Читать книгу The Finance Curse - Nicholas Shaxson - Страница 10

For centuries the City of London, the cash-pumping financial center at the heart of the British Empire, ran the greatest system of wealth extraction ever devised. Royal Navy gunships supported the predations of City-based groups like the East India Company, a trading organization that evolved into a bloodthirsty and unregulated operation with a private army, which in the eighteenth century looted the Indian subcontinent. At the Battle of Plassey, in 1757, the company defeated the nawab of Bengal; it then loaded the Bengal treasury’s gold and silver into a fleet of over a hundred boats and sailed off with it down the Hooghly River. British imperial rule in India was founded on this gigantic international monopoly, and its control over India’s industry, trade, and money would enable one of the greatest systems of wealth extraction ever devised. (That’s the very same East India Company that provoked the Boston Tea Party in 1773 and helped pave the way to the American Declaration of Independence.)

The City’s core principle underpinning these imperial adventures was freedom—specifically, freedom for finance and trade to flow unmolested across borders. “It is the business of government,” one British prime minister declared in 1841, “to open and secure the roads for the merchant.” The City’s devotion to this principle was so extreme, in fact, that it became the unofficial religion of empire. “Free trade is Jesus Christ, and Jesus Christ is free trade,” declared Sir John Bowring, a former City trader who became governor of the British territory of Hong Kong, as Britain sought to bludgeon open the mouthwateringly large Chinese market for its goods and services. Britain fought and won the two Opium Wars, in 1839–42 and 1856–60, enabling it (and other European powers) to impose on China its drug-dealing system of free trade.¹

As with everything in finance, the City’s imperial role was not a simple tale of good and evil. Alongside all the militarized predation, the City financed railways, roads, and many other beneficial projects in the empire and far beyond, lending to France, Russia, Prussia, Greece, and the new South American republics. London was, as the financier Nathan Rothschild put it, “the bank for the whole world.” Its relentlessly international outlook was also the bedrock of Britain’s relatively tolerant multiculturalism, which has for centuries made London one of the most diverse and exciting cities on the planet and contributed to Britain’s decision to send out its warships in support of policies to end the international slave trade. “[In London] the Jew, the Mahometan, and the Christian transact together,” the French writer Voltaire declared in 1733, “as though they all professed the same religion, and give the name of infidel to none but bankrupts.” The American Revolution, which ended in 1783, drastically curbed the City of London’s presence in the United States, which rapidly developed its own financial system interests, so much so that by the mid-nineteenth century the North American colonies held their reserves not in London but in New York City. Yet the London banks continued to lend and trade heavily with the countries around the United States. “In a very real sense,” explains one classic historical account, “the colonies became part of the invisible financial and commercial empire which had its centre in the City of London.”²

Yet all these riches flowing into the City of London didn’t necessarily benefit Britain as a whole; they benefited certain interest groups in Britain, often at the expense of others. Clashes and tensions between finance and the other parts of the economy happened again and again over the centuries. For instance, free trade benefits financial interests that profit from servicing both imports and exports, but it potentially harms local manufacturers, who benefit from protective barriers against cheaper foreign imports. For all the free-trade rhetoric, protectionism was central to the successful industrializing strategies of the United States, Britain, Japan, South Korea, and many others. The outward focus also meant that while the City was great at serving colonies, it often severely neglected British domestic industrialists outside London, something that continues today.³

The sinews of empire—British cunning, diplomacy, money, and violence—were finally broken by World War II, as Britain spent its national strength and treasure defending itself against Nazi Germany. So when the world’s leading nations put together the Bretton Woods architecture at the end of the war, curbing speculative flows of capital across borders to give governments the space to put in place policies their war-weary populations demanded, power had shifted decisively across the Atlantic to Washington, DC, and Keynes and the British establishment failed in their attempts to fashion the new system in a way that would restore Britain to its self-appointed place at the center of world economic affairs. The empire staggered on for a few years, but by then it was an empty shell, ready to crack.

It may seem counterintuitive, but Britain and the United States entered their greatest period of broad-based prosperity and economic growth at precisely the moment the City of London and Wall Street were at their lowest, most heavily regulated ebb. This was no coincidence, for it was a reflection of the age-old clash between finance and other parts of the economy. The Bretton Woods restrictions on speculative financial flows across borders and the remarkable set of New Deal regulations inherited from the 1930s brought this clash into sharp relief.

