European Business, Dictatorship, and Political Risk, 1920-1945 [1 ed.] 9781789204124, 9781571816290

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European Business, Dictatorship, and Political Risk, 1920–1945

European Business, Dictatorship, and Political Risk, 1920-1945, Berghahn Books, Incorporated, 2004. ProQuest Ebook Central,

Copyright © 2004. Berghahn Books, Incorporated. All rights reserved. European Business, Dictatorship, and Political Risk, 1920-1945, Berghahn Books, Incorporated, 2004. ProQuest Ebook Central,

European Business, Dictatorship, and Political Risk, 1920–1945

Edited by Christopher Kobrak and Per H. Hansen

Copyright © 2004. Berghahn Books, Incorporated. All rights reserved.

In Association with the Society for European Business History e.V.

Berghahn Books New York • Oxford

European Business, Dictatorship, and Political Risk, 1920-1945, Berghahn Books, Incorporated, 2004. ProQuest Ebook Central,

First published in 2004 by Berghahn Books www.berghahnbooks.com © 2004 Christopher Kobrak and Per H. Hansen All rights reserved. Except for the quotation of short passages for the purposes of criticism and review, no part of this book may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system now known or to be invented, without the written permission of the Berghahn Books.

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Library of Congress Cataloging-in-Publication Data European business, dictatorship, and political risk, 1920–1945 / edited by Christopher Kobrak and Per H. Hansen. p. cm. “In association with the Society for European Business [History].” “This volume grew out of a series of workshops (Berlin, Odense, Paris) organized by the Society for European Business History (SEBH)”--Introd. Includes bibliographical references and index. ISBN 1-57181-629-1 (alk. paper) 1. Industrial policy--Europe--History--20th century. 2. Business and politics-Europe--History--20th century. 3. Business enterprises--Europe--History--20th century. 4. Country risk--Europe-History--20th century. 5. National socialism-Europe--History--20th century. 6. Europe--Economic conditions--1918-1945. I. Kobrak, Christopher. II. Hansen, Per H. III. Society for European Business History. HD3616.E82E94 2004 380.94’051—dc22 2003067300 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. Printed in the United States on acid-free paper.

ISBN 1-57181-629-1 (hardback)

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Dedication

❖

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To Alice Teichová and Mikuláš Teich, who have known more than their share of political risk and never lost their courage, in grateful appreciation for all that they have done to inspire us.

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Contents

❖ Preface I.

ix

Introductory Essays 1. Business, Political Risk, and Historians in the Twentieth Century Christopher Kobrak, Per H. Hansen, and Christopher Kopper 3 2. Multinationals and Dictatorship: Europe in the 1930s and early 1940s Mira Wilkins

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II.

22

Authoritarian Regimes as Competitive Advantage and Liability 3. Competition and Collaboration among the Axis Multinational Insurers: Munich Re, Generali, and Riunione Adriatica, 1933–1943 Gerald D. Feldman

41

4. Market Assessment and Domestic Political Risk: The Case of Degussa and Carbon Black in Nazi Germany, 1933–1939 Peter Hayes

62

III. The Perception and Management of Political Risk in Dictatorial Business Environments: Outward Investment and Capital Flight 5. German Pharmaceutical Companies in South America: The Case of Schering AG in Argentina Jana Wüstenhagen

81

6. Multinational Jewish Businesses and the Transfer of Capital Abroad in the Face of “Aryanization,” 1933–1939 Martin Dean

103

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viii Contents

7. Siemens in Eastern Europe: From the End of World War I to the End of World War II Wilfried Feldenkirchen

122

IV. The Problem of Foreignness 8. Between Parent and “Child,” IBM and Its German Subsidiary, 1910–1945 Lars Heide 149 9. The Great Northern Telegraph Company and Dictatorship Kurt Jacobsen

174

10. Managing Risk in the Third Reich: British Business with Germany in the 1930s Neil Forbes

194

11. Under Threat of Nazi Occupation: The Fate of Multinationals in the Czech Lands, 1938–1945 Eduard Kub˚u, Jiří Novotn´y and Jiří Šouša

206

12. Industrial Capitalism and Political Constraints: the Bureaucratization of Economic Life during the Fascist Regime Luciano Segreto 223 235

Bibliography

239

Index

249

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Notes on Contributors

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Preface

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But, apart from the writings of socialists, there have been only fragmentary attempts systematically to explore the role of government in industrial society; and even fewer rigorously to analyse the interaction between different economic agents. John Dunning, Governments, Globalization, and International Business.

This volume grew out of a series of workshops (Berlin, Odense, Paris) organized by the Society for European Business History (SEBH). The workshops and the participants shared a common theme and sense of purpose: the view that business and politics, though often treated as very separate spheres of human existence, were better understood in light of how they interacted with one another. Moreover, the society and participants felt strongly that the interwar period – though very different than that which preceded World War I and that which followed World War II – served as an interesting research area for business and political historians to better understand the origin of contemporary business problems and the general flow of twentieth century history. Accordingly, we believe that the turbulence of the period, the increase in foreign direct investment and other forms of corporate expansions in scale and scope, which tended to increase business complexity and documentation, recently opened business-related archives, and the general passage of time helped make the period a rich laboratory for exploring hypotheses about the general relationship of business and society, especially societies in transition. In a sense, this work is built on the foundation of a 1998 conference in Paris and another volume sponsored by SEBH.1 Whereas that earlier study focused on the political economy of countries under fascist rule, these essays bring many of those insights down to a company-specific level and broaden the political environment to include various forms of dictatorship. We have added the concept of political risk to unify our diverse essays, as it goes to the heart of the change in corporate concerns and strategies during the period. The change in degree and kind of political risk from that of the preWorld War to the post-World War I periods forms the single most dramatic 1 Harold James and Jakob Tanner, eds., Enterprise in the Period of Fascism in Europe (Aldershot: Ashgate, 2002).

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x Preface

challenge for firms and the best illustration of business’s new relationship with its environment, a dilemma, moreover, with which business still lives and for which it still has found no satisfactory remedy. For a long time, business and other historians, working on the interwar period and dictatorships, have concentrated on the question of what business contributed to the rise of dictatorships and why. For understandable reasons, the ethical and moral questions have had a rather high priority. With a great deal of justification, there has been no shortage of condemnation of companies and business managers who profited from cooperating with the dictatorships of the interwar period. However, moral condemnation of historical actors and events is not really the role of historians. It is more important to try to understand what happened and why. Moreover, we want to extend the analysis of how this period affected the strategies and structures of modern business. Therefore, we take a somewhat different perspective in this book, which affects how the pieces are organized. The articles here take as their starting point the perceptions of business people about their political circumstances and the scope of business reaction to its changing and often hostile political environment. More generally, the book should be seen as part of ongoing efforts to bridge the gap between politically and economically oriented business history. We believe, moreover, that it is of the utmost importance to keep in mind that as historians, we have the benefit of hindsight, knowing the outcomes of a great many decisions, which historical actors did not. This is no less true of the strategic and tactical thinking of German and other business leaders during our period. Uncertainty about the future was an underlying circumstance of each and every business decision, but as markets became more chaotic and countries “experimented” with new political forms, political risk acquired new meaning and new importance. Because no business leader could possibly know what we know today, he was confronted with an array of possible options with no way to remove uncertainty and assess its consequences. His expectations about the future, moreover, were inextricably linked to his perception of the past and of his own role in society, as interwar German business leaders’ overwhelming fear of the left and longing for the pre-1914 stability, for example, helped mold their decisions. The exact depth and breadth of this shared fear may be a subject of debate, but it, nevertheless, at least helps explain how German business and Germany as a whole ended up with one of the cruelest dictatorial regimes in all history. The essays in this book raise general questions about the extent to which business behavior can be explained by rational criteria and the extent to which, given the amount of uncertainty during our period, much business investment was economically unwarranted. With this in mind, we have built the organization of the main sections of the book – those that follow the introductory essays – around some economic concepts that may not be commonplace for historians: competitive advan-

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Preface xi

tage and disadvantage; outward investment from dictatorship (or potential dictatorships) and capital flight, and inward investment into dictatorships (the problem of foreignness). We introduce the book with two chapters. The first deals with the concept of political risk as it relates to the study of history and the effect of World War I on business concerns about political risk, especially the attitudes of German businessmen. It argues, moreover, that the kinds of experiences described in the book still have relevance to corporations in the twenty-first century. The second, Mira Wilkins’ piece on the general investment patterns and problems of multinational enterprises (MNEs) during the period, lays out for the readers the strategic issues facing corporations during the interwar period and the many political and economic factors that affected how they adapted themselves to a variety of political systems. Her chapter is particularly useful for readers who may not be familiar with the problems of multinational enterprises. Her contribution is designed to do two things: to further develop the overall dilemmas and opportunities of multinationals during the period and to highlight the relationship of many of the chapters to those themes. Weaving together information from many of the case studies, especially those presented at Odense, Wilkins forms some useful generalizations about the strategies of MNEs to the myriad of political controls used by dictatorships. The remaining pieces in this book represent case studies in the many dimensions of political risk and business history. Some of the studies here focus on types of investment, some on companies or groups of companies doing business outside of their home country, while others provide examples of home-country political risk and country ideologies about how and who should conduct business affected company fortunes. The chapters were collected from a series of workshops, whose common theme was dictatorship and business. Part II deals with two companies that had made their peace with the Nazi regime early on, and whose stories illustrate the advantages and disadvantages of a close working relationship with dictatorial governments. As many of the contributions to this book point out, not all of the changes posed by dictatorships were negative for business, but long-term profits were rare and required astute management and often luck for their achievement. Some of the politicization of economic relationships, however, produced immediate gains for companies. Gerald Feldman, in his chapter “Competition and Collaboration among the Axis Multinational Insurers” recounts how German insurers restructured their relationships so as to take advantage of political alliances among fascist regimes. Peter Hayes shows how Degussa resisted, with little success, government attempts to push that chemical company into new lines, how that company tried to hedge itself against potential losses, and how ironically, the new investments led the chemical company into a new product line with unforeseen profitability.

