Portugal’s association with Nazi Germany emerged during the Spanish Civil War. During the conflict, the strong man dictator Dr. Antonio de Oliviera Salazar sided with Franco and Hitler. Salazar helped Germany smuggle arms to Franco’s forces and dispatched Portuguese volunteers to fight with Franco. In doing so, Salazar hoped to achieve his long-term goal of stabilization and development of the country's economy. By the end of 1938, Germany was Portugal’s second largest trading partner. Salazar did however, protest Hitler’s invasion of Catholic Poland.

Salazar’s choice to remain neutral during WWII had as much basis in geography as it did in any ideology. Portugal occupied a strategic position on the map of Europe in that it had many ports along its Atlantic coast that would be harder for Britain to blockade. However, Salazar’s main fear was an invasion of Portugal by the Nazi war machine. After the occupation of France, the Wehrmacht was less than 260 miles from Portugal's border. His other fear was that if Hitler and Franco would form an alliance placing Nazi troops at Portugal’s border. Dean Acheson, then Assistant Secretary of State, expressed the opinion that Salazar granted favors to Germany in the trade war after computing "the relative danger of German and allied military pressure on him."

Salazar promised both Britain and Germany open trade for Portugal's valuable domestic and colonial resources. By remaining neutral, Portugal’s economy benefited tremendously. Portugal’s balance of trade went from a $90 million deficit in 1939 to a $68 million surplus in 1942. Assets in private banks nearly doubled over the first four years of the war, while the assets of the Bank of Portugal more than tripled. Both the Nazis and Allies waged an economic war through threats and lucrative trade deals. However, Portugal couldn’t cut its ties with the Allies, as it was dependent upon the U.S. for imports of petroleum, coal, ammonium sulfate, and wheat. In October, Britain capitalized on its long-standing relationship with Portugal by inducing Portugal to accept sterling in payment for goods. At the time, Britain’s gold reserves were low, and Sweden and Switzerland were demanding gold for payment.

Portugal’s economic success hinged on its rich wolfram ore deposits. The Nazis were totally dependent on Portugal and Spain for its wolfram supplies. Wolfram or tungsten has a variety of uses including its use as the filament in light bulbs. However, it was of particular value in producing war munitions. Germany’s machining industry used tungsten carbide almost exclusively, whereas the U.S. was still largely using inferior molybdenum tipped tools, primarily because of the cartel agreement GE held with Krupp concerning carboloy or cemented tungsten carbide. Additionally, tungsten was useful in armor piercing munitions. Britain and the U.S. agreed that Germany’s minimum requirements for wolfram were 3,500 tons per year.

Considering the quantity the Nazis required and the extraordinary means they went to insure supplies of the ore, the Allies correctly surmised that for the Nazis wolfram was a vital resource. It was equally important to the Allies, but the Allies were not solely dependent upon Portugal or Spain and could obtain wolfram from other sources. Thus, one of the allied goals was to deprive Nazi Germany of as much wolfram ore as possible. In this end, the Allies bought as much wolfram as possible from Portugal. The competition for the ore was intense and by 1943, to Portugal’s benefit, the price of ore had increased 775 percent over pre-war rates. Production also soared from 2,419 metric tons in 1938 to 6,500 tons in 1942.

To maintain its neutrality, Portugal set up a strict export quota system in 1942. The system allowed each side to export ore from their own mines and a fixed percentage of the output from independent mines. England owned the largest mine, while Germany owned two mid size concerns and several smaller mines. The output of Portugal's second largest mine was owned by France and the output was tied up in legation throughout 1941. In January 1942, Portugal concluded a secret trade pact with Germany. The pact allowed the Nazis export licenses for up to 2,800 tons of wolfram. In turn, Germany was to supply Portugal with coal, steel, and fertilizer, which Portugal needed and which the Allies could not supply. In 1943, the Allies tried to negotiate a new wolfram agreement. Portugal asked for price reductions in ammonium sulphate, petroleum products, and other materials from the Allies. The Allies refused any price reductions and Portugal refused to increase the Allies export licenses. At the same time, Portugal completed a new agreement with Nazi Germany.

Parallel with the wolfram negotiations were the negotiations to acquire air bases in the Azores islands. The islands would be able to provide a critical base for antisubmarine warfare, as the battle in the Atlantic was reaching a peak. The Allies had failed to take the Azores by force, fearing Germany would invade Portugal as a reprisal. On August 17, 1943, Britain concluded an agreement with Portugal to use the islands starting in October after invoking the old Anglo-Portuguese Alliance. In late 1943, Portugal interrupted the agreement as to include the U.S. air force as well.

By April 1944, the U.S. decided to use economic sanctions to induce Portugal to cut off the Nazi’s supply of wolfram. Portugal was dependent upon the U.S. for petroleum and other products. On June 5, 1944, the Allies pressed Portugal to cease wolfram shipments to Germany. The Germans immediately began to cloak their mining interests in Portugal by selling them and buying up other businesses. By June 1946, the Allies estimated that the Nazis had cloaked about $2 million dollars in hotels, cinemas, etc. At the same time a German U-boat seized a Portuguese vessel, increasing the anti-German sentiment inside Portugal. The U.S. also began negotiations to construct an air base in the Azores. Construction was delayed until and agreement was reached on a wide range of supplies and services. On November 28, 1944, the agreement was signed. Additionally, the U.S. agreed to Portuguese participation in the campaign to liberate Timor from the Japanese.