An old and profitable set of relationships between Wall Street and London had been decisively interrupted. The City, looking with envy at the giant, fragmented, yet fast-growing global marketplace that the Bretton Woods controls had now mostly placed out of its reach, was bottled up inside Britain’s war-shattered domestic economy, plus a few remaining British territories and outposts that still used the pound sterling. Heavily constrained and highly taxed, the City was suffused with lethargy. Oliver Franks, the chairman of Lloyds Bank, lamented that his daily job was “like dragging a sleeping elephant to its feet with your own two hands.” For the next couple of decades Britain and the countries participating in the Bretton Woods system would collectively enjoy the strongest, most broad-based, and most crisis-free economic expansion in history, with growth running at nearly 4 percent in the advanced economies and 3 percent in developing nations, more than twice the rate that had been attained in a thousand years of history.⁴

British elites, still basking in old imperial and financial glories, dreamed of remaking their system with the City of London at its heart. As Britain’s future prime minister Harold Macmillan put it in 1952, “This is the choice—the slide into a shoddy and slushy Socialism … or the march to the third British Empire.”⁵

Yet these elites were due for another set of shocks. The British Empire was crumbling. India became independent in 1947. Then, in 1956, everything changed. Egypt’s feisty president, Gamal Abdel Nasser, took over the Suez Canal. Britain and France joined Israel in an invasion of the canal zone, but the United States, which had lost patience with European imperialism and fretted that the escapade would inflame pro-Soviet passions in the Arab world, forced the invaders to withdraw. The colonies realized how weak Britain now was and that it was possible at last to break free. Ghana gained its independence in 1957, followed by Nigeria in 1960, then Uganda, Kenya, Northern and Southern Rhodesia, Bechuanaland (now Botswana), Nyasaland (now Malawi, where I was born), Basutoland (now Lesotho), and a host of others.⁶ Those last streams of easy profit from the colonies, backed by British gunboats, were now permanently out of reach—or so the newly independent countries thought.

* * *

Nobody could guess it then, but in 1956, the year of Britain’s greatest imperial humiliation, a new financial market was born in London that would nurture itself on the City’s old religion of freedom, and also reinvent the City as a global financial center. This market would grow so spectacularly that it would come to replace and even surpass the empire as a source of wealth and prestige for the City establishment. And this market in London would also create a new offshore playground that would in the decades to come play a central role in Wall Street’s quest to reassert its own dominance over the US government and establishment and the rise of an all-American finance curse.

A few months before the Suez Crisis, some officials at the Bank of England noticed that the Midland Bank (now part of HSBC) was taking US dollar deposits unrelated to any commercial or trade deals. Under Bretton Woods this was classified as speculative cross-border activity, breaches between the separate national safety compartments of the global oil tanker, and this wasn’t allowed. The City of London in those days was an old boys’ network of elaborate rituals and agreement by gentleman’s handshake. Financial regulation was achieved, often quite effectively, by the Bank of England governor inviting people in for tea and using raised eyebrows and other discreetly English signals to let them know if they were out of line. Midland’s chief foreign manager was called in, and whether throats were politely cleared in his direction, a subsequent Bank of England memo noted that Midland “appreciates that a warning light has been shown.” Yet Midland’s new cross-border business was unusually profitable, so it pressed quietly on.⁷

Any central bank trying to implement the Bretton Woods system needed enough foreign exchange or gold reserves on hand to defend its currency at the fixed level against the US dollar. The Bank of England was constantly anxious about those reserves running out and making it hard for Britain to source essential foreign goods if things came to a crunch. Midland’s dodgy activities were generating healthy dollar fees, bolstering Britain’s dollar reserves, so the Bank of England decided to look the other way. Slowly, as more dollar profits tumbled in, this temporary indulgence solidified into a permanent tolerance. In effect, Britain had decided to host, but not regulate, a new market for dollars in London. Yet this new business wasn’t regulated or taxed by the United States either. So who was regulating it? The answer was: nobody.

Ironically, some of the first users of this über-capitalist market were Soviet and Communist Chinese banks, delighted that their transactions weren’t being regulated or overseen by Western governments during the Cold War. But soon their funds were swamped by far bigger tides, as American banks realized they could come to London and do things they weren’t allowed to do at home, bypassing tight New Deal financial regulations in the States.⁸ In short, these bankers could take their business elsewhere to escape the rules they didn’t like at home. Amid high anxiety about the loss of empire, the City establishment had quietly turned Britain into an offshore tax and financial haven.

As word got out, more and more banks, especially American ones, got in on the action. The Americans gave this business an appropriate name, the Eurodollar markets, or the Euromarkets. This didn’t have anything to do with today’s euro currency; a Eurodollar was simply a dollar that had escaped Bretton Woods controls and was being traded in these new libertarian markets, mostly located in Europe. Eurodollars were a new form of stateless money and, as a London banker put it, “completely isolated from the monetary mass” of the rest of the UK. Bankers in London would simply keep two sets of books: one for offshore Eurodollar deals in foreign currencies, where (mostly) dollars got borrowed and re-lent around the world, and a second book for deals in sterling hooked into the British economy.

So Eurodollars were in one sense dollars like any other, but in another sense they were different because they had escaped into a market outside government control, where they could behave freely. It’s a bit like helping someone escape from their conservative family home environment in the suburbs and taking them to Las Vegas, then offering them whiskey and cocaine. They are the same person but also different—more fun but also more irresponsible. This is a good way to understand not only Eurodollars but also offshore tax havens.

As London created this profitable offshore market, other preexisting tax havens in the neighborhood—notably Switzerland and Luxembourg—also joined the Eurodollar party.

