moneyland goldfinger

PIRATES

In the years after the First World War, the world worked like it does now, although in a less technologically sophisticated way. Money flowed between countries pretty much however its owners wished, destabilising their currencies and economies in pursuit of profit. Many of the wealthy got wealthier even while economies fell apart: which is why the 1930s gave us both Tender is the Night and The Grapes of Wrath, Vile Bodies and The Road to Wigan Pier. The chaos ultimately led to the election of extremist governments in Germany and elsewhere, to competitive devaluations and beggar-my-neighbour tariffs, to trade wars, to diplomatic repercussions, to border clashes, to conflict, and thence to the horrors of the Second World War, with its tens of millions of dead.
The Allies wanted to prevent this ever happening again. So, at a meeting at the Bretton Woods resort in New Hampshire in 1944, they negotiated the details of an economic architecture that would – in perpetuity – stop uncontrolled money flows. This, they hoped, would keep governments from using trade as a weapon to bully neighbours, and block bankers from making a profit by undermining democracy. This enforced stability should stop the march to any new war before it began and create a new system of peace and prosperity. They looked back on the years before the First World War, at the way trade had flowed freely and the global order (at least for rich Western countries) had been stable. That system had been underpinned by gold. The value of a country’s currency was determined by the size of its gold reserves, which rose and fell as trade expanded or contracted, and therefore acted as an automatic accelerant or dampener on money supply and thus prices, keeping everything in balance.
The old Gold Standard could not be resurrected, however. By 1944, almost all the gold in the world belonged to the United States. The delegates would have to think of something else. Britain’s representative, John Maynard Keynes, argued for a new international currency against which all other currencies would be pegged. His US counterpart, Harry Dexter White, was unconvinced. He could not countenance the dollar losing its hard-won position as the world’s dominant monetary force. Since the US was the only solvent country at the meeting, he got his way: all currencies would be pegged to the dollar, which would in turn be pegged to gold. An ounce of gold would cost $35.
That was the fundamental underpinning of the system. The US Treasury pledged that, if a foreign government turned up with $35, it could always buy an ounce of gold. The United States was promising to keep everyone supplied with enough dollars to fund international trade, as well as to maintain sufficient gold reserves for those dollars to be inherently valuable. You didn’t need precious metals, if the dollar was as good as gold.
The other countries made commitments, too. If they wished to change the value of their currency by a significant amount, they promised that they would only do so with the approval of a new body called the International Monetary Fund. This would stop dictators manipulating currencies to ruin their neighbours and stoke conflict. To prevent speculators trying to attack this system of fixed currencies, cross-border money flows were severely constrained. Money could move overseas, but only in the form of long-term investments, not to speculate short term against currencies or bonds.
To understand how the system worked, imagine an oil tanker, a ship full of oil. If a tanker has just one huge tank, then the oil that fills it can slosh backwards and forwards in ever greater waves, until it destabilises the vessel, which overturns and sinks. That was the system after the First World War, when the waves of speculative money capsized democracy. At Bretton Woods, the delegates designed a new kind of ship, where the oil was divided up between many smaller tanks, one for each country. The ship held the same volume of oil, but in a different way. The liquid could slosh back and forth within its little compartments, but would not be able to achieve enough momentum to damage the integrity of the entire vessel. And if one compartment sprang a leak, then it wouldn’t threaten the whole cargo. It was possible to move oil from one compartment to another but (at the risk of pushing this metaphor to the point of absurdity) you needed permission from the captain, and the money had to go through the ship’s official plumbing.
This is hard to imagine for anyone who has only experienced the world since the 1980s, because the system now is so different. Money flows ceaselessly between countries, nosing out investment opportunities in China, or Brazil, or Russia, or wherever. If a currency is overvalued, investors sense the weakness and gang up on it like sharks around a sickly whale. In times of global crisis, the money retreats into the safety of gold or US government bonds. In boom times, it pumps up share prices elsewhere, in its restless quest for a good return. These waves of liquid capital have such power that they can wash away all but the strongest governments. The prolonged speculative attacks on the euro, or on the rouble, or the pound, which have been such a feature of the last few decades, would have been impossible under the Bretton Woods system, which was specifically designed to stop them happening.
Strangely, one of the best evocations of this long-gone system is the 1959 James Bond thriller Goldfinger, written by Ian Fleming. The film of the same name has a slightly different plot, but they both feature a Soviet agent trying to undermine the West’s financial system by interfering with its gold reserves. In the book, ‘M’ – the boss of the British secret service – sends Bond to the Bank of England, where he finds a Colonel Smithers (‘Colonel Smithers looked exactly like someone who would be called Colonel Smithers’) whose job it is to watch for any leakage of gold out of Britain.
‘Gold and currencies backed by gold are the foundations of our international credit,’ Smithers explains to 007. ‘We can only tell what the true strength of the pound is, and other countries can only tell it, by knowing the true amount of valuta we have behind our currency.’ The trouble is, the colonel continues, that the Bank is only prepared to pay a thousand pounds for a gold bar, which is the equivalent of the $35 per ounce price paid in America, whereas the same gold is worth 70 per cent more in India, where there is a high demand for gold jewellery. It is thus highly profitable to smuggle gold out of the country and sell it overseas.
