvements in the technique of business relationships between the central banks -- the investment of their funds; the rediscounting by or through the Bank of their bill portfolios expressed in foreign currencies or in their home currency; the clearing of payments between them; the standardization of dealings in gold; and the setting up of the nucleus of a gold settlement fund, by which debits and credits of balances due between the banks could be effected by book entries at a common center without the actual shipment of physical gold, the resultant savings in cost to be divided, or all allocated to the common agency, so that the normal spread of the gold points would not be narrowed. Whereas profit was a secondary motive, as is fitting in central banking, the earnings of the institution from its general business operations and from its non-interest bearing deposits were always such that it was able to pay the contemplated dividends and to make substantial appropriations to reserves.

The work of perfecting routine technique, and the effort to aid in the stabilization of the currencies of Jugoslavia and of Spain, were proceeding uninterruptedly at the time of the first annual meeting of the Bank's stockholders in May 1931. This drew to Basle the most extensive and representative assembly of central bankers that had ever gathered in one place. But over the meeting, ostensibly devoted to an examination of the methods and objectives of central bank coöperation, there hung a pall. The difficulties of the Austrian Kredit-Anstalt had just become public property, and the possible dire consequences formed the nervous subject of every conversation. It was fortunate that the Bank existed during the ensuing emergency; for, as in the case of the reparation crisis, it was immediately employed as a center both of information and action.

In rapid succession the Bank was called upon to grant, or to organize central bank syndicates to grant, temporary credits to the national banks of Austria, Hungary, Jugoslavia, Danzig, and to the German Reichsbank, aggregating some 750,000,000 Swiss gold francs. If any central bank, such as the Bank of England or the Banque de France, had acted alone, or as leader, the cry of political purpose or favoritism would have been raised somewhere. It was a virtue of the International Bank that others could act through it without fear of having their motives misunderstood. Never was the solidarity between central banks more clearly demonstrated than by these emergency credits, in which nearly a dozen institutions participated, including the Federal Reserve Bank of New York. All the credits have been repaid in full except one-half of the sum accorded the Bank of Hungary. The advances did not accomplish their primary purpose of creating confidence and stopping the run on Germany and Central Europe; but they achieved their secondary object, that of giving the debtor and creditor markets time to prepare themselves for the storm. The ultimate beneficiaries of the loans were the private bankers in London and New York, who continued to withdraw their balances from the danger zone. Whereupon the Bank, seeing the hopelessness of this chain of developments, declined to grant the additional credits requested by certain other central banks.

The wave of distrust then reached London and swept the pound sterling from its gold moorings. The following Monday the central banks throughout the world, most of which still held quantities of sterling, awoke to the realization that the "Gold Exchange Standard" was a misnomer; that, in fact, it was a "foreign currency" standard concealing possibilities of grave financial loss. An embryo run was started on the Bank at Basle, which surrendered over 300,000,000 Swiss gold francs within a few days, because central banks translated their reserves into metallic gold or into another currency considered sound. For this latter purpose some had the misfortune to choose the dollar. The policy of liquidity always followed by the Bank enabled it to meet the withdrawals easily, just as later it met a recurrence of heavy withdrawals when the international gyrations of the dollar commenced. But for an institution directed by its statutes to deal for its own account in currencies on "the gold or gold exchange standard," the secession of sterling, the dollar, and of the many currencies influenced by them, acutely limited upon its field of action. Except for continued operations in the gold bloc currencies, and in other exchanges "for the account of others," the Bank became a sort of international investment trust, husbanding its funds and waiting for a brighter day. But this was only on the material side. As an observation tower from which to survey the changing economic scene, as a center for financial conferences free from the glare of publicity (such, for example, as the regular private meetings of the gold bloc Governors), the Bank grew steadily in importance. A splendid esprit de corps developed. Rumors of quarrels might emanate from Geneva, but from Basle, never.

The diminution in the volume of business transactions enabled the management to concentrate its attention upon the question of the future of the monetary standard between nations and the part which the Bank could play in a better working of that mechanism. Despite the abstract allure of "managed currencies," tied to fluctuating price indices or operated by unidentified persons of super-human prescience, the conclusion was reached that at this stage of the world's development a system based on gold "remains the best available monetary mechanism and the one best suited to make possible the free flow of world trade and of international financing; it is desirable, therefore, to prepare all the necessary measures for the reëstablishment of the functioning of the gold standard." In publicly expressing this viewpoint, however, the Bank recognized that the gold standard of the past, which in reality was never "automatic," required modifications and in the future would be frankly subject to a greater degree of management than had been acknowledged in the past. "The rules of the game," often referred to but not anywhere tabulated, would have to be clearer and would have to command more general agreement if a stable system were to evolve. With these underlying precepts in mind, appointees of the Bank participated in the Preparatory Commission for the World Monetary Conference. Dr. Trip, now President of the Bank, served as Chairman of that Commission; and several of the Bank's directors took part as delegates in the subsequent London Conference.