Switzerland was the granddaddy of the world’s tax havens, having harbored the wealth of European elites in secret for centuries. This dark history is directly connected to the country’s famous political neutrality and also to its snow-capped Alpine geography. After becoming a unified country in 1848, Switzerland was always riven by internal divisions, as hardy and self-reliant Alpine valley communities, often speaking different languages and practicing different religions, were separated from one another by forbidding snow-covered mountain ranges. A German-speaking part around Zurich in the north, center, and east, bordering Germany and Austria, sits next to a very different French-speaking zone in the west, dominated by Geneva and up against the French border, and an Italian-speaking area in the smaller southern segment, above Italy. So if a European war were to break out between France and Germany, for instance, this could pitch Switzerland’s French- and German-speaking zones into conflict with each other. To counter this threat, the Swiss had to adopt political neutrality in all foreign wars. But they also created a remarkable constitutional machinery to minimize internal conflicts, including a major decentralization of power to the cantons and regions, plus a system of government based on rule by consensus between the main parties, called Concordance. These two mechanisms—neutrality and this unique political machinery to curb latent internal linguistic, religious, and cultural antagonisms—have been so successful that they have made Switzerland into one of Europe’s most stable countries. And on this bedrock, a great tax haven has been built.

When Catholic French kings took large loans from heretical Protestants, it was Swiss bankers who acted as the intermediaries, helping them hide the money trails. When European wars broke out, elites in opposing countries looked to discreet Switzerland, 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 in Geneva, London, and elsewhere. “You have many friends here, not least in the City of London,” gushed British prime minister Margaret Thatcher at a luncheon for him in London in 1985. “We shall continue to offer the widest possible trade opportunities to you.”¹⁵

As the murderous Jean-Claude “Baby Doc” Duvalier of Haiti and the grasping Ferdinand Marcos of the Philippines looted their treasuries, American and British bankers in London and Zurich got rich. By some estimates, over half the money borrowed by Mexico, Venezuela, and Argentina in the late 1970s and early 1980s “effectively flowed right back out the door, often the same year or even month it flowed in.” In Venezuela it was nearly dollar for dollar. The ordinary citizens of these countries had to shoulder the burden of crushing debt repayments. In the unpoliced Euromarkets, there was nobody to stop it.¹⁶ The American financial system was increasingly intertwined in complex webs with those of other countries, “no more reducible to Wall Street than the manufacture of iPhones can be reduced to Silicon Valley,” as one account put it.¹⁷ Tax evasion, crime, bad accounting, bank scams, gray-zone semilegal rip-offs, pump and dump schemes, and especially lax financial regulation: it all came together in one unholy, messy, fast-growing festival of finance centered in London.

Long after the formal trappings of the British Empire had crumbled, here was another giant looting machine run out of the City of London. It needed no British soldiers and was predicated on tight secrecy. It was all but invisible.

The Euromarkets grew some more and just kept growing. The Bank of England routinely rebuffed American requests for ideas on how to tackle the growing problems and tensions. “However much we dislike hot money we cannot be international bankers and refuse to accept money,” a Bank of England memo said. “We shall do lasting damage.” The Americans pressed further, and the British screw-you became more explicit. “It doesn’t matter to me whether Citibank is evading American regulations in London,” said James Keogh, a top Bank official. “I wouldn’t particularly want to know.”¹⁸

Like a slow-motion explosion, the Euromarkets rapidly accelerated financial globalization. They metastasized beyond Britain, beyond dollars, and beyond anyone’s control, morphing into a frenzied financial battering ram, which would combine with Hayek’s and Friedman’s ideological pushback against government intervention to smash holes in exchange controls and the cooperative international infrastructure. More and more cracks were appearing in the walls of the dam, and the massive oil price surges of the 1970s threw everything into further confusion. The Bretton Woods system was rubble. And so began a new era of free finance, engendering massive profits for the financial sector—and in turn much slower global growth, rising inequality, global crime, and more frequent financial crises across the Western world.¹⁹ It was precisely what Keynes had warned about.

As this chaos had been unfurling, another set of darker developments, umbilically linked to the Euromarkets, was gathering pace. This particular variety of mayhem goes back as far as you like, but a good place to start is with the Wall Street financier Wallace Groves, an associate of the Meyer Lansky crime syndicate that was operating casinos out of Miami in the 1950s. The US Mob ran offshore gambling and crime operations in nearby Cuba and had thoroughly corrupted the government there, ultimately triggering a populist revolt that began in 1953 and eventually brought the Communists to power under Fidel Castro.