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xii Preface

Part III brings together three chapters, two about specific companies and the third about the rules for remitting Jewish funds out of Germany. For some, this may seem like a bizarre combination. The chapter by Jana Wüstenhagen, for example, highlights the immense power control of foreign exchange transactions gave to regimes, a point which von Hayek argued over fifty years ago when he asserted that foreign exchange controls gave modern dictatorships authority over individuals and institutions undreamed of by pre-industrial revolution despots.2 Peter Hayes’ chapter and that of Jana Wüstenhagen provide an interesting contrast of two companies, one (Degussa) whose business was based almost entirely in Germany and was, therefore, completely dependent on the good will of German officials, and Schering AG, whose international operations made it at once paradoxically dependent on the State for certain foreign exchange transactions but also allowed the company to carve out a certain area of independence from the country in which it was incorporated. Companies like Degussa and Schering were obviously much better off than Jewish firms in Germany or any non-German firms in Czechoslovakia – as Eduard Kub˚ u, Jiří Novotn´y and Jiří Šouša have shown in their chapter – but the two German companies shared a dependence on a regime focused on ideology rather than profit, a prioritization with which most business people are uncomfortable at best. As Wüstenhagen’s chapter and that of Martin Dean show very clearly, the arbitrariness of dictatorial regimes made “who you are” even more important than in liberal democracies. In general, one of the most interesting lessons of these chapters is the degree to which the change in political environment produced a set of imponderable issues for managers. Even those business leaders, who perceived the new risks and saw the degree to which their own country created new obstacles for them, were at a loss to see the full breadth of those problems and to come up with an effective strategy to reduce the harmful effects. Wüstenhagen, for example, convincingly argues that German pharmaceutical companies fought with their own government to hide their foreign ownership structures and cash flows but were ultimately frustrated by bureaucratic persistence and America’s entry into World War II. Wilfred Feldenkirchen shows in his chapter about Siemens between the wars how little in the way of effective alternatives German companies actually had, even one of the most successful in a branch of industry in which Germany had an enormously powerful competitive, international position before World War I. Siemens’ business was so dependent on the international market that its leaders felt compelled to take chances in highly risky markets. Part IV deals with foreign companies from non-dictatorial countries investing into dictatorships and outside perceptions of the political economy in dictatorial regimes. It contains five chapters that not only show how pre2 Friedrich A. Hayek, The Road to Serfdom (Chicago, University of Chicago Press, 1972 (1944), 92.

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Preface xiii

carious foreign businesses were in dictatorial environments but also the degree to which ignoring or adapting to the ideological proclivities of host countries was a prerequisite for doing business. This point is perhaps best illustrated by Kurt Jacobsen in his chapter about the Great Northern Telegraph Company, a business highly dependent on two very different and competing dictatorships, that of the Soviet Union and Japan. He traces how the company’s management struggled for survival by diplomatically avoiding confrontation with these regimes against the background of the approach of World War II. All the chapters in part IV make a contribution to the growing literature on the problem of foreignness, the special problems of multinationals in host countries, especially when those host countries are authoritarian or unstable. Lars Heide’s chapter is a useful contrast to Edwin Black’s one-sided account of IBM and the Nazis. Heide, in contrast to Black, offers a nuanced and detailed account of how dependent American IBM had become on its Nazisupporting local president, because of the German company’s technical innovations, the size of the German market, foreign exchange controls, and the willingness of German officials to seize the American subsidiary. Neil Forbes’s chapter adds some new material to his excellent study of British investment in Germany. Whereas Forbes recognizes the economic interests of firms in Nazi rearmament, he puts these in the appropriate historical context. Forbes acknowledges the dilemmas and uncertainties of business and political leaders who had to deal with the Nazi regime. Britain was a major trader with and lender to Germany long before and after Hitler’s coming to power. These business connections were critical to British workers during the Depression years, and British companies had massive investments, from which they were loath to walk away. Without the benefit of hindsight, many responsible businessmen and political leaders felt that coaxing Germany to behave responsibly was in everyone’s interest. The price for new German commitments to pay outstanding balances was often new commitments for loans and special trading arrangements. With so much in the way of blocked funds and outstanding loans, British business leaders, like those in most countries, were too willing, as we now know, to believe the best.3 Like the chapters by Dean and Heide, Forbes’ chapter highlights the business dilemma: acting on perceptions of political risk often entailed an asymmetrical exchange, reduction in future and possible economic losses for immediate and certain negative ones. As Eduard Kub˚ u, Jiří Novotn´y and Jiří Šouša argue in several case studies of “multinational firms” the effects of even the threat of dictatorship on the development of business were particularly severe in the Czech lands. The authors argue that multinational Czech firms were harmed by the mere 3 See his larger work, Neil Forbes, Doing Business with the Nazis, (London: Frank Cass, 2000).

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possibility of a Nazi takeover even before March 1939, but that in some cases their international networks helped preserve part of the value of their Czech assets. They catalogue a wide range of experiences from Czech big businesses, whose management stayed on with severely curtailed powers and were tainted by their passive collaboration, to the experiences of two “aryanized” firms, whose owners were able to use their international connections to salvage some of the value of their firms, to non-Jewish multinationals that were taken over by the Nazis, carved up, and sold off. Although not all of the companies in this chapter are foreign owned, their foreign connections created special problems and opportunities for the companies. The wartime fates of the biggest Czech firms coupled with nationalization after 1945 in practice meant the end of large-scale Czech enterprise on a multinational basis. Martin Dean’s (Part III) and Luciano Segreto’s chapters (Part IV) contrast two very different roles played by ideology in business. Dean outlines the special problems of Jewish firm getting funds out of Germany, while Segreto argues forcefully that mistaken attitudes about cartels and their origin affected the treatment of Italian firms after World War II by Allied officials. Each in its own way shows the degree to which business became politicized after World War I and the way businessmen had to grapple with the effects of rival ideologies in the interwar period to a degree unimaginable before 1914. At this time, we would like to express our thanks to the members of the academic advisory board of the SEBH and their sponsoring corporations for their intellectual and financial support for these undertakings. At various stages the support staff of the SEBH, moreover, provided invaluable aid to our work. The staff and readers of Berghahn Books contributed a great deal of coordination and good advice. We would also like to thank the journals Passato e Presente and Imprese e Storia for their permission to publish in English two of the chapters, which had already appeared in Italian. Four colleagues in particular helped enormously with cogent critical comments: Professors Patrick Fridenson, Volker Berghahn, Jyoti Gupta, and Bruno Thiery. Several of our students have also made significant contributions to this book. They include Melissa Adrienne Morris, Sushmita Banerjee, and Rajiv Gupta. We are also grateful to our respective academic institutions, ESCP-EAP, European School of Management and The Copenhagen Business School for providing the time, financial assistance, and intellectual support to complete this work. November, 2003 Christopher Kobrak Paris, France Per H. Hansen Copenhagen, Denmark

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PART I

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Introductory Essays

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CHAPTER 1

Business, Political Risk, and Historians in the Twentieth Century

❖ Christopher Kobrak, Per H. Hansen, and Christopher Kopper

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I sympathise, therefore, with those who would minimize, rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel – these are the things that should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national. John Maynard Keynes, “National Self-Sufficiency” (1933), quoted in Harold James, The End of Globalization, 197.

“Political Risk”1 is for many reasons an unusual subject for historians. Whereas political risk pervades all discussions of business in the interwar period, this may be the first time historians have systematically addressed the subject, in a comparative manner that may even help to redefine or, at least refocus, this economic concept. As the chapters in this book illustrate, historians tend to understand intuitively and integrate into their work how much political risk is really political uncertainty. For them, describing decision-making in business and other domains requires helping the reader understand that, unlike the reader, historical actors do not know what is going to happen. Those actors have neither a statistical roadmap from which 1 Though not strictly identical, “country risk” or “sovereign risk” will be used here as synonyms for the “political risk.” “Country risk” usually refers to the general characteristics of a host country, for example, financial conditions, attitudes of people, infrastructure, etc.; whereas “sovereign risk,” strictly speaking, refers the risk of governments defaulting on their debts. “Political risk” sits between the two, focusing on all political actions and governmental decisions, not just the question of repaying of sovereign debt. These distinctions, while sometimes important, are not significant for our discussion.

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4 Christopher Kobrak, Per H. Hansen, and Christopher Kopper

to guess at the future probabilities of outcomes nor often, almost by definition, an inkling of “unforeseen” paradigm changes. In this spirit, the book represents a conscious attempt to repair a rupture that has for too long permeated business and historical studies. It is a collection of case studies of business and political uncertainty during traumatic times. Despite a recent spurt of interest in business history and interdisciplinary studies, much of our work on commercial institutions remains unfortunately rather isolated from mainstream economics and even history. There are still a great many differences between what historians, business people and economists view as important, and how they address questions about the development of commercial institutions. Uncomfortable with historians’ emphasis on the particular, “historical specificity,” and lured by the prospect of general theory, like many social scientists, economists often neglect history in their work.2 Moreover, sitting between other historians’ discomfort with what Alfred Chandler called business’s “prime mover status” in the modern world and economic historians’ focus on aggregated data, business historians often find themselves in a kind of no-man’s-land. Or as Volker Berghahn concluded, “One of the more regrettable developments in history as a scholarly discipline has been the institutional separation of economic and business historians from the rest of the profession.”3 Political risk is a tricky concept for economists, too. In spite of its recent and tragic resurrection as a business issue, political risk during the past few decades has held only sporadic interests for economists and business people alike. Though the risk that government actions will affect business, the usual definition of political risk, has been discussed for at least two hundred years, it did not receive a name until well into the twentieth century. Some authors define “political risk” as the unforeseen consequences of government action, but most analyses of political risk emphasize the negative effects of governments. The concept is very broad – perhaps too broad, a defect which historians might help remedy. As politics can have farreaching consequences and our expectations for governments vary considerably, political risk overlaps a host of normal business and financial risks. In our world of specialization, some analysts prefer to break political risk into many of its component parts, for example: foreign-exchange; interestrate; liquidity; logistical; personnel; and even demand risk. This book is predicated on the view that for many reasons political risk is a concept that suffers from its lack of historical treatment. First, as historians we have a special role in helping our audiences – other historians, economists, business people, or the general public – to “expand the present,” or as some business writers might put it, “thinking outside the box,” by con2 For an excellent discussion of the problems, see Geoffrey M. Hodgson. How Economics Forgot History (London: Routledge, 2001), 5. 3 Jürgen Kocka, Introduction to Industrial Culture & Bourgeois Society: Business, Labor, and Bureaucracy in Modern Germany, (New York: Berghahn Books, 1999).

