Explorers during the Age of Discovery set off in sailing ships to look for gold. The objectives of Columbus were gold, god, and glory. On October 12, 1492, the day after he landed on the island of Guanahani in the Bahamas, he set out on a quest for the metal. He wrote of his first experience: “Seeing some of them with little bits of this metal hanging at their noses, I gathered from them by signs that by going southward or steering round the island in that direction, there would be found a king who possessed large vessels of gold, and in great quantities.”7
Two years after that first voyage to the new world, the proud Columbus proposed to his Spanish patrons, King Ferdinand and Queen Isabella, the rules for gathering gold from the new territories. Colonists, for example, should be obliged to get a license from the Spanish governor, and all gold found should be smelted immediately. He wrote them, “Without doubt there is in these lands a very great amount of gold.” In the century after Columbus, the world’s stock of gold increased five-fold setting off one of the world’s most productive eras of gold discovery.8
Under the mercantile system, which dominated the world economy from the sixteenth to the eighteenth century, countries imported as few goods as necessary, exported as much as feasible, and sold as little of their gold as possible. This was followed by the international gold standard, which was the bedrock of global finance for the next century, leading up to World War I.
The British in the early eighteenth century established the value of a country’s currency on the basis of gold. Sir Isaac Newton, the master of London’s Mint, in 1717 tied the value of the pound sterling at 113.0016 grains of pure gold. Britain was such a dominant economic power that other countries had no choice but to follow its lead. That gold system became the foundation of world trade and fostered economic prosperity. The U.S. dollar in that era was worth 23.22 grams of gold. From the 1830s to the 1930s, the international price of gold was about $20 an ounce.9 During that time, Britain was the international lender of last resort and helped countries out of financial troubles. The system had credibility and fostered close cooperation among the leading nations as well as widespread prosperity. If a country followed irresponsible economic policies, it had to devalue its currency by decreasing its gold value. It was a humiliating and painful process that nations fought hard to avoid.
Governments often ignored the gold standard in times of war, but they returned to it in peacetime. Britain and other nations suspended it during World War I. In April 1925, though, Chancellor of the Exchequer Winston Churchill put his country back on the gold standard at the pre-war level.10 It was an unrealistic price that fostered the world depression. Nonetheless, Joseph Schumpeter, the great Austrian-American economist of the mid-twentieth century, praised gold as an automatic system that reacted quickly to changing conditions, writing, “Gold imposes restrictions upon governments or bureaucracies that are much more powerful than is parliamentary criticism. It is both the badge and guarantee of bourgeois freedom—of freedom not simply of the bourgeois interest, but of freedom in the bourgeois sense.”11 Robert Mundell, the winner of the Nobel Prize for Economics, has said, “Gold will be part of the international monetary system in the twenty-first century.”12 George Bernard Shaw, the playwright, in The Intelligent Woman’s Guide to Socialism and Capitalism, wrote, “You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. And, with due respect for those gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold”13
On January 24, 1848, James W. Marshall discovered a few flakes of gold at the sawmill he owned with John Sutter in Northern California. Ambitious miners from around the world rushed to California by land and sea to seek their fortune, and in the process helped settle the nation from sea to shining sea. When the Union Pacific and Central Pacific railroads met on May 10, 1869 at Promontory Summit in the Utah Territory, a golden spike completed the job. The United States had become a global power.
