The White War

Ian Locke. History Today. Volume 48, Issue 12. December 1998.

The Yalta and Potsdam conferences of 1945 are significant points of departure for the East-West divide that became the Cold War. By the time the Big Three sat down in early 1945, the suspicions that led to the freeze were already in place. During the Second World War, economic intelligence, political and military aspirations became inseparable on a global scale, to an extent and on a scale never previously seen. Economic warfare extended beyond visible activities—such as those of the SOE and `resistance economic sabotage’ (the direction of forces to economic targets and blockade)—to cumulative intelligence operations. The latter sought to penetrate and expose Axis economic influence and assets, then curtail or seize them. These goals were wideranging and complex, and inter-Allied co-operation proved essential.

Economic warfare, known as the ‘white war’ (a term coined by The Economist in May 1939) was commenced by the British in 1938. The domestic Economic Warfare department, an independent body with close ties to the War Office and Foreign Office, was headed by a succession of notables, including Sir Desmond Morton and Hugh Dalton (later Chancellor in the Labour administration); MI5 and MI6 both provided personnel. In the United States the British effort was directed by the Canadian industrialist Sir William Stephenson. By 1940 Churchill had acknowledged the primary importance of intelligence, and economic knowledge of the enemy came to the fore in a totally industrialised war plan. Britain had the capacity to marshal such intelligence and use it influentially. The US, for example, only agreed to become the `arsenal for democracy’ as a result of explicit information it received from the British.

As the war drew to an end, Britain (overlooking the extant Anglo-Soviet mutual assistance pact) turned its attention to a new economic target: the Soviet Union. Preliminary intelligence work on the Soviets (and Communists) had already been undertaken following the Nazi-Soviet Pact of 1939. British intelligence readily acknowledged an immediate advantage; the Soviets found it impossible to keep secure their internal and external communications by having to deal with up to 125 local languages which had to be translated into Russian. As a result there were limits on the type of signals they could effectively use.

The Economic Warfare department had begun to tailor its objectives towards undermining Soviet economic interests early in 1944, based on the experience of handling the Axis powers. The anti-Communist operations comprised three main areas of activity—direct intervention in the economy; the gathering, interpretation and handling of economic intelligence; and overt economic counter-espionage.

The first step in 1944 was to cut the Soviets out of shared Allied counter-intelligence, primarily of the G2 and G5 elements of the Secret Intelligence service. In 1946 the USSR was given a ‘Class C’ designation by the British—to receive unclassified information only. Britain’s treatment of the Soviet Union was not unique. Aware of the Communist infiltration of France, limits were also placed on intelligence passed to the French (though these increased after the Anglo-US plan for the post-war occupation of France was abandoned in 1945).

The first test of the effectiveness of direct economic intervention was in Italy where AMGOT, the Allied occupation authority, rapidly took control of the Italian economy (literally, insofar as it directly held the printing plates for the new Italian currency), and took over all major industry in its efforts to limit the influence of the Communists.

Elements of the counter-espionage policy were immediately compromised by the threat posed by Soviet spies within Britain. The primary known spies working from the 1930s—Philby, Burgess, Maclean, Cairncross and Blunt—were exposed by internal enquiry in the 1950s and 1960s. The level of infiltration was extreme: in 1944, Philby was able to move from the counter-espionage Section V of MI6 to actually running the MI6 anti-Soviet operations. Significant damage was also done by scientific spies, notably the naturalised Briton Klaus Fuchs who betrayed the secrets of the atom bomb to the USSR in the mid-1940s.

The three major conferences at the end of the war gave Britain the opportunity to extend her economic influence. The first of these, the Bretton Woods conference of 1944, determined the Western post-war economic structure (leading to the establishment of the International Monetary System, the IMF and the World Bank). The agreement stemming from it aimed at controlling exchange rates, which were fixed for members in terms of gold and the dollar, and to recover assets plundered by the Nazis. The revival of the gold standard, however, was not immediately recognised by the British Labour government (The official UK gold market did not reopen until 1954). Lord Boothby spelled out the reality of Article IV of the Agreement in the Commons in December 1945:

Under the Bretton Woods Agreement, gold will purchase any currency If that is not going back to gold, I do not know what going back to gold is.

If par values for currencies were to be backed again by gold, the pursuit of gold claims took on a new importance. The decision made pressurising the neutrals (primarily Switzerland) over sheltered ‘Nazi’ gold a matter of significance.

