An International Bank Born of Reparations Negotiations
The establishment of the Bank for International Settlements was linked to the reorganization of German reparations after the First World War. In the late 1920s, creditor countries hoped to turn future receipts into funds available sooner; bankers saw opportunities in issuing and managing bonds; and Germany was concerned with whether funds would flow back into its economy. Bank of England governor Montagu Norman and others also hoped to create a lasting venue for cooperation among central banks.
On January 20, 1930, Germany, Belgium, France, Britain, Italy, and Japan signed a convention with Switzerland at The Hague, providing for Switzerland to grant the bank a legally effective constituent charter. The convention entered into force on February 27 following Swiss ratification, and the bank began business in Basel on May 17. These dates mark international legal arrangements and actual operations respectively, and should not be collapsed into a single act of establishment.
Separating Capital Subscription from Voting Rights
The original statutes organized the bank as a company limited by shares, with authorized capital of 500 million Swiss gold francs divided into 200,000 shares. The gold franc was measured by a specified gold value. Only one-quarter of each share’s value had to be paid on subscription, with the board deciding when to call the remainder. Authorized, issued, and paid-up capital were therefore distinct concepts.
The founding documents set out participation by European and Japanese central banks and an American banking group. In the first actual subscriptions, Japan participated through a group led by the Industrial Bank of Japan; the American group included Morgan and the First National Banks of New York and Chicago. The statutes allowed subscribing institutions to offer shares to the public, but share ownership did not itself confer voting rights at general meetings. Voting and representation were exercised by the relevant central banks or institutions designated under the statutes.
The Board and the Limits of Operations
The original statutes vested management in the board and separately specified how ex officio directors, appointed representatives, and co-opted directors were selected. The board elected a chairman, who also served as the bank’s president. A general manager appointed by the board handled operations and the permanent staff. Gates McGarrah was the first president. This design distinguished periodic deliberation, executive leadership, and day-to-day business.
Cooperation did not require other central banks to surrender their authority over monetary policy. Article 20 required the bank, before operating in a particular market or currency, to give the central bank concerned an opportunity to object. An operation could not proceed if that bank objected. Article 25 also prohibited activities including the issue of bearer banknotes payable on demand and advances to governments. The international bank’s powers had explicit limits.
The First Trustee Assignments
Articles 3 and 4 of the statutes paired the promotion of central-bank cooperation with international financial settlement, specifically requiring the bank to receive, manage, and distribute German annuities under the reparations plan. Acting as trustee meant handling designated funds according to agreements, rather than independently deciding how much reparations countries owed or replacing negotiations among governments.
The first annual report records that, on May 17, 1930, the former Agent General for Reparation Payments transferred the undistributed balance to the bank, which immediately assumed responsibility for subsequent payments. It also undertook trustee or agency work relating to the German international loans of 1924 and 1930 and the Austrian international loan of 1930. Receiving, holding, and distributing funds and servicing bonds became concrete tasks after it opened.
From Book Transfers to Gold Transfers
Article 24 allowed the bank to conclude special agreements with central banks to hold earmarked gold for them and establish accounts for converting assets in different currencies. This provided an institutional basis for centralized cross-border settlement: cooperation could take the practical form of account entries and asset arrangements, rather than only joint declarations at meetings.
In November 1930, heads of foreign-exchange departments at banks of issue discussed the gold standard and reserve management. The first annual report explains that the bank collected information on gold held in different cities and tried to match transfers in opposite directions to reduce physical shipments. Cooper’s study also notes that early meetings produced technical cooperation on gold-bar specifications, information about storage locations, and foreign-exchange settlement. Such everyday coordination was practical work that could proceed before agreement on macroeconomic policy.
The Limits of Cooperation during the Great Depression
The new institution soon felt the impact of the Great Depression. In 1931, the BIS participated in short-term stabilization lending to Austria, Germany, Hungary, and other countries, but the loans did not prevent financial crisis or the disintegration of the gold-standard system. Cooper emphasizes that political delays over reparations and differences in national policies constrained the effectiveness of joint assistance.
Borio and Toniolo argue that the BIS helped gather information, organize consultations, and coordinate loans, but was too small to alter the overall international credit situation. Nor could a technical institution operate independently of relations among states. After reparations were suspended, the bank gradually relied more on services to central banks, research, and exchanges of information. Its foundation turned temporary contacts into a permanent mechanism; whether that mechanism could respond effectively to crises still depended on resources, policies, and political conditions.