Gold has always been the last refuge of people in times of crisis. In July 1864, Confederate military units invaded the District of Columbia and were within sight of the nation’s capital. Union Secretary of War William Stanton took $5,000 in government bonds and $400 in gold belonging to his wife Ellen out of his safe at the War Department next door to the White House, gave them to his secretary, and told her to go to his home and hide the valuables in his mattress.14
In Lords of Finance, which recounts the history of central banking between the two world wars, Liaquat Ahamed wrote that Montagu Norman, the governor of the Bank of England, the predominant banker in that period, considered gold to be “one of the pillars of a free society like property rights or habeas corpus, which had evolved in the Western liberal world to limit the power of government.”15
At the beginning of World War II, when nations fell in a matter of days and millions of refugees flooded the roads to escape the conflict, people turned to gold as their last hope for survival. In June 1940, twelve-year-old Felix Rohatyn, who would later become the chairman of the international financial giant Lazard Frères and rescue New York City from bankruptcy in 1975, was one of millions of European Jews trying to escape from the Nazis in France. His mother instructed him to empty tubes of Kolynos toothpaste and refill them with gold coins from his grandfather’s collection. Two years later, when Rohatyn finally arrived in New York City to end his long escape odyssey, the gold was still in the toothpaste tubes.16
In a similar but less successful tale, Prime Minister Paul Reynaud, who had led his country’s battle against Hitler, fled France after the armistice and was trying to get into Spain in June 1940. Spanish customs officers at the border inspected the luggage of his mistress Helène de Portes and found $2 million worth of gold.17
The world’s central banks are the traditional home for most gold. That is where the vast majority of it is stored, and the biggest trades in the metal have traditionally been made among national financial institutions. Governments looked to central bankers to run their economies, and for most of history nations settled their foreign trade exchanges with gold. Countries buying more than they were selling usually made up their trade gap with bullion. Sweden established the first central bank in 1664 following the failure of a prominent private financial institution. The Bank of England was established thirty years later and was the preeminent one for nearly three centuries. During that time, it was the custodian of gold. The New York Federal Reserve, the American central bank, took over that international role during World War II.
Adolf Hitler knew nothing about economics and cared little for gold. He wrote in his opus Mein Kampf, “It may be that today gold has become the exclusive ruler of life, but the time will come when man will again bow down before a higher god.”18 The people working for Hitler, such as Hjalmar Schacht and Hermann Göring, however, believed strongly in bullion. Schacht wrote in his book Gold for Europe, “With all peoples and at all times gold has always been a welcome means of exchange, and it was possible to acquire all other goods in current commercial use with gold long before rulers and governments took control of the monetary system by legal measures.” They used the precious metal as an important way to finance Nazi wars and achieve their goal of dominating Europe. The Nazis systematically attempted to steal gold from each of the nearly two-dozen countries they invaded. Sometimes they succeeded; other times they failed. Nations made heroic efforts to safeguard the national treasury. The most despicable gold thefts were the tons of dental gold that elite SS (Schutzstaffel) guards ripped from the mouths of people who had died in the gas chambers. That, however, represented only a small portion of total Nazi theft. Willy Sutton, the Depression era crook, apocryphally said that he robbed banks because that’s where the money was. The Nazis robbed central banks because that’s where the gold was. Between 1938 and 1944, the government in Berlin stole some 600 tons from Europe’s national depositories.19
Gold was the centerpiece of the Nazi economic policy and war strategy during
World War II. They stole it, and then used the booty to finance their war machine. They could have been taking their marching orders from King Ferdinand of Spain, who in the sixteenth century told his conquistadores: “Get gold humanly if possible, but at all hazards get gold.”20
Chapter Two
SPANISH PRELUDE
The Spanish Civil War of 1936 to 1939 set the stage for World War II and left a half million people dead.1 Germany, Italy, and the Soviet Union used Spain as a real live testing ground for their soldiers, weapons, and tactics. The first urban carpet-bombing, which would be used extensively in the battles of Britain and Berlin, was the German attack of April 26, 1937 on the Basque town of Guernica, a tragedy that Picasso immortalized in a painting. Tank combat, while first seen in World War I, was vastly improved in Spain. The first airlift of war materiel took place when Germany landed caches of weapons and men to help anti-government forces.
The Spanish Republic also used its stockpile of gold, built up by the conquistadors, as a weapon of war. At the outbreak of the conflict, the Spanish government had 635 tons of it in its vaults.2 That was the world’s fourth largest national holding after the U.S., France, and Britain. By the end of the conflict, Stalin would have much of it.