Britain made the pursuit of gold a priority and the revival of the gold market in the City of London was soon underway, a campaign spearheaded by Rothschilds and the Bank of England. By 1946 the Tripartite Gold commission was established by France, Britain and the US, with a mandate to return stolen gold to genuine claimants.

The British gold trade came to dominate the European market by the end of the 1940s and also undertook many deals both legal and illegal in the Middle and Far East, South Africa and India. Over and above any pure commercial usage, gold served a political end—maintaining the influence of what was known as the Sterling Area. A Cabinet Office study of 1949 stated the issue clearly:

…the reserves of gold and foreign exchange are required to service the need of the whole sterling group; without adequate reserves the group could not continue to function…

The Soviets made no claim to ‘Nazi’ gold. The USSR remained one of the world’s top three gold producers and also, unencumbered by international agreement, it planned to strip all gold from its satellites and occupied territory. British intelligence was well aware that Soviet gold had supported overseas Communist parties. The British Communist Party, for example, had received large sums of cash—such as Swiss francs—throughout the 1920s and 1930s bought with Soviet gold.

From 1946 Britain had the first concrete intelligence that the Soviets might be seizing all gold in their occupied territories. Tons of precious metals were initially seized from the Reichsbank and other German banks located in the Soviet zone. There appear to have been efforts to thwart this campaign—an Allied raid on the IT (Thyssen) Bank in Berlin in 1946, for example, recovered a haul of valuables. Then, in 1948, with the defection of a leading Communist legal expert, Britain gained detailed intelligence of the entire Soviet operation. It transpired that shortly after the war, the Soviets offered cigarettes and tobacco in exchange for all private gold held in Eastern Germany. The campaign was extraordinarily successful. The source of the tobacco proved to be both a huge stockpile seized in Austria and substantial stocks of cigarettes provided by Jews in payment for escape to the West or Israel. That some of the gold ‘bought’ by the Soviets had initially been stolen from Jews by the Nazis appears more than probable.

Under the reparations agreements arising from Yalta and Potsdam, and the subsequent peace treaties, Britain retained the overseas assets of Germany and her allies. The terms also allowed pursuit of financial claims against the former enemies. Wartime economic intelligence, from Europe and the US, revealed to British operatives that the extent of British financial interests in Europe was considerably greater than expected. These assets included the major oil fields of Romania (partly controlled by Phoenix Oil), coal and gas interests in Yugoslavia, insurance companies (such as European General Reinsurance), rail, mining and mineral resources especially in Poland and Austria (Borax Consolidated Ltd), chemical industries (ICI) and so on. In addition, British interests retained substantial shareholdings in major companies and holdings of government bonds, not only in Germany but across the East. Many of these assets had gone offshore before the war and were conveniently ‘buried’ in neutral shells for the duration.

From 1945, Britain used the claims and detailed knowledge of such assets to put pressure on the Soviet Union and the increasingly Communist-dominated governments of Eastern Europe to concede both favourable trade terms and substantial financial settlements. Much of this work was promoted, at various times, by Harold Wilson at the Board of Trade. This indirect economic pressure undermined the Soviet rejection in October 1946 of the demand of Byrnes and Bevin, the American and the British foreign ministers, for free entry into the Danube valley and Eastern Europe for the goods and capital of Western countries.

By the end of the 1950s the British strategy had achieved substantial results. The Soviets and their satellites had been drawn into the Sterling Area, and the Moscow Norodny Bank was undertaking frequent gold sales in London to cover for capital goods. This gave British economic intelligence officers direct access to key Soviet economic data and information on personnel working in Soviet trade missions. There was an added bonus when Soviet satellite states unexpectedly returned to currencies backed by gold in the early 1950s. The knowledge gained was to be of great strategic significance to Britain and, by exchange of intelligence, the US over the next decade.

With a broad interpretation of booty and reparations, and using the catch-all of Military Government Law No 52, Britain, France, the US and the USSR, had all sought to recover or gain control of as many assets as possible from the occupied territories of Austria, Germany and Italy. This was most effective in terms of controlling government bonds and financial instruments. According to economic intelligence reports, in west Germany alone the cumulative ‘unofficial’ private and public assets located by 1947 totalled some 750 million, equivalent to the gross domestic product of several nations. However, Britain’s failure to pursue certain other intelligence objectives effectively handed the bulk of German atomic data, the V-weapons and their personnel (including Von Braun and Dornberger) to the Americans and the Soviets. This lapse contributed, eventually, to the enormous cost (some 2,500 million by 1963) of Britain’s decision to develop an independent nuclear deterrent.

