Gold Laundering - Mark Pieth - ebook

Gold Laundering ebook

Mark Pieth

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In this eye-opening book, Mark Pieth gives an in-depth insight into how the global gold market works, what role Switzerland plays in it, where the hidden abuses lie and how human rights in the gold industry can be protected in a credible way. This hard-hitting, exclusively researched depiction of a key area of economic policy takes us both to the glittering world of gold refining and to the world's worst mining regions. Mark Pieth illuminates the historical roots of the gold trade before turning his attention to today's supply chains, from mines to refineries and clandestine intermediaries to consumers: central banks, investors, jewellers and watchmakers. He reveals some of the horrific problems caused by gold mining that still receive little attention due to a lack of binding regulations: severe environmental destruction, forced labour and human trafficking, land grabbing, stolen assets and money laundering. The author manages to make these complex topics easy to understand and hard to ignore. Switzerland is not only a major power in the financial sector and commodity market – whose scandalous workings were revealed by the Swiss NGO Berne Declaration (now Public Eye) in the book Rohstoff, also published by Salis. Switzerland is also a leader in global gold trading. But while the EU, for example, has recently turned existing OECD guidelines into binding law, Switzerland continues to rely on voluntary self-regulation.

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MARK PIETH

GOLD LAUNDERING

THE DIRTY SECRETS OF THE GOLD TRADE – AND HOW TO CLEAN UP

CONTENTS

Why write this book?

01TWO SIDES OF THE COIN

La Rinconada

The world of glamour

Gold laundering

02THE HISTORY OF GOLD

Ancient Egypt

The Roman Empire and Middle Ages

The Age of Discovery

The Spanish conquest of Latin America

The reaction of rival European nations

The effects of the gold avalanche on the economy

Gold rushes

The gold standard

Britain

United States

Financing the Nazi war effort

Supporting the apartheid regime

The early history

Recruiting the necessary workforce

Willing helpers of the apartheid regime

03 THE SUPPLY CHAIN

The size of the gold trade

Where does gold come from?

Large-scale gold mining

Exploration and acquisition of mining rights

Surface mines

Underground mines

Deep sea mining

On-site processing

Mining companies

Major challenges of large-scale mining

Artisanal and small-scale mining

Dimensions

Surface mines

Underground mines

Dredging

Intermediaries in doré

Recycling

Grandfathered stock

Refining

What do gold refineries actually do?

The process

Arrival, weighing, measuring

Smelting and founding

Blockchain

Trading in gold

Buyers

The changing role of central banks

Investors

Jewellers and watchmakers

04PROBLEM GOLD

Environmental challenges

Organised crime, money laundering and smuggling

The case of Colombia

From drugs to gold

Money laundering and more

Forced labour, child labour and human trafficking

Forced labour

Sexual exploitation

Child labour

Land grabbing and displacement

Conflict gold

The DRC

The Congo wars

Pillage and genocide

Traders and refiners

The DRC’s problems are not over

Sudan

Washing the problems away?

05CREATING A RESPONSIBLE SUPPLY CHAIN

Reactions to the DRC genocide

Business responsibilities to respect human rights

International regulation against economic crime

Regulation of business conduct to protect human rights

UN Guiding Principles

OECD Guidelines for Multinational Enterprises

OECD Due Diligence Guidance

OECD Supplement on Gold

Regional and domestic rules

US Dodd-Frank Act 2010

EU Conflict Minerals Regulation

Chinese Due Diligence Guidelines

Private sector initiatives

London Bullion Market Association

Responsible Jewellery Council

World Gold Council

Dubai Multi Commodities Centre

Reputational breakdown

Evaluation of the DMCC Rules

Do industry standards work in practice?

Multi-stakeholder initiatives to certify and formalise artisanal mining

Certification

The Fairmined Standard

The Fairtrade Standard

The Better Gold Initiative

Development initiatives

What value do multi-stakeholder initiatives provide?

Responsible sourcing?

06WHAT WORKS AND WHAT DOESN’T?

The attraction of voluntary standards

How seriously does the industry take the risks?

Are refineries as clean as they claim?