The Spanish Civil War was the culmination of a half-century of chaos and violence in a country struggling to move from the medieval to the modern. A social revolution spun out of control, and politicians from extreme right to extreme left who had little experience in democracy believed every disagreement was a fight in which no prisoners would be taken. At one point twenty-six political parties were represented in the Cortes, the national parliament.3 The spectrum went from royalists to anarchists. In addition, Basque and Catalan separatists fought to win freedom for their regions from the central government in Madrid.
On one side was a democratically elected leftist government; on the other a rightist military. Government supporters called themselves Republicans, while those backing the armed forces were Nationalists. To their opponents, Republicans were communists, while Nationalists were fascists. The rallying cry of the right was Viva España, and that of the left was Viva la Republica.
The war brought about the bloodshed and cruelty so often seen in wars of religion and ideology. The Roman Catholic Church struggled to preserve long-held privileges, while its opponents considered the church the epitome of everything wrong in Spain. In the opening weeks of the war, thirteen bishops, 4,184 diocesan priests, 2,365 religious brothers and 283 religious sisters were killed.4 At the same time, Pope Pius XI in the encyclical Dilectissima Nobis (On Oppression of the Church of Spain) called on Catholics to join “a holy crusade for the integral restoration of the Church’s right.” The Pontiff condemned the Spanish government as an “offense not only to religion and the church.”5
There was no limit to vicious rhetoric. Dolores Ibárruri, the left’s Pasionaria, bellowed, “It is better to kill one hundred innocents than to let one guilty person go,” while Franco wailed that communists “should be crushed like worms.” Assassination became the continuation of politics by other means, and tit-for-tat murders of two politicians set off the war.
Passionate volunteers from around the world rushed to join one side or the other. An estimated 32,000 foreigners from fifty-two nations joined the International Brigades that fought alongside the Republicans. Others supported the Nationalists. Portugal, where António de Oliveira Salazar in 1932 set up a fascist state, sent some 10,000 soldiers to help Franco, and 75,000 Spanish Moroccan troops joined the Nationalists. Germany dispatched 10,000 men to Franco, while Italy sent between 40,000 and 50,000. Seven hundred Irish Catholics formed the Blue Shirts to fight for the Nationalists and Catholicism.6
After fascists came to power in Italy, Germany, and Portugal, the Comintern, the coordinating organization of national communist parties that did Moscow’s bidding, urged leftist parties to form Popular Front coalitions to oppose right-wing groups. The Spanish national election on February 16, 1936, pitted the leftist Popular Front against the rightist National Front. The Popular Front won 4,451,300 votes or 47.03 percent, while the National Front garnered 4,375,800 or 46.48 percent. Despite the lack of a clear mandate, the Popular Front moved to implement its program. Manuel Azaña, a long-time leftist leader, became first prime minister and then president. At the same time, Spanish generals plotted a coup d’etat.7
Spain soon slipped into chaos. In a speech to the Cortes on June 16, José María Gil Robles, a leader on the right, counted off the toll in the four months since the national election: 160 churches burned, 269 political murders, 1,287 political assaults, 69 party offices destroyed, 113 general strikes, 228 partial strikes, 10 newspaper offices sacked. He pleaded, “A country can live under a monarchy or a republic, with a parliamentary or a presidential system, under Communism or Fascism. But it cannot live in anarchy. And we are today at the funeral of democracy!”8
Only a month later during the night of July 16-17, military units in Spanish Morocco staged a coup d’etat. The code broadcast over the radio to signal the revolt: “The skies are cloudless all over Spain.” At the time, General Francisco Franco was stationed eight hundred miles away on the Canary Islands and had only a few troops under his command, but a Spaniard in London hired a plane to fly him to Spanish Morocco, where he took over leadership of Spain’s Army of Africa, the country’s premier fighting unit. While rebel units quickly captured a few key towns in the north and south, the big population centers remained in government hands. After some uncertainty, the navy remained mostly loyal to the Republic and blocked the Nationalists from moving Moroccan troops to the mainland.
