Between the Alps and a Hard Place (20 page)

That is why in mid-1941 the National Bank asked the Reichsbank informally to channel its gold transactions in Switzerland through official channels at Switzerland's fixed price. On December 9, 1942, the Swiss government put in place the other half of its plan: It limited gold trading to licensees, banned sales of Swiss gold coins, and tried to impose
an official price for private transactions in gold. Again, the point was not to get rich,
but to cut losses
. The channeling arrangement and the attempt at market regulations did not much affect the burgeoning black market. Some Swiss banks opened gold accounts in Turkey or Argentina and traded telegraphically. The black market price kept rising. But the agreement did ensure that foreign central banks would take out of the National Bank no more gold than the Reichsbank put in. The government's formal withdrawal from the domestic market stabilized the price of monetary gold. All this stopped the hemorrhage from the bank's reserves and took speculative pressure off the franc.

The Swiss government and National Bank had always seen the gold trade with Germany as a perilous political necessity rather than as a means of making money. In addition to the 28 million francs in brokerage fees, the bank made another 20 million in the coin trade, which amounted to a little more than half of its wartime profits—but these profits were not large. Indeed, the bank existed to protect the integrity of the currency rather than to profit. Paul Rossy was the only director who really liked the gold trade, and that, not for economic reasons, but because he thought it would earn his country a place in the “New Europe.” That idea had faded by 1943. The rest of the bank's board and the government treated the German gold trade with the proverbial ten-foot pole.

The first gold shipment from the Reichsbank arrived at the Swiss National Bank in March 1940, unannounced. The Swiss bank's policy had been to welcome gold sales only as part of commercial transactions. It considered sending the gold back. But, to avoid an embarrassing confrontation, it credited to the Reichsbank the gold's value of 9 million francs. In February, after a Swiss commercial bank had accepted a shipment of
Soviet gold from Berlin, the National Bank let it be known that “such gold transactions are not favored.”
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In May, twice as much German gold as the initial German load was dropped on the bank's doorstep. This time the bank advised the Germans that such sales were not welcome, but said that it would make an exception for Germany and buy its gold outside of a commercial context. Some Swiss naively hoped that the Reich could be induced to start paying for its imports with gold. Still, in early 1940, the Swiss believed that they were not starting down a slippery slope because the U.S. dollar, not the franc, was going to be the international currency. If anything, they expected the Germans to use Switzerland to buy dollars. By June, however, after the fall of France, the bank's board and the government had begun looking at German gold conversions as a price to pay for the Reich's goodwill.
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But the National Bank's negative attitude is also the reason why the Reichsbank initially converted its gold primarily at commercial banks.

Convenience ruled the Reichsbank's gold operations. It did not always buy francs; sometimes, it bought escudos or pesetas or krona directly. It also shipped to the Swiss National Bank some 400 million francs' worth of gold that it did not convert at all, but transferred either directly to the lockers that other central banks kept in Bern or to its own locker there. In 1940–1941 it even shipped to Bern 60 million francs' worth of gold from the Soviet Union that the Swiss were to redeem for dollars in New York and then remit to Berlin, presumably for Moscow.

The Reich did not particularly like to sell gold, but as it had to use more and more real money abroad it sold with abandon and with a keen eye for maximizing returns. After selling 141 million francs' worth in 1941, Germany jumped to 424 million francs' worth the following year. In 1943 it sold
only 370 million, but a third of that amount was made up of coins sold at a premium, and after 1943 some of the Reich's gold sales to Switzerland actually paid for Swiss products.

Swiss authorities were uncomfortable with the traffic from the beginning for three reasons: the profits it generated were not worth the financial turmoil it caused; the traffic made the Allies unhappy because it was so valuable to Germany; and, of course, at least some of the gold was dirty.

