The war, however, quickly turned into a disaster for Moscow. The Finnish military was well led by Carl Mannerheim, a former czarist general, and his brave soldiers were better at winter warfare than the Soviets. A favorite Finnish tactic was to wear white uniforms that made soldiers all but invisible in the snowy countryside. Then they would shoot passing invaders at point-blank range. The Soviet army was also poorly led because the officer corps had not recovered from Stalin’s purges of military leaders only two years before and was lacking in combat experience.
The ragtag Finnish army initially pushed back the mighty invaders, which shocked the world. The Swedes and other Scandinavian countries supported the Finns, and donations to the Finnish cause came rushing in from around the world. Former American president Herbert Hoover and New York City Mayor Fiorello LaGuardia in December 1939 attended a rally in Madison Square Garden in New York City that both showed American public support and raised lots of money.
With everything going wrong, Stalin at one point tongue-lashed Marshal Nikolai Voronov, the People’s Commissioner of Defense, for the military’s failures. In an unheard of response, the military man blasted back at him screaming, “You have yourself to blame for all this! You’re the one who had our best generals killed.” He then picked up a platter with a roast suckling pig on it and smashed it on the table.19 Incredibly, and despite this confrontation, Voronov had a long and successful career in World War II.
In the end and despite international support, the Finns could not hold on. Helsinki sued for peace after 105 days of war and signed a peace accord with Moscow on March 12, 1940. In the settlement, Finland lost eleven percent of its land and one-third of its economic assets. Stalin essentially got everything he had wanted.
Historians believe that the poor Soviet showing in the Winter War strongly encouraged Hitler to invade the Soviet Union in June 1942. The Nazi leader figured that if a small country with limited resources such as Finland could hold the Red Army off for months, then his mighty Wehrmacht would crush it in no time. Military leaders around the world shared that view.
Finland spent almost half of its gold holdings on weapons to fight the war and had only 14 tons left at the end of the conflict. At the beginning of 1940 and with the war still being fought, the Bank of Finland rushed to get its remaining gold out of Europe. In January, it sold some bullion to Sweden and shipped 12.8 tons from Stockholm to the New York Federal Reserve. It already had 4.5 tons at the Bank of England in London, which was moved to the New York Fed. On March 7, only a week before the end of the Winter War, it sold 1.9 tons more.
In the spring of 1941 and after the Winter War, Finland had 11.8 tons of the bank’s total holdings of 12.5 tons at the New York Fed, while the rest remained at the Bank for International Settlements in Basel. With Finland still living dangerously between the Soviet Union and Germany, the country’s leaders soon sold most of the gold that it had built up in the U.S. Only three tons remained, and that was soon frozen due to Washington’s wartime regulations.20
Chapter Twelve
THE WORLD’S FORT KNOX
After European central bankers witnessed what had happened to the gold holdings of Austria and Czechoslovakia, the moneymen became anxious to protect their national treasures. Some central banks decided it was probably enough to send their bullion to Britain, the traditional storage place for the world’s central bank treasure. Others, though, began looking for ways to get it all the way across the Atlantic Ocean to the United States, to put an ocean between their gold and the Nazis.