The Republican government of Socialist José Giral quickly armed its supporters by distributing weapons, including machine guns, to anyone with a union card. The resulting bloodbath left an estimated 50,000 people from both sides dead. The night of July 19-20, some fifty more Catholic churches were set ablaze just in Republican-controlled Madrid.9
With no way to get his troops out of Africa, Franco appealed to the fascist governments of Italy and Germany for logistical support in the form of an air convoy. On July 19, a journalist close to Franco flew to Italy to ask Mussolini for twelve bombers, three fighter aircraft, and a supply of bombs. Three days later, Franco through an intermediary asked Berlin if he could buy “ten transport aircraft with maximum seating capacity.” A Nationalist delegation also arrived in Berlin on July 25 with a letter from Franco to Hitler making a similar request. German Foreign Minister Konstantin von Neurath met with them, but opposed the sale, fearing it might lead to a general European war. Hitler also talked with the Spaniards in Bayreuth, where he was attending a presentation of the Wagner opera Siegfried. Intense talks lasted until 2:00 A.M., when Hitler finally overruled his foreign minister and agreed to send Franco more equipment than he had even requested. Luftwaffe pilots quickly flew an initial twenty Junker-52 transport planes to Franco.10
At exactly the same time, the Republic was trying to get military hardware, especially aircraft, from the European democracies. On the evening of July 19, Prime Minister Giral sent a cable to French Prime Minister Léon Blum, who had taken office only two weeks before in another Popular Front election victory. The Spaniard stressed their common crusade against fascism, writing: “Beg of you to help us immediately with arms and airplanes. Fraternally yours, Giral.” The Spanish ambassador in Paris followed up with specific requests for bombers, fighters, machine guns, and more. Blum agreed. The Spanish Republic used its gold to pay for the weapons. On July 24, Giral authorized the first shipment to France to pay for the materiel Blum promised. Gold worth $720,000 arrived a day later aboard a Douglas DC-2 airplane at Le Bourget airport outside Paris. Further payments were delivered to France on July 26 and July 30 and then sporadically until March 1937.11
On July 25, Prime Minister Giral also sent a message to Joseph Stalin asking for “supplies of armaments and ammunition of all categories, and in very great quantities, from your country.”12 The Soviet lead
er was uncertain about whether to get involved in Spain. He had several reasons to stay out of the conflict. The Spanish Communist Party had just three thousand members and none in the government, although it had been part of the Popular Front during the election. Stalin was also preoccupied with internal problems. The Great Terror, his purge of old Bolsheviks from the government, party, and secret service, was just beginning. The first trial started on August 19. The country’s economy was weak after his collectivization of agriculture, rapid industrialization, and state-created famine that left millions dead. Stalin was also waging an international battle with Leon Trotsky, his old revolutionary comrade-in-arms, for leadership of the international communist movement. Because of all those troubles, Stalin at first watched developments in Spain from the sidelines.
Britain and France were meanwhile trying to find a way to stop the Iberian conflict. After a quick trip to London to explain his strategy to a skeptical Foreign Minister Anthony Eden, Blum arrived back in Paris on July 24 to face a cabinet rebellion. Part of his coalition strongly opposed selling arms to Spain. French President Albert Lebrun told the prime minister that it would drag France into a war, and the speaker of the Chamber of Deputies and the president of the Senate also both voiced opposition. Following a blustery meeting, the cabinet on July 25 announced that France would not sell arms to Spain. That, however, did not entirely stop them, and leftist cabinet members, particularly Air Minister Pierre Cot, succeeded in getting French planes to the Republicans. The famed author André Malraux helped deliver French aircraft to the Spanish Republic.13
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