Living with criticism

Argor-Heraeus

Problems in the DRC

Problems in the present?

Metalor

Problems in Peru

Problems in Colombia?

Problems in Eritrea

Problems in Ghana?

MKS PAMP

Valcambi

Problems in Peru

Problems in Burkina Faso

Problems with Dubai?

Kaloti

Rand Refinery

What is wrong with due diligence standards?

Step 1: “Establish strong company management systems”

Step 2: “Identify and assess risks in the supply chain”

Step 3: “Design and implement a strategy to respond to identified risks”

Step 4: “Carry out an independent audit of refiner’s due diligence practices”

Step 5: “Report on supply chain due diligence”

Downstream compliance

Why the gaps in compliance?

07SWITZERLAND, THE WORLD CENTRE OF GOLD REFINING

What’s so special about Switzerland?

High exposure, little regulation

Assaying and metals control

Anti-money laundering rules

Criminal law

Corporate criminal liability

Customs regulations

Hard law vs. soft law?

The official line

How Switzerland can strengthen its patchy regulations

08THE WAY FORWARD FOR THE GOLD INDUSTRY?

Mapping the supply chain and its risks

Improving human rights in mining

Large-scale mining

Artisanal and small-scale mining

Protection of miners’ human rights

Supporting formalisation

New technologies to protect workers and the environment

Certification of clean gold

Opening the international supply chain

Addressing conflicts between LSM and ASM

Collectors and traders

Refiners

Taking control of the supply chain

Increased due diligence

Auditing and reporting

Downstream companies

Illicit financial flows

Hard law vs. soft law revisited

Industry regulations

Public sector regulations

The future role of the OECD

09THE WIDER PICTURE

ACKNOWLEDGEMENTS

ANNEX

Correspondences

Endnotes

Literature

Documents

Images

Infographics

Abbreviations

Index

WHY WRITE THIS BOOK?

I have spent the last 25 years working in the field of international regulation to keep corruption, money laundering and organised crime at bay. As an academic working at a Swiss university, I could of course not help realising that my native country played a very special role not only in banking and commodity trading, but also in refining and trading precious metals.

In contrast to other products, precious metals are imported and reexported after refining. The sheer magnitude of the turnover is mind-boggling: up to 3,000 t of gold per year, amounting to 50–70 percent of the world’s gold refining. So Switzerland is obviously confronted with considerable environmental and human rights risks – adding to the risks from its involvement with financial services (money laundering, kleptocracy, tax evasion and the like), commodity trading (corruption), arms exports, international sports organisations, and more.

I was, and still am, shocked at the general lack of awareness about these risks. I am equally dismayed at the lack of political will to implement regulations to improve the lives of the millions of people involved in or affected by gold mining worldwide. It is obviously not a problem only for Switzerland. But you would think we had learnt our lesson from the past.

I decided to give international efforts to regulate the gold supply chain, including soft law and self-regulation, a critical look based on my experiences in the fight against economic crime. As this book will show, we have not yet achieved credible protection of essential human rights in this area – and given our fast-growing hunger for other rare metals and rare earth elements, the implications of this go far beyond gold.

TWO SIDES OF THE COIN

01

LA RINCONADA

In a world of rocks and glaciers 5,100 metres high in the Peruvian Andes, 60,000 miners, shopkeepers, bartenders and prostitutes jostle for space in a town that, 25 years ago, housed barely five families.1

In La Rinconada, the world’s highest permanent settlement and largest gold-mining shanty town, vultures do the garbage disposal and stinking human waste hardens on the infertile ground. Alcohol and coca leaves are the only protection against the altitude and brutal climate, which sees temperatures dropping to minus 20°C.

Like the conditions, people are merciless. Entertainment takes the form of fighting, robbing, raping and murdering.2 And there is nobody to stop this because the police officers and teachers have all turned to mining, preferring to endure the hazardous conditions at the rock face than to live off their meagre salaries.

