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Venezuela, Nazi Gold and BIS Account No.17

Maduro wants 'his' gold. London says 'No'...
 
SO the DASTARDLY Bank of England is refusing to give Venezuela its gold back, writes Adrian Ash at BullionVault.
 
The government of Nicolás Maduro simply wants to take possession of what it still holds in London – some 14 tonnes of bullion bars apparently – because it "fears the gold could be caught up in international sanctions [against] the country," reported Reuters on Monday, citing un-named sources in Caracas.
 
Over in London, "There are concerns that Mr.Maduro may [then] seize the gold, which is owned by the state, and sell it for personal gain," The Times repeated on Thursday, adding no further detail to (or acknowledgement of) Reuters' scoop.
 
"The Venezuelan government," claimed Russia Today, "has been trying to reach the gold for two months" but failed because Maduro "has recently made attempts to eliminate reliance on US-controlled financial institutions and instruments, including the US Dollar" – and clearly, on RT's juxtaposition at least, that dash for freedom has met with "US penalties".
 
"The Bank of England declined to comment," was all Business Insider could add on Friday.
 
Here at BullionVault we have no special insight either, let alone un-named sources to quote. But for what it's worth, Venezuela, you will recall, is a true socialist success story
 
For every 100-worth of today's Bolivars its economy produced back in the year 2000, it now produces 3.4 billion. Next year that will rise to 310 trillion on the International Monetary Fund's forecast.
 
Outside the Bolivar Soberano however, success looks a bit different. Compare and contrast in US Dollar terms for instance.
 
Chart of Venezuela GDP, baseline Y2K = 100
 
What began as popular high-spending programs under Hugo Chavez soon became exchange controls, price controls and labor controls (the state must approve any firing) as inflation took off. Then like all such basket-case nations – even with the world's 11th largest daily crude oil output and its No.1 proven oil reserves below ground – Venezuela's descent into the economic collapse of hyper-inflation came with the collapse of law, state-approved gangsterism, arbitrary arrests, detention without trial, enforced disappearances, and the outright plunder of national assets by the twice-elected government.
 
"We will not reward firing squads, torturers, and murderers," said US president Donald Trump's national security advisor John Bolton with a straight face last week, adding to the long list of sanctions started way back in 2014 and failing to say anything about Saudi Arabia's war in Yemen or torture and murder of a journalist in Turkey (but he did then threaten more sanctions against Saudi enemy – and murderous regime – Iran).
 
As for the Bank of England, it has a long history, if not memory. And if the Old Lady really is refusing to ship its custodial client's gold to Maduro, the Bank may be trying to atone for its shameful behaviour over Czechoslovakia's gold in spring 1939.
 
David Blaazer, now Associate Professor in the history of economic thought at the University of New South Wales, picked up the story a decade ago:
"On 19 May 1938, the Financial News and the Daily Telegraph reported that gold to the value of about £6,000,000 in the name of the Bank for International Settlements had been transferred [by the Bank of England] to the ownership of the German Reichsbank. As both papers pointed out, the transfer had taken place despite the fact that the government had moved to block all Czech assets held in the United Kingdom within 24 hours of the German invasion of Czechoslovakia on 15 March.
 
"The ensuing controversy became one of the major British news stories of the middle of 1939 [and] cast serious doubt over whether the Chamberlain government had truly changed its policy towards nazi aggression in the light of the invasion of Czechoslovakia, or whether it was using the secretive channels of finance to continue to appease Hitler."
Whatever was the Old Lady thinking?
 
Starting from 1936, the National Bank of Czechoslovakia had begun to move its bullion reserves abroad. London was of course a key storage point, then as now hub of the world's physical bullion trade. And like the rest of Europe's central banks, Prague managed much of its gold and currency reserves through its accounts at the Bank for International Settlements. "Established in 1930 originally to provide a mechanism for payments of reparations and war debts between central banks," says Blaazer, the BIS aimed to stand above politics and so "enjoyed strong legal immunities from governmental interference with its activities." One key service was running accounts in London so that the true owners stayed anonymous to the Bank of England. Or so protocol claimed.
 
Says the Basel-based BIS itself:
"The BIS adopted a neutrality declaration excluding banking operations that might benefit one belligerent party to the detriment of another, but decided to maintain its banking services to assist central banks and to fulfil the Bank's own obligations so far as was consistent with neutrality. The Bank's precarious position – having on its Board central bank representatives of countries that were at war with one another as well as of neutral countries, and being cut off from direct communications with many of its members – gave rise to a number of difficult decisions. The most controversial of these dated from before the war, when, in March 1939, the BIS decided to honour an order received from the Czechoslovak National Bank to transfer part of its gold reserves held in a BIS account at the Bank of England in London to a German Reichsbank account. The transfer order had been issued days after German troops had occupied Prague, as it later transpired, under duress."
With Britain, Italy and France sacrificing the Czech sudetenlands to try appeasing Hitler and avert a second world war with the 1938 Munich Agreement, Prague's worst fears became reality in spring 1939 when the Wehrmacht marched in. Officials from the Reichsback accompanied the very first troops to arrive – just as they had when Hitler annexed Austria a year before – and headed straight to the central bank. But staff at the NBC had that morning already wired the French, the British and the BIS in Switzerland to warn that any orders to transfer their gold to the Reichsbank "would [only] be given under duress, and should be ignored."
 
