The IMF’s annual meetings held in Washington DC last week demonstrated that when the institution issues new economic projections or warnings of a downturn, the mainstream press are not averse to giving them prominent coverage. After the Fund was founded in 1944 (off the back of World War Two), it became part of what internationalists call the ‘rules based global order‘. For 75 years, the IMF has been regarded by the political establishment and banking elites as a lynch pin of the world financial system.
Contrary to what some may believe, the IMF was not the first global monetary institution.
That accolade belongs to the Swiss based Bank for International Settlements, which predates the IMF by fourteen years. Its creation in 1930 was, according to the BIS, primarily to settle reparation payments ‘imposed on Germany following the First World War‘. Without WWI – a major crisis event – there would have been no mandate for the BIS to exist. Much as there would have been no mandate for the IMF to exist were it not for the spectre of WWII.
As well as settling German reparation payments, the BIS was also recognised from the outset as a forum for central bankers – the first of its kind – where they could speak candidly and direct the course of global monetary policy.
The board of directors at the BIS is taken up predominantly by the heads of the leading central banks in the world. Right now the governor of the German Bundesbank Jens Weidmann is chairman of the board. As public servants they gather in Basel every eight weeks or so for a series of bimonthly meetings, the discussions from which ordinary citizens are not privy to.
In 2013 author Adam Labor published a book called ‘The Tower of Basel‘ which analysed certain key figureheads behind the early years of the BIS. What Labor detailed is how many of them were integral members of the Nazi regime.
Hjalmar Schacht, who through his role as Reichsbank President from 1933 to 1939 was Hitler’s finance minister, was a BIS director. Schacht was tried and acquitted of war crimes following WWII.
Walther Funk, a former Nazi economics minister and Reichsbank President from 1939 to 1945, was also a BIS director. Funk was initially sent to prison for war crimes before being released in 1957. As Labor documented, Funk worked closely with Heinrich Himmler, who was chief of the SS (Schutzstaffel). Funk was also a pioneer of a 1940 paper called, ‘Economic Reorganisation of Europe‘, which was endorsed by the Nazi leadership and is stored in the BIS archive.
Emil Puhl, Funk’s deputy, was vice president of the Reichsbank during WWII and a BIS director. Like Funk, Puhl was convicted as a war criminal.
Kurt von Schroder, convicted of crimes against humanity after WWII, was a BIS director.
Then there is Karl Blessing, dubbed as Hjalmar Schacht’s protege, who worked at the BIS in the 1930s and eventually became President of the Bundesbank and a BIS director in 1958. Blessing was imprisoned following WWII but not charged with war crimes.
Labor made the observation that ‘the parallels between the plans of the Nazi leadership for a postwar European economy and the subsequent process of European monetary and economic integration were real‘. In other words, the objectives of post WWII internationalists mirrored those of the Nazi regime.
And as Labor pointed out, the BIS ‘runs like a thread through both‘.
Labor also rightfully stated that after 1945, it was former Nazi’s that took many of the key positions of power in the new Germany. Industrialists at the time saw this as a price worth paying in order to rebuild Germany’s economy.
Study the history of European monetary integration and you will find that the BIS have featured prominently to bring it about. One example is the 1989 Delors Report. Drafted at the BIS, it mapped out plans for a European Monetary Union. One of the leading men behind the report, by dint of his position on the Delors Committee, was the then BIS General Manager Alexandre Lamfalussy.
With the evidence at hand, it is undeniable that the BIS stand at the heart of the European integration project. The fact that they were exposed for accepting looted Nazi gold in the run up to WWII, and that their actions served to finance Hitler’s war machine, have largely been ignored.
To this day, the BIS receives scant coverage within the media. Their latest initiative, ‘Innovation BIS 2025‘, is a case in point. First outlined in March 2019 by General Manager Agustin Carstens, it is a ‘medium-term strategy‘ comprising three elements which the BIS summarise as follows:
Identify and develop in-depth insights into critical trends in technology affecting central banking
Develop public goods in the technology space geared towards improving the functioning of the global financial system
Serve as a focal point for a network of central bank experts on innovation
It was not until the end of June 2019, in line with the publication of the BIS Annual Economic Report, that the project was ratified by the BIS board of directors. ‘Innovation BIS 2025‘ had now grown to encompass plans for a ‘BIS innovation Hub.’ The accompanying press release mentioned how the hub will ‘foster international collaboration on innovative financial technology‘.
General Manager Carstens commented that the BIS would now work ‘on a set of projects that reflects the innovation priorities of the central banking community.’
These priorities include the progression of Fintech and global reforms to national payment systems. The BIS narrative of questioning the role of ‘money in the digital age‘, which began in the wake of Brexit and Donald Trump’s presidency, is central to these ambitions.
Bank of England Governor Mark Carney, a leading proponent of the project, believes that closer collaboration between central banks via the Hub will ‘help the private sector to fully realise these major opportunities.’
As I will be looking at in future articles, private sector companies are due to play an instrumental part in the drive towards the full digitisation of money and the prospect of central bank digital currency.