Henry Morgenthau was the member of Franklin D. Roosevelt’s cabinet most concerned about the threat Hitler posed, even though that was not directly in his area of responsibility. Thankfully, Morgenthau had a direct line to the White House because of his close relationship with the president. The two men lunched together every Monday at 1:00 P.M., and Morgenthau never hesitated to pick up the phone and call the Oval Office when something was on his mind. He worried in particular about the Nazi attacks first on Germany’s Jews and then on others when he conquered new countries. Morgenthau was particularly sensitive to the issue because of his own Jewish heritage but also as a result of his father’s experience as U.S. ambassador to the Ottoman Empire from 1913 to 1916. The elder Morgenthau witnessed at first hand the Turkish extermination of Armenians that left as many as one-and-a-half million people dead. He tried to bring their plight to the attention of both President Woodrow Wilson and the world, but with little success. That case of ethnic genocide showed to both father and son the horrors that a modern state-run terror could produce. The Treasury Secretary also realized that the Nazis could use modern methods to do even more harm.1
American political leaders and the general public believed that U.S. bankers and munitions manufacturers, who were tagged with the moniker “merchants of death,” had dragged the country into World War I. They wanted to make sure that would not happen again, which made it difficult for Morgenthau to raise public concerns about a new European war. The Neutrality Act of 1935, which was followed by similar legislation in 1936 and 1937, forbade the sale of weapons to belligerents. Roosevelt lobbied Congress to permit some arms purchases, but Congress refused.2
The Roosevelt Administration, and the American public, did not pay much attention to Germany’s seizure of the Austrian gold in 1938. But after the Munich sellout to Hitler later that same year, the White House became more concerned about developments on the continent. Morgenthau’s department was particularly critical about the role the Bank for International Settlements had played in turning over the Czech gold over to Berlin. William C. Bullitt, the U.S. ambassador in Paris, also sent ominous reports about the Nazi danger, but his counterpart in London, Joseph Kennedy, advocated finding some accommodation with Berlin.3
The Federal Reserve System, America’s central bank, is located in Washington, D.C. at 20th Street N.W. and Constitution Avenue in a four-story classical Georgian marble building featuring a giant eagle on the front. The head of the Fed from 1933 to 1948 was Marriner Eccles, who served as chairman. While the Fed’s board of governors made overall American monetary policy, the central bank’s gold activity took place at the Federal Reserve Bank of New York, one of twelve regional banks. It ran the day-to-day bullion business, and the nation’s gold was stored in the basement of its headquarters at 33 Liberty Street in Manhattan’s Wall Street area. The bank president from 1928 to December 1940 was George L. Harrison. Fed Vice President L. Werner Knoke, who had worked for years in private banking, handled daily gold operations.4
With Nazi threats becoming ever stronger throughout Europe, Morgenthau, at two meetings in early 1938, told the president bluntly “the world is drifting rapidly towards war.” He brought along to one luncheon meeting statistics showing how much the ten leading countries had spent on armaments during the past five years. The numbers were ominous. Germany had quickly built a modern military that had all the latest technology, while other countries were still struggling to get out of the Great Depression and had spent little on national defense. The treasury secretary bluntly warned Roosevelt, “The European countries are gradually going bankrupt through preparing for war. You are the only person who can stop it.”5
The president was none too happy with that news and jokingly fired back, “I feel like throwing at you either a cup and saucer or the coffeepot.”6 Nonetheless, Morgenthau had gotten the president’s attention, and FDR began bringing him into the inner circle on international and defense issues.
Gold began flowing into the U.S following the March 12, 1938 Anschluss of Austria, but the pace picked up sharply that September following the Munich agreement that dismantled Czechoslovakia. The reason was not just that European countries were worried that their national treasures might fall into the hands of the Nazis. Countries were suddenly spending heavily to buy war materiel in anticipation of a new European conflict. The U.S. was the world’s leading industrial power, and it could quickly turn out the new weapons, especially the airplanes. Coun
tries such as Britain, France and the Low Countries badly needed to catch up militarily with the Germans, and those nations purchased many of the munitions with gold. In addition, they sent it abroad for safekeeping. In the spring of 1938, gold was moving to the U.S. at the rate of $4 million a month, but in the nine months between July 1938 and April 1939 more than $3 billion landed in New York City, with nearly $2 billion of that coming from Britain alone. Even Mussolini’s Italy was sending bullion to New York. In 1939 and 1940, the Italians deposited $25 million in gold at the New York Federal Reserve.7 Gold was arriving either to buy weapons or to get it away from the danger in Europe.
