In the summer of 1940 Walther Funk, the president of the Reichsbank and economics minister of Nazi Germany, set out his thoughts on Europe’s postwar future. For Funk, a former financial journalist, these were heady days. The nine-page, closely-typed memo, numbered H.S. 70, was entitled “Economic Reorganisation of Europe”, to take place after, of course, the coming German victory.
To many at that time, especially in Berlin, the triumph of Nazism was a given. Austria and Czechoslovakia had been absorbed into the Reich, Poland dismembered between Germany and the Soviet Union. Denmark, Norway, Holland and Belgium had all fallen. France had surrendered and the Luftwaffe was nightly pounding Britain.
Funk’s memo is a detailed outline of what needs to happen for Germany to control the postwar European economy, one designed to meet Germany’s economic and commercial interests. Some of his measures seem arcane, others more grandiose. Funk calls for a bonfire of regulations to ease free trade and exchange restrictions across a Europe-wide market. He argues that currency exchange rate fluctuations should be brought under control to stabilise cross-border trade.
A better system of clearing technniques should be developed for countries to settle their payments to each other. Funk stresses the need for Europe to be a profitable market for high-quality German exports. In the immediate postwar years the German unit of currency would be the most powerful currency on the continent. Eventually a united Europe would have a single currency.
Five years later, Funk was tried for war crimes. But he was also a prophet.
I found Walter Funk’s memo in the archives of the Bank for International Settlements (BIS) in Basel. The BIS is one of the world’s least known but most influential financial institutions. Founded in 1930 to channel German reparations for the First World War, the BIS has far outgrown its original mandate. Nowadays it acts as the bank for central banks, and also hosts regular meetings of central bankers, which are conducted in secret.
The bank was granted, and retains, extraordinary legal privileges, similar to those enjoyed by the United Nations or diplomatic embassies. Its managers and their papers are inviolable. Its assets are not subject to civil claims under Swiss law and can never be seized. The Swiss authorities have no jurisdiction over the BIS’s premises.
I first encountered the BIS while researching my book Hitler’s Secret Bankers, which exposed Swiss economic collaboration with the Nazis. That book led me to write Tower of Basel, the first investigative history of the BIS. Earlier this year, I finished a new, updated edition of Hitler’s Secret Bankers. I was particularly interested in Nazi postwar economic planning and the role the BIS played as a secret communications channel between the Nazis and the Allies. The bank is one of the most bizarre footnotes of the war. Throughout the conflict, American, British, French, German and officials of other nationalities all worked together to keep the BIS functioning and open. Paul Hechler, the German assistant general manager, even signed his correspondence with “Heil Hitler”.
The cabal ensured Nazis guilty of economic crimes received token punishments – a policy that shaped postwar Europe
London, Washington and Berlin all agreed: the BIS was vital for postwar planning. The more I delved into this, and examined the BIS’s behind-the-scenes role in postwar economic planning, the more I kept returning to Walther Funk’s memo. Those nine pages seemed less like the power-mad fantasies of a Nazi financier and more like an actual blueprint for Europe’s financial and economic infrastructure.
Funk’s memo was translated and a copy given to Thomas McKittrick, an American who served as the BIS’s president during the Second World War. The BIS described itself as neutral, but it actively aided the Third Reich. The BIS accepted looted Nazi gold and carried out foreign exchange deals with the Reichsbank. It legitimised the Nazi occupation of its member shareholders. The Nazi regimes in France, Belgium, Greece and the Netherlands, for example, were given control of those countries’ BIS shares, so that the Axis block held 67.4 per cent of the BIS’s voting stock. With McKittrick at the helm, and the Axis powers controlling its shares, it was no wonder that Emil Puhl, the vice-president of the Reichsbank and BIS director, described the BIS as “the only real foreign branch of the Reichsbank”.
So how had an American worked with Nazi colleagues to launder looted gold? Who was Thomas McKittrick — and who was protecting him and why? McKittrick was a lawyer, rather than a banker. After graduating from Harvard in 1911 he lived in Italy, then joined the US Army in 1918. He was seconded to British military intelligence and sent to Liverpool docks to check for spies. After the war he was despatched to France, where he worked with the occupation forces, before joining Lee, Higginson, a once prestigious Boston investment firm.