Without state authority, the miners exert their own justice. Suspects are known to have been strung up.3 Most miners are armed. Guns are easily available in the closest town, Juliaca, with or without ID. In a recent TV documentary, the place was called a “no-man’s-land”.4

As La Rinconada has no functioning infrastructure, trash piles up everywhere

Mining is done underground, in some places by digging into the glacier with chisels and hammers. In areas where licensed companies run the mine,5 methods are slightly less makeshift and the miners work with electric drills and explosives.

Even where mines are formalised, the cachorreo system under which miners are employed6 is informal. Depending on the arrangement, miners work 27 or 28 days per month for the mine in order to get two or three days for themselves. A regular shift is four hours. On the days when they work for themselves, they are allowed to take all they can carry in their bare hands or a bag, which usually isn’t much. They get no regular salary, no insurance and no pension. Employment conditions have not changed much since the days of the Incas and the Spaniards.

Strikingly though, many miners themselves claim to prefer the cachorreo system to regular employment according to labour laws.7 They believe in their luck, just like the bounty hunters caught up in the famed Klondike Gold Rush.8

The path to the entrance of the mine leads across frozen mud, ice and rock

Gold and guns, a dangerous combination

KLONDIKE GOLD RUSH

In 1896 two prospectors, Robert Henderson and George Washington Carmack, were fishing in a stream flowing into the Yukon River in the Klondike region of northern Canada when they found gold. What followed was one of the most feverish and desperate gold rushes in history. Of the close to 100,000 bounty hunters who set out, only about 30,000 made it to Dawson City, the centre of the gold rush. Very few made a fortune. Charlie Chaplin managed to make brilliant comedy out of these events in his 1925 film The Gold Rush, but the harsh and murderous reality was surely not very funny for those involved.

What the individual informal miner takes out of the mine in this lottery-like system is usually crunched in a quimbalete, a primitive mill powered by men moving heavy stones. It is not so different from methods used in ancient Egypt or Rome.

The miners use large quantities of hazardous mercury – about 10 grams of mercury for one gram of gold – to separate the gold from the ore in a process called amalgamation.9 Mercury is subject to progressive bans all over the world due to its disastrous impacts on human health, plants, animals and entire ecosystems.10 In La Rinconada and other such mining communities, it is freely sold close by and handled without any protection by bare hand.

A slightly more modern process of gold extraction involves concentrators. Here, ball bearings crunch the sand in a type of washing machine before the mercury is added.

Next, the amalgam of gold and mercury is taken to little shops called entables, where women torch off the mercury. As you might imagine, there are no closed-circuit retorts to keep the poisonous substances from escaping.11 Instead, the mercury fumes simply float up through a little chimney into the open air.

Measurements in a similar environment, Antioquia in Colombia, have shown that the air outside such entables can easily reach 1,000 times the World Health Organization air quality guideline for mercury.12

Since mercury does not kill immediately, miners are frequently unaware of its dangers and of the serious health problems awaiting them later in life.13 Citizens in the nearby village of Putina say that children “do not grow” in La Rinconada due to the mercury contamination of air and water.

The role of women in such places is difficult. Due to the superstitious belief that they will arouse the jealousy of Mother Earth, women are not allowed into the mines.14 So-called pallaqueras are, however, allowed to search for traces of gold in the tailings, the rock left over after the gold is extracted. The tailings are often contaminated with hazardous chemicals.

Other women work in bars and brothels as prostitutes. Southern Peru, especially the region of Madre de Dios northeast of La Rinconada,15 is a hotspot for hijacking and forced prostitution. Girls, frequently from neighbouring Bolivia, are the victims of violence by frustrated and jealous miners.16 Studies by relief organisations talk of 4,500 women forced to offer sexual services in La Rinconada.17

Miners crushing gold ore with primitive stone mills (“quimbaletes”)

Mercury outlet operated by women without gloves or masks in La Rinconada

Powered “quimbaletes”

Street scene from La Rinconada

“Pallaqueras” searching for traces of gold in rubble left behind by miners

Locals, including priests working in adjoining parishes, claim that miners occasionally still perform human sacrifice in La Rinconada to “pacify the devil controlling the mountain”.18 From outside, these accounts are difficult to confirm.