It is not realized what a great community of doctrine was reached both upon monetary matters and upon a program, both in the Preparatory Commission and in the committees of the London Conference, where representatives of the sterling area countries, the gold countries, the "gilt" countries, and the (at that time) silver countries all sat together. Most of the proposals accepted emanated from the Bank or were informally endorsed by its Board. The application of any of the resolutions of the Conference was frustrated by the monetary experiments undertaken at that moment by the United States. But those resolutions still form the foundation upon which any enduring international monetary structure seems likely to be based.

The most important resolution prophesied, by implication, a managed gold standard, with conscious control of credit, and having more regard to fluctuations in the purchasing power of money than central banks usually accord. It read as follows:

(1) The proper functioning of the gold standard requires in the first place the adoption by each individual central bank of a policy designed to maintain a fundamental equilibrium in the balance of payments of its country. Gold movements which reflect a lack of such an equilibrium constitute therefore an essential factor in determining central bank policy.

(2) Gold movements so far as they seem to be of a more permanent character should normally not be prevented from making their influence felt both in the country losing gold and in the country receiving gold.

(3) While gold should be allowed freely to flow out of and into the countries concerned, central banks should always be prepared to buy gold at a publicly announced fixed price expressed in their currency, and to sell gold at a publicly announced fixed price, expressed in their currency, the latter at least when exchange rates reach gold points.

(4) Central banks should obtain from their markets the fullest possible information concerning the demands that might be made upon their reserves.

(5) Since as already stated under (1) the proper functioning of the gold standard requires in the first place the adoption by each individual central bank of a policy designed to maintain a fundamental equilibrium in the balance of payments of its country, the discretion of each central bank in regulating the working of the gold standard in its own country should remain unimpaired. Central banks should, however, recognize that in addition to their national task they have also to fulfill a task of international character. Their aim should be to coördinate the policy pursued in the various centers in order to contribute towards the satisfactory working of the international gold standard system.

Moreover, they should endeavor to adapt their measures of credit regulation, as far as their domestic position permits, to any tendency towards an undue change in the state of general business activity. An expansion of general business activity of a kind which clearly cannot be permanently maintained, should lead central banks to introduce a bias towards credit restriction into the credit policy which they think fit to adopt, having regard to internal conditions in their own countries. On the other hand, an undue decline in general business activity in the world at large should lead them to introduce a bias towards relaxation.

In pursuing such a policy the central banks will have done what is in their power to reduce fluctuations in business activity and thereby also undue fluctuations in the purchasing power of gold.

(6) With a view to arriving at an agreed interpretation of the data revealing the tendency of developments in general business activity, and an agreed policy, central banks should consult together continuously, each central bank in case of difference of opinion, acting on its own judgment of the situation. The Bank for International Settlements constitutes an essential agency for central bank action designed to harmonize conflicting views and for joint consultation. This instrument should continue to be employed, as far as possible, for the realization of the principles set forth. It should continuously examine the application of the principles of the working of the gold standard and study such modifications thereof as experience may prove desirable.

No such program (and no other program) for a restored monetary mechanism, so vital to the restoration of the American export business and to the repayment of American investments abroad, can successfully work without some collaboration between central banks and other financial authorities, including our own. The isolated action of one may unintentionally checkmate the action of the other, to the injury of both. To bring order into the monetary chaos is the prime objective of the Bank today; to contribute to the maintenance of such order is its prime objective for tomorrow. Many idealistic projects have been conjured up for it. One such is that it should issue an international currency -- an ancient aspiration like that for an international army. It requires for realization much more internationalism in the economic field and more pacification in the political field than is visible upon the horizon. Another is that all the world's gold should be concentrated at the Bank -- a sensible conception, unanswerable in logic, but running head-on against the human factors of nationalism and tradition. Still another is that the Bank should be made a super-bank, beneficently guiding and controlling the various national central banks, a proposal as realizable in practice as that of an omnipotent super-state.

Instead, the Bank will work and continue to function as a center for counsel and coöperation. It will be at the heart of any restored financial mechanism. It will endeavor to advance the principles of the resolution quoted. It will serve as a rediscount bank for central banks, as the Federal Reserve System does for private banks in the United States. It will hold the foreign exchange reserves of central banks, and clear for them. It will be the custodian of some portions of the metallic gold, and simplify its transfer. It will be a gatherer and disseminator of economic data upon which judgments can be reached. It will be an instrument for facilitating the normal, new international flow of capital, so necessary to natural growth. It will grant seasonal credits to small banks and may well serve as a medium for the redistribution of some share of the world's gold through advances, at longer term, from the greater central banks. And it may well operate an international exchange equalization fund. Above all, the continuous personal contacts at Basle of financial leaders from the various countries will afford some hope of a gradual improvement in international financial relations, without which internal economic advance cannot be realized to the full.

As the United States has an immediate interest in such improvement, and in the aim of currency stabilization to which the Bank is committed, our advantage would be served, without any curtailment of our independence, if the American monetary authorities were to occupy the two seats reserved for them on the Board of Directors, the non-political character of which has been proved and which will have an increasing opportunity for usefulness as time unfolds. "The conception is sound; the need is real."

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  • LEON FRASER, President of the Bank for International Settlements, 1933-1935; Vice-President of the First National Bank of New York
  • More By Leon Fraser