After the Innovation Hub was approved, the BIS ran a series of job advertisements for the initiative. The deadline for these adverts have now expired, but one role listed was for the Head of the BIS Innovation Hub. A five year term located in Basel (which would culminate just as the BOE and the Fed bring new payment systems online), one of the leading requirements was for the successful applicant to possess at least ten years experience in a senior position within Fintech, central banking, economic research or the financial industry. So far the BIS have yet to announce the management make up of the Hub. One possible candidate is Mark Carney, who will step down as BOE governor on January 31st next year.
The first phase of implementation for ‘Innovation BIS 2025‘ will begin with three hubs, two of which will be located in Hong Kong and Singapore. This reflects the BIS wanting to broaden their presence in the East. The process has already started, as in September 2019 the Hong Kong Monetary Authority (HKMA) signed an operational agreement on conceiving an Innovation Hub in Hong Kong.
Quickly following on from this announcement was a second operational agreement, this time between the Swiss National Bank (SNB) and the BIS. This completes plans for the first phase of implementation. The second phase, which as yet does not have a reported time scale, will see Hub’s brought to be across the Americas and Europe.
In the press release for the Swiss Hub, it expands on the motivations behind Innovation BIS 2025:
The Swiss Centre will initially conduct research on two projects. The first of these will examine the integration of digital central bank money into a distributed ledger technology infrastructure. This new form of digital central bank money would be aimed at facilitating the settlement of tokenised assets between financial institutions. Tokens are digital assets that can be transferred from one party to another. The project will be carried out as part of a collaboration between the SNB and the SIX Group in the form of a proof of concept.
The SIX group referenced in the above passage is a financial service provider that runs the infrastructure of Switzerland’s financial system.
Of greatest concern here is the explicit mention of integrating central bank digital money into a DLT framework. This is something I wrote extensively about in a series of articles in August and September. The rise of distributed ledger, and making the technology compatible with payment systems, is crucial to central banks realising their aims of implementing a cashless society. I would contend that this is why the Bank of England and the Federal Reserve are in the midst of reforming their systems.
To examine more the motives for creating the Hub, Agustin Carstens gave two speeches within the first eleven days of October. The first of these was titled, ‘The new BIS strategy – bringing the Americas and Basel closer together.‘ Carstens spoke of how innovation and technology are ‘reshaping the financial landscape‘, and how ‘the scars left by the financial crisis‘ and the ‘post – crisis environment‘ mean it is necessary to reform the way the central banking community operates.
In relation to the ‘post – crisis environment‘, Carstens said:
The uncertainty stemming from the return of protectionism and the resulting trade tensions is not at all helping the economic outlook.
Against this background, technological innovation is changing banks’ business models and affecting the financial sector and the economy as a whole.
So the uncertainty and division generated through a volatile geopolitical climate is coinciding with the technological innovation that the BIS and their members want to utilise as part of an agenda to make all assets intangible i.e. the end of physical notes and coins.
Amidst this volatility, the BIS clearly see an opportunity:
In the light of the new challenges facing the central banking community, the BIS has reassessed the way it is fulfilling its mission.
Our work will focus on the implications of technological innovation for central banks, the financial system and the economy at large.
Prevailing geopolitical conditions are enabling the BIS to advance their goals through Innovation BIS 2025. This is why I have long argued that the rise in protectionism, which by extension is aligned to resurgent nationalism / populism, are not detrimental to central banks. ‘Crisis management‘, as Carstens refers to in his speech, is paramount to internationalists. Economic crisis is beneficial provided the BIS and fellow global bodies are tasked with ‘managing‘ the fallout. Notice how they concentrate their efforts on management rather than resolution. Each outbreak of crisis is in effect an opportunity, which is perhaps why no sustained effort goes into resolving fundamental flaws within the system.
Carstens second speech, ‘Central bank innovation – from Switzerland to the world‘, tells us a little bit more about the ‘BIS 2025 strategy‘:
In our previous medium term-plan, the emphasis was mainly on addressing the challenges associated with the aftermath of the Great Financial Crisis. In this post-crisis environment, amid rapid economic and technological change, the needs of central banks and other financial authorities have evolved.
He talks of how the advancement of technology is a ‘critical driver behind the design of our strategy‘. The BIS is therefore fully committed to ‘continuous innovation and to preparing ourselves for the challenges of tomorrow‘.
The Hub is in its infancy, but as Carstens makes known, as it gathers in knowledge and experience, ‘a home-grown agenda will quickly be developed.’ This is one reason why the first European base will be located in Switzerland, the home of the BIS. But I suspect the primary reason, outlined by Carstens, is due to start up Fintech firms in Switzerland being ‘supported by amendments to the Swiss legal framework that facilitate the use of new technologies in the financial sector.’
An interesting aside is that the Swiss National Bank was one of the first central banks to introduce the concept of the real-time gross settlement system – the same system which is now ripe for international reform to accommodate Fintech.
It was in this speech that Carstens described the BIS as ‘the world’s oldest international financial institution and remains the principal centre for international central bank cooperation.’ This understates the BIS somewhat. Where they stand is at the apex of the world financial system. And they manage to achieve this away from the glare of the world’s media, in spite of their history.
Innovation BIS 2025 is the next step in the quest to harmonise digital technology like distributed ledger with the next generation of payment systems, thus endangering the existence of physical money. As the world grows more unstable both economically and politically, central banks, in league with the private sector, will seek to take advantage of perpetual crisis to achieve their ends.
The longer the BIS remains in the shadows, the more likely their initiative is to succeed.