Corpse of Susy Delgado Quispe, murdered in La Rinconada

THE WORLD OF GLAMOUR

Half of the world’s gold production goes into jewellery and watchmaking. Until very recently, the watch and jewellery trade fair Baselworld19 was the place to go for the industry. Large watchmakers like Swatch spent up to CHF 50 million on presenting their brands at one of the annual events. Even smaller companies would easily invest CHF 1 million and above.

Glamour at the fairground and wining and dining outside were pushed to the extreme. Hotels and restaurants in the region earned millions in just one week.

Up until recently, 1,500 watch and jewellery companies from 40 countries would present their newest products at this fair. Since the market leaders participated, all the others simply had to be present and make use of the hype.

Lately, the fair has experienced a tremendous exodus of annoyed companies. At first it was the smaller companies, who found it difficult to pay for the excruciatingly high rents at the fair and the side costs such as hospitality. Shortly afterwards, however, they were joined by market leaders, who claimed that fairs were outdated in the time of the internet.20 It must be assumed that the “bazaar of vanities” simply overdid it – too lush, too expensive and too arrogant?

What remained an absolute side issue in the temple of luxury was the question of where the gold came from that filled the show rooms. The courage to raise this question was left to NGOs like Human Rights Watch (HRW).21 HRW spokesperson Juliane Kippenberg stated that most of the watch and jewellery companies that they surveyed as part of a study did not know where their gold and diamonds were sourced from. Some simply refused to participate in the study.

Baselworld Watch and Jewellery Show

Hostesses at Baselworld 2016

At first sight, Chopard sets a significant contrast. In a press conference in March 2018, the Co-Presidents of Chopard, Caroline and Karl-Friedrich Scheufele, announced that 100 percent of the gold used in their production would come from sustainable sources. This news was welcomed as a major step by the media.22 NGOs remained more reserved: Kippenberg acknowledged the sourcing from Fairmined-certified small-scale mines, but expressed disappointment that the rest of the supply chain continued to lack transparency. Indeed, the announcement that the company would source either from Swiss Better Gold Association (SBGA)-accredited or Responsible Jewellery Council (RJC)-certified sources leaves a lot open to interpretation. We will see in CHAP. 5 that RJC certification is far from convincing.

GOLD LAUNDERING

For over 6,000 years, mankind has been fascinated by gold. What makes it so irresistible? On the surface, this indestructible, shiny element seems of little practical use but to show off status and look good in buildings and artworks. Yet people from all countries, cultures and centuries have trusted it as a kind of world currency, allowing the exchange of goods where national currencies are distrusted. Only in recent times have industrial uses been developed, with gold now regularly used in electrical contacts, semiconductors, mobile phones and medical devices.

A quick look back at history in CHAP. 2 shows that the value of gold goes far beyond its properties as a metal or even its use in trade. Greed for gold drove the brutal Spanish conquest of Latin America and wars between European nations whose consequences are still felt today. Waves of gold rushes in California (1848), Australia (1851), South Africa (1886) and Canada (1896) generated sufficient quantities to start basing national currencies on gold – what we call the gold standard. Gold has profoundly influenced our modern banking and financial systems, and still does.

For all the excitement and fabulous wealth associated with gold, the process of mining it, supplying it and refining it (CHAP. 3) has brought incredible misery to many people. People like informal miners and their families, struggling to survive and often battling helplessly against multinationals granted licences to take over their land. Slaves, from the convicts and prisoners of war used by Egyptian pharaohs to those working under conditions of forced labour in the eastern Democratic Republic of Congo. The hundreds of thousands of black labourers toiling in South African mines under apartheid, in wretched conditions and with their meagre salaries falling in real terms. Employees of large mining companies, in the past and unfortunately often still in the present.

Despite all the advances in industrial technologies, processes and standards, CHAP. 4 shows that the gold industry still faces formidable challenges. There is growing concern about environmental degradation caused by gold mining through deforestation and the use of toxic substances. Gold plays a significant role in organised crime, money laundering and tax fraud. But the most visible and shocking risks in the gold supply chain are human rights violations: working conditions, the dispossession of indigenous populations, child labour, violence against women and many more.