That warning had definitely reached both the BoE in London and the BIS in Basel by 18 March, says Blaazer. And so two days later, when the BoE received the NBC's gunpoint request to the BIS for its metal in London to be transferred to Germany's BIS account, the Old Lady's staff rightly refused.
 
But at the top of the Bank – and still clinging to the starched-collars, top hats and gentleman's honor of Victorian diplomacy – sat Montagu Norman. Famous for pushing the British Empire to return to its pre-WWI Gold Standard at the Pound's pre-WWI gold value, the Governor had helped spur Britain's economic deflation and depression of the 1920s. When the Great Crash then went global in 1931, and the UK faced utter financial collapse, Norman refused even to discuss the option of suspending the Gold Standard again, as had happened during the Great War of 1914-1918. Instead he took a holiday to Canada, seeking to calm his frayed nerves. When he got back he found that Britain had quit gold altogether without bothering (or daring) to consult him, while he was mid-Atlantic in fact, sailing home.
 
Now the lights were going out across Europe once more, but Norman wanted to keep alive some spark of central banking's international co-operation. So did senior colleagues both at the BIS (where he just happened to be a director) and at the Banque de France (where other BIS directors worked), as well as at the Bank of England itself (Sir Otto Niemeyer, director of the BoE's overseas and foreign department, was chairman of the BIS too). They debated, in a series of wires and telephone calls between Basel, Paris and London, whether the NBC still existed in the eyes of Swiss law, and whether the BIS should still accept its instructions. 
 
Yes and yes, came the answer. So the next question was whether the Bank of England would act on the BIS instruction about the Czech gold.
 
Because of the BIS acting as agent, the BoE shouldn't know whose gold was whose inside those BIS accounts. Norman had the cheek to use that in his defense when challenged by the UK Treasury. But memos and notes written inside Threadneedle Street make it plain that the Old Lady knew BIS account No.2 was held for Czechoslovakia...and that a new account, No.17, belonged to the Reichsbank.
 
Blaazer:
"It is clear that responsibility for the transfer of the gold rests with Montagu Norman, who was offered an opportunity to stop it with a word, and – with full knowledge of the ownership and destination of the gold – chose not to intervene."
Put another way, as did Neville Wylie, professor of International Political History at the University of Nottingham, when the BoE released new archive material in 2013:
"Norman was perfectly clear about what the BIS's instructions entailed and knowingly connived in the sale of plundered gold."
The press stories of early May caused such a fuss, the matter was debated in Parliament on 26 May, and again on 5 June. That day Norman lied outright to the UK Chancellor, claiming he had no knowledge of whose gold was in which BIS account.
 
But by then the ship had long sailed anyway. The Nazi account got the Czechoslovak gold on 21 March. Again through the BIS, it had sold the lot for cash within 10 days.
 
"The Third Reich both ransacked Europe's state gold reserves and extracted smaller, though significant, quantities of gold from private individuals, some of whom perished in the gas chambers. As a result, Germany was able to more than treble its pre-war holdings of gold, estimated at about $298.9 million in 1939 values, by adding some $614 million worth to its war chest. Of this impressive haul, approximately two-thirds is believed to have been sold to third parties – predominantly neutral central banks – by the time the war ended."
An army marches on its stomach, as Napoleon said, but it needs paying too as Cicero noted 1,800 years earlier.
 
Fast forward to November 2018, and "Venezuela es Venezuela, jodidos pero felices," laughs Maduro to a cheering crowd in this YouTube clip – "We're messed-up but happy" (Google it if your Spanish cuss-words need work). But while El Presidente seems muy felices, he looks far from jodidos himself – at least for now, until the inevitable piano-wire and petrol station.
 
As for Venezuela's gold, the socialist governments of first Chavez and now Maduro have made a run of terrible decisions... pulling it home from London to try and avoid sanctions in 2011...only to ship much of it back as collateral for a cash loan from commercial banks...struggling to meet the repayment schedule of what looked a bad deal...and then raising other, more short-term cash, from yet worse gold-loan deals again.
 
Where the Bank of England blinked at Czechoslovakia's plight in 1939, the people of Venezuela might one day be grateful if it is indeed refusing to accept Maduro's instructions today.
 
Because whatever you make of Trump's ambassador to the UN, " Something is very wrong when citizens of an oil-rich country have to leave in order to beg on Colombian streets to feed their children," as Nikki Haley said last week.
 
"That something is the corruption of the Maduro regime."

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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