Groves had settled in the nearby Bahamas, an old offshore pirates’ den that had once hosted the notorious Blackbeard and the bloodthirsty Henry Morgan (who was so successful as a pirate that the Queen knighted him and appointed him lieutenant governor of Jamaica). Groves set up casinos and other profitable businesses in the British-ruled Bahamas, catering heavily to American clients outside the reach of US law enforcement, and he deployed his profits to subvert the thuggish Bahamian elite, known as the Bay Street Boys. As the Communist threat to the Mob’s Cuban operations grew, the Mafia turned its attentions to the Bahamas as an alternative. In 1955 the Bay Street Boys gave Groves a two-hundred-square-mile concession to develop a port and free-trade zone, exempt from taxes until 1980 (subsequently extended to 2054) and largely free of the rule of law too. This anything-goes, libertarian free-for-all tax haven prospered greatly, though it contributed relatively little to the rest of the Bahamas, apart from corruption and some jobs, which mostly went to shady expatriates. A British official in 1968 worried that it had become “a separate city state.” As the empire crumbled, British officials were reluctant to alienate the elites in another potentially restive colony by outlawing this lucrative and fast-growing offshore activity.

All this would have been troubling enough for the US and British governments. But other British territories in the region had noticed the money pouring into the Bahamas tax haven and wanted to copy it. A race to the bottom got under way, led by an unholy triumvirate of money-scenting local colonial elites, a few (mostly American) promoters of tax haven schemes, and a coterie of (mostly British) accountants and offshore lawyers to help set it all up.

The British National Archives for this period tell a remarkable story, with officials from government departments becoming aware of tax haven activity popping up like Caribbean mushrooms on island after island, then engaging in a whirlwind of official correspondence, chasing after it all. Different departments pushed and pulled in different directions. The treasury, for its part, fretted about losing tax revenue to these tax havens, while seeming quite unconcerned that tax and crime-fighting authorities in the United States and elsewhere were being undermined and cheated. The Bank of England seemed most worried about shoring up exchange controls and the Bretton Woods architecture—these places were obvious points of leakage. But again, it showed little or no concern for North or South American governments and citizens, whose countries’ tax and crime-fighting systems were being undermined by these British havens, mostly known as British overseas territories. The Foreign Office seemed delighted with the dirty-money game, since it would help these tiny territories become self-sustaining, so they weren’t a drain on British foreign aid budgets.

Aside from the Bahamas, the main territories in question were (and still are) the last fragments of the British Empire: fourteen semi-independent nations including seven global tax havens—Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands. Alongside the tax havens of Jersey, Guernsey, and the Isle of Man around the British mainland, known as the Crown dependencies, these colonies did not cut all their ties with Britain when the empire collapsed.²⁰

In many of these places banking was conducted in both pounds sterling and US dollars, which were supposed to be kept separate under the safety hedge of the Bretton Woods system. Banks were supposed to keep two sets of books for the different currencies and implement exchange controls carefully between them. But arbitrage between currencies was highly profitable, and these libertarian paradises didn’t want to play by the rules, especially if there was big money to be made. By the 1960s all sorts of curious creatures were scurrying through the holes in the Bretton Woods boundary hedge that ran right through the middle of all these tax havens. Among the best known and the earliest of these creatures were the Beatles, whose film Help! was shot in 1965 in the Bahamas because the band had to live there for a while in order to make it work as a tax shelter. There’s a memo in the archives from a Bank of England official in 1969 that quivers with alarm:

Events, however, seem to be moving rather faster. The potential gaps in the Exchange Control hedge can no longer be contained by occasional visits. The smaller, less sophisticated and remote Islands are receiving almost constant attention and blandishments from expatriate operators who aspire to turn them into their own private empires. The administrations in these places find it difficult to understand what is involved and to resist tempting offers.… Tax haven proposals by a US resident are leading them to have second thoughts about the need for Exchange Control at all. We might need to station a man somewhere in the area.²¹

Fabulous and enticing promises began to mount. The memos going back and forth are ferocious by crusty British civil service standards, describing a game of whack-a-mole in these outgrowths of the Euromarkets, an offshore whirligig running faster and faster, driven by foreign criminals, shady characters, and anti-regulation bankers. Someone from the Overseas Development Ministry was gung ho for secret banking and seedy shell-company business because it “attracts entrepreneurs and financiers,” he said, arguing that this was a fine way for these Caribbean microstates to develop their economies—without apparently sparing a thought for the hundreds of millions of North Americans, Latin Americans, Africans, and many others paying a murderous price for Britain helping their elites, drug gangs, and kleptocrats to ransack their national coffers. These activities, he said, were “mainly aimed at North American companies” and “may have little adverse effect on the UK.” Screw you, America.