We have already seen how slim a percentage of the German gold traffic returned directly to the banks. But what about the bottom line for the country? In 1939 Swiss gold reserves totaled 2.8 billion francs. At the end of the war they totaled 4.6 billion. But the latter figure includes
net
purchases from the Allies of 2.2 billion francs' worth of gold. To see the net effect on Swiss gold reserves of the German gold traffic, just subtract the Allies' sales from the postwar bottom line. With German traffic alone, the Swiss would have wound up with about one-seventh
less
gold than before the war. The only net gain came from the National Bank's purchase of gold from the Allies, which was frozen in New York. The postwar gnomes of Zurich's gold was American, not Nazi.

As early as 1940 Swiss authorities noted the American Embassy's displeasure with Germany's use of Swiss financial markets. By 1943 the United States and Britain were warning the neutrals that they would not recognize their ownership of gold that the Nazis had stolen from Europe. This was always more of a moral statement than a realistic threat, because stolen gold was
spent
and could not be recovered without somehow despoiling a new set of innocents in a chain stretching from Portuguese tungsten miners to their suppliers and middlemen. To what extent could the Allies punish the Swiss for having
been part of the traffic? Once the money was spent, it was gone. By 1944 the Allies had shelved moral admonitions and, as belligerents, demanded that the Portuguese and Spanish stop selling merchandise to the Germans and that the Swiss stop converting Axis gold—or risk being treated like enemies.

The moral side of the equation was never in doubt. The Hague Convention of 1907 prohibited occupying powers from taking the property, and especially the gold, of private parties. That the Nazis were thieves as well as murderers was not news. Nor was it news that a special Nazi police unit had been formed to enforce (often with the death penalty) decrees in Germany itself as well as in occupied countries, obliging individuals to exchange personal gold possessions, including wedding rings, for paper currency. The Nazis called this program to steal private gold the “Four-Year Plan.” Eventually, according to a U.S. government postwar audit of the Reichsbank, the program yielded $71.8 million worth of gold.
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The most infamous kind of gold theft, the extraction of prisoners' last possessions at labor-death camps, surely yielded at least the $2.9 million worth that was deposited in the Reichsbank in the so-called Melmer account. Although the amount of “victim gold” was much greater than that, it is essential to note that the Reich apparently never smelted the bulk of victim gold, some $30 million worth of it, and that therefore this gold never entered international circulation. American forces in Thuringia in 1945 found boxes and boxes of wedding rings and dental gold; apparently, the recipients in the Reichsbank had not dared turn it over to ordinary employees of the mint, lest they be scandalized. After all, the Holocaust was a state secret, and boxes of wedding rings and dental fillings would have repelled even most Nazis. Americans discovered and took possession of the Reichsbank's cache (and
made films of these ghastly prizes). American, not Swiss, authorities smelted this victim gold, and did so
after
the war. Nevertheless, the possibility—indeed, the likelihood—that some indeterminable amount of the gold in the Swiss-German traffic came from blatantly illegal sources was always clear and present.

The Reich also appropriated large amounts of gold in circumstances that were not so clearly illegal. The government of the Netherlands actually lent its entire gold reserves to the Reich, and the pro-Nazi head of its national bank signed a piece of paper to the effect that it was doing so of its own will. Of course, since the Nazis had just occupied the country, a reasonable person might conclude that the Dutch government's will was about as free as that of the Romans who were paying off Brennus. The Reich also got the two-thirds of the Belgian gold reserves that Brussels had sent to the Banque de France; the Vichy government handed them over. Since Vichy had no legal right to do so, the Reich had no right to Belgian gold—except for one fact. The Hague Convention does allow belligerents to take possession of enemy
governments'
possessions, including gold. If central banks are considered “independent” of governments, the Reich's possession of gold from Dutch, Belgian, Hungarian, Italian, and other central banks was illegal spoliation of private property. If central banks are government organs, then under international law their spoils belong to the victor.

The Reichsbank, however, always claimed that the gold it was selling abroad came entirely from its own prewar stocks. That claim is not as ridiculous as might appear from mid-1939 German statements of reserves, including Austrian and Czech stocks—a mere $256 million worth (or close to 1 billion Swiss francs' worth). In fact, the Swiss National Bank estimated pre-1940
Reich stocks at 1.5 billion francs. And during the twenty-one months of the Stalin-Hitler Pact, the Soviet Union shipped to Germany very large (and as yet unknown) amounts of gold to purchase German weapons and to finance its own purchases in the rest of the world. This may have almost doubled German stocks.
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At any rate, through 1942 the Reichsbank had shipped to the Swiss National Bank only 700 million francs' worth of gold—arguably within German pre-1940 reserves, every ingot bearing the seal of the Reichsbank.

