Full text of William McChesney Martin, Jr., Papers : The Bank for International Settlements, Box 23, Folder 1

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mi

William McC. Martin, Jr*f
c/o Yale Club, N. Y* C#

THE BANK FOR INTERNATIONAL SETTLEMENTS.

The salient financial characteristic of post-war Europe
has been international debts and resultant exchange difficulties*
Statesmen of all countries have directed the major portion of
their energies toward the restoration of monetary stability and
the adjustment of war debts and reparations to whatever measure
of reality was consistent with political expediency.
During the two decades prior to the World War the predominant tendency in banking was toward government regulation or
supervision.
A central bank or a central banking system was
considered an intelligent and worth-while instrumentality but by
no means an essential to the maintenance of national life*
since
the war adequate central banking facilities have become a requisite
of good government*
This is attested to by the recommendation
of the Genoa conference of the League of Nations that all the
newly formed states of Europe should maintain central banks* Credit has become the magic word.
No matter what the condition of
any given country or state credit is the popular key to unlock
the difficulty*
G^ernment ownj?rs^
of the
banking machinery has .assja^
of a social movement
and untilthe experiment has proved either successful or misleading there appears nothing in the offing to halt it.
People having lost their faith in private enterprise turn blindly to a naive
faith in government control of credit as a world stabliz/er and
as means of surcease from their troubles.
Regardless of how slow and painful the process may have
appeared , no one can ser lously doubt that until the collapse ©f
1929 the world appeared to be on the mend.
Germany and France
had both survived devastating inflations and possessed a real
measure of economic stability.
Here and there optimistic hopes
for the League of Nations""were being more and more entertained, andt
while formal religion was gradually losing its grip the world round$
a new gospel of peace was assuming a doctrinal nature*
The wholesale granting of foreign credits continued to maintain this mirage
of prosperity and the full force of public approval tended toward
internationalism as a sound economy.
It was out of this background that the Bank for International settlements was framed and
it was a natural and almost inevitable sequence to the League of
Nations.
That the bank should have been conceived on the eve of
the great trade depression has seriously handicapped all efforts
which have been made to accomplish its program.




-2in order to examine more carefully the bank as a natural
post-war phenomenon whose object was to liquidate the reparations
problem and prevent a financial relapse in juxtaposition with the
League of Nations whose object was to liquidate the inheritance of
war and attempt to set up machinery to prevent its recurrence, we
will briefly review its history and statutes^
December 22, 1928 the German, French, Italian^, British,
Belgian and Japanese Governments agreed upon the terms for the
Committee of Experts which they had decided to establish three
months before*
Independent financial experts composing the committee were to draw up "proposals for complete and final settlement
of the reparation problem" including a settlement of the obligations resulting from the existing treaties and agreements between
Germany and the creditor powers"#
The Reparation Commission
and the German Government separately invited qualified Americans
to serve. The attitude of the Washington Government was given out
by the State Department as follows:
"The president has indicated
that the Europ^n Governments or the principal nations, including
Germany, would like to secure the services of two Americans to join
with the experts who are to be appointed by the European Governments, and the united states has reported to the European Governments that this Government has no objection to their taking that
course.
The President feels, however, that it should be emphasized that it is the European Governments that are making the appointments as well as the selection of the experts«tf
The committee met on February 9, 1929, and signed its
report on June 7, 1929.
Owen Young was unanimously chosen
chairman and acted in that capacity throughout the 17 weeks of
continuous deliberation.
He not only presided at the meetings,
but shared the work of constructing solutions of the problems.
On the basis of his active negotiations among the experts of the
creditor countries and the German experts the plan has become popularly known as the Young Plan#
The report of the committee, while exceedingly detailed
and interesting, has no place in our discussion here except in so
far as it provided among incidental developments for the establishment of the Bank for International Settlements.
After abolishing all organs invented specifically for the collection ancj. distribution of reparations, including the Reparation commission, the
Agent-General for Reparation payments, and foreign commissions
supervising pledges representing security for Germanyfs liability,
tf
the report stated:
A general plan for a complete and final
settlement Qf the reparation problem, being primarily financial in
character, involves the performance of certain banking functions
at one or more points in the sequence between the initial payment
of the annuities and the final distribution of the funds.
A
banking institution designed to meet these requirements justifies
and makes logical the liquidation of all political controls and
provides instead machinery essentiaHycommercial and financial in