The Bank of England quietly welcomed foreigners stashing money in the territories, generating foreign currency fees just as the Euromarkets were doing in London. The same Bank memo urged the authorities “to be quite sure that the possible proliferation of trust companies, banks, etc. which in most cases would be no more than brass plates manipulating assets outside the Islands, does not get out of hand.” But as long as exchange controls were not breached, “there is of course no objection to their providing bolt holes for non-residents.” That last sentence is, of course, code language for welcoming shady money. Especially North and South American shady money.²²

The correspondence shows a mounting range of scams and schemes building up in Britain’s havens. One memo described a “financial pirates’ nest” being set up in the British Virgin Islands, used for drugs and gunrunning, while another opposed a plan by an American consortium of “investors,” with the innocuous name of Global Risk Underwriters Inc., to take over Antigua’s satellite island of Barbuda, to set up a free port and an investment bank with numbered accounts and exemption from any investigation, along with unregulated gold refining, gambling, and, officials suspected, drug smuggling.²³ Officials in London discovered that an American financier called Clovis McAlpin was proposing a scheme in the Turks and Caicos Islands that would amount to “exclusive rights which would virtually turn him into the uncrowned king of the islands.” (The scheme came to nothing.) They fretted that the Caymans had been “literally raided by an expatriate tax council, who overnight persuaded them to enact trust legislation which goes beyond anything yet attempted elsewhere.” (This council has evolved and still exists today, and it largely writes the Caymans’ tax haven laws.) One memo slammed Cayman’s Trust Law of 1967 as “quite uncivilised,” while another lamented the role of the accounting firm Price Waterhouse, which had been urging nearby Montserrat to set up an “objectionable” brass-plate business, again catering mostly to Americans. There were new laws on shell companies in the British Virgin Islands, whose users would be “immune for at least twenty years from all enquiries from any source,” and this risked infuriating the US government.²⁴

As one scheme followed another, the wrangling continued in London. The archives show how those supporting the offshore tax haven model slowly began to gain the upper hand. The merry-go-round continued, getting ever faster and more interconnected with the Euromarkets. More and more private operators flocked to the territories, urging each to compete fiercely with its rivals by putting in place ever more devious and criminal-friendly secrecy facilities, trust laws, and financial regulatory loopholes.

This era, from the mid-1950s to the early 1980s, was the great watershed between the two ages of the global system of tax havens, as the slow, discreet system of secret offshore banking dominated by the Swiss ceded ground to a more hyperactive, aggressive Anglo-Saxon strain, operating first out of the London-centered Euromarkets, then rippling out into the unpoliced and heavily criminalized British offshore network that still exists today. If you consider Britain and its tax haven satellites together as a network, it would soon constitute the world’s biggest offshore tax haven. This network is like a spider’s web, linking the City of London at the center to satellites like the Caymans or Gibraltar.²⁵ Fees or assets captured in the web, typically from jurisdictions near the haven in question, get fed upward to the City of London. So, for example, a Colombian criminal or American mobster might set up a shell company or bank in the Cayman Islands; or a French bank or energy company will establish a special purpose vehicle (SPV) in Jersey to hide assets from shareholders or from government regulators; or a Russian oligarch might set up a dodgy bank in Gibraltar. Sometimes illegal activity is involved, sometimes not. Each step needs lawyers, accountants, and banking services, which the British network happily provides. The most profitable heavy lifting happens in London, but it is often the haven that snared the business in the first place. A spider’s web is a sinister analogy, but it is apt.²⁶

In 1976 Anthony Field, the managing director of Castle Bank & Trust in the Caymans and the Bahamas, was arrested at a Miami airport, after a private eye hired by the IRS discovered that the bank had been helping two hundred rich Americans dodge taxes: Americans who included Playboy’s Hugh Hefner, the rock band Creedence Clearwater Revival, Chicago’s Pritzker family, and members of the Cleveland Mafia. The Castle banker was told he faced jail if he didn’t provide details about his American tax-evading clients. He refused, saying he’d be prosecuted in the Caymans if he did. To bolster Field’s case, the Cayman government drafted a ferocious new secrecy law that could land you in jail not only for leaking confidential information to outsiders but for merely asking for it (a version of the law is still in place today). This Cayman law was an astonishingly brazen, London-approved, fist-pumping fuck-you to the United States. (In the end President Richard Nixon stepped in and appointed a new IRS commissioner from Cleveland, who squashed the whole case.)²⁷

The close legal links these British havens have with London is crucial, providing the reassuring legal bedrock, political support, and familiarity that other fly-speck havens can’t match. If there’s a dispute over a Cayman-incorporated structure, for instance, British courts and British judges will rule on the case and have the final say. Why would you deposit your money in a banana republic bank when you can go to the Cayman Islands and have your stash protected by the British legal system? The importance of the British link was illustrated clearly when the Bahamas became fully independent from Britain in 1973 under a black nationalist premier, Lynden Pindling (who was also, as it happens, on Meyer Lansky’s payroll). The money fled the Bahamas in droves, and most of it alighted in the nearby Caymans, which was still British. A London-based lawyer called Milton Grundy, who helped write laws of “labyrinth complexity” for tax havens like the Caymans, explained why the money left the Bahamas so fast: “It wasn’t that Pindling did anything to damage the banks,” he said. “It was just that he was black.”²⁸

The need for this British bedrock highlights how tax havens turn two faces to the world. On the one hand, they need to appear clean, trustworthy, and efficient, to reassure flighty clients that they’re in safe hands. On the other hand, they want to get hold of as much dirty money as they can. They square this apparent contradiction with a simple offering to the world’s stateless hot money, which goes roughly like this: “You can trust us not to steal your money, but if you want to steal someone else’s money, then you can also trust us to turn a blind eye.” This helps explain why Swiss people are famed around the world for their punctuality, personal honesty, and efficiency—and yet Switzerland is historically one of the world’s greatest money-laundering sinks of dirty money. And it’s a similar story in Britain. British people are still admired the world over for fair play, and British judges for their incorruptibility, yet at the same time we find Roberto Saviano, Italy’s most celebrated anti-Mafia journalist, calling Britain “the most corrupt place on Earth” because of all the City’s dirty money. This contrast between apparently clean officials and dirty money is no coincidence; it is the heart of the offshore model.