In 1921 he moved to the firm’s London office and put in charge of foreign operations. He loved London and became a kind of honorary Englishman, reading an ironed copy of The Times each morning with his breakfast. McKittrick worked on the Dawes Plan German External Loan of 1924, which extended credit to Germany to rebuild. John Foster Dulles, who later served as US Secretary of State, helped to arrange German loans through his powerful law firm, Sullivan and Cromwell.
McKittrick knew Dulles and was also friends with his brother Allen Dulles, who later served as the Bern station chief of the Office of Strategic Services, the forerunner of the CIA, before becoming director of the CIA. Allen Dulles was friends with another powerful lawyer, John McCloy, who represented I.G. Farben’s American subsidiary in the US. John Foster Dulles and McCloy were also close to Jean Monnet, a French financier and diplomat who later became one of the founding fathers of the European Union.
These details are important because after 1945 Allen Dulles and John McCloy in particular would ensure that Nazi war criminals, especially those guilty of financial or economic crimes, such as powerful bankers and the directors of I.G. Farben, received only token punishments or none at all. Dulles and McCloy would ensure the continuity of economic and financial power between prewar and postwar Germany — a continuity rooted in their prewar commercial and business interests. The policies and their decisions of this cabal shaped postwar Germany and Europe, and thus the world in which we live today. The histories of all these men show that while countries go to war, and millions lose their lives, finance and capital will keep channels across the front lines, while planning a future that will safeguard their interests and profits.
There are few better illustrations of the depth of this cynicism than the relationship between McKittrick and Emil Puhl. McKittrick was especially close to the Nazi banker, whom he described as his “friend”. Puhl was tightly bound to the financial and economic wing of the SS that managed its business interests. He was a frequent visitor to Basel and often met with McKittrick. McKittrick passed political and economic intelligence to Puhl in full knowledge that the German would immediately pass such valuable information to his superiors and colleagues.
For example, the Lend Lease act, passed in March 1941, allowed the US to supply its allies with food, oil, arms, ammunition and other war material. The act effectively ended American neutrality and caused great alarm in Berlin. More information was needed and Puhl was the man to get it. In Autumn 1941 McKittrick gladly gave Puhl a brief tutorial on the Lend Lease act. McKittrick later recalled the conversation.
McKittrick had just passed high-level strategic intelligence to a high-ranking Nazi official
Puhl asked, “What does this Lend Lease thing mean? We don’t understand it. Is there anything you would be willing to tell me about it?” McKittrick replied: “Yes, I’ll give you this. It’s my own idea but there’s no reason I shouldn’t tell it to you. I think that if America is going to be in the war, something will happen to get us in. Just the way it did in the first war. And what is happening is that we’re getting our industrial organisation into shape for our entry into the war.” I’ve never seen a man’s face drop more than his did. I thought he was going to faint or something. He said, “My God, if you’re right, we’ve lost the war.”
McKittrick had just passed high-level strategic intelligence to a high-ranking Nazi official. At this time the US was still technically neutral, although it was clear it was preparing to enter the war. In December 1941 Germany declared war on the US. For Puhl, McKittrick was now a citizen of an enemy nation. Now there were also questions in Berlin about the BIS’s American president, the Germans working there, and the BIS’s relationship with the Reichsbank. Puhl ardently defended the BIS. In September 1942 Puhl wrote of McKittrick, “Neither his personality nor his manner of conducting business have cause for any concern whatsoever.”
McKittrick also passed intelligence to the Allies, through his old friend Allen Dulles. McKittrick had his own OSS codename: 644. The two men often met Leland Harrison, the US ambassador to Switzerland.
