The Fascinating Story of the German Gold Reserves after the Second World War
As the central bank of the Federal Republic of Germany, the Deutsche Bundesbank currently holds gold reserves amounting to 3,355.24 tons. This makes it the world’s second-largest oﬃcial owner of gold after the US Federal Reserve (US Fed). Where did this gold treasure come from, where is it stored and what is the Bundesbank’s policy regarding handling the Germans’ gold in the future? The following article will provide answers to these and other questions.
Germany 1945: Zero Hour
May 1945: In Europe, the Second World War started by Nazi Germany had come to an end and the country itself – which had inﬂicted a terrible war and endless suﬀering on its neighbouring countries, and was responsible for countless crimes in Europe – lay on the ground, destroyed, divided and disoriented, as the perpetrator and the loser of the war.
The price for the crimes committed during the war was high. All major cities were destroyed and the economy was crippled. More than a quarter of the historical territory of the state had been lost and now belonged to Poland and the Soviet Union. Seven million people displaced from these areas had to build a completely new existence in the remaining territories of what was to become the Federal Republic and the GDR.
Given this initial situation, how was it possible that only ten years later the western part of the country once again formed one of the strongest economies in the world and, as such, also had rapidly growing gold reserves as part of its state currency reserve?
THE DEUTSCHE BUNDESBANK CURRENTLY HOLDS GOLD RESERVES AMOUNTING TO 3,355.24 TONS. THIS MAKES IT THE WORLD’S SECOND-LARGEST OFFICIAL OWNER OF GOLD.
The German Wirtschaftswunder (‘Economic Miracle’)
This can only be explained if one takes a closer look at the local as well as global monetary history in the years immediately after the war. The resurgence began as early as 1946-1948 with the establishment of a total of 11 local state central banks in the three western occupation zones by the victorious powers responsible there, namely the US, England and France.
In addition, on 1 March 1948, the Allies established the Bank deutscher Länder as the new central bank of West Germany, with its headquarters in Frankfurt. In the end, the structure of the newly created central banking system was strongly based on the model of the US Fed.
One of the new central bank’s ﬁrst actions was to prepare for a currency reform. Even before the founding of the Federal Republic of Germany (West Germany) in May 1949, a new currency – the Deutsche Mark – had replaced the old Reichsmark on 20 June 1948. The Reichsmark had become almost worthless in the meantime. West Germany’s economic resurgence began – stores ﬁlled up overnight, the previous black-market economy dried up and industrial production took oﬀ.
In addition to the currency reform, the economy of the newly founded Federal Republic also beneﬁted from the funds of the European Recovery Plan (also known as the ERP or Marshall Plan), through which US$3 billion ﬂowed into the economy of West Germany. With the help of these US funds, it was possible to import raw materials, among other things, which were urgently needed by the economy for producing industrial goods.
As early as 1951, just six years after the end of the war and three years after the introduction of the Deutsche Mark, the German economy was consistently running export surpluses, which quickly led to a substantial accumulation of foreign exchange reserves.
As the Cold War between West and East intensiﬁed during this period, the young Federal Republic was also viewed by its former Western wartime adversaries as a stronghold against the growing inﬂuence of the Soviet Union in Europe. Not least for this reason, West Germany became an integrated member of the European Payments Union (EPU) as early as 1950 and, in 1952, became part of the Western monetary system of Bretton Woods, which was based on a dollar and gold standard.
And the Gold Flows In
In the case of the European Payments Union, the increasing export successes meant that, as a result of its set-up, Germany automatically received gold as a part of the foreign currency inﬂows.
Thus, in 1951, the country obtained its ﬁrst 25 tons of gold and, by the end of 1952, Germany already held almost 125 tons.
Over the next few years, the gold reserves literally exploded. By 1959, when the European Payments Union was replaced by the European Monetary Agreement, Germany had already received 1,584 tons of gold from its European partner countries. As a result of further inﬂows from the Bretton Woods system, among others, the Bundesbank’s total holdings reached 2,344 tons by the end of 1959, and the inﬂows continued steadily. Its peak was ﬁnally reached in 1968 with 4,034 tons (130 million ounces).
While the Bundesbank’s gold reserves grew rapidly from the outset, private individuals in Germany were still formally prohibited by law from owning gold in the ﬁrst ten years after the end of the war. This ban – which had existed in Germany in various forms since the great inflation of 1923 and had been maintained or even tightened by the National Socialists and, later, by the victorious Allied powers – lasted until May 1955. Only then could private individuals oﬃcially trade and own gold again.
After the Peak
The increasing private demand for gold in the face of uncertainties due to the Cold War, and the rising fortunes worldwide despite these uncertainties, led to the price of gold on the free market rising in the 1960s at times signiﬁcantly above the oﬃcially ﬁxed price of the Bretton Woods Agreement of $35/ounce. Thus, in the very early 1960s, the idea of the London Gold Pool was born – an instrument of leading central banks to intervene in the gold market with the target of keeping the gold price stable at $35/ounce. To this end, gold was to be bought during weak market phases and sold when prices rose.