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Business, Political Risk, and Historians 5

tributing a historical perspective on their activities, a clearer idea of what is unique and what is commonplace in what we are experiencing today. Until very recently, some optimists during the boom of the 1990s began to regard political risk as an aberration of a more primitive economic paradigm, with little relevance to the New Economy. Although many business investments take decades to recoup, attitudes about political risk, moreover, tend to shift or be discarded like yesterday’s newspaper. Political risk is an evolving concept. In the 1970s expropriation dominated discussions; in the 1980s the debt crisis moved to center stage; in the late 1990s the meltdown of developingcountry capital markets was the predominant theme. Since September 11, 2001 and America’s pursuit of what it perceives as menacing rogue nations, the “clash of civilizations” and economic retaliation among once friendly nations are the “new horsemen” of a “political-risk apocalypse.” Even doing business with dictatorships, our topic, which was for many years a negligible risk for companies, is rearing its ugly head in countries like Nigeria and Iraq. In short, the treatment of political risk has suffered from a somewhat narrow view of its causes and implications, reflecting received opinion about current conditions, and, therefore, offering little insight about potential, “unforeseen” shocks to a firm’s political and macro-economic environment, which are often the most destabilizing for companies. As historians, we may be able to enlarge businessmen’s imagination about what is possible and, thereby, reduce the realm of the “unforeseen.” Second, the evaluation of many business risks, including political risk, does not lend itself to the methods of economics, which are often based on statistical analysis derived from numerous observations of standardized goods.4 Services such as those run by Business Environment Risk Intelligence (BERI), The Economist, and Risque Politique rank countries, in contrast, according to their degree of political risk based on a series of social, economic, and political criteria, which are supposed to indicate how much of a threat those governments pose to business interests. On the positive side, these criteria include many elements of liberal democracy, for example: wellfunctioning legal and tax systems; mechanisms for the smooth transfer of political power; fiscal responsibility, and an economic system with relatively few political controls. On the negative side, the existence of oppressed minorities and other social conflicts, a controlled foreign-exchange system, wasteful government spending, and potential military adversaries are 4 For an excellent readable discussion of development and basis of finance’s approach to risk, see Peter Bernstein, Against the Gods (New York: Wiley & Sons, 1996). Bernstein points out, for example, that many of the mathematicians who first tackled probability theory were avid gamblers, looking for methods of improving their performance at the roulette wheel. As he notes, the statistical analysis of risk requires assumptions about the uniformity of assets and volatility of their values that are more compatible with betting at Las Vegas than investing in many real assets.

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6 Christopher Kobrak, Per H. Hansen, and Christopher Kopper

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regarded as risk factors. These criteria for judging what social and political configurations serve to undermine or enhance business interests are imbued with nineteenth-century liberal ideology and grew out of what some economic historians have called the British model for quelling investor fears of political risk.5 Although a complete discussion of the origins of the concept of political risk is beyond the scope of this work, these principles might be better applied when tested more systematically against historical experience.6 Lastly, virtually all the literature on political risk focuses on the risk of host countries, that is, the political risk of investing in the United States, for example, by a company whose home country is say Germany. Home country risk, the risks posed to a company by the politics of the country in which it is incorporated, is nearly always ignored, as is the interaction of home country with host-country and industry-specific risk. That is to say, a German company may have investment risk in the United States that a French company does not and this risk may be greater in some industries than others, due to the politics of the country in which the companies are incorporated, a fact that is born out for companies from all three countries mentioned above. We as historians can provide many examples of home country follies and virtues, and their effects on business, which illustrate that the greatest and longest lasting risk to companies comes from their countries of incorporation. Closely connected with home-country political risk is the degree to which business shapes its own country’s and host country’s political environments. Moreover, whereas it is often assumed that liberal democracy is good for business, historians of the interwar period know of many examples of businesses that profited from authoritarian regimes and even encouraged their formation.7 No country’s businesses serve as a better illustration of home-country risk and the temptations of authoritarian regimes for commercial activities than Germany’s during our period. 5 See Niall Ferguson’s The Cash Nexus (New York: Basic Books, 2001); Niall Ferguson’s The World’s Banker: The History of the House of Rothschild (London: Viking, 1998). The Rothschilds were particularly influential in promoting a “world order,” in which democratic values, free exchange of goods and services, convertible and stable currencies, and limited government were identified with low risk countries. Whereas these principles were not universally applied – notably by the United States, which flouted many liberal tenets, and by many European countries, which tried to control political risk by colonizing, as The Economist put it, “uncivilized countries” – they formed the basis of thinking about political risk in the nineteenth and much of the twentieth centuries. See The Economist, 17 October 1857, for a good description of early views on the subject. 6 See Alan Shapiro, Management Multinational Financial (Boston: Allyn and Bacon, 1998), 503–530, for a summary of the standard political risk criteria. Shapiro’s text is considered one of the leading books on international financial management. 7 In addition to the large body of historical works, such as those by Peter Hayes, Gerald Feldman, and Harold James, the issue plays a role in some economics texts. See the late Raymond Vernon’s In the Hurricane’s Eye (Cambridge, Mass.: Harvard University Press, 1998) and his earlier Sovereignty at Bay (New York:

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Business, Political Risk, and Historians 7

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Discussions of how Europe moved from limited government to dictatorship and from minimal to extensive political risk must begin with Germany. While many countries turned toward dictatorial political and economic policies after World War I, seven of the ten chapters that follow our introductory chapters deal with investment into or from Germany. The case of Germany strongly argues that businessmen are not passive observers, when it comes to many of the most important political risks that they face, and that authoritarian political regimes had many economic consequences. According to many historians, moreover, some aspects of authoritarianism in Germany in the twentieth century had their roots in the nineteenth. Although this particular work deals with political risk in many dictatorships, some of the most democratic-capitalist governments were notable for their backsliding than their vigorous defense of liberal principles. But Germany, even before the advent of National Socialism, is pivotal to our story. First, of the many dictatorial countries discussed here, it was by far the most industrialized. Second, despite it industrialization, Germany developed economically and politically later than Britain, for example, and preserved many more feudal institutions and attitudes. The paradox of German business is its dependence on international commercial ties and its willingness to accept extensive control of markets, which requires strong national governmental authority. Before World War I, many of its crucial economic sectors, such as chemicals and electronics, were world leaders and leaders in exporting and establishing foreign subsidiaries in non-colonial regions of the world. Many companies were exporting approximately half of their production. After World War I, Germany became a huge recipient of foreign capital, a dependency that exacerbated anger over its losses and the Versailles Treaty. Moreover, unlike some of the other dictatorships we will discuss, the Nazis kept many of the trappings of Basic Books, 1971) and Storm over Multinationals (Cambridge, Mass.: Harvard University Press, 1977). We have tried to track down when the terms “political, country, and sovereign risk” came to be used in economic literature, but the best that we can come up with at present is the following. A 1969 textbook on international finance by two Columbia University professors, International Financial Management, makes no mention of any of the three terms. Nevertheless, the authors, David Zenoff and Jack Zwick devote much of the book to the determination and management of what they call “adversities in international business,” a concept which comprises most of the elements of political risk already discussed above in this text. According to some of our colleagues, there were several professors at the University of Indiana in the 1960s, who were using the term then. The earliest reference using the term “political risk” that we have found is an article by Franklin Root, “U.S. Business Abroad and the Political Risks,” MSU Business Topics (Winter 1968), in which he argued, among other things, that U.S. companies were not systematically analyzing political risk. By the early 1970s, the term was being used relatively frequently in works by Stefan Robock, Kenneth Simmonds, Lee Nehrt, as well as in many other international economic and financial texts.

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8 Christopher Kobrak, Per H. Hansen, and Christopher Kopper

capitalism during their era. Businessmen played an integral role in the implementation of many of the regime’s most heinous projects. Indeed, the importance of this period for business studies is augmented precisely because many of Germany’s worst crimes against humanity were acted out with the tacit and at times active cooperation of business leaders. Lastly, for many reasons business’s role in bringing a dictatorial regime to power and helping that regime to coalesce its power may have been more extensive, or at least better documented, in Germany than in other countries. Although its colonial empire was small by comparison to Britain and France, Germany, perhaps unfairly, is probably most associated with the rejection of liberal tenets and, more importantly for this chapter, the imposition of many economic controls which helped define dictatorship. Despite their economy’s heavy dependence on exports and the widespread rejection of formal German colonialism, even before World War I, many German businessmen, especially those in heavy industry, turned away from some key elements of nineteenth century liberalism and the international approach to political risk, advocating a Sonderweg (Special Way) for Germany. By the last decade of the nineteenth century, much of German business supported cartelization of industry, and high tariffs for industrial and agricultural products, which insured control of domestic markets. With that control of domestic markets came higher prices at home, which helped German firms’ cash flows, facilitating in turn investment in foreign markets. As Wolfgang Mommsen wrote of the German case:

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[T]he system of high protective tariffs for both industrial goods and agricultural products ensured that German industry was pre-eminent in the domestic market, which in turn gave firms a base from which to compete successfully in markets abroad.8

No less an economic historian than Alexander Gerschenkron was convinced that “no autarkic regime pure and simple was initiated in Germany after the reforms of the seventies (1870s, our note). But it cannot be gainsaid that from then on the mind of a large fraction of the German people was increasingly affected by the elements of an autarkic Weltanschauung.”9 It is very clear that he meant to include in the term “German people” large segments of German business. Germany embraced “liberal imperialism” to help offset its late industrial start. Its attachment to unfettered markets was weaker and perhaps more realistic than that of most of its economic rivals. As one historian wrote: The intellectual justification was provided by the theorists of the Historical School: the earth was about to be divided up among rival empires, and 8 Wolfgang Mommsen, Imperial Germany, 1867–1918: Politics, Culture, and Society in an Authoritarian State, trans. Richard Deveson (New York: Arnold, 1995), 85. 9 Alexander Gerschenkron, Bread and Democracy in Germany (Ithica: Cornell University Press, 1989), footnote, 45.

