The [Bretton Woods] 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.

All 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, Brazil, 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, the rouble or the pound, which have been such a feature of the past few decades, would have been impossible under the Bretton Woods system, which was specifically designed to stop them happening.

And the system was remarkably successful: economic growth in most western countries was almost uninterrupted throughout the 1950s and 1960s, societies became more equal, while governments made massive improvements in public health and infrastructure. All of this did not come cheap, however. Taxes had to be high to pay for it, and rich people struggled to move their money out of the taxman’s reach – thanks to the separate compartments in the oil tanker. Fans of the Beatles will remember George Harrison singing on Taxman about the government taking 19 shillings for every one he could keep; that was an accurate reflection of the amount of his earnings that was going to the Treasury, a 95% marginal tax rate.

It wasn’t only the Beatles who hated this system. So did the Rolling Stones, who relocated to France to record Exile on Main St. And so, too, 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 in a note to the government in 1963. “I therefore regard [it] ethically as wrong.”

Today, looking over its glass-and-steel skyline, it is hard to imagine that the City of London once almost died as a financial centre. In the 1950s and 1960s, the City played little part in the national conversation. Yet, although few books about the swinging 60s even mention the City, something very significant was brewing there – something that would change the world far more than the Beatles or Mary Quant or David Hockney ever did, something that would shatter the high-minded strictures of the Bretton Woods system.

The problem was that not all foreign governments trusted the US 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 fair umpire. In the immediate post-second-world-war years, the US government had sequestered communist Yugoslavia’s gold reserves. The rattled eastern bloc countries then made a habit of keeping their dollars in European banks rather than in New York.

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.

City banks, which could no longer use sterling in the way they were accustomed, 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 US, there were limits on how much interest banks could charge on dollar loans – but not so in London.

This market – the bankers called the dollars “eurodollars” – 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, a fact which annoyed many bankers in London. After all, many of the companies borrowing the money were European, yet it was American banks that were earning the fat commissions.

In 1962, Warburg learned from a friend at the World Bank that some $3bn was circulating outside the US – sloshing around and ready to be put to use. Warburg 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?

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 $3bn – Switzerland. Since at least the 1920s, the Swiss had been in the business of hoarding cash and assets on behalf of foreigners who wanted to avoid scrutiny. By the 1960s, perhaps 5% of all the money in Europe lay under Switzerland’s steel mattresses.

As Warburg saw it, if he could somehow access the money, package it up and lend it, he would be in business. Surely, Warburg thought, he could persuade the people who were paying Swiss bankers to look after their money that they would rather earn an income from it by buying his bonds? And surely he could persuade European companies that they would rather borrow this money from him and avoid paying the steep fees demanded in New York?

If the bonds had been issued in Britain, there would have been a 4% 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 which were rightly concerned about the eurobonds’ impact on currency controls.

The cumulative effect of this game of jurisdictional Twister was that Fraser created a 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. 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, worldwide.

So, who was buying Fraser’s magical invention? Who was providing the money he was lending to IRI, via Autostrade? “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 in his autobiography. “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.”

The eurobonds set wealth free and were the first step towards creating the virtual country of the rich that I call Moneyland. Moneyland includes offshore finance, but is much broader than that, since it protects every aspect of a rich person’s life from scrutiny, not just their money. The same money-making dynamic that enticed Fraser to defang capital controls on behalf of his clients, entices his modern-day counterparts to find ways for the world’s richest people to avoid visa controls, journalistic scrutiny, legal liability and much more. Moneyland is a place where, if you are rich enough, whoever you are, wherever your money comes from, the laws do not apply to you.

The result was that, over time, the system created at Bretton Woods fell apart. More and more dollars were escaping offshore, where they avoided the regulations and taxes imposed upon them by the US government. But they were still dollars, and thus 35 of them were still worth an ounce of gold.

The trouble that followed stemmed from the fact that dollars don’t just sit around doing nothing. They 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 was nominally worth a fixed amount of gold, the US would have needed to keep buying ever more gold to satisfy the potential demand. If the US 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.

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 country that created it – had been answered.

If you had money, thanks to the accommodating bankers of London and Switzerland, you could now do what you wanted with it and governments could not stop you. As long as one country tolerated offshore, as Britain did, then the efforts of all the others came to nothing. 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 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 US 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.

Different nations are affected by Moneyland in different ways. Wealthy citizens of the rich countries of Europe and North America 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. The economist Gabriel Zucman estimates it to be just 4% for the US. For Russia, however, 52% of household wealth is offshore, outside the reach of the government. In the Gulf countries, it is an astonishing 57%.

Adapted from Moneyland: Why Thieves & Crooks Now Rule The World & How to Take It Back by Oliver Bullough, published by Profile Books

https://www.theguardian.com/news/2018/sep/07/the-real-goldfinger-the-london-banker-who-broke-the-world