How can anyone not see the risks? How is it possible for NGOs and industry players to debate whether gold is really problematic or whether everything is actually okay? Sure, there are laws, standards and initiatives that should serve to kick the gold supply chain into shape. CHAP. 5 sets out a comprehensive picture of them all. Or perhaps we should call it a patchwork, not a picture, because the regulations are still pretty patchy and weakly enforced.

So are the regulations working at all? Turn to CHAP. 6 to find out, but the short answer is “not really”. Here we look more closely at some individual gold refineries, because they are the gatekeepers of a responsible supply chain. Although all of us – regular citizens, NGOs, governments, international bodies, industry associations, mining companies, traders, banks – can play an important role in cleaning up the gold industry, refineries are the key. The complex refining process transforms the rough, raw metal into what we think of as gold, washing off any dirty secrets about where the gold came from and who suffered along the way. Hence the title of this book: Gold laundering.

Some of those working in gold refining openly recognise the risks in the supply chain. The owner of one of the biggest refineries in the world has even said that “[i]n this industry it is impossible to refine clean gold […]”.23 But others close their eyes. As you will read in CHAP. 7, Switzerland, the world centre of gold refining, is only just starting to see some of the problems – and to recognise that it has the power to solve them.

By the time we reach CHAP. 8, we have swept through the history, processes, risks and regulations around gold, looking at what works and what doesn’t. So we are in a good position to suggest some sensible reforms that can make a real difference to the lives of people working at all levels of the gold industry, all over the world. And hopefully, by the time you get to CHAP. 9, you’ll already know some things you can do to help clean up the shady value chain that lies behind our shiny gold jewellery and the components in our mobile phones.

THE HISTORY OF GOLD

02

ANCIENT EGYPT

Gold already played an essential role in ancient Egypt1 and Mesopotamia.2 As early as 5000 BC, settlers along the Nile found nuggets at the bottom of seasonal rivers called wadis. They found that by hammering it into leaf form, they could make primitive jewellery, later found in tombs.3 Metallurgical skills advanced rapidly in Egypt in the time around 3500 BC,4 even before the dynasties of the pharaohs.

Under the pharaohs, gold gained a high religious significance.5 It was considered the Sun God’s metal and was put under exclusive control of the pharaoh. Treasuries at temples kept stock of deliveries.6 Gold was systematically prospected, helped by green stains on the rocks that indicated the presence of gold.7

Gold mining in ancient Egypt peaked at the height of its empire, around the time of Thutmose III (1479–1425 BC).8 The famed tomb of Tutankhamun (1323 BC) contained over 110 kg of pure gold, testifying to its significance.9 Mining gold developed into a highly organised activity. Scholars estimate that during the pharaonic times, seven tonnes of gold were mined10 and that wherever gold deposits could be mined, they were.11

The funerary mask of Tutankhamun

Gold was not used for coinage in ancient Egypt, which had a barter economy. The pharaoh did, however, organise an exchange of gold for ebony from sub-Saharan Africa.12 Gold coins were a much later development, with the use of modern-style bimetallic coinage first recorded between 560 BC and 546 BC under Croesus, king of Lydia (western Anatolia in modern-day Turkey).13 Croesus, by the way, was so fabulously wealthy that we still talk about being “as rich as Croesus”.

The Egyptians first started prospecting for gold in the Eastern Desert, part of the Sahara east of Aswan. Later, after the conquest of Nubia, it was mined in the Nubian Desert as well,14 a vast area stretching down through what is now northern Sudan. In fact, the hieroglyph for gold read “Nub”.15

Alluvial gold – tiny flakes or particles of gold found in low-flowing rivers or dry river beds – was gathered at open pits in the desert.16 That wasn’t enough to meet the demand, so the Egyptians started mining underground by cutting trenches into hills and digging shafts.17 Excavation tools were primitive, basically a hammer and chisel.

