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On the role of gold

by Otto Scott

Although The Wall Street Journal lists gold as a commodity, and scorns the concept of gold as a currency, it continues to play its ancient role as the only true standard of value in times of war or crisis. These are presumably times of peace, but in fact we are riddled with cultural wars that continue to evoke murders, bombings, riots, and rebellions on the international stage.

A new level in this global conflict was reached fairly recently when Stuart Eizenstat, a former senior Carter Administration official and until recently an Undersecretary of Commerce,(1) issued a report accusing Swiss banks of accepting "gold pulled from Holocaust victim's teeth intermingled with central bank gold" during World War II, and later refused to return the deposits of Holocaust victims to their heirs.

This Report escalated a campaign against Swiss banks led by former Fed Chairman Paul Volker, who has been appointed head of an Independent Committee of Eminent Persons, to audit the records of Swiss banks for the deposits of Holocaust victims. Lawsuits claiming very large sums have been filed, and the air is thick with charges hurled by the headline-seeking Senator Alfonse D'Amato, indignant denials fading into apologetic offers from the Swiss government, and the abrupt dimming of Switzerland former reputation as a tiny, remarkable democracy, into a nation and system motivated by unconscionable greed.

Nazi gold, in other words, is not unimportant even after 57 years. All gold, in fact, remains immensely valuable in the views of all governments. That is why every central bank of any significance buys and holds gold in reserve in a world of almost universal paper money.

Gold retains value under a variety of circumstances

The reason for this is not mysterious. History tells us that only gold retains its value during wars and upheavals, changes of empires and governments, and times of crisis. Although now officially held to be of only industrial value, gold is the oldest and most respected currency in the world and the only one respected when national paper monies lose value. Islam, the Orient, and citizens everywhere familiar with the uncertainties of governments such as in Italy, France, Asia, Africa, central Europe, and Latin America, often bank gold in private repositories.

Some indication that such times loom today can be gained by the recent effort of Chancellor Helmut Kohl to improve Germany ability to help create a common European currency. This program, which instead of uniting has greatly divided Europeans for several years, and is encountering continuing difficulties. Its main sponsors France and Germany established certain requirements before the nations involved can weld their currencies and issue a new common currency. These requirements now embarrass both governments. Their unemployment statistics are insupportably high, and their debts are beyond the minimums established for entry. Chancellor Kohl wanted to alter his nation economic statistics (though not circumstances) by raising the value of the 95 million troy ounces of gold held in the reserves of his nation's central bank (3) to its market price.

If the bankers had agreed, that would have allowed Kohl not only to balance his annual budget, but would have made several billion marks available to fund his entry into the European common currency as well as launch efforts to both save his welfare state and to placate his unemployed with new programs. Although it is unlikely that the Chancellor thought about it, the fact is that his proposed solution exactly paralleled the one chosen by President Franklin Roosevelt when he first took office in 1933. The new president first persuaded Congress to enact enabling legislation granting his office the power to demand all gold held in private hands under pains of fines or imprisonment or both, and then raised the price of gold. That launched an inflation that enabled the White House to launch its governmental employment programs, and become the idol of the poor and unemployed. Helmut Kohl was not as fortunate as President Roosevelt. Germany central bank, irretrievably scarred by memories of not only the inflation of the early twenties but also by the worthless paper left to the people by Hitler, brusquely refused to cooperate in changing the official price of gold in reserve to the far higher price of gold in the marketplace.

In the meantime, however, the frugal Swiss, under intense bombardment by the American Jewish community, "released" some of their reserve gold and raised it to the market price, in order to fund a special effort to locate and repay survivors of the Holocaust from the deposits they made during the thirties and forties if they (or their heirs) can be discovered.

It is interesting to note that both steps one refused and one accepted treated gold as currency by cashing it in the marketplace. That is as close to a return to a gold standard as any German administration has come in fact since its recovery in post World War II. Switzerland, of course, has always been on a gold standard in the sense established after World War I. It will of course be recalled that at one time the international financial community relied upon a real gold standard. Paper currencies were issued, backed by gold. Citizens could present paper money to banks and receive gold coin in exchange. (The West in the U.S. used silver dollars.) Raw gold could be turned in to the Treasury, which would mint it and return it to the citizen. All that ended in World War I.

In the twenties the franc, dollar, and pound were backed by gold and therefore had a relatively stable value. (That is one of the reasons why such a heavy exchange of property took place in Germany in the early twenties, when those citizens who had access to "hard" money were able to buy property at bargain prices from people beggared by inflation.) This was a factor in the rise of Hitler.