The villain Auric Goldfinger’s cunning scheme is to own pawnbrokers all over Britain, buy up gold jewellery and trinkets from ordinary Brits in need of a bit of cash, then melt them down into plates, attach the plates to his Rolls-Royce, drive them to Switzerland, reprocess them and fly them to India. By doing so, Goldfinger will not only undermine the British currency and economy, but also earn profits he could use to fund communists and other miscreants. Fully one-sixth of the Bank of England’s 3,000 employees are engaged in trying to stop this kind of scam from happening, Smithers tells 007, but Goldfinger is too clever for them. He has secretly become Britain’s richest man, and has £5 million-worth of gold bars sitting in the vaults of a bank in the Bahamas.
‘That gold, or most of it, belongs to England. The Bank can do nothing about it, so we are asking you to bring Mr Goldfinger to book, Mr Bond, and get that gold back. You know about the currency crisis and the high Bank rate? Of course. Well, England needs that gold, badly – and the quicker the better.’
In this dull but important introductory section (spoiler alert: Bond does succeed in defeating Goldfinger, but not before he gets entangled with the Chicago mob, foils a daring raid on Fort Knox and seduces a lesbian who has ‘never met a man before’), Colonel Smithers dissects the philosophical question at the heart of the Bretton Woods system. By modern standards, Goldfinger wasn’t doing anything wrong, apart perhaps from dodging some taxes. He was buying up gold at a price people were prepared to pay for it, then selling it in another market, where people were prepared to pay more. It was his money. It was his gold. So what was the problem? He was oiling the wheels of commerce, efficiently allocating capital where it could best be used, no?
No, because that wasn’t how Bretton Woods worked. Colonel Smithers considered the gold to belong not only to Goldfinger, but also to Great Britain. The system didn’t consider the owner of money to be the only person with a say in what happened to it. According to the carefully crafted rules, the nations that created and guaranteed the value of money had rights to that money, too. They restricted the rights of money-owners in the interests of everybody else. At Bretton Woods, the Allies – desperate to avoid a repeat of the horrors of the inter-war depression and the Second World War – decided that, when it came to international trade, society’s rights trumped those of money-owners.
This was just one element of a whole series of measures created in the 1930s and 1940s to provide full employment and better services in the interests of stability and prosperity. The New Deal legislation in the United States severely limited the rights of banks to speculate, while the Welfare State in Great Britain provided universal healthcare and free education. The innovations were remarkably successful: economic growth in most Western countries was almost uninterrupted throughout the 1950s and 1960s, with massive improvements in public health and infrastructure. All of this did not come cheap, though, and taxes had to be high to pay for it: Beatles fans will remember George Harrison singing on ‘Taxman’ about the government taking 19 shillings for every one he could keep, which was an accurate reflection of the amount of his earnings that was going to the Treasury. Rich people struggled to move their money out of the taxman’s reach – thanks to the separate compartments in the oil tanker. Taxes were hard to avoid, unless you physically relocated (like the Rolling Stones, who moved to France to record Exile on Main Street).
What you thought about this innovative bit of tanker design depended on whether you were one of the people being taxed, or one of the people enjoying unprecedented improvements in your standard of living. The Beatles and the Stones clearly hated it, as did Rowland Baring, scion of the Barings bank dynasty, Third Earl of Cromer and – between 1961 and 1966 – the governor of the Bank of England. ‘Exchange control is an infringement on the rights of the citizen,’ he wrote to the British government in 1963. ‘I therefore regard [it] ethically as wrong.’ He thought the owner of money should be able to do whatever he (and it was almost invariably a he) wanted with it, and that governments shouldn’t be able to limit his opportunities by stopping that money flowing overseas. Baring thought this new kind of oil tanker was wrong. Captains shouldn’t be allowed to stop oil from sloshing wherever its owner wanted it to, no matter how much damage it might do to the ship.
Funnily enough, ‘M’ thought so, too. In Goldfinger, he told Bond he couldn’t really understand what Colonel Smithers was talking about. ‘Personally I should have thought the strength of the pound depended on how hard we all worked rather than how much gold we’ve got,’ he said, with the kind of bluff common sense of someone who insists their views are above politics. ‘However, that’s probably too easy an answer for the politicians – or more likely too difficult.’ That viewpoint was very widely held in the City of London, where the bankers believed that the valuing of assets should be left to the markets with no political interference.
One of the main reasons why the viewpoint was so widespread in the City was probably that the new Bretton Woods system severely restricted its ability to make a living. Before the First World War, Britain’s pound sterling had been the world’s most important currency, and the bankers of the City had done very well out of financing the world’s trade. Vast fortunes were made by those who worked hard, who hustled, and who had the right connections. With Britain beggared by two world wars, however, and the dollar now the world’s pre-eminent currency, the bankers had precious little to do.