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Germany must not be left out. To the classical liberal thesis that the world market was capable of indefinite expansion, there was now a counterargument: the world’s total economic resources might be unlimited, but unless action were taken in time, the great empires would shut out their rivals.10

All of this poses an interesting general challenge for historians to better understand the preconditions and effects of dictatorship on business. This book is intended to be part of the ongoing debate among historians and other social commentators about the role played by capitalism, especially international firms, in the health of democratic institutions, and, conversely, in the formation and maintenance of totalitarian regimes. The book will address the particular experiences of companies that invested in countries with dictatorial regimes or whose own home country was a dictatorial regime. It is designed to shed light on the extent to which those companies perceived the risk, and, if so, how they manage that risk, and, in the end, whether dictatorial regimes helped or hindered their businesses. For business people, business analysts, and historians, it should contribute to a better understanding of how government actions affect business outcomes, and the long-term risks and advantages of doing businesses in or with non-democratic regimes. But the concept of dictatorship is hard to define. It is perhaps a term whose definition can best be understood in a historically specific context. Although the original term comes from ancient Rome, its current use bears little relationship to the republican officials elected for a limited period and invested with special powers to solve specific problems or crises. In the twentieth century, dictatorships shared several characteristics. They significantly departed from basic liberal political and economic principles such as free elections, the rule of law, respect for private property, and free movement of goods and services. Plenty of states in the eighteenth and nineteenth centuries, conformed to this conception of dictatorship, but we generally refer to them as authoritarian. In the twentieth century, as peoples in many parts of the world had gotten used to a different standard for the relationship between the individual and the state, and as society became more complex both in the activities to be controlled and the technology available to control them, the term authoritarian became insufficient to describe what had developed. The shock of having lost what once seemed secure may have contributed to the advent of a new vocabulary like totalitarian, fascist and dictatorial. For our purposes here, the regimes of Nazi Germany, Fascist Italy, Militarist Japan, and Communist Soviet Union represent dictatorial governments, because of the state’s changed role vis-à-vis the individual. All these states during our period placed severe limits on what had been before 10 George Lichtheim, Imperialism (New York: Praeger, 1971), 67. Lichtheim’s discussion of the German reaction to liberalism and the role played by German social thinkers like List, Schmoller, and Sombart, as well as the conversion of Keynes, a favorite of Germans, is fascinating.

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World War I the extent to which citizens’ and institutions’ could express themselves through elections, free speech, and commerce. For many reasons, we also have a geographic focus here. The Industrial Revolution began in Europe and many of the institutional changes that served as the basis of the development of our modern corporation were first introduced here. Moreover, already in the nineteenth century, European firms led the way in foreign direct investment, which gives rise to much of what we understand as political risk. It was in Europe, too, that some of the first thinking about political risk occurred, and, sadly, where in 1914 the greatest shock to a faith in the possibility of a world with minimal political risk was dramatically shattered. In our view World War I represents a watershed in business affairs that is too often ignored in business literature. Our time focus is the two decades that followed the armistice in 1918 as they represent businesses first confrontation with its new reality, but by necessity many of the chapters in this book contain some “slippage” into the periods just prior to and just after the interwar period in order to place their stories in their proper context or to follow up on some aspect of their significance. The rise of dictatorships added a new dimension to political risk. With the Russian Revolution, Fascist governments in Italy, Spain, and much of Central Europe, and above all Hitler’s Germany, business was faced with a degree of government intervention and control of private activities undreamed of in the decades just preceding World War I. As Mira Wilkins points out in the following chapter, this period not only witnessed a continuation of foreign investment, it also increased and took new forms, some of which were more costly and many of which were designed to ward off the effects of political risk. To fully understand the concept of political risk and what changed about it after August 1914, it is helpful to remember the origins of the concept and how it evolved in the nineteenth century, as discussed above. For the 40 years that preceded the outbreak of hostilities in 1914, expropriation, inflation, foreign-exchange rate fluctuations, and blocked funds – regular features of the interwar economic landscape – were almost unimaginable for businessmen working in Western Europe. Although World War I is seen as a watershed in human affairs, especially for the peoples of Europe, the degree to which it produced a sharp break in the political environment for commerce is less well recognized in business literature. Political risk was at the forefront of corporate concerns all over the world. In addition to the direct physical and human destruction, and the general disruption of normal domestic and international business caused by World War I, numerous other social and economic changes contributed to making political risk a vastly more important issue for business people during the interwar period. As The Economist noted, with wisdom and helpless dismay, during the first week of World War I:

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We have watched the increasing rivalry of armaments with consternation, we have implored our Government to convene the nations of Europe, and seek to arrest the mischief before it was too late. The explosion has come. Look where you may you can see no ray of comfort. Central Europe will be deluged with blood, and whether the war ends through economic exhaustion or not, commercial prostration is certain for the combatants, and the longer the war lasts the more acute will be the distress and the longer the process of recovery. In the opinion of many shrewd judges, a social upheaval, a tremendous revolution, is the certain consequence.11

Whereas political entities declared and conducted the war, ironically, an undeniable part of that “social upheaval” was the willingness of governments and the peoples they represented to use political power to harness economic activities for national projects. In nearly every developed country, within a few years of the end of hostilities, the State increased its role in economic and social life; in some countries, political regimes with virtually no respect for private property and individual rights seized power. The greater role of the state may have increased the potential for political risk, but clearly all government intervention did not have an adverse impact for business, especially in the short-run. Some government activities increased social and economic stability; other projects added to demand and the quality of their respective countries infrastructure, also an aspect of political risk. The war and its aftermath witnessed the growth of three other commonplace characteristics of our political and economic landscape. First, as countries seemed less capable of working together to preserve the international order, much of the responsibility for the control of the international system was passed on to transnational organizations like the League of Nations and Bank for International Settlements, whose legitimacy and power were even then minimal at best. Second, despite or perhaps because of the seizure of private property by several belligerents, there was an extraordinary increase in the amount of foreign direct investment (FDI). The number of foreignowned manufacturing subsidiaries, for example, grew fourfold from 1914 to 1938.12 Third, several aspects of the prewar economic stability, which had facilitated international trade and reduced risk, disappeared or were severely hampered. Foreign-exchange transactions between most countries in the industrial and non-industrial world were virtually costless and riskless, because currencies were simultaneously convertible and rates were stable, a circumstance that has not been repeated for more than a few years in a row since 1914. The volatility and difficulty in acquiring foreign currency created vast new problems for companies, especially Central European 11 Quoted in, Ruth Dudley Edwards, The Pursuit of Reason: The Economist 1843–1993 (London: Hamish Hamilton, 1993), 540. 12 Alice Teichova, et al. eds. Multinational Enterprises in Historical Perspective (Cambridge: University Press, 1986), 364. Between 1959–1967, approximately 5100 new subsidiaries were established.

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companies, during the interwar period.13 Finally, the number of States increased enormously, along with the pressures to liberate colonized regions of the world, and the power of Western States to guarantee commercial advantages for their own and other companies began its steady diminution. In short, the conditions created by the long, brutal, and surprisingly expensive war established the conditions that made political risk an integral part of business’s calculations about cost and benefits of investment. By shattering the pre-war “liberal consensus” – respect for private property, limited government, and with it a credible focus on maintaining macroeconomic discipline and free movement of economic inputs and outputs – and Europe’s economic hegemony, the war simultaneously led to an increase in FDI, a weakening of control of developing countries, more direct and indirect impediments to trade, more national attention to social projects and autarky, an increase in the number of countries, and conflicting ideological views of how the world should be organized. The impact of the war on commercial affairs in general and political risk in particular was probably greatest in Germany. The relationship of German business to the demise of the Weimar Republic and the consolidation of Nazi power is one of the most controversial areas of modern historiography. Nevertheless, a discussion of Germany’s transition from democracy to dictatorship and the relationship of that transformation to commerce must begin with the political attitudes and activities of German business. Although there is a clear distinction between Nazi politics and economics and those of the Weimar Republic – as well as those that predated World War I as discussed above – studying the many overlapping elements reveals many insights about German business attitudes and institutions that help explain the transition to dictatorship.14 The overwhelming focus of the political fears, which stimulated political activity, of German businessmen during the interwar period, for example, was toward the dangers posed by left-wing political parties and the related demands of labor. The intensity of these concerns coupled with the economic crisis of the early thirties, for which industrial leaders refused to share responsibility, made those businessmen more amenable to right-wing authoritarianism, or at the very least, insufficiently attuned to its consequences. Ironically, despite the loss of foreign property during and after the war, there is much evidence that German businessmen were more focused on political risk in their own country than that in others. As economic conditions worsened, their craving for stability and secure markets brought them ever closer to open acceptance of authoritarianism. What made them ideologically predisposed to accept dictatorship, was neither 13 See Christopher Kobrak, “Foreign-currency transactions and the recovery of German industry in the aftermath of the First World War: the case of Schering AG,” Accounting, Business & Financial History, 12, no. 1 (March 2002): 25–42. 14 See Harold James, The German Slump (Oxford: Clarendon Press, 1986).

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their materialism nor their idealism, but rather their discomfort with and unwillingness to adapt to their new political and economic realities. Although most historians of the Weimar Period accept that most of big business was neither enthusiastic about Hitler’s taking over the reigns of power nor large financial backers of the party before early 1933, big business’s role in establishing the framework which made National Socialism a credible alternative is still in doubt.15 Despite some early successes at working out an effective means of establishing industrial relationships based on mutual recognition, wage negotiation and cooperation, the shaky loyalty of business to the new social order became evident within a few years of the birth of the new republic. The representatives of heavy industries especially remained rather pessimistic about their companies’ future in the context of a political system, in which workers had a large voice. But business did not speak with one voice. There were conflicting interests among large companies and sectors. Nevertheless, the relationship between much of big business and labor – and the government, which according to most businessmen supported the interests of labor over capital during the Weimar period – shifted from cautious tolerance to open conflict. Neither big business nor labor could be said at any time to be comfortable with the fundamental beliefs of the other about how society should be organized. Using labor and social changes as a convenient scapegoat, even during the best years of Weimar, much of business tried to ward off significant change by restoring pre-revolutionary authoritarian and paternalistic industrial relations. Many company structures remained needlessly complicated, small companies and old products were propped up with cartel arrangements, and whole sectors were spared from international competition, which would have lowered end-user prices in Germany. German business was not alone in taking this course, but Germany’s desperate need for capital, profits, and export earnings, made it particular sensitive to this commercial folly, which ultimately only authoritarian measures could hope to preserve. Indeed, many of the most profound changes business did make were forced on managers, first by bankers and other investors, and later by a dictatorial regime preparing for war. In many sectors, with or without high profitability or the promise of profits, it appeared that new investments were made and diversification strategies undertaken with little hope of synergies. Important stream15 See debates surrounding David Abraham, The Collapse of the Weimar Republic: Political Economy and Crisis (New York: Holmes & Meier, 1986); Henry A. Turner, “Großunternehmertum und Nationalsozialismus 1930–1933,” Historische Zeitschrift 221 (1975), 18–68; Henry A. Turner, German Business and the Rise of Hitler (New York/Oxford, Oxford University Press, 1985); Dirk Stegmann, “Zum Verhältnis von Großindustrie und Nationalozialismus 1930–1933,” Archiv für Sozialgeschichte 13 (1973), 399–482; Dirk Stegmann, “Antiquierte Personalisierung oder sozioökonomische Faschismus-Analyse? Eine Antwort auf H.A. Turners Kritik an meinen Thesen zum verständnis von Nationalsozialismus und Großindustrie vor 1933,” Archiv für Sozialgeschichte 17 (1977), 275–296.

