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The
Money Club (part 2)
HARPER'S
November 1983
by
Edward Jay Epstein
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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 deposits.
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 thirty 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 staffs
capable of investing their deposits. The German Bundesbank,
for example, has a superb international trading department
and 15,000 employees— at least twenty 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 profit?
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 created'
a convenient screen behind which they can hide their own deposits
and withdrawals in financial centers around the world. And
the central banks are apparently willing to pay a high fee
to use the cloak of the BIS.
There is, however, another reason
why the central banks regularly transfer deposits to the BIS:
they want to provide it with a large enough 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 eighty-six 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 other 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 Larnfalussy, 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 line. 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 in 1983 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."
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."
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