The mining process stayed pretty much the same throughout pharaonic times, except for the introduction of bronze tools.18 On the other hand, archaeological evidence found at hundreds of old mining sites prove that concentration techniques advanced as Egyptian imperial power grew. Crushing the ore was initially done with large hammers, later with a battery of mortars like a modern-day stamp mill.19 The resulting mix of gold and quartz gangue (the valueless bit of the ore) was then reduced in mills to powder.20

Thanks to the 1st-century BC historian Diodorus Siculus, as well as tomb decorations21 and other archaeological evidence, we have an insight into separation methods. The powder was washed on slanted stone tables covered with sheep skin. Some say the myth of the “golden fleece” of the Argonauts originated from this practice.22 The skin would trap the sharp and heavier gold particles. This method reminds us of “modern” separation methods used as an alternative to dangerous extraction using mercury or cyanide, such as the technologies discussed in CHAP. 8. The skin would then be burned in order to recover the trapped gold.23

Tomb of Rekhmire depicting artisans casting metal

The next stages to refine the gold again remind us of methods still in use today, such as cupellation, in which heat is used to separate gold and silver from other elements. According to ancient accounts, the raw material was mixed with lead, tin and barley bran in a heat-resistant earthen container (a cupel). The mixture was then heated, with a strong current of air helping the oxidation process. Other metals would be absorbed by the porous walls of the cupel,24 leaving gold and silver.

As today, more difficult was separating gold from silver. It seems, as Diodorus Siculus claims, to have been done by cementation. This process involves heating the gold and silver amalgam together with salts. After a few days, the silver combines with the salts and separates from the gold.25

At this stage of the process, the gold was finally ready for casting or any other form of working by goldsmiths. According to modern tests, the purity of Egyptian gold varied considerably, between 70 and 90 percent.26

It is incredible to think that this complex process, including many elements which look similar today, was carried out between 6,000 and 3,000 years ago. The concept of human rights may not have been talked about back then, but the horrific abuses against human beings were plain for all to see. Miners were slaves and convicts, and their lives did not count27 – an attitude that, sadly, persisted in gold extraction in the centuries to come.

THE ROMAN EMPIRE AND MIDDLE AGES

In ancient Egypt, the pharaoh held the monopoly over gold. Bartering with gold to acquire goods from other countries in Africa or the modern-day Middle East was a sovereign prerogative. The Ptolemaic invaders of Egypt and then the Roman Empire adopted an entirely different attitude: they transformed gold into currency and minted gold coins for high-value money.28

Ancient Egypt’s energetic mining efforts were not really resumed in the Middle Ages. Newcomers, especially the Arabs from roughly 640 AD on, concentrated on reactivating some of the known mining sites and looting graves.29 Production remained low.

Nevertheless, the Middle Ages inherited gold currency from the Romans. Quality was of course an issue. The magnificently named Worshipful Company of Goldsmiths (now The Goldsmiths’ Company) based at the exquisite Goldsmiths’ Hall in London, started to assay precious metal (evaluate its composition) and hallmark it (mark it with a quality guarantee) in 1300.30 Rapidly though, known mines in Europe were exhausted, leading to a shortage of precious metals during the 14th and 15th centuries now known as the Great Bullion Famine.31

Common coins of the Roman Empire

Throughout the Middle Ages, alchemists sought to satisfy the constant hunger for precious metals by searching for the so-called philosophers’ stone – a material that could turn base metals artificially into gold or silver.32

The bank cheques that many people still use today saw their precursors in the late Middle Ages. Times were rough. Former military men and desperate people displaced from their homes were living lawless in the woods. It became increasingly dangerous for merchants to travel to fairs carrying sacks of gold and silver with them – much nastier characters than Robin Hood were lurking behind every tree.

“The Alchemist”, 16th-century engraving attributed to Philip Galle after Pieter Bruegel the Elder

Some enterprising early bankers therefore started to offer certificates known as bills of exchange. They would keep the merchant’s gold in their vault and supply him with a certificate that would be recognised by a correspondent banker at the fair, who would then pay out the required sum to the merchant. The merchant would pay back once at home from his holdings at the bank, including an additional fee. This private guarantee system became the basis of public currency as time went on.33

A goldsmith in his shop, painting by Petrus Christus (1449)

A bill of exchange from 1873 England

THE AGE OF DISCOVERY

The discovery of the Americas by Columbus in 1492 was timely in more than one way. It ended the gold famine and it also provided the Spanish monarchs with the means to finance their wars and build a fleet.34 Since this profoundly changed the course of world history, let’s have a look at what happened and the important role of gold.