‘It was like driving a powerful car at twenty miles an hour,’ lamented one banker, of his spell in charge of a major British bank. ‘The banks were anaesthetised. It was a kind of dream life.’ People arrived at work late, left early, and frittered away much of the time in between having boozy lunches. One banker remembers spending his lunch breaks on the water. He would set off downriver to Greenwich on a scheduled service, eat his sandwiches and drink beer, then get the boat back again, drink more beer, and return to work. The whole pointless round trip would take as much as two hours, but no one particularly cared, because there wasn’t anything to do anyway. At least he got lots of fresh air. City workers weren’t very well paid, but then their jobs weren’t very demanding. The banks considered it wrong to poach each other’s clients, and the clients they had weren’t doing very much. Well into the 1960s, tracts of the City bore the scars of the German bombs that had fallen on London two decades earlier. Shattered buildings that once housed hubs of trade and commerce grew abundant crops of rosebay willow herb, and provided playgrounds for feral children. Why bother rebuilding them when there was nothing for the buildings to do?
For anyone with any understanding of London’s long history, this felt wrong. There was a trading station on this hill on the north bank of the river Thames before even the Romans arrived. Rome simply formalised the situation by putting its capital here and calling it Londinium (you can still go and see a Roman amphitheatre in the basement of the Guildhall, if you’re sufficiently interested in all this and it’s a rainy afternoon). And it’s easy to see why they did so; London is perfect for trade. It is well drained, defensible, and as far inland as a ship can sail up the Thames. It looks out to sea, to the world; not upriver towards England. You can offload your cargoes here, and sell them to locals coming from the hinterland; or keep them in London before selling them on to other foreign traders. The City is the interface between Britain and the rest of the world; the river Thames and the oceans made London rich, and getting rich was London’s purpose. London isn’t technically even the capital of England; that is Westminster, a different city just upriver, which has merged with London physically but not philosophically. Westminster obsesses over the minutiae of British life, but London has always had its own politics, dominated by the great finance houses, more interested in Manhattan or Mumbai than in Machynlleth or Maidenhead.
It was London companies that first conquered India, and Africa, and North America, not the British state. They funded the railways and the steamships which bound the continents together, and insured the cargoes that travelled on them. And if, under Bretton Woods, the City wasn’t allowed to finance trade, to hustle, to compete for business wherever it wanted – as it wasn’t post-Second World War – then what really was the point of it?
And what was particularly vexing about all this was that New York was booming. Much of the business that once flowed through London – the trade financing, the bond deals, everything London saw as its birth right – was being conducted by those pesky parvenus on Wall Street. London was reduced to acting as a financial centre just for Britain, and for the shrinking band of colonies and ex-colonies so conservative that they clung to the pound. That was no fun at all.
The fact that London almost died as a financial centre is hard to imagine for anyone who now sees its gleaming glass-and-steel canyons, or who joins the teeming army of commuters crossing London Bridge in the half-light of a weekday dawn. But in the 1950s and 1960s, the City was almost entirely absent from the national conversation. Fat social histories of the Swinging Sixties don’t even mention what was happening in the old Roman trading post, which is strange because something very significant was brewing, something that would change the world far more than the Beatles or Alan Sillitoe or David Hockney ever did, and which would shatter the high-minded strictures of the Bretton Woods system. This is where the tunnel into Moneyland first opened up, and where the first people discovered the profits to be made from seeing where that tunnel led.
By the time Ian Fleming published Goldfinger, there were already some leaks in the supposedly impermeable compartments of the great oil tanker of the world economy. The problem was that not all foreign governments trusted the United States to honour its commitment to use the dollar as an impartial international currency; and they were not unreasonable in doing so, since Washington did not always act as a neutral umpire. In the immediate post-war years, the US government had sequestered communist Yugoslavia’s gold reserves, and the rattled Eastern bloc countries then made a habit of keeping their dollars in European banks rather than in New York. The International Monetary Fund, which was and is based in Washington, and was and is dominated by its largest shareholder, refused to help communist Poland to rebuild. Similarly, when Britain and France attempted to regain control of the Suez Canal in 1956, a disapproving Washington froze their access to dollars and doomed the venture. These were not the actions of a neutral arbiter.
Britain at the time was staggering from one crisis to another. In 1957 it raised interest rates sharply and restricted the use of sterling in an attempt to protect the pound (this was the ‘currency crisis and the high bank rate’ that Colonel Smithers told James Bond about). City banks, cut off from sterling, began to use dollars instead, and they obtained those dollars from the Soviet Union, which was keeping them in London and Paris so as to avoid becoming vulnerable to American pressure. This turned out to be a profitable thing to do. In the United States, there were limits on how much interest banks could charge on dollar loans – but not so in London. In the United States, banks had to retain some of their dollars in reserve in case loans went wrong – but not so in London. The banks had discovered a hole in the compartments of the Bretton Woods oil tanker: if they used dollars outside the United States, then US regulators couldn’t touch them, and British regulators didn’t care. These stateless dollars – they became known as ‘eurodollars’, perhaps because of the ‘Euro’ telex address used by one of the Soviet-owned banks – could flow between countries unhindered, just like in the old days. And the laws could not follow them.