In the twenties, however, citizens no longer had access to gold through an exchange of paper currency with the banks. As the twenties extended, the post-World War I depression was temporarily lifted by international loans and a credit inflation through the introduction of installment payments for both tangible (farms, houses, and goods) and intangible property (stocks and bonds), which created production based on promises to pay. These promises collapsed in late 1929 with the declines in the stock exchanges and losses in many banks. When payments were not met, bankruptcies almost halted production; jobs vanished and a global economic crisis occurred. The crisis was especially severe in Germany when all banks failed.

The founding of the Bank for International Settlelments in 1930

The German debacle meant that World War I reparations, paid in the twenties by Germany from international loans, would cease. That brought a group of international bankers together in 1930 to create the world's first international bank. It was named the Bank for International Settlements. It originally consisted of the central banks of Belgium, France, Germany, Great Britain, Italy, and some commercial banks from the U.S. and Japan. In 1931 the Federal Reserve began active participation in the BIS, and soon more than two-thirds of the BIS funds in America were held by the Federal Reserve.

All this resulted in the world first group of bankers operating internationally independent of their governments. Only the German directors were, in this coalition, entirely controlled by their governments; later an exception of great value to Hitler. The charter of the new bank, approved by the various governments, certified its immunity from "expropriation, requisitions, seizure, confiscation, prohibition, or other restrictions of gold or currency export or import, or any other similar measures."(4)

The role of gold was central in the creation of the BIS. The new bank was authorized to "arrange with central banks to have gold earmarked for their account and transferable on their order, to open accounts through which central banks could transfer their assets from one currency to another and to take such measures as the Board might think advisable within the limits of the powers granted. . . . Therefore the BIS was ready to lend gold without delay. . ."(5) That meant that gold transfers from one central bank to another could be made quite swiftly and did not have to lag behind physical transfers.

As the thirties extended and Hitler came into power, the situation of Switzerland worsened. Gestapo agents were especially interested in Jewish properties and holdings, and began to make demands that Jewish deposits in Swiss banks be disclosed to German authorities. In 1935, as a measure to protect German Jews, Swiss banks introduced secret numbered accounts. These enabled the Swiss banks to prove that depositors were not identified by name, and that therefore their identities could not be disclosed.

That practice amounted to an expansion of Switzerland's ancient role as the protector of foreign funds deposited in Swiss banks safe from the pressures of tyrannical governments. This tradition remains a very important one. Switzerland's name is almost synonymous with secret accounts. It has always refused to open its books for investigation by foreign police in pursuit of refugees either political or financial from other countries.

Swiss bank secrecy originally encouraged by neighboring nations

This has been a cause of increasing irritation to American authorities ever since World War II, who have watched the steady increase of international depositors into Swiss banks. Washington's frustration with Switzerland has been deepened by the fact that its influence in other nations has, since World War II and the end of the Cold War, grown enormous. Both nations have, in fact, grown increasingly apart in recent years. Their differences are economic, political, and moral. The United States is in the midst of what President Nixon launched and named a Drug War. This effort has led to the expansion of American police authority to global levels. (6) The Swiss believe that an effort to escape taxes is human and understandable, and not basically criminal. In the U.S., despite its former reputation for individualism, paying taxes until recent expansions has been considered the duty of every good person.

An equal conflict consists between the U.S. and Switzerland regarding banking rules. In recent years the Drug War, and the huge sums it entails, has led Washington to enact laws not only opening bank records of all transactions to the government, but rules that force banks to inform the authorities of any transaction beyond the ordinary. (7) Switzerland's bank secrecy, created after the Vienna Conference of 1820 led by Metternich, was deliberately encouraged by the leading nations of Europe as an escape from the confiscations of the type installed by the briefly-lived Napoleonic Empire. (8)

World War II did nothing to lessen the Swiss belief that the inviolability of its banks was crucial to its survival though that survival was by no means certain. "After Germany invaded Poland in September 1939, the Swiss army mobilized up to ten percent of the population and throughout the war went through long periods when it expected imminent attack from the Germans. That Hitler wanted Switzerland as he wanted Europe for the rest of his thousand-year Reich is well documented. As Gerard Weinberg writes in his history of the Second World War:

At 1:35 a.m. on June 25, 1940, the armistice between Germany and France went into effect; a few hours later orders went out of the high command of the German army to prepare an invasion of Switzerland. . . .The plan was to crush Swiss resistance quickly. . . . It was never launched as more important projects came to the fore in German planning. The end of Switzerland, that pimple on the face of Europe as Hitler described it in August 1942, would have to wait until Germany had defeated her European enemies. (9)