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lining of management organizations was put off. Sometimes keeping companies out of foreign hands seemed to be the only reason for a German company’s purchase of another German firm. The period from 1918 to the end of the hyperinflation in 1924, for example, presented a mixture of opportunities and challenges for German big business, but Germany’s commercial elites hardly exploited them. As Gerald Feldman argued in The Great Disorder, to a large extent, German businessmen in the 1920s preferred to deceive themselves and others by inflation profits and later baseless Goldmark balance sheets.16 Perhaps even more to the point, many observers hold German industry, not the trade unions, responsible for over investment and overcapacity before 1929. Although it is beyond the scope of this introduction to reopen the longstanding debate about wages in Weimar, it is clear that the focus of business concern was unwaveringly on labor costs and government spending, although there were a host of real economic factors that made “business as usual” untenable.17 The heavy industries extended their productive capacities way beyond any realistic perspectives of domestic demand, while attempting to prevent a market-oriented readjustment of prices through cartelization, control of demand, and even protective tariffs. Thus, many managers seemed to plunge into a self-generated problem of high fixed capital costs. Even in a sector like chemicals, in which Germany still held a leading position, returns on assets and equity remained below their prewar levels, in large part because of over investment and an unwillingness to get out of marginal or unprofitable businesses, despite persistently high real interest rates.18 While big business was by and large skeptical about the Weimar “social contract” during the 1920s, after 1930, many openly expressed their disloyalty to the constitution.19 In the spring of 1930, the German entrepre16 Gerald D. Feldman, The Great Disorder (Oxford: Oxford University Press, 1993), 841. 17 Carl-Ludwig Holtfrerich, “Alternativen zu Brünings Wirtschaftspolitik in der Weltwirtschaftskrise?”, Historische Zeitschrift 235 (1982), 605–631; Knut Borchardt, “Zwangslagen und Handlungsspielräume” in “der großen Weltwirtschaftskrise der frühen dreißiger Jahre. Zur Revision des überlieferten Geschichtsbildes,” in: ibid., Wachstum, Krisen, Handlungsspielräume. Studien zur Wirtschaftsgeschichte des 19. und 20. Jahrhunderts (Göttingen: Vandenhoeck & Ruprecht, 1982), 28–41, 165–182. 18 See, for example, James, The German Slump and Christopher Kobrak, National Cultures and International Competition: The Experience of Schering AG, 1851–1950 (Cambridge: Cambridge University Press, 2002). 19 Bernd Weisbrod, Schwerindustrie in der Weimarer Republik. Interessenpolitik zwischen Stabilisierung und Krise (Wuppertal: Peter Hammer Verlag, 1978). Even earlier, big business had established a firm grip on the German Peoples” Party by means of moral suasion and huge financial contributions. To the detriment of the German Peoples” Party, industrial interference had undermined the party’s standing with its middle-class electoral base and alienated a growing part of its traditional constituency. The ill-fated attempts to “hijack” the party drove a substantial part of the protestant middle class electorate away to short-lived special interest parties of small business entrepreneurs (Wirtschaftspartei) and apartment house owners (Hausbesitzerlisten). In 1932, the protestant part of self-employed middle-class electorate ended up in the Nazi Party.

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neurial elite exerted considerable pressure on the still moderately conservative German Peoples’ Party (DVP), for example, to break up the Great Coalition with the Social Democrats. To be sure, big business was not the German elite most favorable to authoritarianism, but by pressing the German Peoples’ Party to pull out of the coalition, parts of the business elite tragically toppled the last Weimar government that was based on the support of an active majority in parliament.20 Many German business leaders were at best politically naïve. German industrialists hoped that their party machinations would insure an upswing in conservative power. They did not foresee the National Socialist triumph in the September 1930 elections. Even after the first Nazi successes in the state election of Thuringia in December 1929 and the erosion of the traditional right-wing business parties, which made a potential electoral shift to the extreme right well within the realm of possibility, few business leaders awoke to the dangers. The risk of a National Socialist takeover did not stop German heavy industry in particular from opting for an authoritarian revision of the Weimar constitution in 1932.21 Nevertheless, business or big business cannot be described as ideologically comfortable with National Socialism. Despite the ominous turn toward authoritarianism in 1932, most German businessmen did not welcome Hitler’s appointment as Chancellor in January 1933. But the new regime’s promises of labor and political stability insured business’s silence while the National Socialists solidified their power. Once again, business’s focus was more on the threats posed to firms by recalcitrant workers and a left-leaning government, rather than an authoritarian regime of the right. By the time the regime embarked on measures that were clearly less favorable to its interests, big business had lost the means of expressing its opposition. Confused by the National Socialists’ vague and incalculable economic agenda, which oscillated between the praise of free entrepreneurship and anti-capitalist rhetoric, like the members of the military and the administrative elite, industrial leaders believed in the idea of “taming” Hitler through government responsibility and the constraints imposed by putting him at the helm of a rightist coalition government. Soon after Hitler’s inauguration, the industrial elites started to give him credit for his general political plan. In particular, they endorsed his commitment to crush the unions and the left-wing parties, to restore their “boss in his own house” position, to overcome parliamentary inertia and to suspend parliamentary powers for an indefinite period. In spite of the radicalism of the Nazi rank and file and their anti big-business propaganda, the entrepreneurial elite was willing to trust Hitler’s promise to 20 Peter Fritzsche, Rehearsals for Fascism: Populism and Political Mobilization in Weimar Germany (New York: Oxford University Press, 1990). 21 Hans Mommsen, Die verspielte Freiheit: Der Weg der Republik von Weimar in den Untergang 1918–1932, Frankfurt/M. 1989, in English, The Rise and Fall of the Weimar Democracy (Chapel Hill: University of North Carolina Press, 1996).

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respect and even to strengthen property rights. Only a few companies protested openly against the negative effects of anti-Semitism on their human resource policies, even though research-oriented and export-dependent enterprises such as IG Farben soon realized that the anti-Semitic purge of research institutes, universities and corporate research departments put their worldwide competitiveness in jeopardy.22 Although the new economic policy of import substitution hurt the strategic interests of export-oriented enterprises, big corporations, especially those with a high technological potential for product diversification, soon adapted to the rising demand for ersatz products. Even those firms least attracted to National Socialism before 1933 and those which tried to keep their international orientation, became increasingly entangled in a web of technological and economic path dependencies. From 1934 on, the managers of IG Farben embarked on higher capital investments in synthetic fiber and synthetic fuel production, areas in which the company had already invested before 1933 with disastrous results and which would have been rendered truly unprofitable by a sudden return to the world market.23 A new generation of senior executives not only supported the policy of autarchy because of its ideological dedication to the politics of “Lebensraum,” but also because the new division of synthetic fuel and rubber opened new career tracks for advancement. Ironically, too, some managers from heavy industry were far more reluctant to invest in new and seemingly unprofitable steel capacities, although they generally agreed with National Socialist policies. This was the main reason why Hermann Göring established in 1937 a national steel trust and coerced the steel industry into a minority partnership of the newly established Reichswerke AG Hermann Göring.24 Whereas the details of National Socialist economic policies were never very coherent – as Gerald Feldman put it, the Nazis were “anti-capitalist enough to be threatening to private enterprise and property but flexible enough to take advantage of the efficiencies of capitalist enterprises”25 – one common theme runs through the treatment of business in the Nazi period: the steady erosion of the distinction between private and public good, politics triumphed over economics, “common good” over private. Accordingly, entrepreneurs were supposed to invest for the benefit of the community of the German people (Volksgemeinschaft) and to support Germany’s war policy and not in order to maximize profits. 22 Peter Hayes, Industry and Ideology. IG Farben in the Nazi Era (New York: Cambridge University Press, 1987). 23 Ibid. 24 Gerhard Th. Mollin, Montankonzerne und “Drittes Reich”. Der Gegensatz zwischen Monopolindustrie und Befehlswirtschaft in der deutschen Rüstung und Expansion 1936–1944, (Göttingen, 1988); John R. Gillingham, Industry and Politics in the Third Reich. Ruhr Coal, Hitler and Europe (London, 1985). 25 “Economic Origins of European Fascism,” in Harold James and Jakob Tanner, eds., Enterprise in the Period of Fascism in Europe (Aldershot: Ashgate, 2002), 5.

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The new government had developed many means of applying pressure on business; some of the measures were welcomed by business, others not. Nazi economic policy interfered with corporate decisions by exerting moral suasion and pressure to invest into autarchy oriented and armament-related production lines. In some cases, public ownership (such as with Reichswerke Hermann Göring and Volkswagen) simply substituted private investments, which from a profit-oriented perspective, were seemingly unprofitable and overly risky businesses.26 Among the “carrots” thrown to business were most of the measures used to control labor. German big business did certainly profit from the suppression of trade unions and the labor movement. By mid 1933, collective bargaining was replaced by wage regulation through the “Trustees of Labor” which the Reich Ministry of Labor appointed. Particularly in the boom years from 1936 to 1939, wages remained below the level they would have reached in a process of free negotiation. Although corporations had to accept direct interference from the Nazi Labor Front (DAF) into company affairs, the interference of the DAF was limited to non-monetary benefits such as the improvement of lavatories, provision of cafeteria food, construction of sports facilities and the preferential employment of active National Socialists. Incorporating the idea of the Volksgemeinschaft at the shop floor level did not mean the recognition of DAF functionaries as industrial relations partners, but rather the implementation of anti-Semitic human resource policies to the detriment of the Jewish employees. The industrial elite did not consider the introduction of the Volksgemeinschaft idea on the shop floor level as a revolutionary or even a pseudo-revolutionary break with the traditions of industrial relations. In the Weimar Republic (and even before), the big industrial corporations had already established a tradition of corporate social policies. Despite the propagandist claims of the DAF, corporate expenditures for social benefits did not rise significantly after 1933. In this respect, the Labor Front’s pressure for additional social benefits merely compelled management to adopt a new ideological framework and label for its traditional “human relations” policies. Of a less welcome nature was the strict control over capital markets, which prevented the non-military-related industries from enlarging their capital base and crowded out politically unwanted investments for the sake of rearmament, especially after 1936. By forcing corporations to limit dividends and invest all excess cash into temporary state bond funds, corporations found themselves improving their equity capital base and augmenting their hidden reserves. Around this time, too, foreign exchange regulations were tightened so as to make even the most international companies extraordinarily 26 Hans Mommsen and Manfred Grieger, Das Volkswagenwerk und seine Arbeiter im Dritten Reich (Düsseldorf: Econ, 1996).