US officials tried to put a stop to this, and the Comptroller of the Currency (who administered the federal banking system) opened a permanent office in London to inspect what the British branches of American banks were up to. But the Americans had no power on the far side of the Atlantic, and got no help from the locals. ‘It doesn’t matter to me,’ said Jim Keogh, the Bank of England official responsible for monitoring these banks, ‘whether Citibank is evading American regulations in London. I wouldn’t particularly want to know. If the Comptroller’s people feel they can make their jurisdiction run in London, I say, “Good luck to ’em.”’ He told a foreign banker, only half-jokingly, that he could do whatever he liked in London, provided he didn’t ‘do it in the streets and frighten the horses’. The total sum of money involved wasn’t enormous, compared to the amount being moved around in New York by American banks, but it was growing by a third a year, and London had finally found a new revenue stream.
Almost simultaneously (and entirely unconnectedly, except perhaps that rebellion was just generally in the air in those days), British radio listeners gained some new stations to listen to. At the time, only the BBC could legally broadcast in the UK, and it was backward when it came to sharing new pop artists with its listeners. Teenagers wanted to hear exciting new acts like Nero and the Gladiators or B. Bumble and the Stingers, and found the BBC’s reluctance to play their tunes frustrating. Entrepreneurial ship owners saw an opportunity. They moored their vessels outside Britain’s territorial waters, set up radio equipment, and broadcast pop music back into the UK.
Many people called these radio operators pirates, but others called their stations something else: offshore, which was less amusing but more literally accurate. The ships were situated just off Britain’s shoreline, and thus outside of UK authorities’ jurisdiction. Offshore radio stations were as physically present as any other broadcaster, in that you could easily find their broadcasts on your wireless, yet they were legally absent, and very difficult to deal with.
This concept of ‘offshore’ – of being legally absent while physically present – was a useful one, and the term started to be employed to describe financial transactions as well. The banks moving the unregulated eurodollars kept two sets of accounts. One set told of the usual boring transactions, all the pounds that obeyed the exchange controls and so on. These transactions were referred to as onshore. The other described the swashbuckling, piratical new eurodollar market, the oil which had leaked out of the compartments and which was now sloshing around in the bilges of the Bretton Woods tanker. These transactions were referred to as offshore – as if they were conducted outside of British territorial waters, and Britain had no jurisdiction over them. The two sets of transactions took place in the same geographical location – the City of London – but legally one of them was elsewhere, somewhere rules did not apply. And this concept, the idea of offshore, the idea of an asset being legally outside the jurisdiction that it is physically present in, is absolutely central to our story. Without it, Moneyland could not exist.
This offshore eurodollar market gave a bit of life to the City of London in the late 1950s, but not much. The big bond issues were still taking place in New York, which was annoying. It was especially annoying because often the companies borrowing the money were European, and the people lending the money were European, too, yet it was American banks that were earning the fat commissions for setting up the deals. European governments and companies were very keen to borrow money, since there was so much war damage to repair, and the economies were growing so fast, but it didn’t seem right to bankers in London that Europeans were not getting a cut of the business. One banker in particular was very annoyed about it: Siegmund Warburg.
Warburg was an outsider in the cosy world of the City. For one thing, he was German. For another, he hadn’t given up on the idea that a City banker’s job was to hustle for business. He wasn’t prepared to sit back and accept a subordinate place in the cartel of big City banks; he lived for deals. He famously didn’t consider one lunch to be enough for all the networking he wanted to do in a day, so he sometimes dined twice, with different sets of guests each time. It was Warburg who introduced the idea of hostile takeovers to Britain, despite the disapproval of the City establishment. He travelled widely, networked ceaselessly, and learned from a friend at the World Bank in 1962 that some $3 billion was circulating outside the United States – sloshing around in the bilges of the tanker, ready to be put to use. Warburg decided to get involved. He had been a banker in Germany in the 1920s, and remembered arranging bond deals in foreign currencies. Why couldn’t his bankers do something similar again?
Bond deals are long-term financing arrangements, in which a borrower borrows a fixed amount of money in exchange for promising to pay a fixed interest rate, and to repay the money at the end of a fixed term. Bonds are absolutely crucial to how companies and countries fund themselves. Up to this point, if a company wanted to borrow dollars, it would have to do so in New York. Warburg, however, was pretty confident he knew where he could find a significant chunk of that $3 billion – Switzerland – and he wondered if he couldn’t find a way to put it to work.