character, which carries with it all the support and at the same


-3time all the responsibilities that economic engagements imply*
* * * * * * * These several considerations led the committee to
the elaboration of a plan for a Bank for International Settlements"•
The Organization committee of the Bank for International
Settlements met at the Hotel Stephanie, Baden-Baden, Oct* 3 Nov* 13f 1929*
This Organization Committee produced the text
of the charter of the bank, the statutes of the bank, and the
trust agreement*
A brief outline of the bank is in order here*
The authorized capital of the bank is 500,000f;000 Swiss
francs (|96,475,000) divided into 200,000 shares of 2,500 Swiss
francs ($480*38) issuable at par only, the nominal value to be
expressed in dollars and local currency converted into gold mint;
parity.
The Banque Nationale de Belgique, the Bank of England,'
the Banque de France, the Reichsbank, Banca dfItalia, the Yokohama Specie Bank and a New York financial institution guarantee
the total authorized capital, and the bank may begin business
as soon as a total of 112,000 shares (56$) has been subscribed
by the seven mentioned institutions in quotas of 16,000 each*
The remaining 88,000 shares (44$) may be issued by the Board of
Directors by offer to central or other banks of other countries
whose currencies are on the gold or gold exchange standard (for
those interested in reparation) in lots not exceeding 8,000
shares per country*
Twenty-five percent only of each share is payable at
the time of subscription, the balance to be ncalled up* at the
discretion of the board on three months1 notice*
Capital of
the bank may be increased or reduced by vote of a two-thirds majority of the board.
In the case of an increase, the seven guaranteeing institutions are entitled to subscribe for 55$ of the
increase, the remainder being assignable to other subscribing
countries.
Shares are registered and transferable on the books
of the bank, which retains the faculty of accepting a suoscriber*
Ownership of shares carries no right of voting or representation
at general meetings, both rights being exercised by the central
bank or its nominee in proportion to the shares subscribed in
each country.
The suoscribing institution may issue either
the shares or certificates against the shares to a banking group
within the country, or to others*
The major purposes of the bank are; (1) to promote cooperation between central banks and to provide additional facilities for international financial operations (2) to act as trustee
or agent in regard to international financial settlements intrusted to it under agreements^tth the parties concerned.




The board of directors are to consist of 25 members

-4during the continuance of Germanyfs liability to pay reparation
annuities, and always shall consist of 23 members*
The directorate is composed as follows:
!•
The governors, or their substitute nominees of like
nationality, of the central banks of Belgium, France, Germany,
Great Britain, Italy, Japan and the united States, known as
ex officio directors*
in case one of these countries has no
central bank, or if such bank is either unable or unwilling to
act, the board shall nominate an appropriate financial institution to designate candidates for election*
The Yokohama
Specie Bank acts for Japan and J# p # Morgan & Co. with the
First National Banks of New York and Chicago for the United
States*
2.
Seven persons "representative of finance, industry
and commerce" of the same nationality as and appointed by each
of the former group*
3.
Nine persons elected from lists submitted by the governors of the central banks of Bulgaria, Czechoslovakia, Greece,
Hungary, Poland, Portugal, Rumania and Yugoslavia - being
countries interested in reparation - and by the governors of
the central banks of the Netherlands, Sweden and Switzerland,
all of which have subscribed to the bank»s capital "at the time
of its incorporation."
The candidates are to be representatives of finance and of indnstry or commerce in equal numbers*
The election of the nine persons from these lists is by a twothirds majority for three-year terms*
4*
"During continuance of the liability of Germany to
pay reparation annuities two persons of French and German
nationality respectively, representative of industry or commerce, appointed by the governors of the Bank of France and
of the Reichsbank respectively, if they so desire."
Aside from governors of central banks, no official
of a Government is entitled to be a director, and directors must
reside in a place from which it is possible to attend meetings
of the bank regularly*
The Bank for International Settlements is a limited
share company with its registered office at Basle, Switzerland,
established by the central banks of Belgium, France, Germany,
Great Britain, Italy and Japan and a financial institution of
the United States, incorporated by and receiving its charter
under the laws of Switzerland.
The bank is generally immune
from Swiss taxation, its statutes are sanctioned by Swiss law
and may not be amended except in accordance with their own
terms, irrespective of consistency with present or future Swiss
laws relating to corporations.
The bank is not subject to
Swiss restrictive legislation*




-5The distribution of the net profits is set forth in
the statutes in detail and shows an intimate connection with
the payment of reparations•
The statutes of the bank carefully limit its operations to the international financial field and indicate that
its normal activities in any country will be supplementary
rather than duplicative of the national banking organization,
including the central banks•
It may deal with almost anyone,
provided the central bank of that country does not object.
ce
tain things are, however, definitely prohibited such as:
(1)
requirements of
(2)
Governments"
(3|
4J
5)

Owning of real estate permanently beyond the
its own business
opening of current accounts "in the name of
Acceptance of bills of exchange
Making advances to Governments
Note issue