While the Bundesbank received even more gold in 1963 and 1964 because of corresponding support purchases, the situation changed from 1966 onward when central banks had to sell gold in order to keep the gold price at $35/ounce. The London Gold Pool system ﬁnally collapsed in 1968 due to high and no longer sustainable gold outflows, and the idea of a two-tier gold price replaced the previous position. From this time onwards, there was a ﬁxed oﬃcial gold price which remained at $35 and a free-market price which at times was much higher. In the end, the Bundesbank had sold 183 tons more gold under the London Gold Pool than it had bought. Together, the participating central banks lost around 3,000 tons of gold, equivalent to $3.7 billion, through the interventions.
Incidentally, the Bundesbank’s gold reserves could and should have risen far more in the 1960s due to the rapid increase in dollar reserves than they did. The reason for this was that the Bundesbank largely refrained from exchanging dollar balances for gold. The cautious attitude of the Bundesbank culminated in an exchange of letters in 1967, in which the then Bundesbank President Karl Blessing oﬃcially conﬁrmed to the US Fed that the Bundesbank – with the express consent of the then German government under Chancellor Kurt Georg Kiesinger – would henceforth not exchange any more dollars for gold, at all.
The Bundesbank’s gold reserves therefore stabilised around 1970 at around 3,600 tons. Of these, about 740 tons were later transferred to the European Monetary Cooperation Fund (EMCF) in 1979 as part of a new European monetary reserve, which itself was a result of the creation of the European Monetary System (EMS). With the establishment of the European Central Bank (ECB) at the beginning of 1999, the 740 tons were ﬁrst transferred back from the EMCF to the Bundesbank at the end of 1998, with the Bundesbank then immediately transferring 232 tons of gold to the ECB for its monetary reserve.
Activities on the Gold Lending Market
Transfers to supranational institutions were not the only gold-related issues that the Bundesbank dealt with in the 1990s. Later than other central banks, the Germans also turned their attention to gold-lending activities. Starting in 1996, the Bundesbank lent at the height of its activities a maximum single-digit percentage of its gold reserves to various commercial banks with high credit ratings in order to generate at least part of the storage costs for its gold, which was, for historical reasons, stored at the Bank of England. The ever-decreasing demand for gold loans in the mid-2000s and the resulting trend for gold interest rates to trade at zero or even negative numbers, as well as the increasing credit risks in relation to the partner banks as a result of the emerging ﬁnancial crisis, ﬁnally led to an end of the activities on the loan market in 2007.
NO DISCUSSION HAS BEEN SO INTENSELY DEBATED IN THE PUBLIC DOMAIN IN THE ALMOST 75-YEAR HISTORY OF THE GERMAN GOLD RESERVES AS THE QUESTION OF THE RIGHT PLACE TO STORE THEM
No Sales Please
But other issues surrounding the Bundesbank’s gold hoard also ensured that the responsible members of the Executive Board did not get bored during this period. On an almost regular basis, important and less important German politicians demanded the sale of parts of the gold reserves or, alternatively, at least their revaluation closer to the then current market value. The proﬁt from these measures would then have gone to the federal budget in each case.
One often-used argument for the demand for sales was the enormous follow-up costs of German reuniﬁcation from 1990 onward, but there were also numerous other justifications for the desire to use the gold reserves to ﬁnance public tasks – for example, a proposed Fund for Economy and Research, the ﬁnancing of cash-strapped municipalities or financial support following natural disasters such as the great ﬂood on the Elbe River in 2002, which caused almost €12 billion in damage.
Particularly legendary in that respect was the ‘gold war’ between the conservative ﬁnance minister Theo Waigel and the Bundesbank in 1997. However, back then, Waigel – just like his successors, the social democratic ﬁnance ministers Hans Eichel and Peer Steinbrück – suﬀered a crushing defeat when he tried to monetise the Bundesbank’s gold. In the light of these experiences, no serious politician has called for a sale of the Bundesbank’s gold in recent years, especially since such a measure would be extremely unpopular with the German public today.
Okay, We Sell a Little…
Even though the Bundesbank’s Executive Board always resisted demands to sell gold on a large scale, it did not close its mind to smaller sales. For example, at the turn of the millennium, the central bank agreed to provide at least some small amounts of gold for minting German commemorative coins on an annual basis. This was the case for the ﬁrst time in 2001, when 12 tons of Bundesbank gold were used to mint a commemorative coin in the form of the old 1 Deutsche Mark coin to mark the farewell of the Deutsche Mark and the introduction of the euro. This gold sale started a tradition that has ensured that over the past 22 years and depending on demand from collectors and investors, between 3 and 11 tons of gold have ﬂowed out of the Bundesbank’s holdings each year for various coin series. At ﬁrst glance, these annual ﬁgures may not look very large, but over such a period of time, the Bundesbank has sold 113.5 tons of gold in this way, which is anything but negligible.
My Gold in My Castle
No discussion, not even the subject of possible sales, has been so intensely debated in the public domain in the almost 75-year history of the German gold reserves as the question of the right place to store them. In the days of the Cold War, it was generally accepted that the German gold reserves should not be stored in Frankfurt because, in the worst-case scenario, Warsaw Pact troops could have been at the city’s gates within two days if war had broken out.