There was a lot of money in Switzerland. The Swiss had been in the business of hoarding cash and assets on behalf of scrutiny-evading foreigners since at least the 1920s, when France raised the top rate of tax to 72 per cent. In the years between then and the Second World War, the amount of money held in Switzerland increased tenfold, eventually making up around 2.5 per cent of all household wealth in continental Europe (at a time when the continent’s economy in general was stagnant). These customers were overwhelmingly Frenchmen and Italians who didn’t want to pay tax. After the Second World War, the good times continued and, by the early 1970s, some 5 per cent of Europe’s household wealth was deposited in Switzerland. You loaded up your car with cash, drove it to Zurich or Geneva, deposited the banknotes with a discreet cashier, and went on your way. ‘For rich Europeans that wanted to evade taxes, the situation was the same as it was during the 1920s: the country that offered the protection of banking secrecy was Switzerland,’ writes French economist Gabriel Zucman, in his 2015 book The Hidden Wealth of Nations, which delves into the Swiss role in creating Moneyland.
This wasn’t exactly a secret. In the Tintin story Flight 714 to Sydney, published in 1968, mega-villain Roberto Rastapopoulos kidnaps a millionaire and then tries to force him to divulge the details of his secret Swiss bank account. ‘I know the name of the bank: I know the name in which you hold the account; I have some magnificent examples of the false signature you use,’ Rastapopoulos tells his captive. ‘In fact, the only thing I don’t know is the number of the account, and that you are now going to give me.’ Thence follows perhaps the most madcap adventure of the whole Tintin canon, involving truth serum, a volcanic eruption, extraterrestrials and telepathy. Appropriately enough, however, throughout all this lunacy, the number of the account is never revealed. That would have been too far-fetched; this was Switzerland, after all, where banking secrecy had been legally guaranteed since 1934. Swiss bank accounts were so well guarded that only three people knew their true owners: two bankers and the owner him or herself. And if news of the existence of great pools of cash owned in Switzerland by tax-dodging crooks had even filtered down to the authors of children’s books, it was certain to be well known to London’s most ambitious financiers.
‘The rich and famous, the bad and ugly, intelligence agents and Mafiosi used their numbered accounts to hide money from wives, husbands, and business partners; to embezzle company profits; to fund small wars and finance drug cartels,’ wrote Bradley Birkenfeld, a one-time Swiss banker we shall hear more from later in this story. ‘Never mind that if you held a numbered account, you actually paid the Swiss a small flat fee for the privilege and never received a penny of interest. The balance was yours to dream about, tucked safely under your Swiss steel mattress.’
For the London bankers of the early 1960s, this was tantalising: there was all this money squirrelled away in Switzerland, doing nothing much, and it was exactly what they needed in their quest to start selling bonds again. As Warburg saw it, if he could somehow access the money, package it up, and lend it, he would be in business. Surely he could persuade the people who were paying Swiss bankers to look after their money that they’d rather earn an income from it by buying his bonds? Particularly if that income was tax-free. And surely he could persuade European companies that they’d rather borrow this money from him than paying the steep fees demanded in New York?
Not so fast. One thing stood in his way: the post-war system, whereby all the compartments of the oil tanker stopped speculative money flowing seamlessly between different European countries. How could Warburg find a way to move that money from Switzerland to clients who wanted to borrow it, whatever countries they happened to be in? He took two of his best men, and told them to get it done.
They began their negotiations in October 1962, the same month that the Beatles released ‘Love Me Do’, which reached number 17 in the UK music charts – respectable for a band’s first single but hardly spectacular. The bankers signed their contract on 1 July the following year, the same day that the Fab Four recorded ‘She Loves You’, the song that sparked global Beatlemania. That extraordinary nine months not only revolutionised pop music, but also geopolitics, since they included the Cuban Missile Crisis and President John F. Kennedy’s ‘Ich bin ein Berliner’ speech. In the circumstances, it is understandable that a simultaneous revolution in global finance passed little remarked.
Warburg’s new bond issue – these bonds became known as ‘eurobonds’, after the example set by eurodollars – was led by Ian Fraser, a Scottish war hero turned journalist turned banker. His elegantly written autobiography, The High Road to England, lays out in remarkable detail quite how many bureaucratic obstacles he overcame to realise his boss’ vision. He and his colleague Peter Spira had to find ways to defang the taxes and controls designed to prevent hot money flowing across borders, and to find ways to pick and choose different aspects of different countries’ regulations for the various elements of their creation.
If the bonds had been issued in Britain, there would have been a 4 per cent tax on them, so Fraser formally issued them at Schiphol airport in the Netherlands. If the interest were to be paid in Britain, it would have attracted another tax, so Fraser arranged for it to be paid in Luxembourg. He managed to persuade the London Stock Exchange to list the bonds, despite their not being issued or redeemed in Britain, and talked around the central banks of France, the Netherlands, Sweden, Denmark and Britain, all of whom were rightly concerned about the eurobonds’ impact on currency controls. The final trick was to pretend the borrower was Autostrade – the Italian state motorway company – when really it was IRI, a state holding company. If IRI had been the borrower, it would have had to deduct tax at source, while Autostrade did not have to.