The intra-Swiss debate about the legality of the Reich's gold began in 1943, when the Germans traded for francs larger amounts of Belgian “Lator” gold coins than the Reichsbank was known to have, and when German gold shipments were reaching dubiously high levels. The Allies said none of the gold was legitimate. The Germans said all of it was. But apart from the Belgian coins, the Swiss had no hard evidence that the gold was not German. On that basis, the bank limited its acceptance of gold to ingots, and asked the Germans no longer to convert gold for the purpose of buying third-country currencies. In other words, it preferred to take gold only in payment for Swiss merchandise.

But two practical problems prevented the National Bank and the Federal Council from cutting off the German gold trade. First, as mentioned, by 1943 the trade had ceased to harm the Swiss economy. It was finally bolstering the franc and bringing in real payments. Stopping it would wreck the franc and perhaps result in economic siege by the Reich. Second, the only practically conceivable way of stopping the German gold trade—the only way that stood even a dim chance of avoiding the most violent German reactions—was to close down the Swiss gold
market to all foreigners at once. But by 1943 the gold trade with the Allies had become much bigger than that with the Germans. Stopping it would wreck the economy from the other end, and anger the Allies.

Thus, the bank and the council took the middle route. But their tactic of justifying their actions by pointing to international law rather than the economic and military balance of power won them no friends.

Even in the war's darkest years, 1941 and 1942, exports to the Allies, mostly to the United States and the “dollar zone” of Latin America, never fell below 17 percent of total Swiss exports. By 1943 they were over 20 percent. Swiss industry never earned less than 300 million francs in Allied countries, and usually made more. Unlike exports to Germany, however, these were paid in real money, converted to gold, but “frozen” in Allied vaults. By contrast with the gold bought from the Reich, which stayed “Swiss” only until it was reconverted to Portuguese, Spanish, Swedish, or Turkish ownership, most of the gold sold by the Allies would remain Swiss. To this were added the dollars (converted to gold) earned by Swiss investments, mostly in the United States but also in Britain. Also, since Switzerland was among the top five foreign investors in America ($1.4 billion, prewar), the returns were considerable, up to $100 million per year. And since the blockade prevented the Swiss from spending all but a pittance of this money for imports, Swiss gold piled up in New York. To keep Swiss exporters in business, the National Bank advanced them the franc equivalent of their New York balances in exchange for title to the frozen gold. The bank sold the debt to the government.
The government in turn “sterilized” the debt by selling bonds. So the Swiss people were indirectly buying American war bonds, too. By the end of the war the bank, the government, and major investors had title to about $1.5 billion either in gold or holdings convertible to gold—almost $400 for every man, woman, and child in Switzerland. In addition, the $1.4 billion of Swiss investments in the United States had grown substantially in value.

Yet this ultimately lucrative arrangement posed immediate difficulties. In 1943 Swiss watch exports to the West rose dramatically while at the same time the Allies, mostly the United States, started buying massive amounts of Swiss francs for their various operations in Europe (as well as for relief of Allied prisoners). How was the Swiss economy going to finance all of this? At first, fearing inflation, the Swiss National Bank and the government refused to buy up the watch exporters' entire credit balances. At the same time the Allied gold sales were creating massive amounts of francs unsupported by gold in Bern.

Mitigating these problems from the demand side proved impossible. The watchmakers, led by able lobbyist Max Petitpierre, launched a powerful campaign for full funding. The Allies supported the watchmakers' claims on the Swiss government, saying that Switzerland's failure to support the watchmakers would be taken as a sign of pro-German partiality. So, long-term hope and fear of the Allies overcame short-term fear of inflation and the Germans. The authorities stepped in and bought the full commercial debt.