The publication last week of the Bank of England’s internal ‘war history’ offers a fascinating insight into the workings and ‘mind set’ of one of the key institutions affecting government policy-making between 1939 and 1945. At 1175 pages, the History, can hardly be read in a single sitting, so it is not surprising that attention has focused on what the Guardian has dubbed the Bank’s ‘most shameful episode’; its involvement with the Basle based Bank of International Settlements (BIS) in assisting Berlin’s disposal of looted Czech gold in March 1939. The episode occurred five days after German troops entered Prague, when the Reichsbank co-opted the BIS to help it secure control over Czech overseas assets. The Bank of England’s part in the drama amounted to agreeing to a BIS request to transfer £5.6m of gold held in the BIS’ ‘Czech’ account in London to that known to be earmarked for the Reichsbank.
The Bank’s behaviour triggered a storm in the House of Commons and, in the eyes of the government’s critics, quickly came to epitomise the moral bankruptcy of Neville Chamberlain’s policy of appeasement. While the Bank’s part in the Czech gold controversy has been known for some time, the History sheds fresh light on the views of the Bank’s senior staff; its governor, Sir Montagu Norman, and vice-chairman, Sir Otto Niemeyer. In particular, it reveals that the Bank was far from innocent in the affair. Norman was perfectly clear about what the BIS’s instructions entailed and knowingly connived in the sale of plundered gold.
To understand the episode, and the Bank of England’s part in it, we need to step back and consider the wider context. This is something I did in an article in 2009, ‘Loot, gold and tradition in the United Kingdom’s financial warfare strategy, 1939-1945‘, and more generally in my book Britain, Switzerland and the Second World War, where I suggested that British financial measures against Germany were undermined by Britain’s excessive attachment to established orthodoxies and policies, despite the mounting evidence that pointed to both the scale and significance of Germany’s sale of looted gold.
What is striking about the Bank’s conduct during the Czech affair is its insistence on defending the BIS’s autonomy rather than halting German plundering. Norman remained resolutely opposed to attempts by the British Treasury and French National Bank to force the BIS to suspend further transactions on the Czech account. ‘Questions by certain members of the House of Commons do not change my views on, nor my attitude towards, the Bank of International Settlements’, he bluntly informed the Chancellor in early June 1939. Even after the outbreak of war, Norman held to the view that London should leave the BIS alone. It took, in the understated words of the History, a ‘long controversial meeting’ with the Chancellor of the Exchequer on 10 October 1939 for him to agree to have the BIS rein in its activities on Czech gold. Thereafter, the Bank’s fondness for the BIS continued to colour its judgement. Although the BIS’s ‘contribution’ to German gold operations over the course of the war was relatively slight, its activities were not as innocuous as the History implies. Basle frequently justified transferring gold ‘from places which were relatively unsafe to others which were relatively safe’, but much of this trade entailed moving Reichsbank gold to the Iberian peninsula, where it was needed to cover Berlin’s trade deficit, exchange transactions and espionage activities, in and outside Europe.
My research findings suggest that Norman’s outlook was dominated by a desire to uphold the fabric of international finance; a system which he had been personally instrumental in creating. Although the BIS had been initially set up in 1930 to oversee German reparation payments, it soon evolved into one of the primary vehicles of central bank cooperation over fiscal and monetary matters. Norman’s affection for the institution can be seen from the fact that by 1939, the sixty-eight year old took five days out of his busy schedule to attend the BIS’s monthly board meetings.
Norman’s fondness for central bank action was not unique. In mid-1942, Sir Otto Niemeyer admitted to feeling that while ‘the present tendencies both in Whitehall and Washington are in the direction of Government action to the exclusion of Central Banks., … when it comes down to practice it will be found, as it was found 25 years ago, that Central Bank co-operation will be essential to get things done’. Such views were not without their effect, and by the summer of 1944, opinions in Whitehall had clearly softened. News that Washington was intent on calling for the BIS’s early dissolution prompted the Treasury to hammer its colours to the mast. It was, remarked one official, ‘the height of intellectual modesty to think that the only way of not being outwitted after the war by the defeated Germans is to cut our connection with the BIS now with all the immediate loss to the war effort that that entails’. That the BIS survived to take its place in the post-war financial structure, had much to do with British sponsorship of its interests during the final months of the war.
Finally, a full reading of the extant papers suggests that the Bank staff, as much as their counterparts in the Treasury, were unwitting heirs to a tradition of British war fighting that ran counter to the kind of vigorous action proposed by the French in 1939/40, or the Americans in 1944. Ever since the Napoleonic wars, finance had been acknowledged as one of the Britain’s foremost strategic assets. But the ‘fifth arm’, as it became known, was principally viewed in defensive, rather than offensive, terms. Thus, in the autumn of 1938, when serious war-planning in Whitehall belatedly began, officials instinctively assumed that Germany’s financial position could best be weakened by protecting Britain’s financial resources, not indulging in offensive measures. ‘We do not consider that any regulations or restrictions of a general character are required for the purposes of exercising financial pressure on Germany’, noted a Committee of Imperial Defence paper, ‘over and above those which will be required to conserve our own financial resources’. Britain therefore entered the war wedded to a financial policy that privileged the defence of its own interests above attacking those of its enemies.
This policy ensured that Britain’s priority, both in the months leading up to the 3 September 1939 and in the curious ‘twilight war’ that followed, lay in shoring up London’s status as the centre of global finance; leaving sterling as a convertible currency and allowing foreigners to access their deposits and securities in the United Kingdom for as long as Britain’s finances could bear. It was ultimately this wider goal that Norman had in mind in ‘sacrificing’ Czech gold reserves to the Reichsbank in 1939, and explains why he fought so tenaciously to hold London to its international obligations and convince his febrile colleagues that Hitler could best be beaten by a policy of ‘business as usual’