(City bankers got so good at playing jurisdictions off against each other that, two years later, they even succeeded in persuading the Belgian tax authorities that closing a deal was just a formality. This meant they did not need to travel to Luxembourg to sign the final papers, and could hold the celebratory dinner in Brussels – where the restaurants were acceptable – rather than in the gastronomic wasteland that was Luxembourg at the time.)
The cumulative effect of this game of jurisdictional Twister was that Fraser created a highly convenient bond paying a good rate of interest, on which no one had to pay tax of any kind, and which could be turned back into cash anywhere. It was the ultimate expression of offshore. ‘The secret … was that the bonds must be totally anonymous, coupons must be paid without any deduction of tax and the bonds at maturity paid off in full without any questions asked,’ he wrote. These were what are known as ‘bearer bonds’. Whoever possessed the bond owned them; there was no register of ownership, or any obligation to record your holding, which was not written down anywhere. Fraser’s eurobonds were like magic. Before eurobonds, hidden wealth in Switzerland couldn’t really do much; but now it could buy these fantastic pieces of paper, which could be carried anywhere, redeemed anywhere, and all the while paid interest to their owners, tax free. Dodge taxes and make a profit: they were like $1,000 interest-paying travellers’ cheques.
A deal as ambitious as this hadn’t been done in the City of London for almost half a century and it briefly looked like it might fail for the most mundane of reasons: no one could remember how to engrave the detailed plates needed for printing the bonds. Mercifully, two ancient Czechs turned up who had retained the skills, and all that remained was for bank directors to sign the pieces of paper. ‘There was one signing-machine in Brussels which could sign twelve certificates at a time, with twelve pens attached to it,’ remembered Spira, decades later. ‘But basically the company had to send a team of three or four people to Luxembourg for a week to sign pieces of paper. That shows you the idiotic bureaucracy that existed.’
So, who was buying Fraser’s magical invention? Well, this was a bit of a secret, since the sales were largely handled by Swiss bankers, who didn’t let on who their clients were. But Fraser had a pretty good idea. ‘The main buyers of these bonds were individuals, usually from Eastern Europe but often also from Latin America, who wanted to have part of their fortune in mobile form so that if they had to leave they could leave quickly with their bonds in a small suitcase,’ Fraser wrote. ‘There was still a mass migration of the surviving Jewish populations of Central Europe heading for Israel and the West. To this was added the normal migration of fallen South American dictators heading East. Switzerland was where all this money was stashed away.’
Later historians tried to downplay Fraser’s account a little, and to claim that corrupt politicians – ‘fallen South American dictators’ – made up just a fifth or so of the demand for these early bond issues. But Fraser was already downplaying it; these fallen dictators may have been living in South America but they weren’t all of them locals. In the early 1960s, there were plenty of people still alive who had looted Europe in the Second World War, parked the proceeds in Switzerland, and skedaddled to Argentina. It must have been very frustrating for Nazi war criminals to have money sitting in Switzerland and no prospect of a decent return. Finally, thanks to Ian Fraser and his team, they had a risk-free and tax-free method to make their secret stash earn a living.
As for the remaining four-fifths of the money that bought up the bonds, this came from standard tax dodgers – ‘Belgian dentists’, the bankers called them – high-earning professionals who steered a chunk of their earnings to Luxembourg or Geneva, and who welcomed this lovely new investment. Fraser could hardly claim to have been surprised by this. In his memoir, he records how ‘Uncle Eric’ – Eric Korner, one of the senior Warburg’s bankers – had a broker in Zurich he called whenever a client company was about to announce better-than-expected news. Korner would get into the trade before the rest of the market knew about it, which earned him secret tax-free cash at his clients’ expense, while simultaneously building up the pot of money in Switzerland that could be spent on the new bonds.
This is the first glimpse of the tunnel into Moneyland. It works as follows: first, you obtain money (you might have stolen it; or avoided taxes on it; or simply earned it); then you hide it; then you spend it. Previously, you could take two of the three steps, but never all of them together. You could obtain money, then spend it, but that was risky. Or you could obtain money, then hide it, but that meant it was stuck in Switzerland, and you never got to enjoy it. Moneyland set wealth free, and it didn’t care where that wealth came from: steal, hide, spend, in perpetuity. This is the dirty secret at the heart of eurobonds. It was all made possible by modern communications – the telegram, then the phone, then the telex, then the fax, then the email – and this is the dark side of the revolution of convenience that we call globalisation.
I am not saying there was no one with a legitimate desire for privacy. As Fraser made clear, among the first clients were European Jews who had hidden their money in Switzerland from the Nazis, and who had finally found a way to make a living from it. The problem was that the privacy, the portability and the convenience that attracted Holocaust survivors moving to Tel Aviv, also attracted dentists in Antwerp, insider-trading bankers in London, and Nazis in Buenos Aires. In Switzerland, the legitimately scared money mixed with the naughty tax-avoiding money, which mixed with the evil looted money. The eurobond was convenient to anyone with cash to hide, wherever it came from.