On May 14, 1945, Portugal passed law 34,600, freezing all German assets in Portugal, creating a licensing system for unblocking these assets, providing for a census of these assets, prohibiting the trading of foreign currency notes, and establishing a penalty regime to enforce these provisions. On May 23, Portugal extended the law to include all Portuguese colonies. Included in these assets were the German government buildings. On May 6, at the request of the Allies, Portugal seized all German government buildings. Included in the seizure was 5000 gold sovereign, found in the German Legation in Lisbon.

While the Portuguese law gave the appearance of cooperation, the State Department feared it contained too many loopholes. For one, the census excluded the Allies from participation. The law also allowed for the transfer of blocked assets to individuals for their subsistence and the normal exercise of commercial and industrial activity. In a report issued on a June 19, 1946, the Division of Economic Security Controls concluded that German firms continued to operate without any serious handicaps and much of Germany’s assets had been dissipated. Additionally, the Portuguese census had failed to uncover any holdings the Allies had not already identified.

On September 3, 1946, negotiations between Portugal and the Allies began on how to assess, liquidate, and distribute German assets. Seymour Rubin reported to the American Ambassador to Portugal, John C. Wiley. While the talks were friendly, serious disagreement separated the sides. The negotiations were stalled on four points.

1.  Defining what German assets would qualify for liquidation

2.  Determining how much the Portuguese could claim for wartime losses against Germany

3. Deciding what role each side would play in overseeing liquidation

4. Deciding how much gold, if any, Portugal would have to relinquish to the Allies.

None of these issues were resolved in the Lisbon talks of 1946-1947. Portugal took a firm stand in 1945 that it was not their responsibility to return the gold that they had exchanged with Germany during the war for tangible assets. Portugal maintained this stand, going so far as to claim that no gold was ever shipped from Germany to Portugal between the years of 1938 and 1945.

Allied intelligence concluded Portugal had received $143.8 million of gold from the Swiss National Bank, about half of the increase in Portugal’s gold reserves reported earlier in this chapter. Of this amount, the Allies were certain that $22.6 million was from gold looted from Belgium and of the remaining portion 72% was looted by the Nazis. During the negotiations, the Allies proposed that Portugal turn over $50.5 million. The Allies contended that this amount of gold was obtained after 1942 when it was clear to everyone that the German gold reserves were expanded by the looting of Europe. Portugal claimed it was not aware of such looting. Later in the negotiations, Portugal contended that all the gold they obtained had been in good faith and was not looted. Throughout the long period of negotiations with Portugal stretching into the 1950s, Portugal would only agree to return $4.4 million.

Recently evidence that has surfaced shows that the Portugal's claims were at best disingenuous. In a confidential report discovered recently, Victor Gautier, a high-ranking Switzerland National Bank official reports on his meeting with Albino Garble Peso, secretary-general of the Bank de Portugal, that Portugal would not accept gold from the Nazis. He noted the reason probably extends from political motivations and the need for legal caution. He further noted that the Portuguese objections would evaporate if the money were to pass through our hands, and the need to explore that option. These statements and others within Gautier’s report make it clear that the Portuguese wanted the Nazi gold and a clean slate from the Swiss money launders. Initially, Portugal used the Bank of International Settlements and Yugoslav National Bank in Basel to launder the Nazi gold.

However, starting in 1941 with the Nazi invasion of Yugoslavia, Portugal was forced to look for other ways to launder the gold. Also, on January 8, 1942, Montagu C. Norman, director of the Bank of England, notified Thomas McKittrick, the American director of the Bank of International Settlements that it would no longer recognize shipments of gold from the International Bank to Portugal as valid. Portugal then insisted that the Reichsbank sell its gold at the daily rate to the Swiss National Bank for francs. The francs would then be deposited by the Reichsbank into the Banco de Portugal account with the Swiss bank. The Banco de Portugal would then use these francs to purchase the gold from the Swiss National Bank. Additionally, the Portuguese used three accounts in the Swiss bank. One account was used to deposit gold transferred in payment for the purchase of escudos by the SNB from the Banco de Portugal. The second account was used for gold that the Banco de Portugal financed with the Swiss francs. The last account closed the circle by transferring gold on orders from Berlin to the Banco de Portugal account in Zurich.  

The Banco Espirito Santo also played a significant role in obtaining wolfram for the Nazis. A FEA report dated October 1945 charged the bank was the German financial agent for Nazi wolfram operations. After the Allies had compelled the bank to forgo its Nazi ties, the Nazis transferred their accounts to the Banco Lisboa e Acores.

