The BIS was established in the context of the Young Plan (1930), which dealt with the issue of the reparation payments imposed on Germany by the Treaty of Versailles following World War I. The new bank was to take over the functions previously performed by the Agent General for Reparations in Berlin: collection, administration and distribution of the annuities payable as reparations. The Bank's name is derived from this original role. The BIS was also created to act as a trustee for the Dawes and Young Loans (international loans issued to finance reparations) and to promote central bank cooperation in general.
The bank’s key architects were Montagu Norman, who was the governor of the Bank of England, and Hjalmar Schacht, the president of the Reichsbank who described the BIS as “my” bank. The BIS’s founding members were the central banks of Britain, France, Germany, Italy, Belgium, and a consortium of Japanese banks. Shares were also offered to the Federal Reserve, but the United States, suspicious of anything that might infringe on its national sovereignty, refused its allocation. Instead a consortium of commercial banks took up the shares: J.P. Morgan, the First National Bank of New York, and the First National Bank of Chicago.
In April 1930, Gates White McGarrah (1863-1940) would become the first president and chairman of the board of the BIS. He was nominated to represent the American banking consortium. He was given a yearly salary of USD $50,000. Leon Fraser, deputy chairman and Pierre Quesnay, general manager, would receive USD $40,000 and USD $30,000.
The inability of Germany to continue reparation payments, in concert with the global disarray resulting from the Great Depression, put the future of the BIS’ continued existence into question. In fact, given the original stated purpose of the BIS to manage Germany’s WWI reparations payments “the BIS would have disintegrated in 1932 when the Lausanne Agreement brought an end to war reparations”. However, Article 3 in the BIS’ statue stated that the function of overseeing reparations was secondary to providing a forum for central bank cooperation. Some forward-thinking BIS founder had foreseen the eventual cessation of reparations payments and provided other and seemingly more defendable justification for the BIS’ continued existence. At this point the BIS began to take on the form of a central bank for central banks.
The real purpose of the BIS was detailed in its statutes: to “promote the cooperation of central banks and to provide additional facilities for international financial operations.” It was the culmination of the central bankers’ decades-old dream, to have their own bank—powerful, independent, and free from interfering politicians and nosy reporters. Most felicitous of all, the BIS was self-financing and would be in perpetuity. Its clients were its own founders and shareholders— the central banks. During the 1930s, the BIS was the central meeting place for a cabal of central bankers, dominated by Norman and Schacht. This group helped rebuild Germany. The New York Times described Schacht, widely acknowledged as the genius behind the resurgent German economy, as “The Iron-Willed Pilot of Nazi Finance.” During the war, the BIS became a de-facto arm of the Reichsbank, accepting looted Nazi gold and carrying out foreign exchange deals for Nazi Germany.
On the front the BIS shows a certain kind of transparency, The bank’s archives are open and researchers may consult most documents that are more than thirty years old. The BIS archivists are indeed cordial, helpful, and professional. The bank’s website includes all its annual reports, which are downloadable, as well as numerous policy papers produced by the bank’s highly regarded research department.
The BIS publishes detailed accounts of the securities and derivatives markets, and international banking statistics. But these are largely compilations and analyses of information already in the public domain. The details of the bank’s own core activities, including much of its banking operations for its customers, central banks, and international organizations, remain secret.
The BIS is not subject to Swiss laws or taxes and authorities may only enter their offices with permission. Some six hundred staff from more than fifty countries do not pay income taxes and their bags are free from searches.