The Finance Curse. Nicholas Shaxson
not just as a place to stash their gold in the event of banking catastrophes at home but also as a place to continue to do profitable business with the enemy. Even more important, European governments at war needed to raise taxes to pay for their armies, and the elites looked to Swiss bankers to hide their wealth and shelter it from those war taxes: let the lesser classes send their sons to die and pay for the costs of fighting and subsequent reconstruction. The first real flows of offshore wealth came during the Thirty Years’ War of 1618–48, and this was followed by larger rivers of money during the Franco-Prussian War of 1870–71. Then World War I came and brought a flood. World War II brought great dirty tides of it, helped by the fact that in 1934 Switzerland had codified its long traditions of banking secrecy into an ironclad law, with dire penalties for transgression.
Swiss bankers love to tell a story that their banking secrecy law was put in place to protect Jewish money from the Nazis. In fact, pretty much the opposite was true. During the war the Swiss banking establishment protected Nazi loot, and when Jewish survivors tried to reclaim their money after Germany surrendered, the Swiss stonewalled them for decades. It was only in the 1990s that the US government finally started putting pressure on them, and they began to disgorge at least some of that stolen money. The story about Swiss banking secrecy being put in place to protect Jewish money was first created by a bulletin of the Schweizerisches Kreditanstalt (now Credit Suisse) in 1966, and it was eagerly embraced and trumpeted by Swiss officials and bankers as a convenient myth to wrap around themselves to justify helping the world’s dictators, cronies, and crooks pursue their dark sports with impunity.9
In early 1945, as the war wound down, the Swiss signed a new agreement with the Nazis to accept three more tons of looted gold, some from melted-down dental fillings and wedding rings from Jews and other victims of Nazi concentration camps. The US government heaped pressure on Switzerland to open up the books, and the Swiss promised to cough up information on Nazi gold, but it was a ruse. Allied lawyers soon spotted loopholes and evasions, but Swiss officials knew they had a powerful friend among the Allied forces: the British banking establishment. So Swiss officials began musing publicly that amending Swiss banking secrecy laws would reveal British secrets too. British officials began backpedaling. A crackdown, the Brits reckoned, might risk disclosure of certain numbered Swiss accounts that they didn’t want opened up. Furious correspondence went back and forth between the British treasury, the prime minister’s office, and diplomatic offices. “We need to go slow on this,” one official said. “We don’t want to be forced to reveal Swiss banking secrets.” An urgent telegram came flying back: “You are not (repeat not) doing anything that would lead to requests for disclosure of information from British banks.” American diplomats, many fresh from the horrors of confronting the Nazi war machine, were flabbergasted.10
Swiss banking laws were not only about secrecy of bank deposits and other assets, but also about a deliberate lack of official oversight and regulation of all kinds. So when the Euromarkets first appeared in London, it is hardly surprising that the Swiss were among the most enthusiastic followers. A Bank of England memo in those early days explained the Euromarkets’ attractions: freedom from local supervisory controls such as banking regulations to restrain risk-taking; freedom from foreign exchange controls; low taxes for the players and for their customers; deep secrecy; and “very liberal company legislation” to let company directors get away with operating outside standard democratic rules. While the Euromarkets were mostly disconnected from mainstream economies, the unrestricted interconnections among the emerging centers were intense, effectively creating a single rootless nowhere zone of finance. (Think of it as being a bit like cloud banking.) It was an unaccountable, profitable, seamless global financial adventure playground, overseen by nobody—and growing like a virus on speed.11
This rules-free paradise was ideal for tax cheats, scammers, and criminals. But there was another big attraction. The banking system in any country constantly creates new money when banks make new loans to customers. As the economist J. K. Galbraith put it, “The process by which money is created is so simple that the mind is repelled.” To stop banks running amok, governments put brakes on money creation by enforcing reserve requirements, which restrict how much they can lend out in relation to their deposits. The Euromarkets had none of these brakes. Eurodollar lending, a Bank of England memo noted, “is not controlled, as regard amount, nature or tenor: reliance is placed on the commercial prudence of the lenders.” Prudent bankers won’t indulge in an orgy of reckless lending, whatever the official constraints are, but the British were assuming that everyone operating in the Euromarkets was prudent.
US authorities soon began to notice these new Atlantic ripples, and in 1961, two years after US banks joined the party in London, US officials warned the Bank of England that the market posed a “danger to stability.” Benjamin J. Cohen, then at the Federal Reserve Bank of New York, remembers being asked to look into Eurodollars in 1962. “It was in the manner of ‘There’s this development over in London we want to understand better,’” Cohen recalled. “‘Go over there and find out about it.’” It was quickly obvious that this interconnected system of financial centers was already amplifying and propagating financial shocks, sluicing rising tides of financial capital back and forth across the world. Worried US officials began calling the markets “disruptive forces” and a dangerous “transnational reservoir” of rootless money. By 1963 messages were flying between Washington and New York as higher interest rates in the Euromarkets drew dollars out of the United States to London and beyond. A memo from the time lamented “the undercutting of New York as a financial center” and slammed the Euromarkets for generating the same kinds of risks that caused the crash of 1929. The Federal Reserve Bank of New York and the US Treasury complained that the markets were making “the pursuit of an independent monetary policy in any one country far more difficult” and aggravating a “world payments disequilibrium.” Robert Roosa, a top US Treasury official, told US bankers using the markets that they should “ask themselves whether they are serving the national interest.” But others in the US administration, more in favour of Wall Street interests, were gung ho for the new market. Hendrik Houthakker, a junior staff member of the Council of Economic Advisers who wanted to alert President Kennedy to the market, was told “no, we don’t want to draw attention to it.” As one analysis of the markets put it, it was “almost as if [US authorities] wanted to create a financial centre outside their own shore.”12
At the start of the 1960s, Euromarket deposits already amounted to $1 billion, the equivalent of perhaps $50 billion in today’s money. Between 1960 and 1970 the dollar sums circulating in these markets multiplied tenfold.13 A top Bank of England official captured the spirit of the City in a comment to a financier setting up an Italian bank in London in that decade: the banker could do whatever he wanted, as long as he didn’t “do it in the streets and frighten the horses.” In the late 1970s Roosa warned of speculative global capital flows moving around the globe “in magnitudes much larger than anything experienced in the past, massive movements.” Then, from 1970 to 1980, volumes expanded tenfold again.14
The Vietnam War, which heated up in the early 1970s, added to the flames, as the United States was sending more dollars overseas for military spending than it was receiving back in foreign earnings. The result was a growing overhang of dollars in the global system, feeding the Euromarkets further. The twin oil price shocks of the 1970s accelerated the flows, generating giant new surges of petrodollars—more accurately, petro-Eurodollars—which the large banks recycled out of the oil-producing countries via the giant turntable in the City of London back into disastrous, crime-soaked cycles of Third World lending. Those loans would often be looted by national elites through bogus development schemes or outright theft and sent back for safekeeping into the Euromarkets, where nobody would ask questions about the money’s origins, and then re-lent again back into those looted countries. With each turn of this whirligig, the bankers took a profitable cut.
When Mexico’s Harvard-educated president Miguel de la Madrid took power in 1982, he lectured his fellow citizens about “belt-tightening” while starting to accumulate tens of millions in his own foreign bank accounts—$162 million in 1983 alone, according to US intelligence reports. Most of this was first obtained by squirrelling away the proceeds from official Mexican loans via the Euromarkets, and pretty much all of it was then stashed offshore via the Euromarkets