The Bretton Woods agreement put pressure on Britain to pursue gold deals in order to maintain the value of sterling and to sustain the appeal of sterling as a hard currency. Post-war administrations gave much publicity to the gold and currency reserves. The pervading sense of crisis in the British economy was emphasised by continued references to the cost of the war and the constant high cost of borrowing to meet the deficit. However, the reports of the Treasury and the economic intelligence committees up to the 1950s suggest that economic circumstances were much more healthy than was assumed. An expert report from a leading economist in the City of London laid out this position as early as May 7th, 1945, stating that the UK `can be better off than ever before…’ and suggesting that Britain’s war costs had already been covered by a 5,500 million increase in productivity during the war years.

Despite this, the public impression of a virtually unending British economic crisis persisted after the first meeting of the Council of Foreign Ministers in 1945 to discuss reparations and compensation arising from the war. Domestically, the tightening of rationing seemed an unmistakable sign of a major problem, and Bevin capped the sense of economic woe by bluntly putting it to his opposite numbers that Britain was ‘bust’. This unnecessarily low assessment of Britain’s economic state might have been founded on a strategy that sought to temper Communist aspirations, even at the cost of deception at home. Also, government proved unable to lay its hands on the enormous private assets of Britons that British business had put away from its grasp, usually at a far distance. But though the literal assets might not be within the orbit of government, the intelligence (and influence) this state of affairs presented could be tapped and used.

While taking advantage of the post-war agreements, Britain actively pursued anti-Communist operations overseas. Among the first overt moves was the support of the French and Dutch in the regaining of their colonies to counter the Viet Minh and Communist-backed nationalist factions. Britain supplied weapons and training to blatantly anti-Communist forces (including the Foreign Legionnaires who were ex-Nazis and ex-Fascists) for the re-occupation of these territories. Among the immediate economic benefits of this policy was the re-integration of Royal Dutch Shell interests in the Far East. Foreign Minister Bevin’s enthusiasm for the Far East did not abate. In 1950 he proposed a six-year, 1,868 million investment programme for the region.

Bevin also continued Churchill’s campaign in the Greek civil war of 1945 until Britain abrogated responsibility for support of the anti-Communists to the Americans in 1947. Until then, the corrupt Tsaldariz regime had only survived through British finance. As the Americans took on the campaign, Dean Acheson remarked, ‘We’re right up against it now’. The consequent American acceptance of the potential scale of Communist ‘aggression’ was the inspiration for the Truman doctrine, which introduced the theory of Communist contagion. The lion’s share of the financial cost of Anglo-American anti-Communist campaigns was now to pass to the US through the Economic Co-operation Administration.

On consultation with the Americans, the campaign was extended into the Balkans, with Yugoslavia and Albania as targets. The intervention relied on military expeditions supplemented by economic pressure. The British delayed the gold claims of both Yugoslavia and Albania and imposed virtual blockades. While these Yugoslav interventions detached Yugoslavia from Stalin’s grip, the efforts to remove Hoxha in Albania were a failure.

Britain’s direct financial responsibility for anti-Communist operations further diminished from the period of the Berlin airlift of 1948. US political and military evaluation of the Communist threat not only saw the introduction of the Marshall Plan (a form of economic warfare writ large), but also at the most secret level, the NSC-68 option—the US government budget for all securityrelated operations. The outbreak of the Korean War in 1950 triggered the US administration’s acceptance of this, by now, massive fund for antiCommunist operations (it reached $50 billion by 1953).

Britain’s own counter-espionage reaped rewards. The leaking through MI6, though perhaps not deliberate, of the threat of a nuclear strike over the Berlin airlift crisis of 1948 forced Stalin’s retreat. In Italy, MI6 worked alongside the CIA in encouraging the Christian Democrats and the anti-Communist stance of the Catholic Church to avert the threat of a Communist government getting elected there. The US ambassador to Italy had stated in early 1948 `Make the needed aid available or prepare to see a Communist government in spring’.