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dependent on state bureaucrats.27 In the short run, these restrictions obviously violated the shareholders” rights to reap the benefits of their capital investment. But in the long run, shareholders potentially profited from untaxed hidden reserves, provided they were invested into profit-yielding capital goods, which could be retooled for civilian production. Ironically, despite the devastation of World War II, from 1935 to 1945, many German companies enlarged considerably their capacities and built valuable assets for the post-war reconstruction.28 The lessons of the interwar period and these case studies are important for historians and business people. Many of the questions regarding what responsibility businesses must take when working with unsavory regimes are still with us. Despite a resurgence of internationalism, companies may still have an enormous amount of political risk. As Harold James has recently argued, our era may have more in common with the pre-World War I and interwar periods than we would like to think.29 As in our own age, in the late nineteenth century, internationalism and nationalism seemed to be simultaneously on the ascent and fears of the consequences of political risk relatively subdued.30 As in the pre-World War I period, too, the greatest risk facing companies today may arise from the political agendas of their own countries that emanate out of the desire to protect national interests against the adverse effects of internationalism and modernism. Like the interwar period, moreover, our internationalism is particularly challenged by the absence of an international consensus around a global agenda and a suitable method for regulating international economic issues. Although most nations want to reap the benefits of stability and growth of international trade, like that enjoyed before World War I, much of their behavior suggests an unwillingness to submit individually to the draconian discipline of the nineteenth century and to transfer sovereignty for regulation to international organizations, which in the eyes of governments and the people still lack democratic legitimacy and sufficient concern for non-commercial values. 27 Christopher Kobrak, “The Foreign-Exchange Dimension of Corporate Control in the Third Reich,” Contemporary European History, 12, no.1 (2003): 33–46. 28 Neil Gregor, Daimler-Benz in the Third Reich (New Haven: Yale University Press, 1998) 29 In addition to James, The End of Globalization, see also Christopher Kobrak, “Zwischen Nationalismus und und Internatlismus: Globalisierung und Unternehmenskultur aus historischer Sicht,” Deutsche Unternehmer in der Welt (Frankfurt: Frankfurter Allegemeine and Gesellschaft für Unternehmensgeschichte, 2000). 30 Consider, by way of comparison, a recent article from the front page of the International Herald Tribune. Despite all of the rancor about globalization and the willingness of some to commit acts of terror to forestall some aspects of internationalization, it reported that “seattle now looks like the high-water mark for the anti-globalization movement.”

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Like the pre-World War I period, complacency may be our greatest enemy. Optimists would be wise to remember that not only was faith in the efficacy of internationalism extremely strong before World War I, but also that Germany’s willingness, for example, to risk international adventurism and even world war was predicated on its national elites’ desire to avoid social conflicts, which arose in large part from economic integration. While the spread of democratic institutions is a welcome development over the last few decades, introducing or reintroducing dictatorial control over economic activity in many countries struggling with effects of globalization is far from unimaginable – witness Argentina, Venezuela, and China to name a few. Some would even include Europe and the United States, especially as the “War on Terrorism” promotes a resurgence of Cold War methods to insure discipline among America’s allies. As economic imperatives drive them toward further interdependencies, businessmen are caught between two powerful conceptions of world economic organization: one a global and the other a more national. For the most part, financial institutions and commercial companies are running their businesses as if national borders no longer existed, but national governments, the peoples they represent, and international public interest groups are understandably concerned about the power of transnational firms and international regulatory bodies, whose power seems to transcend elected, national political institutions. Despite extraordinary economic prosperity in much of the developed world during the last two decades, a lot of the international cooperation, which seems necessary to make our global economy work, is not politically popular. Consider that in much of Europe a new currency has been created that will have many of the effects of the Gold Standard while most Europeans are unwilling to turn over governmental authority to European bodies and that the U.S. still practices many aspects of l’exception Americaine, which so terrified European investors in the mid nineteenth century. In France, roughly a third of French voters cast their ballots in the first of France’s last presidential race for candidates of the right and left who were opposed to further European integration. In short, the greatest political risk to business in the twenty-first century may be from further resistance to globalization, or better put, from the absence of a workable consensus about what should be controlled internationally and what nationally. Worse still, the political mistakes of the interwar period, which gave us beggar-thy-neighbor tariffs, aggressive militarism, enforced zones of international economic “cooperation” and extensive national controls of domestic markets, could easily be repeated in our own time if any one of a number of easily imagined crises – for example, a meltdown of the Japanese banking system, defaults in derivative markets, or extensive loss of faith in corporate financial controls – gave rise to an extended economic downturn. The consequence of such a crisis would in all likelihood lead to further erosion of

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20 Christopher Kobrak, Per H. Hansen, and Christopher Kopper

confidence in international economic interdependencies, a reaction to which even Keynes in 1934 was not immune (see quote on page 3). Harold James’ words about how an age of nationalism replaced one of capitalism in the 1930s bear repeating: It is easy to sum up the conventional wisdom that quickly emerged in response to the problems of the global economy. Everything was moving across national boundaries – whether capital, goods, or people – really had no business to be doing that and should be stopped. If it could not be stopped, it should be controlled, in accordance with a definition of national interest. Trade was to be regulated so as to maximize domestic employment. Central banks began to redefine their job of monetary management in accordance with national priorities.31

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Sadly, as we know, those fears of globalization and national frustrations with governmental failure to soften its effects during the interwar period contributed in many countries to autarky and dictatorship, in large part the subject of this book. In some respects, the risks for international corporations may have even increased in our era of globalization. The propensity of transnational firms to demand of national governments the right to treat their assets as interchangeable components in a network designed to optimize the economic value of the whole, rather than the parts, puts those companies at risk. As Raymond Vernon succinctly characterized competition in many industries, multinational behavior, and the potential conflicts, globalisation has its risks: When mature multinationals are at war [in competition, our note], those who shape the strategy of the enterprise usually see it as a global war, with shareof-global-market as the telling measure of success. From their viewpoint, every unit in the enterprise is involved in the global face-off, irrespective of its location. Decisions to open or close plants, to introduce new products or retire old ones, to raise prices in a market or lower them, are likely to be framed by their effects on the global position of the firm. Those decisions can be expected at times to vary from the decisions of a stand-alone firm confined to a single market. Sensing that possibility, government officials, labor representatives, and other nation-bound interests are frequently wary of the durability of the multinational’s presence and uncertain how it is likely to behave in the national economy.32

Multinational firms have in one sense more freedom because of their transnational orientation – by their ability to move from one source of labor, raw material, technical, and financial input to another, as well as their wide range of national distribution capabilities – but the economic value of many of their production processes and marketing advantages depend on operating 31 James, The End of Globalization, 187. 32 Raymond Vernon, In the Hurricane’s Eye (Cambridge, Mass.: Harvard University Press, 1998), 14.

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Business, Political Risk, and Historians 21

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in a borderless world, in which political risk among countries has no more significance than the risk of doing business between New Jersey and California in the United States. Though hopefully part of our past, the interwar world with its nationalism, authoritarian regimes, and autarkic economic policies provides an important lesson, an alternative reality that business leaders and historians forget at their own peril. We have no intention here to argue that history repeats itself. We recognize that dwelling on the past can paralyze action in the present, but contemporary business leaders have much to learn from the experiences of their colleagues of the past, most importantly, a sense for the uncertainty with which they go about defining strategies and an appreciation of the rich variety of expected and unexpected possible future outcomes. The case studies presented here are a useful reminder of the diversity of business experience, and that business risks, political or otherwise, follow no laws and, whether in authoritarian or liberal-democratic environments, past or present, resist reduction to neat mathematical formulas.

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CHAPTER 2

Multinationals and Dictatorship: Europe in the 1930s and early 1940s

❖ Mira Wilkins

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Who loves not knowledge? Who shall rail Against her beauty? May she mix With men and prosper! Who shall fix Her pillars? Let her work prevail. Alfred Lord Tennyson, “In Memoriam,” CXIV

A multinational enterprise (MNE) is a business that operates over borders. The typical MNE comprises a cluster of corporations, owned and controlled (or potentially controlled) from a, or (in certain exceptional cases) more than one headquarters. At the start of the 1930s, numerous MNEs, headquartered in various European nations, conducted business across country lines in Europe as well overseas, around the globe. Then there were the American MNEs with their sizable investments in Europe. When we consider MNEs and dictatorship, we need to view both the operations of outward investors (that is, domestically headquartered MNEs that had expanded or sought to expand beyond a particular dictator’s jurisdiction) and inward investors (that is, foreign MNEs within a particular “host” nation that was a “dictatorship”). We also need to consider network (or alliance) interconnections between and among firms in different countries. Sometimes the boundaries of MNE were porous and ill-defined, with overlapping and partial ownership associations. Dictatorships had impact on both the activities of outward and inward MNEs. They influenced the relationships between and among firms over borders. Moreover, sovereign jurisdictions were not set in stone in the 1930s and early 1940s, and as Hitler acquired new territory, this had profound effects on the strategies and structures of MNEs. Business firms produce goods and services; a MNE is no different. It is a business that produces goods and/or services and does so in more than one

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Multinationals and Dictatorship 23

country. A purely domestic firm is affected by a single sovereign nation’s rules and regulations. A MNE as it extends over political borders operates under two or more, and often many more, diverse national rules and regulations. Political risk is inherent in all transactions and is accentuated in crossborder economic activity. A MNE’s operations over borders are linked in various manners; thus, we are not merely discussing bilateral connections but rather a tissue of interrelationships. When we have political boundary changes, the map alters and so do the influences on MNEs. All the MNEs that I am considering herein had operations in Europe before the advent of the dictatorships of the 1930s. Indeed, basic to the understanding of the MNE is the proposition that the presence of and the constraints of the dictatorships will, by definition, affect the business activities. The more interesting questions then become how does the existence of a MNE per se under circumstances of dictatorship present different issues from those encountered when we study purely domestic firms and what are the distinctions between outward MNEs and inward MNEs as public policies were made and implemented? What specifically were the effects on the strategies and structures of MNE? What was the range of choices to be made by individual firms, and if there were dissimilarities why did they exist? Are there legitimate generalizations that we can make, or does our evidence add up to merely a series of separate, distinct case studies? I draw on some of the chapters presented in this book and at the Conference in Odense in 2001, add extra information, and uncover certain common threads. Wherein were the experiences of individual MNEs totally unique and wherein were there commonalities? Before I explore these matters, I want to address two issues, the first internal to the firm and the second a political one. First, there is the matter of ambiguities in the word “control.” The economics literature is replete with commentaries on “principal-agent” problems, where the principal has one set of intentions (stockholders look to profit maximization) and the agent has his own agenda (managers look to having more employees and larger business). Owners may not (and usually do not) have full control over managers. The principal-agent problem is multiplied many times over within MNEs. Information is asymmetrical. “Control” is always constrained, but in different manners. Increasingly, I find the concept of managerial control in a purely domestic context elusive, but far more so in an international one. Under dictatorship, rules and regulations limited the decision-making of outward and inward MNEs (and domestic enterprises) in varying degrees. Managers of an affiliate within the host country may understand, interpret, or follow the rules and regulations in accord with the parent company’s interests or with their own separate agenda. Most often there is a combination. In dictatorships and democracies, the relationships between parent and affiliates are always fraught with nuances and complications. When at the start of this chapter, I defined a MNE; I said ownership and “control” or “potential for control” over the affiliates abroad. Ownership was frequently