THE SPANISH CONQUEST OF LATIN AMERICA

By the 15th century, Portuguese and Dutch sailors had already discovered new frontiers, especially when sailing along the coast of Africa and beyond to Asia. Spain had been held back by La Reconquista, its centuries-long fight to “reconquer” the south of Spain from the Muslim Moors. When they succeeded, the so-called “Catholic Monarchs” Isabel I and Fernando II were finally persuaded to fund an expedition by Italian explorer Christopher Columbus to look for the west passage to India.

Columbus’s original goal was, like that of Vasco da Gama of Portugal, to open trading routes. It was only when he returned from the Caribbean with gold and pearls that he sparked the greed of the monarchs, as well as the realisation that they could use the gold to fund wars at home. Rapidly the paradigm changed from trade to conquest. This is the context in which King Fernando II sent out expeditions of conquistadores – from the word for “conquer” – rather than mere explorers. “Get gold”, he ordered. “Humanely if you can, but at all costs get gold”.35

Depiction of “Christopher Columbus landing on Hispaniola” by Theodor de Bry

Depiction of “Amerigo Vespucci at the continent” by Theodor de Bry

The early seafarers were greeted with presents on the Antilles, but the atmosphere rapidly changed once it became clear that the conquerors had come to rob and to kill.

One of the worst killers was Alonso de Ojeda, a lowly but ambitious nobleman who had joined Columbus’s expedition as one of the King’s surveyors. He began his own series of expeditions in 1499. His aim was to rob as many goods for the King and for himself as possible. A companion of more famous conquistadores including Francisco Pizarro, he was moderately successful in finding gold. But he found his true calling as a brutal killer.36

It is amazing that those small and ill-equipped armies managed to conquer huge empires in such a short time. It took Spanish conquistador Hernando Cortés just a couple of years and a few hundred soldiers to conquer the Mexican Aztec Empire,37 which came under his control in 1521. A few years later in 1533, the Inca Empire fell to Pizarro in modern-day Peru.38 The story goes that Pizarro faced 80,000 Inca troops with just over 100 sick and weary foot soldiers and 62 horsemen. Tricking Atahualpa with the offer of a friendly encounter, he locked him up and slaughtered his entourage.

Whatever the truth, huge quantities of gold, silver and precious stones were looted in the aftermath. In fact, legend has it that the captured Incan leader Atahualpa even agreed to fill a large room with gold to secure his release. True to form, the Spaniards waited until the gold was delivered and then publicly executed Atahualpa anyway.39

This gold booty, sent home to Spain via the southern port of Seville, marked the beginning of a long procession of Spanish shiploads draining Latin America of its gold and silver. It has been estimated that 185 t of gold and 16,000 t of silver arrived in Seville during that period.40 A fifth of the spoil – a quinto – belonged to the King.41

Gold artefact exhibited at the Larco Museum in Lima, Peru

It may be hard for us to imagine this today, but gold had no value as currency to the indigenous Latin American peoples who had extracted it. Like in ancient Egypt, it was instead mostly used for ornamental and religious purposes. In addition to the death and destruction caused by this raid on Latin America’s gold, it is sad to think of these beautifully crafted artefacts being melted down into bars by the Spaniards.

THE REACTION OF RIVAL EUROPEAN NATIONS

Since the leaders of Spain and the Holy Roman Empire were using the gold to pay for their European war efforts, the bonanza endangered the position of other major European nations, in particular England, France and the Netherlands. This explains in part why Elizabethan England embarked on an aggressive attack on Spanish interests. The academic Barbara Fuchs talks of “a rather desperate willingness to attack Spain in the Elizabethan years”.42 The main difficulty of Queen Elizabeth I was, though, that England had no organised navy at that time – and only a weak army, as became painfully clear when the Spanish invasion was imminent shortly afterwards.

