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image by Luis Miguel Arias
According to Calvo and Grávalos 1983, this flag flew over the Royal Palace.
Luis Miguel Arias, 06 May 1998
The different quarters are explained thus at the Heraldica website:
In 1761 Carlos III modified the arms as follows:The actual reason is the second one. With the extinction of the Carlist dynasty, Alphonse XIII was the candidate of the French legitimistes to the French throne, being the closest descendant of the French Bourbon by line of male primogeniture. Such line is represented today not by King John Charles but by HRH Louis Alphonse of Bourbon, Louis XX of France.
Quarterly of six (in three rows of two each): 1. per pale Aragon and Aragon-Sicily; 2. per pale Austria and Bourgogne [Burgundy] modern; 3. Farnese [i.e. Parma]; 4. Medici; 5. Bourgogne [Burgundy] ancient; 6. Brabant; enté en point per pale Flanders and Tyrol. Overall an escutcheon quarterly of Castile and Leon enté en point of Granada, overall Anjou. Around the shield are the collars of the Golden Fleece and of the French Saint-Esprit [Holy Spirit].
In 1808, Jose Napoleon (brother of Napoleon I of France) proclaimed a new coat of arms (...) In 1813 Fernando VII re-established the arms of Carlos III (...) The Provisional Government of 1868 adopted the following territorial arms: Quarterly, Castile, Leon, Aragon, Navarra, enté en point of Granada. (...) During the brief reign of Amadeo of Savoia [Savoy], the crown was a royal crown and an escutcheon of Aosta (Argent, a cross gules within a bordure compony azure and or) was placed en surtout [overall].
When the Borbóns [i.e. Bourbon-Anjou] were restored with Alfonso XII, a decree (8 Jan 1875) restored the use of the coat of arms as it stood until September 29, 1868. In practice the Anjou escutcheon (actually called Borbón in Spanish) was displayed without the bordure, because the bordure was considered inessential, and the escutcheon an indication of lineage from the French Bourbon dynasty.
Calvo and Grávalos 1983 mention photographs of the standard flying over the royal palace, taken during Alphonse XIII reign.
Santiago Dotor, 29 Nov 2001
François Velde's Heraldica website goes on to say:
Alfonso XIII (...) took the arms of Carlos III, substituted the Aragon quarter with Jerusalem, and replaced the escutcheon with the former national arms:I was quite surprised to read about the change of Jerusalem for Aragon – I had never before read about it. Actually Charles III, who first established the arms used 1761-1931 (with interruptions), did have the Jerusalem arms as part of his quarterings as King of the Two Sicilies before his younger stepbrother Ferdinand VI died unexpectedly and he became king of Spain, causing a reshuffle of the Spanish arms which included dropping the Jerusalem quarter.
Quarterly of 6, in three rows of two each: 1. per pale Jerusalem and Aragon-Sicily; 2. 2. per pale Austria and Bourgogne [Burgundy] modern; 3. Farnese [i.e. Parma]; 4. Medici; 5. Bourgogne [Burgundy] ancient; 6. Brabant; enté en point per pale Flanders and Tyrol. Overall an escutcheon quarterly of Castile, Leon, Aragon and Navarra enté en point of Granada, overall France.
I have checked several sources, including Neubecker 1977, Símbolos de España 1999 and Calvo and Grávalos 1983. None of them show the Jerusalem quarter in the Spanish royal arms after 1761. As has been said, Calvo and Grávalos 1983 mention photographs of the standard flying over the royal palace during Alphonse XIII reign. This lasted 29 years which was far too long to keep using his late father's standards unnecessarily, if his royal arms had really changed.
Towards the end of the chapter dealing with Alphonse XIII in Símbolos de España 1999, there is a reference to a proposal for new greater arms and lesser arms to be used by the Spanish government. This proposal followed several official reports by the Real Academia de la Ciencia, the Spanish Foreign Office and the Spanish King of Arms, answering a 1924 official governmental enquiry on "which are the correct national arms". The proposal left the lesser state arms unchanged (similar to the current ones) and created new greater state arms consisting of the lesser arms placed on the oval escutcheon containing all the arms of pretence. Since the lesser arms already contained Aragon, this quarter was to be replaced in the oval escutcheon with the Jerusalem one.
Símbolos de España 1999 says that such greater state arms was never used due to political circumstances first – end of the 1923-1930 military dictatorship – and the end of the monarchy after that – Second Spanish Republic proclaimed 14th April 1931 – . However, the king did use them privately (i.e. in his stationery etc.) but "probably not before 1931", thus only a few months. So most probably the royal banner was left unchanged.
Santiago Dotor, 29-30 Nov 2001
That is what I was referring to in my page. More precisely, my source was an earlier book by Menéndez Pidal y Navascués [author of the heraldry part of Símbolos de España 1999], Heraldica Medieval Española, 1982, p. 229, which tells essentially the same story and concludes: "Estas nuevas armas (...) de hecho tuvieron muy escasa difusión y continuaron siendo tratadas más bien como armas personales" ["This new arms was in fact very scarcely disseminated and kept being used rather as personal arms"].
François Velde, 30 Nov 2001
I later found out that the 'legitimist' heir of Alphonse XIII (i.e. his oldest living son), Don Jaime de Borbón, Duke of Segovia and Anjou, did use privately those modified arms. In Balansó, J., Los Borbones Incómodos, 2000, there is a copy of the invitation he issued to his elder son's wedding in 1973, displaying those arms (scan here). The first quarter is Aragon-Sicily, the second Jerusalem. The drawing is very little, but clear enough provided one is acquainted with Spanish royal quarterings.
I do not know whether Alphonse XIII's fourth son, Don Juan de Borbón, father of nowadays King Juan Carlos, used similar arms in his stationery.
Santiago Dotor, 3-4 Dec 2001