In the light of the Korean War, Britain became alarmed by the increased amount of Soviet aid donated to the Third World. Anthony Nutting, the British Secretary of State during the Suez Crisis, described the Soviet intention: `they come and bail them out’. Economic intelligence reports revealed that this had three effects: it threatened export markets, adherence to the Western alliance, and allowed for the infiltration of Soviet agents. Britain’s policy of economic independence in anti-Communist operations was not a foregone conclusion. The experience in Iran, where the success of anti-Communist operations of 1949 was followed by the Anglo-Iranian oil company (BP) disaster where the company was nationalised was telling. It was only the intervention and influence of the United States, which reversed this position. In the process Britain lost her economic influence in Iran to the United States. It was a warning that Britain could not pursue policy without reference to the US. Among the first steps taken to redress the situation was a series of pacts challenging potential or real Soviet interests, beginning with the Baghdad Pact of 1955. The lesson was quickly forgotten, however. Britain’s approach to the Suez Crisis was, as one American put it, `shattering [to] the shaky British economy’. It appeared that the gains were about to be lost. Khrushchev was happy to rub salt in the wound, laughing at a Moscow reception at the `hopeless attempt to restore lost colonial bastions’ and adding `We will bury you’.

Though economic warfare was initially directed overseas, the Labour prime minister, Clement Attlee ordered a fight at home against Communist involvement in economic disruption and subversion in 1946. In a period when seaborne trade made up the bulk of British imports and exports, the post-war Labour administrations could not afford to neglect the domestic threat. This was most visible from the the likes of the Wollweber organisation, directed by the East German head of security Ernst Wollweber, which specialised in sabotage. This organisation was a part of the Soviet `War of Diversion’ controlled by the 9th section of the Terror and Diversion department of Soviet intelligence. The main targets were Western installations and factories. During the decade 1945-55, the Wollweber organisation was responsible for, among other incidents, the sabotage of the Royal Navy ships Illustrious, Cavendish and the submarine the Tallyho and the massive destruction of the ammunition dump and docks near Portsmouth in 1950. That such organisations worked alongside the likes of the IRA further complicated matters.

Regardless of the precise circumstances, Communist infiltration was blamed for many industrial disputes throughout the 1940s and 1950s, even though Britain had far fewer of these than its allies. As it was, the brutal crushing of the Hungarian revolution of November 1956 reduced British support for Communist influence in industry and commerce to minimal levels for the remainder of the decade.

One of Britain’s primary sources of information concerning the threat of Communism from abroad lay in the US/UK operations of Sigint, Signals Intelligence, derived from a worldwide array of listening stations and directed through GCHQ at Cheltenham. It was this intelligence which gave foundation to arguments over defence spending—an area of understandable concern at the highest level. In 1948, when Attlee questioned the economic viability of rearmament, his judgement was challenged by the Minister of Defence, Albert Alexander who argued that Britain should maintain its position in the West, the Middle East and the Far East, saying it was `essential, from an economic, as well as from the political and strategic point of view’ that Britain should rearm. Economic intelligence supported the theory that British assets could sustain even ambitious armaments programmes. However, the level of repatriation of wealth required to uphold such a programme over the long-run was never likely to be achieved.

Among those who gave siren warning, as Britain stood on the precipice of Cold War crisis that marked the late 1950s was Field Marshal Montgomery. In 1958, he stated `We now face an economic and financial war, directed at the very foundations of our civilisation and standard of living; if we lose it, international Communism will gain a bloodless victory’. Montgomery was talking specifically about the resources required for an independent nuclear capacity and the reduction of conventional forces this might demand. But he also, in a climate of fear, alluded to the consequences of diminished financial resources to protect against any Soviet `first strike’ or nuclear attack.

The official papers concerning the preparations undertaken to allow for the unthinkable make for grim reading. They reveal the use of reason and the level of economic intelligence which became a palpable necessity for Britain and the United States to survive. The revelations make no distinction between a nation standing alone or one positioned full square within an alliance, nor do they allow for the luxury of determining the threat either as real or as a shadow.

Montgomery voiced widespread concerns. His was not the last word. He underestimated the strategic breadth and economic resources Britain had at hand or on call for effective anti-Communist operations. If, after the Berlin airlift, America was the guiding light for overt operations, Britain (and Britons) up to the 1990s increasingly worked by stealth and traditional understatement. This was, perhaps, quite natural for a nation where invisible earnings constantly outstripped the visible. Up to the late 1940s the British Exchequer claimed to be in the dark over the invisible account. This substantial omission (which effectively excised more than 50 per cent of the economy from the books) was a convenient support for the argument that the nation was bust.

Thereafter, Britain accepted American largesse, lived with the nascent label ‘the sick man of Europe’ and spent, or rather invested, a fortune on ambitious social, industrial and defence policies at home and abroad. By 1960, in terms of Montgomery’s economic war, Britain was winning. How it was winning will always, appropriately, retain an element of mystery.