Morgenthau closely monitored the gold that was flooding into the U.S. both to protect it from Nazi confiscation and to pay for weapons, and he kept the president informed of developments. The topic was a frequent subject at the weekly lunches between the two men. The president also put his treasury secretary into a key position to oversee the sales of weapons to the Allies even though that work was far from his portfolio. Morgenthau dealt closely with Harry Hopkins, FDR’s top personal aide on foreign affairs, on the issue of getting armaments to Europe. Morgenthau was thus at the heart of the action in dealing with both the Allied defense requirements and the European gold shipments whether they were to buy war goods or to keep bullion out of Nazi hands. The storage location for bullion in the early war years was the New York Federal Reserve, where it was in underground vaults in lower Manhattan. Morgenthau received daily reports from the New York Fed of gold arrivals.
The treasury secretary wished that Roosevelt would have moved faster to bolster the democracies, but he recognized that the president could not get too far ahead of the American public, which was still largely isolationist. At staff meetings, Morgenthau and others voiced concerns that the whole gold system was becoming unstable because the U.S. held so much.
In October 1938, the French government sent businessman Jean Monnet to Washington to investigate the possibility of making large purchases of American aircraft and supporting equipment. He told Morgenthau that the French would be buying about one thousand planes. Paris had one of the largest stores of gold, but they worried nonetheless about how they were going to pay for the huge armament build up. The English-speaking Frenchman had earlier sold cognac in Canada for his family firm J. G. Monnet & Co. He had also worked for the Chinese government. He was well known and respected both in Washington and Wall Street circles.
Britain decided to establish a similar operation, which it called the British Purchasing Commission.8 The director was Arthur B. Purvis. During World War I, he had been sent to Canada to buy naval supplies and then stayed there and went into business in Montreal. He became president of Canadian Industries, a chemical company that made munitions. When war again loomed, he returned to Great Britain to help with rearmament. Morgenthau held Purvis in high regard, saying that he had “never known a man who was more determined to do this job well.9 Monnet later suggested to Winston Churchill that the two countries coordinate their work so they wouldn’t get into bidding matches. The result was the Anglo-French Purchasing Board.
The political situation in Europe continued to worsen. On March 15, 1939, Germany marched into the remaining part of Czechoslovakia that it had not gotten in the Munich agreement, and a week later absorbed Memel on the German-Lithuanian border. Memel was a spit of land that had been part of the German Reich before World War I. It was given to the new nation of Lithuania at the Versailles Peace Conference. It was only ninety miles long and twelve miles wide and had 145,000 inhabitants that had a slight German majority but also a large Lithuanian minority. The Nazis had their eye on it because the Memel port would be strategically important during a possible invasion of the Soviet Union, something Hitler was already planning, despite the Molotov-Ribbentrop pact. On March 20, 1939, German Foreign Minister Joachim von Ribbentrop himself traveled there and demanded its return to the Reich. After two days of browbeating, the Lithuanian government at 1:00 in the morning of March 23 agreed to turn the area over to Germany. It was another easy Nazi conquest, and Hitler himself triumphantly sailed into the Memel harbor later that very same day.
With war rumors running wild in the last days of August 1939 following the Ribbentrop-Molotov agreement, Britain spent nearly $2.5 million in gold trying to protect the value of the pound. U.S. ambassador Joseph Kennedy sent Washington a message saying, “England is busted now.” According to the Bank of England’s Montagu Norman, his country’s financial situation was “worse than tragic.” He predicted that the entire world’s gold would soon be in the U.S. and “there will be no hope for the world . . . at least none for Europe.”10
Two months later and after the fall of Poland in September 1939, FDR asked Henry Morgenthau to take on the job of coordinating weapons sales to all the governments at war with Hitler. Since the failure of the Allies to pay off their World War I debts still loomed in the background, Monnet suggested setting up a dummy corporation in Canada so that the western allies could obtain credit. Morgenthau agreed.