This, then, was the moment when the first rich people unlocked the door to Moneyland’s magic garden: the moment when clever London bankers conjured into existence a virtual country where, if you were rich enough, whoever you were, wherever your money came from, the laws did not apply to you. Ordinary Belgians paid taxes on their pay cheques, while dentists who could afford to maintain Swiss bank accounts not only avoided those taxes, but earned profits from doing so. The looted residents of Eastern Europe worked to rebuild their shattered countries, while the Nazis that looted them not only kept the proceeds of their crimes but earned a tidy living doing so.
As we will see, the fact that First World tax avoiders and Third World kleptocrats both inhabit Moneyland is central to why it is so hard to do anything about it. We can thank Ian Fraser and his Warburg’s colleagues for that.

That first deal was for $15 million. But once the way to sidestep the obstacles that stopped cash flowing offshore had been flagged, there was nothing to stop more money following its path. In the second half of 1963, $35 million of eurobonds were sold. In 1964, the market was $510 million. In 1967, the total passed a billion dollars for the first time, and it is now one of the biggest markets in the world. Even American companies abandoned New York with its tiresome regulations, and started issuing eurobonds, though this meant new moves in the game of Twister required to dodge government attempts to keep some kind of control on the surges of hot money. Fortunately, a favourable Dutch–US tax treaty allowed American corporations to borrow money through specially created and otherwise un-needed subsidiaries in the tiny Caribbean islands called the Netherlands Antilles, so they didn’t have to pay any tax.
And what did this mean for the compartmentalised oil tanker created at Bretton Woods? It was as if the cargo’s owners had created their own plumbing system, allowing them to move their oil from tank to tank without the captain’s permission or knowledge. But here the metaphor breaks down, because of the nature of money. These dollars escaped offshore, where they avoided the regulations and taxes imposed upon them by the US government. But they were still dollars, and thus thirty-five of them were still worth an ounce of gold. The trouble that followed stemmed from the fact that dollars don’t behave like oil. Unless you use it for something, oil is oil, it just sits there, doing nothing. Dollars, however, multiply.
If you put a dollar in a bank, the bank uses it as security for the money it lends to someone else, meaning there are more dollars – your dollar, and the dollars someone else has borrowed. And if that person puts the money in another bank, and that bank lends it, there are now even more dollars, and so on. And since every one of those dollars is nominally worth a fixed amount of gold, America would have needed to have kept buying ever more gold to satisfy the potential demand. If America did that, however, it would have to have bought that gold with dollars, meaning yet more dollars would exist, which would multiply in turn, meaning more gold purchases, and more dollars, until the system would eventually collapse under the weight of the fact that it didn’t make sense; it couldn’t cope with offshore. It’s as if the oil in the tanker wasn’t just moving covertly from tank to tank, but doubling in volume every time it did so.
Perhaps you’ve already worked out what this means. Foreign governments had the right to buy gold at $35 an ounce, yet there were more and more dollars, and still only a fixed amount of gold. The simple rules of supply and demand insist that a black market would have appeared sooner or later, in exactly the same way that unofficial exchange rates always spring up in dictatorships that try to control the dollar price. A foreign government could buy gold at $35 an ounce from the United States, then sell it on the open market for eurodollars. It could then use those eurodollars to buy more US gold for $35 an ounce, which it would sell at a profit, and so on. It would basically be the Goldfinger scam, but vastly more profitable, without the need to smuggle bullion disguised in the armour plating of a Rolls-Royce or play 007 at golf, and limited only by the amount of money Washington was willing to lose. The scam was prevented only by the participants’ willingness not to profit from such an obviously flawed system.
The US government tried to defend the dollar/gold price, but every restriction it put on dollar movements just made it more profitable to keep your dollars in London, leading more money to leak offshore, and thus more pressure to build up on the dollar/gold price. And where the dollars went, the bankers followed. For American banks, Britain began to play a role loosely akin to that played by China for American manufacturers today. The City had looser regulations and more accommodating politicians than Wall Street, and the banks loved it. In 1964, eleven US banks had branches in the City of London. In 1975, fifty-eight did. By that time, however, Washington had bowed to the inevitable and stopped promising to redeem dollars for gold at $35 an ounce. It was the first step in a steady dismantling of all the safeguards created at Bretton Woods.
The philosophical question over who really owned money – the person who earned it, or the nation that created it – had been answered. If you had money, thanks to the accommodating bankers of London and Switzerland, you could do what you wanted with it and other governments could not stop you. If they tried, they just made the situation worse, like trying to firm up a leaky inner tube by squeezing it. Money kept heading offshore, however officials tried to stop it. As long as one country tolerated offshore, as Britain did, then the efforts of all the others came to nothing. (If only everyone had listened to Keynes and created an international currency at Bretton Woods, this would not have happened.)
This, then, is the origin of the inevitable tension between borderless money and bordered states. If regulations stop at a country’s borders, but the money can flow wherever it wishes, its owners can outwit any regulators they choose. If one boxer has to stay within the ropes of the ring while his opponent can jump out at any time, ducking back in from any direction undetected and without warning, it’s clear who the smart money favours.