The Queen’s adviser, the magician John Dee, suggested that she “rein in the pirates and profit from their ability”.43 Pirates who were ready to work for their country as “privateers” would receive an official mandate to attack ships of a hostile nation and were allowed to keep up to 50 percent of the bounty.44

What a brilliant idea, thought the Queen. England organised 13 expeditions into the Caribbean between 1570 and 1577.45 Other naval powers like France and the Netherlands caught on and pursued a similar policy.

The privateers – a direct result of countries’ greed for gold – were notoriously daring and their activities changed the course of European history. Sir Francis Drake, one of the best known privateers, raided the Spanish port of Cadiz in 1587. Within a year, open war broke out and the Spanish Armada set sail in an attempt to invade England. Their catastrophic defeat in the English Channel was a huge setback to Spanish interests and helped Britain rise to become the leading naval power. In fact Spain, despite its massive gold bonanza, turned out to be bankrupt at the end of the 16th century.

The English privateer Sir Francis Drake

Replica of the Golden Hind in Brixham, UK

While privateers acting in defence of their country were at first glorified,46 they became an embarrassment as soon as Spain and England agreed a peace treaty under James I in 1604. Rapidly expanding international commerce and larger colonial efforts led to a radical change in attitude towards piracy.47

The Virginia Company and the East India Company, emerging large trading houses wishing to preserve their monopolies, were particularly opposed to piracy. Even though villages in western England and Ireland lived for some time off trade with privateers, i.e. handling stolen goods in today’s terms, the larger interests of the emerging British Empire prevailed. The navy defended the merchant fleet.48 In a raid in the Caribbean in 1710, 500 pirates were allegedly killed by the British.49

SIR WALTER RALEIGH

Sir Walter Raleigh’s life story illustrates England’s shifting social and political attitudes in the 16th and early 17th centuries. He grew up as a landed gentleman. As an adventurer, sailor, poet and courtier he explored and claimed what is now the US state of Virginia for the English Queen. At the time of the war with Spain he was a heroic figure and one of the key players close to Queen Elizabeth I, acting as both privateer and soldier.

Portrait of Sir Walter Raleigh by Nicholas Hilliard (1585)

For all his closeness to the Queen, her successor James I disliked him and threw him into prison. He was pardoned to search for El Dorado, a rumoured “city of gold” in South America. When his men attacked a Spanish fort in violation of the 1604 peace treaty between England and Spain, however, he was again arrested and brought back to England, where he was promptly executed by James I at Spain’s request.50

THE EFFECTS OF THE GOLD AVALANCHE ON THE ECONOMY

Despite the best efforts of rival nations to prevent it, gold was flowing into Spain through the port of Seville. The Spanish monarchs contented themselves with a fifth of this, their quinto, to further develop their imperial policies in Europe and Latin America. So what happened to the other four fifths of the bounty?

The Spanish economy at that time was by no means able to digest the inflow of such large quantities of gold. Spain was an impoverished rural country that had, for religious reasons, just expelled the Jewish and Muslim populations who had acted as financiers. Foreign bankers, especially from Italy and the Netherlands, struggled to step in. Rightly, Hart says that the gold and silver was not helping the Spanish economy.51 Instead, the influx of gold spilled out and helped the entire European economy to grow in the early times of industrialisation.

The use of bills of exchange instead of physical transportation of gold helped foster the banking world. Bankers would mutually accept each other’s paper bills. This practice, which had evolved gradually since late medieval times, now became a public matter. Sovereign states took on the task of issuing paper money against gold they held in storage. From private promises, banknotes became official currency.

Gradually, the concept of the gold standard emerged, meaning that paper money was now exchangeable for gold and vice versa. Sir Isaac Newton, Master of the British Royal Mint among his many other roles, introduced the gold standard de facto in 1717 by setting a fixed rate for the pound against gold.52 It is no coincidence that the first central banks were created virtually at the same time: the Amsterdam Wisselbank (1609), Bank of England (1694) and Banque générale de France (1716).53

Bank of England one pound promissory note of 1802

GOLD RUSHES

For all the gold pouring in from Latin America, however, there was still not enough in Europe to support the currencies in the phase of the colonialist expansion and through industrialisation. More widespread adoption of the gold standard had to wait until the supply of gold was drastically increased yet again.54