"The estimate among Hitler's generals was that at least eighteen divisions were needed to dislodge the Swiss from their redoubts, and after the failure to defeat Britain and the Soviet Union, the cost of a Swiss invasion became a mountain too far." (10)

During the war the BIS became the center of international trades even between the warring powers. Its directors were well acquainted and congenial, and shared some interesting ties. Per Jacobson, economic director oft he bank,(11) was the brother-in-law of Sir Archibald Nye, Vice Chief of the Imperial General Staff for the British Army. Meanwhile, President Roosevelt froze the gold holdings of most of the belligerent nations in Fort Knox. At the same time, the governors of nearly all the European banks from France, Hungary, Romania, Italy, Spain, and Portugal as well as Germany were regular visitors to the BIS in Basle.

Swiss National Bank vaults were, during this period, open to all trading nations. And as a neutral, Switzerland traded with all governments. If Germany wanted to sell gold for grain or fuel, the Swiss National Bank moved the gold from Germany's share in the National Vault to the section reserved for Portugal's gold. Meanwhile, while serving Germany's international needs, Switzerland was also dependent on Germany for its fuel including coal and oil and most of its food. The tiny nation is, after all, landlocked, and Germany controlled all the land of Europe around it. Switzerland only direct trading route by sea is down the Rhine river northward to the North Sea also controlled by Germany. Switzerland was technically independent, but in reality its freedom was precarious. Its only window of free commerce was a strip of territory from Geneva to Vichy France, which was severed when the Germans occupied all of France.

Swiss defense and military strategy before and during World War II

Yet Switzerland held some strong cards. If forced to fight, it could block access to its north-south tunnels whose rail lines would have cut Germany's access to its forces in Italy. An invasion would also have ended the activities of the BIS bank, through which Germany traded gold with the world beyond (and inside) Europe. The role of gold in World War II was, obviously crucial. In March 1938, when Hitler marched into Vienna, "much of the gold of Austria was looted and packed into vaults controlled by the BIS. This gold was immediately credited to the Reichsbank accounts."

In March 1939 the Nazis invaded Czechoslovakia. Storm troopers, holding the bankers at gunpoint, ordered them to transfer their nation's national store of gold, which they had placed in a BIS account in the central bank of England, transferred to the Reichsbank account. Jacobson afterward said that the BIS learned only later that this transfer was ordered at gunpoint, but this statement can be disregarded as pro forma. The facts were that the conquest of a small nation by a larger one is historically accompanied by a looting of assets, and Jacobson's added comment that "The Czechs never held this against the BIS" can be taken as far more significant. Losers in a war seldom expect the world to be shocked.

Neither was trading with Germany unique in World War II. Spain, for instance, cooperated with Nazi Germany, although Franco did manage to obtain the freedom from German concentration camps for thousands of Jews descended from Sephardic families, whom he had returned to Spain for the first time in centuries. (12) The Irish, who had no such ancient ties, not only traded with the Nazis but gave their submarines refuge at a time when their toll of Allied shipping was deadly. Sweden, which benefited economically from trading with both sides in World Wars I and II, allowed the German army to cross Sweden without protest as part of this arrangement.

There is no question that fortunes in trading with and for Germany were also achieved by businessmen and institutions in Portugal as well as Spain, in some U.S. banking circles and some large corporations as well as in Vichy France, Portugal, and Sweden. All these nations, (13) however, also rendered services to the Allies without which the war might well have tipped the German way. Switzerland, as not only the Dulles family but also Winston Churchill pointed out, provided an invaluable listening post that kept the Allies apprised of events, policies, and even plans inside the Reich.

"Switzerland also protected its own 18,000 Jewish citizens completely, unlike France, which obediently deported thousands to Germany. Switzerland did more: it accepted more Jewish refugees, in terms of percentage of population, than any other country. And Switzerland was and is a very small country. Its population is only 7 million now, and was probably less then. More than 14,000 Jews escaped Germany to Switzerland during the same period that 55,000 left for the United States and 15,000 went to France . . .[Switzerland also] accepted 50,000 French and Polish soldiers. In 1944 the Swiss National Assembly voted to admit up to 14,000 Jews who were trapped in Hungary and were in the charge of Swedish diplomat Wallenberg. But Eichmann allowed only 1,400 to leave." (14)

To put this into perspective, "the United States accepted only 21,000 Jewish refugees during the war."(15) In fact, the United States, which retroactively assumes that its role in World War II was purely heroic, seldom admits that some of its bankers not only traded with the Nazis through the BIS all during the war, but that the entire nation remained aloof when Britain fought Nazi Germany alone for two years. Even then, we did not declare war against Hitler: he declared war against us. Otherwise we might have fought only against Japan.