Additionally, there was a significant amount of gold smuggled into Portugal. German Commercial Attaché in Madrid admitted to smuggling almost $1 million in English gold sovereigns from Berlin to the German embassy in Lisbon. The coins had been sent in diplomatic pouches during 1943 and 1944. Another report indicated that $360,000 of gold was flown to Portugal in June and July of 1944 and deposited in the Bank of Portugal under the name of the ambassador. The bank director admitted several other dignitaries had special accounts, including the brother of Franco.

While the Portuguese reached an early agreement with the allies on German property, the issue of gold stalled the talks. Moreover, Portugal tied the property agreement to the gold issue and refused to liquidate the property until the gold issue was settled. This delaying action only served to erode the value of the Nazi property seized. Talks continued off and on sometimes on, a formal basis, at other times informally. Recently declassified documents show that the American negotiators were aware of an OSS memo dated February 7, 1946 stating that Portugal had received 124 tons of Nazi gold. Nevertheless, Allied negotiators were only seeking a return of 44 tons of gold. The Azores complicated the entire negotiations from the end of the war until 1953. During the war, Portugal had granted the U.S. permission to build an air base in the Azores for use during the war and for five years after the war. By July 1947, the State Department was urging the negotiators to ease on the hard line approach and seek a compromise with Portugal on the gold issue. Foremost in the change of stance at the State Department was the Azores air base negotiation. In 1945, the Joint Chiefs had deemed the Azores base; one of nine essential strategic bases needed to maintain the security of the United States. The negotiations on gold were broken off in 1947 until the Azores negotiations were completed.

In 1948, Robert Lovett wrote the Treasury Secretary that "overriding political and strategic considerations of our foreign policy make it essential that the Portugal assets in the U.S. be unblocked." A week later the Treasury Department weakened the licensing procedures, effectively unblocking the assets. With that action the U.S. lost all leverage over Portugal. On July 17, 1951, the State Department wired the embassy in Lisbon to settle on the Portuguese terms. The decision was based on overriding importance of politico-military objectives. Portugal had become a full member of NATO. Also at stake was a long-term lease for an air base in the Azores, the last agreement had only extended the lease for five years. Based on the priority of the cold war objectives and with consulting British authorities, the State Department recommended settling the gold issue with Portugal for a mere $4.4 million.

The Treasury Department would only agree to the terms if Treasury received a letter signed at the Assistant Secretary level, indicating that there were political considerations which warranted a settlement and that any agreement would not result in claims against the United States. Acting Assistant Secretary for European Affairs James Bonbright signed the letter to the Treasury. Agreement with Portugal was finally reached on June 24, 1953. However, Portugal hinged the agreement on the condition that it reached an agreement with West Germany. It would take until June. 1958 before Portugal would reach agreement with Germany. It wasn’t until 1959 that Portugal restituted the $4.4 million in gold.

While many of the neutrals leaned toward fascism, none were fully fascist like Franco’s Spain. Both Germany and Italy had provided support for Franco during the Spanish Civil War. In fact, Franco dispatched 40,000 volunteers to Germany in 1941. They served on the Russian front known as the Blue Division until 1943. Although Franco declared neutrality as soon as war broke out in Europe, Spain hovered on the brink of joining the Axis powers through 1940 and 1941. Spanish belligerency was premised on an early German victory over Britain and Germany’s agreement to allow Spain to expand territorially into French Morocco, Africa, and perhaps even Europe.

The Nazis recognized the strategic location of Spain early on. As early as mid 1940, the Nazis had comprehensive plans to invade Gibraltar. The plans code name, Operation Felix, originally called for a mid 1941 operation. The plan called for two corps to move across Spain, with Franco’s permission, by roads. Spain’s rail system was a different gauge than the rest of Europe, forcing the Nazis to rely on the road system. Once in position, Gibraltar would be attacked from both the land and air in deadly Nazi efficiency. The plans also included two additional divisions to attack Morocco once Operation Felix was successful.

Surely, General Franco, like the Nazis, recognized the strategic sitting of Gibraltar. With the Pillars of Hercules guarding the entrance to the Mediterranean Sea, a Nazi seizure of Gibraltar would add weeks for oil tankers to reach Britain from the Mid East and give the Nazis strategic control of the Mediterranean. Likewise, Franco certainly must have been aware of the precarious situation Britain was in during 1940. England was barely able to defend itself. As the empire was under attack worldwide, it was hardly in the position of defending another part of its empire. The attack even included a follow up attack on Morocco the country that Franco had eyes for. Nevertheless, the Nazis failed to get Franco’s approval. Whether the failure was due to the interjection of the American Ambassador or poor diplomacy on the part of the Nazis, it has to be one of the biggest diplomatic and strategic blunders the Nazis made.

After 1941 passed there were similar plans to attack Gibraltar. However, once the Nazis invaded Russia, any such plans were impractical, as the Nazis didn’t have the manpower or equipment to expend in opening a new battlefront.

One of the biggest ties between Spain and Nazi Germany was the debt incurred by Spain during the Civil War. Spain was in debt to Germany for more than $212 million for supplies of war material and other items for the forces of General Franco.