One of the most interesting features of the bank is
in the provisions respecting reserve funds.
3y Art. 26 of
the statutes, "the bank shall be administered with particular
regard to maintaining its liquidity," and its assets shall be
"appropriate to the maturity and character of its liabilities."
The Young Plan provided special gold reserve percentages for
specified types of deposits.
The statutes provide for no
gold reserve, but create two reserve funds.
The "legal reserve
fund" is to amount to 10$ of the paid-up capital and is to be
created from a percentage of the net profits. 4 "general reserve fund," which is "available for meeting any losses incurred
by the bank," is to be created by a sum subtracted at the fourth
point in the distribution of the net profits.
This general
reserve fund is stipulated by the statutes to be built up to
five times the paid-up capital and beyond that will be increased
by a very minor percentage of the net profits*
/
it is not withink the province of this paper to more
/than sketch the framework on wEicH TSe Ijank stands. The scope
/ of the banking department, the credit resources of the bank
and possibilities therein for inflation, the hope of a world
bank rate, and international Gold clearing are all subjects
for detailed technical study*
Our purpose here has been
merely to show the ambitious province of the bank and to point
out that it attempts for finance what the League of Nations
attempts for politics and that therein lies its chief weakness
inasmuch as finance and politics have today become inseparable
as the aftermath of the r7ar.
Time will demonstrate, we




-6believe, that, having been founded primarily to settle the Reparation problem, the bank must do more than it has so far been
able to achieve or else gradually fall into the discard.
The bank ended the year 1934 with funds totaling
654,384,181.18 Swiss francs at par (Swiss franc is 32.669 cents).
This is 3,000,000 Swiss francs less than on Nov. 30 but is
within 500,000 of the bank's position at the end of 1933. We
cannot but consider this a real achievement and a demonstration
that the bank is still to be reckoned with.
in the second annual report of the bank we have a
summary of that fiscal year which in itself serves as a testimony
to the adaptibility and resourcefulness of the management and
gives a clear picture of the difficult times through which it
had to pass.
"In the second month of the fiscal year, the collapse of the Oesterreichische Credit-Airstalt, with its ramifications throughout Central Europe, called for ifii&ediate aid
to the National Bank of Austria.
In the third month of the
fiscal year, there was announced the so-called 'Hoover moratorium", which materially changed the scope of the operations
of the Bank and the magnitude of the funds at its disposal in
its capacity as Trustee for international financial settlements
between governments.
In the same month banking difficulties
in Germany,precipitated by wholesale withdrawals of short-term
credit, and the pressure on the Hungarian Exchange, necessitated
the organization of central bank aid to the Reichsbank and to
the National Bank of Hungary.n
"In the fourth month the London International conference declared that ^excessive withdrawals of capital from
Germany had created an acute financial crisis* and invited the
bank to set up a Committee to inquire into the credit needs
of Germany.
In the fifth monthj^, this committee urged "most
earnestly upon all Governments concerned that they lose no time
in taking the necessary measures for bringing about such conditions as will allow financial operations to bring to Germany and thereby to the world - sorely needed assistance.w
"In the sixjnmonth the world was shocked by the sudden fall of sterling, which was almost immediately followed by
the suspension of the gold or gold exchange standard by six
other nations.
These occurrences still further shattered
what was left of confidence, and forthwith caused a strain
on reserves of nearly all central banks of world, including
T
the F . R. System.
he necessity for the employment by
central banks of their reserves in turn place a strain upon
the Bank for International Settlements, in its capacity as the
depositary for a substantial portion of the reserves of many
European banks of issue, but the large withdrawals in September



7were met without decreasing its high degree of liquidity. *
That after such a report in 1932 the bank could make
such a creditable report as it did in 1934 lends hope to its
ability to continue.
Mr. Fraserfs recent resignation as
president makes it likely that a member of the Gold Bloc will
be named head in March.
Since the World bank had as one
of its objectives the promotion of the gold standard, the
present American position is, to say the least, anomalous.
With president Roosevelt friendly to the world court there is
some hope a non-American president might facilitate the entry
of the Federal Reserve into the bank by diminishing the responsibility the step would involve.
The sterling, dollar, frano
tangle is still in the offing and a stabilization agreement
of some sort would possibly give a new lease on life to the
bank.
If, in conclusion, one were to express a hope it
would be that more information and publicity be disseminated
about an institution which is of universal interest if not,
as yet, of importance*




BIBLIOGRAPHY
Report of the Committee of Experts on Reparations»
London, His Majestyfs stationery Office, 1929.
International Agreement on the Evacuation of the
Rhineland Territory, the.Hague, August 30,1929.
London, His Majesty's Stationery Office, 1929#
Protocol with Annexes approved at the plenary Session of The Hague Conference, August 31, 1929#
London, His Majesty's Stationery Office, 1929#
Second Annual Report - Bank for international
Settlements, May 10, 1932.
New Yok Times, Jan. 20, 1935, Jan# 5il935,
The Bank for International settlements - Paul

Einzig*

p

.

V