Gold and the Cold War

These points are made not to review the war, in which an estimated 40 million persons died and more lost their homes, possessions, and relatives, but to broaden the frame of reference beyond the fates of the bank deposits of only some sufferers in the largest of all the world many tragedies. One later tragedy was surely the Soviet-inspired Cold War, which was unnecessary, frightening, and divisive for over a generation. In that long and expensive continuation of war by other means, the role of gold continued to be central. The central banks continued to amass and hold massive gold reserves, but all the governments functioned on paper money alone in the postwar world. From the end of World War II until 1971, the world functioned with the United States pledge to buy gold at $35 an ounce, and to thereby maintain a dollar standard by which all other currencies would be measured in the international marketplace.

In 1971, however, the Central Bank of France began to use its accumulated dollars to order gold from the U.S. Treasury in immense quantities. The gold reserves in Fort Knox began to fade like summer snowballs. The dollar was falling, imports began to soar and President Nixon grew alarmed. On August 15, 1971 he went on the air to announce a 10 percent Job Development Credit for investments in new equipment, a 7 percent excise tax on automobiles to assist Detroit, a small tax break for individuals, a $4.7 billion cut in federal spending, an additional 10 percent tax on imported goods a freeze on wages and prices for 90 days and a temporary suspension of the convertibility of the dollar into gold." (emphasis added.) (17)

Only specialists seemed to grasp the importance of the end of the gold-backed dollar. It meant that from the 15th of August 1971 through today, the dollar has had nothing behind it but the promise of politicians and the printing press. The media in 1971, as economically feckless then as now,18 seemed to consider a "floating dollar" as they labeled it simply another arcane measure of importance mainly to bankers and international speculators.

In reality it meant that a world currency was released to float as a balloon without limits, without roots, without stability, as high as the credulity of the world would carry it. One result was the release of a flood of dollars that washed everywhere. The world eagerly accepted those dollars, because the memories of the immense power achieved by World War II America had become imbedded in the mind of the globe. The legend of the dollar and the wealth of the U.S. dazzled the world long after the dollar became simply another paper currency.

One result was that desperate people everywhere scrambled to obtain dollars that seemed to be safety nets from untrustworthy governments. Dollars "floated" abroad through foreign "aid" programs, through loans to foreign businesses, to U.S. investments abroad, and from millions of prosperous American tourists who seemed to be visitors from a remote earthly paradise.

The Cold War made this appear a reasonable and even necessary situation. The media discussed "Eurodollars" as though they were somehow separate from the dollars used at home, on the theory that despite the fact that they issued from our Treasury printing presses, they were somehow different. In effect, the U.S. internationalized its welfare state. American dollars rained upon virtually every nation in the world in an effort to prevail in the Cold War, even as they enlarged our welfare rolls to maintain domestic political stability. This raised so attractive a lure to the world's poor that our borders were besieged even while our guards were withdrawn or weakened by the Courts. As in previous periods of hysterical inflation when paper money appeared to replace gold, from the history of China, the time of John Law in France, and the Tulip Craze in Holland, the laws of economic gravity appeared to be repealed.

In 1975, a few years after President Nixon's amazing economic recklessness, (19) the U.S. Government restored America right to own and trade in gold. Legal gold returned for collectors. As the international price of the paper dollar declined, the international price of physical gold rose. Greenspan, chairman of the Federal Reserve, a former follower of Ayn Rand, regards gold as a measure of the "strength" of the dollar. Since the purchasing value of today's dollar is roughly equal to a nickel in 1969, this does not mean much.

The beginnings of global U.S. Treasuries market

Meanwhile President Reagan, elected after President Carter watched the official U.S. interest rates rise to 20 percent and inflation soar, slowed official inflation by slowing the Treasury's printing presses. He accomplished this, however, by switching the Treasury presses to bond issues. These borrowings, slated to be repaid in the future, met with seemingly miraculous success in the international financial world. They crowd the vaults of the central bank of Japan and many other nations, as well as the private holdings of tens of millions of patriotic Americans. Unfortunately, they are all payable in dollars. What President Reagan accomplished was to halt the retail production of dollars, in exchange for wholesale borrowings.