In February 1939, French Premier Paul Reynaud had told Washington that he had enough gold to buy six thousand American airplanes. An armada of European ships was soon heading to New York with central bank gold and returning to Europe with planes and guns. Sometimes the bullion arrived on military vessels, and sometimes it came on merchant ones. Usually it was carried on foreign ships, but it also came on American vessels as well. The New York Federal Reserve staff, which had been handling only a few shipments of gold a month from both Europe and Asia, was suddenly logging in several each week.
Most gold movements came from major countries such as Britain and France, and some days Railway Express trucks went to the New York and New Jersey docks to pick up shipments and bring them to the New York Federal Reserve. By the spring of 1939 gold flowed in at an historic rate. Just in the month of March, eight ships carried to New York City a total of 1,427 crates and cases of British gold valued at $1.2 billion. The SS President Roosevelt arrived from Britain on April 23 with 453 boxes of bullion. The following week, the SS Manhattan brought in another 434 cases from the Bank of England. In the first ten days of May, four ships arrived from British ports with a total of 974 cases. The American ship SS Harding alone made three cross-Atlantic bullion trips, one in late March, one in early April, and one in early May. The cargo totaled another thousand cases. New York Fed officials were nervous because many ships could not get maritime insurance in view of the risks involved.11
Smaller countries such as Holland, Belgium, Denmark, Norway, Sweden, Romania, and others also sent their bullion to New York City. Between the end of March and mid-April 1939, the Belgian Central Bank sent four shipments. A fleet of Dutch vessels, all with the names of birds preceded by the word black, arrived between late March and late April. They included the Black Gull, the Black Falcon, the Black Osprey, the Black Heron, the Black Tern, the Black Eagle, and the Black Hawk. The value of gold on board the ships ranged between $150,000 and nearly $2 million.12
On September 1, 1939, L. W. Knoke, the New York Fed official who handled the incoming gold, dictated a memo for the record of a conversation he had that day with the Bank of England. He asked officials for instructions on how to handle the flood of gold coming in so quickly. The Queen Mary had just arrived with a shipload, and $12 million in bullion was due on the Samaria. He wrote: “I explained that the rush of gold over the weekend was on such a scale that we had to make preparations beforehand.”13
The New York Federal Reserve balance sheet of September 30, 1939 showed that thirty-nine countries had parked some of their national gold in the vault in lower Manhattan.14 It was arriving so fast by April 1940 that the New York Fed decided to begin charging for services that had up until then been free as a gesture of good will among central banks. The Fed now charged 33.5704 cents for each gold bar received and 22.6007 cents for each bar sent to the Assay Office to test its purity.
Shortly after the Germans took over the Czech rump state of Slovaki
a in March 1939, President Roosevelt asked Morgenthau to look into what actions the administration could take to help the Allies get more weapons without asking Congress again for new trade legislation. The Secretary assigned Harry Dexter White, his top aide, to come up with a plan for waging economic warfare on Germany. On April 8, 1939, White presented a preliminary report on “the possibility of depriving the aggressor countries of needed strategic war materials.” The study zeroed in on nine products that were vital for war, but which Germany had in only short supply. They were: manganese, copper, tin, rubber, petroleum, nickel, manila fiber, tungsten, and cotton. White estimated that Germany had to spend $100 million a month to import the commodities needed to keep its war machine running.15
White did not yet realize that the Nazi strategy was to pay for those products with gold stolen from its victims. White proposed purchasing stores of the strategic materials to keep them out of German hands or establishing international agreements to stop the Nazis from getting them. Morgenthau asked the president to support a billion-dollar program to buy up the three most strategic products: oil, tin, and manganese. After consulting with his war, navy, and state departments, though, Roosevelt decided that the price tag was too high, and the administration eventually asked Congress for $10 million, a fraction of what was needed to do the job.16
Chasing Gold: The Incredible Story of How the Nazis Stole Europe's Bullion Page 18