Since the gold was accumulated in the central bank vaults in Paris, London and New York anyway due to the exchange of foreign exchange reserves, it was therefore left on site there (and to a small extent, initially, also in Ottawa and Berne). This also made sense in case payments were required to other recipients, resulting from, for example, the London Gold Pool or the Bretton Woods Agreement.
However, with the end of the Bretton Woods monetary system in 1973 (the Nixon administration had already ended the possibility of exchanging dollars for gold in 1971), the subsequent collapse of the Warsaw Pact and German reunification, the security argument had become obsolete in the 1990s at the latest. Nevertheless, the gold initially remained where it was, and the Bundesbank did not report until much later that until shortly before the turn of the millennium, only 77 tons of Germany’s gold reserves were in the Bundesbank’s vaults in Germany and thus within its direct access.
However, this changed signiﬁcantly in 2000 and 2001, when in a ﬁrst wave, the German central bank transferred more than 900 tons of gold from the Bank of England to Frankfurt. At the time, this transfer took place virtually, as the Bundesbank was extremely discreet about providing information on its gold reserves until well into the 2000s.
This reticence was certainly one of the reasons why, in the mid-2000s, conservative and liberal politicians, and eventually even the Budget Committee of the German Bundestag and the Federal Audit Oﬃce, demanded more transparency with respect to the Bundesbank’s gold reserves. And the public also became increasingly active. The initiative ‘Bring our gold home!’, which was founded in 2011 and very quickly collected thousands of signatures, not only demanded the transparency already wanted by politicians, but also a more extensive transfer of German gold reserves to Germany.
At that time, only a little over 1,000 tons (31%) of gold were stored in Frankfurt; however, 1,536 tons (45%) were still stored at the Fed in New York, 374 tons (11%) at the Banque de France in Paris and just over 400 tons (13%) at the Bank of England.
In 2013, the Bundesbank ﬁnally responded to the pleas and presented its new depository concept, which outlined that, in the future, 50% of the gold was to be stored in Frankfurt, 37% in New York and a further 13% in London. Its gold would no longer be stored in the Paris depository. The original plan was to complete the transfer by 2020, but Executive Board member Carl-Ludwig Thiele – who was very much in favour of a new openness by the Bundesbank regarding its gold reserves – was able to report completion as early as 2017.
Some of the gold transported to Frankfurt was remelted in Switzerland ‘on the way’ to its new home so that it met the London Good Delivery standard, which is now reached by most of the Bundesbank's 267,966 bars.
Transparency is Everything
The Bundesbank now publishes a precise list of its gold reserves every year, including the bar number, storage location, and gross and ﬁne weight of each individual bar. It is hardly possible for a central bank to go further in terms of transparency. Accordingly, the sceptics and even those conspiracy theorists who have made life diﬃcult for the Bundesbank over the past 20 years have largely fallen silent over the past six years. Credit must be given to them, however, for the fact that without their eﬀorts and the noise they created, probably not even half of Germany’s gold reserves would be stored in Germany today within the immediate reach of the Bundesbank, nor would the Bundesbank possibly have dealt so openly and transparently with its gold reserves. After all, the gold is – even if indirectly – owned by the German people, and therefore it could easily be argued that the public has a right to ask for maximum information about the status of its gold treasure.
Considering that Germany’s gold reserves have hardly changed since 1970, the past 50 years have been quite a turbulent period. Today, the Bundesbank watches over a gold hoard weighing 3,355 tons (and thus almost 40 grams of gold per German citizen) with a market value of more than €184 billion. The value is more than eight times higher than in 1999, the year in which the lowest gold price since 1979 was recorded at US$252.80 per ounce and in which other European central banks such as Belgium, France, the Netherlands, Austria, the United Kingdom and Switzerland had either already sold signiﬁcant parts of their gold reserves or were planning such sales for the near future. Starting in 2001, these sales started to take place within the framework of the Central Bank Gold Agreement (CBGA) of which the Bundesbank was a co-signatory and had at times also secured a sales quota of 120 tons/year, but in the end never made use of this possibility.
It is inconceivable what kind of serious political discussions we would have in Germany today if the Bundesbank had – like its European peers – given in to the political pressure at the time between 1997 and 2005 and sold gold on a larger scale at the low prices prevailing at the time. The fact that the Bundesbank resisted the calls and refrained from selling certainly earns it a high degree of respect from a vast majority of Germans.
The massive increase in transparency that the German central bank has displayed over the past 15 years regarding its gold reserves has further added to public conﬁdence in the Bundesbank as the guardian not only of the world’s second-largest gold hoard but also of a stability-oriented monetary policy for the euro area.
And although the introduction of the euro has meant that for more than 20 years now there has been no currency left that needed to be backed by the Bundesbank’s gold, the knowledge of the existence of this treasure clearly allows many Germans to sleep better in light of the many ﬁnancial and economic policy imponderables in the present day.
fun factThe bar list, which is published every year by the Bundesbank, comprised exactly 2,376 pages in 2022. Printed out on normal copy paper on one side, the list would weigh pretty much exactly 12.5 kilos, as much as a standard gold bar.