With these financial arrangements in place, Britain was able to make up for the loss of its ability to use its soldiers and gunboats to extract riches from foreign countries. Professor Ronen Palan of City University in the UK describes this spider’s web as “a second British empire which is at the very core of global financial markets today.”²⁹ This second financial empire has characteristics in common with Britain’s lost territorial empire. First, the libertarian character of its escape routes strongly echoes the old empire’s evangelical devotion to freedom. Criminals inevitably flock to libertarian, unpoliced free spaces to deal in money, just as wasps will mysteriously turn up when you open a pot of strawberry jelly at a summer picnic. Laws were carefully drafted to achieve maximum secrecy, and when packing crates full of drug money arrived in the Caymans or Panama, the police would be on hand to escort them safely from the airport to the local banks. And as we will see, this laissez-faire approach to money in the British tax havens would extend far beyond handling the proceeds of drug deals and organized crime and into high finance. The veteran US crime-fighting lawyer Jack Blum remembers first understanding the links between crime and financial deregulation on a trip to the Caymans in the 1980s: “I began to see that drugs were only a fraction of the thing,” he told me. “Then there was the [other] criminal money. Then the tax evasion money. And then I realized, ‘Oh my God, it’s all about off the books—off balance sheet.’” By 1989 the Cayman Islands, with just twenty-five thousand inhabitants, would be on paper the world’s fifth-biggest banking center, a position it more or less holds today.

The spider’s web has enabled people connected to the City of London to make immense profits from illegal or immoral activities, typically involving American citizens and taxpayers, while using the overseas territories like barge poles—to hold the stink at arm’s length. And whenever a bad smell has emerged, British officials have told their irate detractors, “Look, chaps, these places are largely independent from us; there’s really not much we can do.” Yet this claim of powerlessness is false. Her Majesty the Queen appoints the governors of these British overseas territories; all their laws were and still are sent to London for approval; and Britain has always had complete power to revoke these laws. Yet it almost never does.³⁰

We should be outraged at this long-running British government strategy in support of the City of London. But not too outraged, because there’s another large player in the tax haven game that may be just as bad, in its own way. The United States itself.

In 1967 Michael Hudson, then a balance-of-payments economist at Chase Manhattan Bank, was in a company elevator when someone handed him a State Department memo asking Chase to take the lead in helping turn the United States into a giant tax haven. “Like Switzerland, flight money probably flows to the US from every country,” the memo began. The United States at that time was suffering outflows of dollars as US forces conducted bloody and expensive ground offensives in Vietnam, and it was looking to attract some money back. The memo listed its complaints: the US Treasury and FBI were too enthusiastic in their use of subpoenas and other tools to crack down on crime; taxes and regulations on foreign money were too high. Hudson was asked if he could estimate how much foreign illicit money the United States might be able to get its hands on. “The hot money wouldn’t come directly into Chase, because that wouldn’t be nice and very legal,” remembers Hudson, now a finance professor at the University of Missouri at Kansas City. “What happened was that the Latin American criminals, other criminals, drug dealers, all sorts of organized crime would put their money in the offshore Caribbean banks, and these offshore banks would then deposit the inflow in the head office.”

According to Hudson, “they were saying, ‘We want to replace Switzerland. All this money will come here if we make this the criminal center of the world. This is how we fund Vietnam. We wanted the foreign criminal money, which is patriotic, but not the American criminal money.’”³¹

In fact, the United States already had some discreet laws to attract foreign money and had, since 1921, exempted from tax the interest income on bank deposits owned by foreigners. After World War II, there were widespread fears that if European economies collapsed again they might fall into communism and the Soviet orbit and also fears that enormous quantities of US aid to address this, under the Marshall Plan, might be undermined by wealthy Europeans seeking to escape paying their share. US policy makers in Congress deplored the “small, bloated, selfish class of [Europeans] whose assets have been spread all over the place” and asked “whether or not [the United States] should become a sanctuary for refugee money.” Indeed, early drafts of the IMF’s Articles of Association said countries should be “required” to help each other address capital flight, especially with transparency: telling European governments about their wealthy citizens’ stashes of offshore wealth. Yet an alliance of US bankers, with some help from Treasury officials, fought back hard against such transparency, fulminating that these and other controls would do “maximum violence to our position as a world financial center”;³² in the end the IMF would no longer require countries to help each other track down offshore stashes, merely permit them to do so. Through this tiny loophole whooshed huge volumes of European treasure, much of it the proceeds of US Marshall Plan aid that had been sequestered by that small, bloated, selfish class of Europeans almost as soon as it landed, and sent back offshore to the United States: a total of at least $4–$5 billion in 1947, which in those days was a vast sum of capital lost to a Europe desperate for capital for reconstruction. Only a major new economic crisis in Europe in 1947, caused largely by these outflows, forced US policy makers to tighten up again.³³