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24 Mira Wilkins

veiled through corporate structures, so my discussion of ownership is broad rather than specifically defined. Most important is the notion of “control” or “potential for control.” “Potential” means ultimately the ability to close down an operation, to fire and to replace the chief executive of the affiliate. At the extreme, there is no control or potential for control, if a foreign dictatorship takes away those rights, or perhaps, alternatively, if such a choice has prohibitively high cost. In wartime, when a MNE has had prior existing business operations on both sides of the conflict, the MNE fragments; control and potential for control are absent. Barring the extreme of closing down a business or changing its chief executive officers, under all circumstances, control is usually tempered. Principal-agent theory helps explain some of the limits of control. The second matter is more difficult for me. I am not a political scientist. I know as I study MNEs that governments clearly influence their behavior, but the governments may be dictatorships or democracies. Yet, we must ask what was distinctive about European dictatorships in the 1930s in dealing with MNEs. Does dictatorship by definition mean more regulations, more shaping by government of the course of MNE behavior for national purposes? Is this merely a quantitative “more,” or are there other distinguishing features? Are dictatorships more “nationally oriented,” more anti-foreign, than democracies? Is it “dictatorship” per se or country-specific rules and regulations that we want to evaluate? Surely, too, there are differences between and among dictatorships in their treatment of MNEs. Dictators’ policies toward MNEs seem to vary not only between and among dictatorships but within bureaucratic units in a particular dictatorship. They also alter through time. As we look at the public policies of dictatorships in relationship to MNEs, we need, in addition, to differentiate between general policies and those ones that are targeted specifically at outward or inward MNEs. For example, Nazi policies toward Aryanization affected German domestic enterprise as well as German outward MNEs and inward foreign MNEs. Did these general policies have a differential effect vis-à-vis MNEs (outward or inward)? So, too, to think about dictatorship in terms of “the assuring the personal power of the dictator … the exploitation of the state by the new party bureaucracy, the aggrandizement of the nation”1 provides a set of phrases that may be too sweeping: Where does “political risk” fit? Does it differ consistently by “form” of government? Enough of introductions, let us move on to the substance. Superficially, it seemed obvious to me that outward and inward MNEs would be governed by somewhat different rules and restrictions whether under dictatorship or not. Thus, IG Farben in the United States and IBM in Germany (the one outward from Germany and the second inward into Germany) would seem to 1 Quote from Harold C. Deutsch, “The National Socialist Dictatorship,” in Dictatorship in the Modern World, ed. Guy Stanton Ford (Minneapolis: University of Minnesota Press, 1939), 83.

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Multinationals and Dictatorship 25

encounter separate German problems, yet at the start of Nazi regime in 1933, and subsequently, each faced in Germany a need to conform to the political realities. Each met with German foreign exchange controls and the difficulties that such regulations entailed. Each faced German autarchy and more specifically the intensification of German nationalism. Each had to consider how to deal with a Germany that was rearming. Each had the German government as a customer, although the evidence is still not very clear on the changing percentage of government business.2 One of the surprises in writing this chapter was the similarity of the problems facing outward and inward MNEs. Also, I asked: how alike were the conditions of doing business for the American Ford company, the British-Dutch Unilever, the Swedish SKF, and the Swiss Hoffmann-La Roche in Germany, for example, cases of four MNEs with histories in Germany going back before the days of dictatorship, yet operating over very different borders and in very diverse industries. All encountered the previously mentioned problems. The choices made by these individual firms were shaped in part by nationality, in part by industry, but always by the specifics of the particular business’s corporate histories. In some cases, the choices made by inward MNEs seemed to have been affected by the form of entry, take-over versus “greenfield” operations. Thus, General Motors’ 1929 acquisition of Opel (at the time the leading carmaker in Germany) put it in a different position from Ford Motor Company, which had gone into Germany afresh. So far I have simply referred to German dictatorship. Clearly, dictatorships were not the same, with varying rules and requirements; moreover, individual MNEs did not have identical operations in each country: International Telephone & Telegraph in Germany and the same company in Spain present very separate investment stories. As I thought about the questions posed above, it seemed impossible in a short chapter to consider various different European dictatorships. Accordingly, I decided to focus on MNEs in Germany, viewing Germany as both home and host to MNEs – namely outward and inward MNEs – and homing in specifically on how the experiences of MNEs were different from purely national companies. What I want to do is look at various MNEs, under this particular dictatorship and try to generalize. Before I do so, I need to reiterate the notion of what businesses do. Businesses are specialists in providing goods and services. The rationale behind a MNE is not pursuing political goals. Yet, in August 1933, George von Schnitzler, commercial director in charge of dyestuffs at IG Farben, wrote to Erwin Selck of IG Farben’s Berlin office, “We have up to now, without exception, acted according to the rule that in foreign countries we represented only our firms and not the Reich or the interests of the entire industry.” He was concerned, since Max Ilgner (a director of 2 At least, I have seen no satisfactory evidence on this subject.

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26 Mira Wilkins

American IG Chemical and employed in IG Farben’s Berlin office) had visited Scandinavia, seeking to improve Hitler’s image. In the United States, Ilgner was arranging for IG Farben’s American public relations man, Ivy Lee, to promote National Socialism. Von Schnitzler commented, “We now appear as the champions of the German cause in general and also appear as auxiliary government agents.” He did not like this new role.3 Ford in Germany encountered a similar quandary. Sir Percival Perry, head of the British Ford company and until 1937 chairman of the board of the German Ford affiliate, sent Edsel Ford in the United States in 1933 numerous letters on German government interventions. “The Nationalist Socialist Party – Nazis – interfere with everything and although their interference is not exactly officially Government, yet it is political and very influential,” he reported in June 1933.4 In March 1934, Perry wrote to another key Ford executive in Dearborn, “The real problem is whether to take action to line up with political conditions as now existing, or struggle with them under the belief that they will be only temporary.”5 Like it or not (and many executives in IG Farben did not like it), IG Farben managers came to recognize that business and politics in Nazi Germany were closely bound. So, too, Ford officials realized that they had to take steps to adjust to certain political realities. What seems increasingly clear are the restraints on corporate choices and the differences that developed within individual MNEs between financial, legal, administrative, and operational strategies and structures. As my chapter continues, we will see these differences. The first problem for MNEs in Germany, after 1933, was the stringent restrictions on foreign exchange, on capital exports, on goods imports, and on remittances of profits and royalty payments. The foreign exchange controls posed far greater problems for a firm engaged in international business than for a purely domestic enterprise. The difficulties affected both the outward activities of MNEs as well as the inward investments.6 Indeed, as I will show, some of the attempts by certain inward MNEs in the late 1930s at 3 George von Schnitzler, Frankfurt, to Edwin Selck, Berlin, 28 August 1933, in Record Group 238, T301, Reel 7, NI-697, National Archives, and Mira Wilkins, The History of Foreign Investment in the United States, 1914–1945 (Cambridge, Mass.: Harvard University Press, forthcoming 2004). 4 Sir Percival Perry to Edsel Ford, 15 June 1933, Select File, Dearborn, Michigan. All the Ford references are based on materials in my personal files in Miami, Florida, but cited according to where they were found when the research was done; the materials were collected in relation to my late 1950s – early 1960s research on the history of Ford’s international business. See Mira Wilkins and Frank Ernest Hill, American Business Abroad: Ford on Six Continents (Detroit, Mich.: Wayne State University Press, 1964). 5 Perry to C.E. Sorenson, 13 March 1934, Select File, Dearborn, Michigan. 6 Chapter 6 deals with the effects on Jewish businesses of blocked currencies. All MNEs were adversely affected, not only Jewish ones.

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Multinationals and Dictatorship 27

coping with foreign exchange problems involved combinations of the outward and inward foreign direct investment. Government interventions (whether under dictatorships or under democracy) are often met by corporate efforts to minimize their burdens, or, in other terms, to offset political risk. One consequence was a “cloaking” through various legal devices by German-headquartered MNEs. The cloaking often had little impact on either the firm’s administrative or operational strategies and structures, but substantial influence on its financial and legal structures. On December 1, 1936, a German law stipulated that “A German citizen who, knowingly and unscrupulously, from motives of gross selfinterest or other motives … leaves property abroad, thereby causing gross injury to the German economic system, will be punished by death.”7 By this time, German-headquartered international businesses were knowledgeable about methods for hiding foreign assets. During World War I, to protect their large U.S. properties against the sequestrations (and then after the sequestrations) by the U.S. Alien Property Custodian, German MNEs had devised disguises. Subsequent to the Armistice, they had figured out further schemes to circumvent the requirements of The Treaty of Versailles and the then prevailing German restrictions on capital exports. In the late 1920s, German MNEs created complex ownership pyramids to avoid German (and probably foreign including U.S.) taxes related to their international business. The camouflaging techniques were useful in the early 1930s, to get around the German exchange controls. Thus, by the Nazi period, the management of large German enterprises knew exactly how to use American “nominees” as well as Dutch, Swiss, Swedish, and Danish conduits to achieve business secrecy.8 And, then matters got worse. In the 1930s as fears of war mounted, German businesses wanted to conceal assets abroad: to protect against “foreign” takeovers in the event of war and, in some cases, to get their assets out of Germany. Cloaking became ever more prevalent. Rules and regulations under dictatorship encouraged avoidance and evasion. It probably could be argued that those firms that had outward MNE connections of prior years had more options than those without them.9 On the other hand, there were many instances where the German state made exceptions for national reasons to the rules and regulations. Thus, Gerald Feldman shows in the following chapter that Munich Re got “special dispensation” in 1936 to use foreign exchange to participate in Österreichische 7 Royal Institute of International Affairs, The Problem of International Investment (1937. Rpt. London: Cass, 1965), 83n.1, and U.S. Office of Alien Property Custodian, Annual Report 1943–1944, 28–29, on the 1936 stiffening of restrictions. 8 See Wilkins, The History, for details on all of this; that book includes citations from the very large literature on “cloaking.” For some particulars, see, for example, Gerald Aalders and Cees Wiebes, The Art of Cloaking Ownership (Amsterdam: Amsterdam University Press, 1996). 9 This point is made by Dean in Chapter 6 vis-à-vis Jewish MNEs. It was in a broader sense true.