The developments that began at Warburg’s did not stop with simple eurobonds. The basic pattern was endlessly replicable. You identified a line of business that might make you and your clients money. You looked around the world for a jurisdiction with the right rules for that business – Liechtenstein, the Cook Islands, Jersey – and you used it as a nominal base. If you couldn’t find a jurisdiction with the right kind of rules, then you threatened or flattered one until it changed its rules to accommodate you. Warburg himself started this off, by explaining to the Bank of England that, if Britain did not make its rules competitive and its taxes lower, then he would take his bank elsewhere, perhaps to Luxembourg. Hey presto, the rules were changed, and the tax – in this case, stamp duty on bearer bonds – was abolished.
The world’s response to these developments has been entirely predictable as well. Time after time, countries have chased after the business they have lost offshore (as the United States did by abolishing the regulations the banks were dodging when they moved to London), thus making the onshore world ever more similar to the offshore piratical world that Warburg’s bankers created. Taxes have fallen, regulations have relaxed, politicians have become friendlier, all in an effort to entice the restless money to settle in one jurisdiction rather than another. The reason for this is simple. Once one jurisdiction lets you do what you want, the business flows there and other jurisdictions have to rush to change, too. It is the Moneyland ratchet, always loosening regulations for the benefit of those with money to move around, and never tightening them.
***

Moneyland may not have an army, or a flag, or border, or any of the attributes of statehood, but it does have a language: the language of euphemism. Anyone who spends any time among the lawyers and accountants who are the legal guardians of Moneyland will hear mention of – on a sliding scale of increasing illegality – ‘fiscal friction’, ‘succession planning’, ‘tax neutrality’, ‘commissions’ and ‘facilitation payments’. After a while, you will find yourself speaking this way yourself.
So, how much money is there out there, hiding behind this palisade of circumlocution? This is a difficult question to answer: the money is invisible, and kept invisible by well-paid, imaginative and highly intelligent people. It is dark matter and, like dark matter, it can only be studied by recording its effect on things that we can see.
Gabriel Zucman, the French economist who has studied Swiss banking, has tried to make these calculations. By analysing the statistical anomalies that banking secrecy creates, he estimates that 8 per cent of all the world’s financial wealth was held in tax havens in 2014: $7.6 trillion, out of a total of $95.5 trillion. Around a third of that was registered in Switzerland, and the rest in Singapore, Hong Kong, the Bahamas, Jersey, Luxembourg, and various other places. And that does not include all the non-financial assets that are owned offshore – art works, yachts, real estate, jewellery – which he thinks may add up to another $2 trillion. (This does not mean the assets are necessarily in Switzerland, Hong Kong, the Bahamas, etc. They are legally present in those jurisdictions, while being physically present somewhere else. There isn’t much to buy in Jersey after all, unless you have a passion for fudge.)
When I visited his office in the University of California, Berkeley, Zucman explained to me that the anomalies are caused by the fact countries are good at reporting when foreign money has invested in them – houses in London, condos in New York, villas on the Riviera – but bad at reporting when money has left. This means that the amount of money that has entered countries does not match the amount that has left them. ‘Our planet as a whole has a net debt, a net financial debt, which of course is not possible at a global level,’ he said. If you put the inflows and outflows of all the countries in the world into a spreadsheet, the sums should add up – all outflows are just someone else’s inflows – but they don’t. It’s like the list of countries’ foreign investment positions is missing an entry. One more country is needed in the spreadsheet to make the columns match: let’s put it between Monaco and Mongolia. That seems apt.
Zucman is not the only person who’s tried to map Moneyland. James Henry, an American economist, came up with a far higher number for the volume of cash it is hiding; he thinks it was $21–32 trillion in 2010. He grasped for astronomical metaphors to explain the sheer bewildering complexity of his task. ‘The subterranean system we are trying to measure is the economic equivalent of an astrophysical black hole. Like those black holes, this one is virtually invisible and can be somewhat perilous to observers who venture too close,’ he wrote in a 2012 paper on the subject. ‘We are up against one of society’s most well entrenched interest groups. After all, there’s no interest group more rich and powerful than the rich and powerful.’
Different nations are affected by Moneyland in different ways. Wealthy citizens of the rich countries of north America and Europe own the largest total amount of cash offshore, but it is a relatively small proportion of their national wealth, thanks to the large size of their economies. Zucman estimates it to be just 4 per cent for the United States, around 10 per cent for Western Europe. For Russia, however, 52 per cent of household wealth is offshore, outside the reach of the government. In Africa (taken as a whole), the total is 30 per cent. In the Gulf countries, it is an astonishing 57 per cent. ‘It’s very easy for oligarchs of developing countries, non-democratic countries, to hide their wealth. That provides them with huge incentives to loot their countries, and there’s no oversight,’ Zucman explained.
So, that is how Moneyland came into being: how the careful safeguards against it were destroyed, setting it free to spread around the world. Now, let’s pay some of its gatekeepers a visit.