Over the ensuing decades, foreign capital continued to wash into the United States, much of it from Europe and much of it smuggled undetected alongside bona fide trade flows. Once the money was there, the US banking community was able to hold on to it by cloaking it in deep secrecy, for the United States didn’t have any meaningful arrangements in place to tell foreign governments about their wealthy citizens’ holdings. And it steadily put in place new federal-level regulations to bolster the attractions: by 1976, when a new US Tax Reform Act reaffirmed America’s commitment to use tax haven secrecy facilities to attract capital to the United States, it was estimated that a third of all bank deposits were from Latin Americans evading taxes and controls at home.

And while this shift was happening at a federal level, mostly with respect to banking deposits, another whole set of games was going on at the state level, as places like Delaware and Nevada started passing laws to allow the creation of shell companies and other mechanisms that would be all but impenetrable to outsiders—including the IRS. In 1984 Time magazine summarized the changes: “America has become the largest and possibly the most alluring tax haven in the world.” At any rate, it was giving the British postimperial spiderweb a run for its money.³⁴

The Janus-faced offshore business model of trying to appear clean and well regulated while attracting as much criminal and dirty money as possible poses many problems for any country, like the United States or Britain, that hosts and encourages this kind of activity.

For one thing, it assumes you can sequester the dirt and the criminality safely away from the rest of the economy, from democracy, and from society. This, however, is impossible, for the two most dangerous parts of a political system are most likely to meet and become intertwined: the richest and most powerful members of society, who are of course the biggest users of tax havens, and criminals. Fish, as the saying goes, rot from the head. Crafting a national economic strategy that relies on offshore finance creates inevitable blowback, which has criminalized American and British elites in four main ways: it brings the wealthiest and most powerful into close proximity with criminals; it offers the elites permanent temptations to criminality; it makes criminals rich, enabling them to join the ranks of the elites; and, by making it easy to escape rules and laws, it creates a culture of impunity and a real sense of being above the law. Modern US politics, with sleazy revelation after sleazy revelation, exposes how dangerous this strategy has been.

All this history helps us answer a question that bothers many people about tax havens: Why don’t governments just close these financial brothels down? Lee Sheppard, a leading US tax expert, summarizes the answer to this question as well as anyone: “We fuss about them, we howl that the activity is illegal, but we don’t shut them down because the town fathers are in there, with their pants around their ankles.”³⁵

And this, in turn, brings us to a further major characteristic of these offshore territories: they are all, especially the smaller island tax havens, “legislatures for hire,” as the British tax haven expert Prem Sikka puts it. Like the old colonies, their political and economic development is mainly dictated not by local democracy but by foreign interests, and in the case of tax havens this means rootless foreign offshore money. A memo in Britain’s national archives from 1969 illustrates this problem, fretting about

a flow of propositions involving Crown lands put daily and endlessly to the government by private developers. These propositions are inevitably propounded in an atmosphere of geniality, lavish hospitality, implied generosity and overwhelming urgency. They are usually backed by glossy lay-outs, and declaimed by a team of businessmen supported by consultants of all sorts. They are invariably staged against an impossibly tight deadline, with an implicit threat of jam today or none tomorrow. On the other side of the table—the Administrator and his civil servants. No business expertise, no consultants, no economists, no statisticians, no specialists in any of the vital fields. Gentlemen vs Players—with the Gentlemen unskilled in the game and unversed in its rules. It is hardly surprising that the professionals are winning, hands-down.³⁶

In small island tax havens, administrations staffed by former fisherfolk or owners or employees of bed-and-breakfast hotels are asked to scrutinize complex laws on special purpose vehicles or offshore trusts. Even in those rare cases where administrators do possess the technical knowledge to understand such laws, there is a wall of money pressuring them not to oppose any proposal. With Cayman-registered banks now holding $1 trillion in assets, equivalent to 100,000 percent of that microstate’s gross national product, it is clear where the power lies. As a result, local administrators can usually do little more than rubber-stamp laws devised for the owners of the world’s hot money. The Panama Papers leaks in 2015 revealed how Mossack Fonseca, the Panamanian firm at the center of the scandal, effectively wrote the tax haven laws of Niue, a tiny Pacific island of 1,500 people. Mossack Fonseca got an exclusive agreement to register offshore companies there, and this operation was soon generating 80 percent of that territory’s government revenue. The logic, as described by the firm’s cofounder Ramón Fonseca, was that “if we had a jurisdiction that was small, and we had it from the beginning, we could offer people a stable environment, a stable price.” They certainly had Niue.³⁷