McKittrick explained how the Germans were financing their intelligence and sabotage organisations in South America. “The Allies,” he recalled in a postwar interview, “were very anxious to stop this, but no way was found to do it without risking a loss of goodwill among the neutral nations which would be too serious to contemplate.” The Portuguese connection was key. Portugal supplied tungsten, a vital war material. The country was neutral but the escudo was a hard currency. How could the Nazis pay the Portuguese? It worked like this, explained McKittrick. The Reichsbank sold gold to the Bank of Portugal. The gold was then delivered to the Swiss National Bank where it was credited to the Portuguese account. The Bank of Portugal credited the accounts of German firms in Lisbon, who then purchased the tungsten.
Dulles and the OSS greatly valued McKittrick’s connection with Puhl, OSS documents reveal. Puhl had high-level intelligence and was considered a reliable source. OSS telegram 3589-90, sent on 25 May, 1944, reported that the Reichsbank had already started to make plans for postwar reconstruction:
Not so long ago our 644 [McKittrick] had two lengthy conversations with Puhl of the Reichsbank. The latter was extremely depressed, not so much by the idea of Nazi defeat but by the situation Germany will have to contend with later. The Reichsbank has been engaged in work on plans for the reconstruction and evidently they are unable to see where an effective beginning can be made.
Puhl was also in deep discussions with the Swedish economist Per Jacobsson, future leader of the International Monetary Fund. During the war Jacobsson was a senior BIS official. The two men lunched together in December 1942, at Puhl’s office in the Reichsbank, not far from the vaults that were piled high with the looted wealth of European Jewry.
Jacobsson believed, correctly, that Puhl was the BIS’s most important ally in Nazi Germany. Without his support the BIS would collapse. Jacobsson wrote in his diary: “I know full well to what extent the future of the BIS depends on Puhl’s possibilities of holding the fort in Berlin.”
Hjalmar Schacht, Funk’s predecessor at the Reichsbank, supposedly described him as a “harmless homosexual and alcoholic”. Funk was indeed gay and enjoyed a dissolute lifestyle. But he was anything but harmless. Indeed his importance to the Third Reich helped keep him out of the concentration camps where less well-connected gay men were tortured and murdered en masse. Building on Schacht’s foundations, Funk sat at the apex of the Nazi plundering of Europe.
Much of the stolen wealth of nations, of their citizens and of murdered Jews was channelled through the Reichsbank. Funk was an economic war criminal of the first order, one of Simon Wiesenthal’s “desk-murderers”. He liked to take guests on a tour of the Reichsbank vaults, to inspect the piles of valuables looted from Holocaust victims.
In his 1940 memo Funk asks how Germany would run Europe after the Nazi victory. The postwar “European large-unit economy”, he writes, “must be an organic growth”, resulting from “close economic collaboration between Germany and European countries”. The most important currency of postwar Europe would of course be the Reichsmark. “In this connection it is obvious that the Reichsmark will have a dominating position. The enormous strengthening of the power of the Greater German Reich, will, as a natural consequence, bring with it a strengthening of the Reichsmark.”
Eventually, the aim would be a single currency across Europe. But before that, conversion rates would have to be tightly controlled to avoid wild fluctuations and disruptions. Only then could currency union be achieved. “There can, of course, be no question of getting rid of foreign exchange controls and compulsory clearing at one blow. The problem is not one of free foreign exchange or European monetary union, but, in the first place, of a further development of clearing techniques for the purpose of ensuring a smooth course for payments within the countries participating in the clearing.”
The first step then was a European structure for central banks to clear their debts and payments to each other. Once exchange rates had been stabilised, foreign exchange restrictions could be abolished, initially for travellers and “petty frontier traffic”, then for import trade. “Meticulous surveillance and all the regulations which weigh down on the individual business enterprise with a mass of forms will no longer be necessary.” Funk’s more immediate objective was to ensure that postwar Europe’s economies should be designed first and foremost to meet Germany’s needs, primarily to act as an export market. That would be the central plank of the postwar European economy. The deciding factor would be the quality of German exports, “and in this respect we really need have no anxiety”. European countries would base their economies, and plan their production as satellites of the Germany economy, to be “an outlet market” offering “security for many years”.