One result was that foreign nations could hardly refuse to subscribe to successive new bond issues by Washington, lest such a refusal precipitate a drop in the price of holdings already in their possession. Sales of these holdings may do the same. Such runs could bring down the great global empire of paper dollars, which every government lists as assets.

This situation has long since alarmed the central banks of Europe. That is the reason for the European drive toward a common European "Euro" currency to replace the dollar. The plan makes it clear that Western Europe does not want to be inside the house that Washington built when the roof falls. This has led to a drive in both European and American financial circles to industrialize the Orient, through a multitude of joint ventures, to avoid being caught in a global collapse. Meanwhile, every financial center is neck-deep in paper currency except for Switzerland.

Switzerland alone has a gold-backed currency and bank secrecy. The Swiss franc is the only existing alternative to fiat money floating everywhere else, whose purchasers (and depositors) represent very conservative investors. That is the reason that Europe led by France and Germany has been attempting to put together a new global financial system that will continue the welfare state that is only possible with paper money and inflation. Such a system cannot succeed indefinitely of course. It might last as long as the tenure of our present rulers and that is all that most rulers can conceive.

But Switzerland, with its real currency, is an alternative and reachable system. As it stands, outside NATO and outside GATT and outside the new Euro plans conceived in Berlin, Paris and Brussels, (20) it remains in silent competition to a New World Order that cannot be ignored. It is in that context that the campaign on behalf of Holocaust victims and their deposits assumes an unexpected and unanticipated, but very timely, global importance. That is why Washington has taken the rare step of supporting a minority campaign by threatening to freeze Swiss assets in the U.S. unless its banks placate their critics. Switzerland cannot, in other words, be allowed to remain outside the Club. That is why the Swiss are understandably alarmed, because bankers rely upon reputations for honesty and fairness and a campaign that attacks Swiss banks on moral issues can be deeply injurious.

Therefore, the overall role of gold in the world economy today is even more important than ever before as a growing threat to the rulers of a paper empire.



1. And now an Undersecretary of State.
2. It is interesting that there is also talk of a gold coin: the écu.
3. As of 1995, in World Almanac, 1997.
4. Trading with the Enemy: The Whole Story by Ron Holland and Rachel Murdock, Independence Press, a division of Offshore Seminars, P.O. Box 1201, Skyland, NC, 28776.
5. Ibid.
6. See: Cops Across Borders: The Internationalization of U.S. Criminal Law Enforcement, by Ethan A. Nadelman, The Pennsylvania State University Press, University Park, Pennsylvania, 1993, Passim.
7. In recent years Swiss banks have also added regulations against accepting money "laundered" from criminal activities and have instituted checks on the backgrounds of depositors.
8. Which so closely resemble the even shorter reign of Hitler over Europe.
9. Going for the Gold by Matthew Stevenson, The American Spectator, May 1997, p. 26.
10. Ibid.
11. Situated in Basle.
12. Giving rise to a rumor that Franco himself was descended from a Sephardic Jewish family on the maternal side.
13. Except France as a nation.
14. The American Spectator, op. cit.
15. The Abandonment of the Jews: America and the Holocaust, 1941-45, by Daniel S. Wyman.
16. WWII has been termed "The Four Trillion Dollar War that Cost 40 Million Lives," although the overall cost in resources and property cannot be accurately ascertained. Civilian casualties can only be estimated; military statistics are more precise. Forty million is compiled from The World Almanac, The Encyclopedia Americana (International Edition 1966), the appendix of Battles Lost and Won, Hanson Baldwin (N.Y. 1966), the overall cited from A World in Flames: A History of World War II by M.B. Hoyle, Atheneum, N.Y. 1970, p. 323.
17. Nixon: The Triumph of a Politician, 1962-72, by Stephen E. Ambrose, Simon and Shuster, N.Y., 1989, pp. 458,459.
18. Economics are not, apparently, taught in schools of journalism. Even the news staff of The Wall Street Journal learns on the job, which is one reason for its uneven market coverage. Some do not learn quickly or well.
19. It's doubtful if he ever realized the full extent of his folly: a lifelong pursuit of political office did not leave much time for true self-education or deep reflection.
20. And perhaps London.


by Otto Scott
September 20, 1998

Copyright © 1998 by Otto Scott's Compass. All Rights Reserved.
Reprinted by USAGOLD with permission. No further reproduction without permission.

For a complete list of available works by Mr. Scott, including his monthly journal (Otto Scott's Compass), books, and audio tapes (Points of the Compass), please visit The Compass at www.the-compass.com.

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