It is also essential to understand how the business model of these places is purposely antidemocratic. A tax haven’s deliberately constructed loopholes are not designed to help locals escape laws and rules but to help others, elsewhere, do so. Officials carefully write their laws to ensure that any resulting damage in unpaid taxes or evaded financial regulations is inflicted elsewhere, protecting the tax haven against self-harm. This “offshore” element means that the people who make the tax haven laws are always separated from those who are affected by those laws. So there is never democratic consultation between lawmakers in tax havens and the people elsewhere affected by their laws. That is the whole point of offshore. And it means that offshore is, almost by definition, the equivalent of the smoke-filled room, where business gets done by cigar-chomping gentlemen outside of, and indeed in opposition to, the democratic process. And they operate according to the golden rule: whoever has the gold makes the rules.

Rudolf Elmer, a Swiss bank whistleblower who was accused of passing information to WikiLeaks about shady arms brokers, Mexican officials linked to drug dealers, Saudi companies linked to the bin Laden family, and around forty American and other politicians accused of corruption, found out the cost of offshore dissent. Two men followed him to work, began watching his wife at home, and hung around his young daughter’s day care and offered her chocolates in the street. The Swiss police declined to help; instead, they searched his house, and he ended up in prison. “I was an outlaw,” he said. “I was godfather to a child whose father is in finance. He said I had to stop—’you are a threat to the family.’” After Elmer’s release, the courts kept pursuing him, and in June 2015 he sent me a trove of documents that showed how Switzerland, under instructions from its banking establishment, had corrupted its judicial system to nail Elmer, despite the case having no legal merit because he had been working in the Caymans when he blew the whistle. The court declined to allow him to call witnesses, refused to accept documents to support his case, and used false evidence. A former Swiss judge told Elmer that his treatment reminded him of the Mafia. “Swiss bankers … simply do not go to court for their crimes,” Elmer wearily told me. “They are a protected species.”³⁸

In tax havens like Switzerland, deference to offshore financial interests becomes reinforced by a ferocious social consensus to make sure everyone does the right thing, which is to keep bringing in the money. The wealthy high-society folk who run these places rarely do anything as crude as to throw opponents of offshore finance in jail. The threat usually lies in more discreet mechanisms, such as the knowledge that if you rock the boat, your employment opportunities will dry up or you will be ostracized. In the goldfish bowl of small-island life, where opportunities are often scant, that is usually enough to silence even the reddest of radicals. John Christensen remembers this pressure from his days as official economic adviser to the tax haven of Jersey. He recalls choking with anger during meetings, yet feeling immense pressure to conform to what offshore finance wanted from the island. “It took real strength to stand up and say, ‘I’m sorry, I don’t agree with this.’ I felt like the little boy farting in church.” Many years after leaving Jersey and setting up the Tax Justice Network to combat tax havens, he says he is still a hated figure in Jersey financial circles, pilloried as a traitor. In such places the capture of the tax haven by offshore financial interests—or financial capture—often extends into family life itself. A few years ago in the Alpine tax haven of Liechtenstein I spoke to a woman who had once spoken out publicly against her country’s financial laws. After that, she said, her own sister crossed to the other side of the street to avoid meeting her.

These cultural changes have been a direct consequence of the race-to-the-bottom contagion, as countries like Britain and the United States have operated under the assumption that they need to “compete” to attract the world’s hot money and have cleared away the political and cultural obstacles to make this happen. There has been no larger arena for this game than the Euromarkets, which, as one analysis put it, created a giant “transatlantic regulatory feedback loop that stimulated deregulation on both sides of the Atlantic … eroding the regulatory architecture of the postwar Keynesian state in Britain and destabilizing American New Deal regulations.” This feedback loop helped generate a rising global wall of money and debt, which has steadily burrowed into the nooks and crannies of our economies and our political systems, driving a gravitational shift inside the United States toward the needs of finance and delivering a payload of financial techniques and methods that have transformed the way we think about businesses, our homes, our public services, and even the people we love.³⁹

The hot capital flowing into the countries that played this game the hardest made some local bankers, lawyers, and accountants wealthy. But this hot money inflicted a wave of more invisible damage on the wider US economy and society, through all the different mechanisms of the finance curse: greater financialization and wealth extraction, the brain drain out of productive sectors and into banks and shadow banks in Miami, Chicago, or New York, and greater deregulation and risk-taking at taxpayers’ expense, as American banks flocked to the London playground, then returned home with threats to move out wholesale if they didn’t get what they wanted.

Worse was to come. As the tax havens and the Euromarkets began to flourish, another set of changes got under way in the United States that would turn out to be just as powerful a crowbar to undo the progressive reforms that had generated such widespread prosperity during the Golden Age of Capitalism. These would deliver a knockout blow not so much to the Bretton Woods system as to an older, yet no less powerful, democratic tradition: antitrust. These changes would help create the wealthiest robber barons in world history.