The postwar continent would stand firm in its defence of Germany and German economic interests, concluded Funk. “This united Europe will not accept the imposition of conditions of a political or economic nature from any extra-European group.” This is not to claim that the European Union is the Fourth Reich. The EU’s founding political principles are freedom, human rights, democracy and the rule of law, the antithesis of Nazi Germany. Its member states are open civil societies, albeit to a varying degree. After 1989 membership of the EU helped to stabilise the post-communist countries and lock them into a democratic framework.
Nowadays much of the discussion around the future of the EU revolves around the political aspect, and whether or not it should evolve into a continent-wide federal state. But the EU’s founding fathers, like Funk, were focused on postwar trade and commerce. The priority was to remove barriers, customs regulations and tariffs. Only then could it evolve into a single market across the continent for all goods, labour, capital and services and then perhaps become a federal European state. But that would take many years.
Funk even anticipated the economic disequilibrium between different members of a single currency zone, such as Greece and Germany. While national economies remained so different, monetary union must remain a longer-term aim, he wrote. “But a monetary union calls for a gradually assimilated standard of living and, even in the future, the standard cannot be the same in all the countries participating in the European clearing and nor should it be the same, for the economic and social prerequisites are lacking, and in any case, the organisation of European economy on this basis in the near future would be an absurd undertaking.”
After the war, Funk was tried at Nuremberg. In October 1946 he was found guilty of war crimes and crimes against humanity and sentenced to life imprisonment. But while Funk was incarcerated, much of his programme for Europe was steadily being implemented. The BIS, the bank on whose board he had served, played a central role in these decades. It was at the BIS that the bankers and technocrats met to plan the new financial institutions and mechanisms that would ultimately lead to the removal of national currencies and monetary sovereignty.
Such decisions, taken behind the scenes by a cabal of central bankers and privileged officials, were presented as apolitical technical steps, technocratic measures too obscure for the general public to bother themselves with. But there are few things more political than the stealthy removal of national sovereignty.
The European Payments Union, a clearing system for countries to manage their trading balances, was established in 1950, with the BIS as its agent. Two years later six countries, including West Germany, France and Italy, founded the European Coal and Steel Community, Europe’s first supranational organisation, which would eventually evolve into today’s European Union. The BIS oversaw the loans issued by the ECSC which gave the fledgling group credibility on international markets.
The ECSC’s member states surrendered control of these industries to an aptly named “High Authority”, based in Luxembourg. Its first president was Jean Monnet, the old friend of John Foster Dulles and John McCloy. Behind all the fine talk about a peaceful future Europe were more hard-headed calculations: to ensure the continuing dominance of the German and steel cartels and the power of men such as Alfried Krupp, whose industrial empire had worked tens of thousands of slave labourers to death. Krupp had been sentenced to 12 years at Nuremberg, but was pardoned by McCloy in 1951. McCloy also restored Krupp’s confiscated property. McCloy also pardoned the leaders of I.G. Farben, including Hermann Schmitz, the company CEO, himself a former director of the BIS.
As for Walter Funk, he was released from prison in May 1957, soon after the six founder members of the ECSC signed the Treaty of Rome, which established a common market and customs union. The treaty also called for closer coordination of monetary policy between member states. That work was carried out by the Committee of Governors of EEC member states central banks, created in 1964. The Governors’ Committee was hosted by the BIS, which also provided its secretariat. The Committee managed the first limits on exchange rate fluctuations within European currencies, a mechanism known as the “Snake in the Tunnel”, a necessary prelude to full currency union.
The Committee of Governors sat for almost 30 years, quietly planning for a single currency, until 1993 when it was replaced by the European Monetary Institute, which relocated to Frankfurt. The EMI’s founding president was Hungarian economist Alexandre Lamfalussy, the former general manager of the BIS. In 1997, the EMI became the European Central Bank and two years later the euro was launched. Of the 19 eurozone central banks that contribute to the ECB’s capital, the Bundesbank, successor to Funk’s Reichsbank, was and remains the most powerful and influential. Finally, Funk’s “European large-unit economy” had come to life.
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