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28 Mira Wilkins

Vericherungs-AG (ÖVAG).10 As late as July 1941, IG Farben was applying to the German government for foreign exchange to support its Chemnyco office in New York. This office involved a minimal investment, but played a highly critical administrative role as a “service center” for the German enterprise.11 IG Farben’s principal operating chemical affiliate, General Aniline and Film – the October 1939 successor to American IG Chemical Corporation – got no financial support from Germany, nor did it require any.12 German foreign exchange restrictions in 1933 (and subsequent ones as well) affected inward foreign MNEs, along with the outward ones. Foreign MNEs were used by the German State to achieve national goals. The foreign exchange restrictions had impact on current account transactions. Foreign MNEs in Germany were not permitted to remit dividends nor to make royalty payments. Companies were also sharply limited in their imports into Germany. The British banking house, Schroder, which was multinational in nature, had long done important German business. Its New York affiliate opened an office in Berlin in the summer of 1933 to try to assist foreign investors in Germany.13 American MNEs, for example International Harvester, opened accounts with the New York office of Schroder, to use that affiliate’s Berlin office to cope with their German needs.14 On inward MNEs into Germany the records are very clear. Blocked Reichsmarks meant a continuing inability to remit profits. Every foreign company, no matter what the nationality, had this problem.15 Foreign MNEs reinvested, since they had little choice.16 Had they decided to sell out, capital export restrictions would have made the repatriation of their receipts from the sale impossible. Some companies tried to export products from Germany (and be paid in a foreign currency), thus getting monies out. Few succeeded (since the German government collected all foreign currency received), albeit it was reported that Sinclair Oil sold all its European marketing subsidiaries before World War II; unable to transfer the proceeds out of Nazi Germany, it took iron pipe instead – and of course it could use the pipe for its purposes in the United States and elsewhere abroad.17 Unilever 10 See Chapter 3. 11 IG Farben to Reich Ministry of Economics, 21 July 1941, RG 238, T301, Reel 34, NI-4615, and Wilkins, The History. 12 As indicated in Wilkins, The History, it could support its operations through domestic borrowing and through reinvested profits. 13 Richard Roberts, Schroder (Houndmills: Macmillan, 1992), 244. 14 Ibid., 245. 15 See, for instance, Jean Heer, World Events 1866–1966: The First Hundred Years of Nestlé (Rivaz, Switzerland, 1966), 160, on Nestlé. 16 Mira Wilkins, The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1970 (Cambridge, Mass.: Harvard University Press, 1974), 187–188, specifically on American MNEs. 17 D.J. Pellei, “The Development of the Sinclair Organization,” unpublished paper, 1966.

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ended up investing its profits in building trawlers, tramps, tankers, and whale catchers to sail its profits out.18 Standard Oil of New Jersey also built ships.19 IBM bought real estate.20 Through a U.S. representative, George Murnane who was on the board of directors of Allied Chemical, the Julius Petschek branch of that Czech family with investments in Germany tried in January 1938 to exchange its properties in Germany, for IG Farben’s U.S. affiliate.21 But with cloaking, IG Farben officials claimed to have no interests in the American affiliate – American IG Chemical Corporation, later General Aniline and Film (GAF) – which, of course, would make the exchange impossible. Once the war started in Europe in September 1939, Standard Oil of New Jersey’s management followed the same strategy, proposing a trade of GAF’s business in the United States for the American oil company’s direct investments in Germany: the proposal was that IG Farben would buy Standard Oil of New Jersey’s German business and pay for it with GAF. Executives of the two companies met in Basle in March 1940 to discuss the proposition. But once more, IG Farben officials denied having any interest in GAF. GAF executives then suggested that Standard Oil of New Jersey purchase GAF from IG Chemie (the Swiss owner of record), but this did not solve Standard Oil of New Jersey’s German asset problem, so the American oil company dropped the matter.22 Sosthenes Behn of International Telephone and Telegraph Corporation also considered acquiring GAF, hoping (as had Standard Oil of New Jersey) to exchange ITT’s blocked assets in Germany for IG Farben’s properties in the United States, but IG Farben continued to insist that GAF was not in any manner owned by IG Farben and thus could not accept this proposition.23 Just as exceptions were made in the case of outward foreign investments, so too when there were international political considerations or the need for imports from abroad, foreign exchange would be released. Thus, the Czech Julius Petschek family that was closely associated with American interests did get foreign exchange from dollars generated by certain 18 Charles Wilson, The History of Unilever 3 vols. (New York: Praeger, 1968), II, 370. 19 Henrietta M. Larson, Evelyn H. Knowlton, and Charles S. Popple, New Horizons. History of Standard Oil Company (New Jersey) 192–1950 (New York: Harper & Row, 1971), 334. 20 Edwin Black, IBM and the Holocaust (New York: Random House, 2001), 123. 21 Otto Steinbrinck, File Note, 29 January 1938, RG 238, T301, Reel 25, NI-3450. Murnane represented Solvay & Cie., a Belgian MNE, on the Allied Chemical board. Allied Chemical, so the plan went, would have then acquired the U.S. properties, providing the Petscheks with dollars. 22 Statement of Orville Harden, Standard Oil Co. (New Jersey), 2 December 1940, printed in U.S. Senate, Committee on Patents, Patent, Hearings, 77th Cong., 2nd sess. (1942), Exhibits, 2462–2463. 23 Joseph Borkin, The Crime and Punishment of I.G. Farben (New York: The Free Press, 1978), 195–196.

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German businesses abroad (outward MNEs) in order to pay for their lignite mines in Germany.24 Yet, many MNEs were stuck with blocked assets in Germany. Why was this the case? Many companies had expanded internationally in earlier years. They saw Germany as a promising market. In the 1930s most American MNEs thought the problems of blocked currency in Germany would prove temporary. Most were making profits on their German direct investments. Most were pleased by the absence of labor difficulties in Germany, problems that they faced in their operations in the United States and elsewhere around the world. George Monroe Moffett, the president of the large U.S. MNE, Corn Products Refining Company, declared in 1933 that he personally did not approve of Nazism, but believed that the Roosevelt administration was more hostile to business operations than the German state. He told a writer for Fortune magazine: “In Germany there is no uncertainty, no political caprice and no nonsense. You reach an agreement with the government and it sticks. You have a problem and you go to the government and get a clear, immediate answer, whereas in America you may spend weeks trying to find out where you stand with the New Deal and then just as you seem to have reached an understanding there is an overnight change in policy and you are up in the air again.” The interviewer decided that “All in all, Mr Moffett prefers the tangible, explicit Nazi interference to the half-defined meddling of democracy.”25 Foreign MNEs in Germany faced intense nationalism and at least in 1933 strong “anti-foreign” sentiments. Their German operations were part of an internal corporate network. Many affiliates in Germany were dependent on imports of the end product and also parts. Foreign exchange restrictions meant monies available for imports were highly limited. Autarchy, nationalism, anti-foreign sentiments were all linked with the foreign exchange problems and the German desire to have “all German” products. Affiliates that had been dependent on imports of parts now provided those “all German” products. Ford serves as a good case in point. In 1926, when Ford had opened an assembly plant in Berlin, 100 percent of the knockeddown car was imported from the United States. By 1928, Ford-Germany was still importing 90 percent of the car, while buying locally tires, batteries, chassis springs, and glass. In 1931, imports continued to be substantial, although down to 80 percent, and local purchases had expanded to include, along with the earlier ones, starter motors, generators, coils, distributors, 24 Wilkins, The History, explains the source of the dollars. See also Chapter 11 by Eduard Kub˚u, et al. on the two sets of Petschek interests in Germany. The other branch of the family (the Ignaz Petschek side) met with confiscation of its German properties, with Aryanization. It had the larger German properties and apparently none of the politically effective American (and British) associations of the Julius Petschek branch of the family. 25 This is quoted in Wilkins, The Maturing, 188.

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cushion springs, soft trim, and the like. That year, Ford began construction of a manufacturing plant in Cologne; by May 1931, Ford-Cologne had begun to make engines and axles; its imports were now reduced to 60 percent of the product, local purchases 30 percent, and manufacture 10 percent. With the advent of National Socialism, the demand for “all German” products took on new intensity. In December 1933, Ford imports of body panels and other knocked-down materials came to an end, and as of 1934, Ford was building a vehicle that was of 100 percent German content. Eighty percent was purchased from German suppliers, while 20 percent came from Ford’s Cologne plant.26 Tires and body parts needed raw material inputs. The German government pushed multinationals to help out. Arrangements were made.27 Government involvements grew. Plans had to be approved. In order to get required imports, American companies exported and engaged in barter. They tried to do business within the new rules and regulations. They sought to meet national aspirations, by “looking” less foreign (sometimes, taking on joint-venture partners).28 Where they could conform to national needs they did so. Ford Germany’s principal leader, Dr Heinrich Albert, who replaced Sir Percival Perry as company chairman in 1937 (so as to make the affiliate appear more German), boasted in 1938 that his arrangements with the German state were a “great success because it [the new agreement] gives us the possibility of increasing production [and] because I succeeded by the right way of handling the people in question [read government officials] to overcome the passionate opposition of our competitors [read Opel] which is at the back of the whole difficulties as well as the intrigues of some of the men at the ministry. In the negotiations I have used the argument of shutting down the plant, but very, very carefully. For it is a bluff! We would, as matters stand here, never get on our feet again, if we once had shut down.”29 Ford archives contain materials on the rubber and pig iron imported into Germany and arrangements for exporting German merchandise – transmission assemblies to the Rouge, wheel assemblies to Mexico and to Ford-Japan in Yokohama, transmission bearings to Ford-Canada, and so forth. The records are very detailed.30 In 1937, Ford in Germany was exporting cars to Sweden, Spain and Denmark; in 1938, it was selling in Brazil, Argentina and 26 Between 1935 and 1939, 76 percent was bought in Germany; 24 percent made by Ford in Germany; between 1940 and 1948, the ratios were 74 percent and 26 percent. W.R. Loughran, “Outline of Import, Make, and Buy History – Ford Werke AG,” 27 July 1955, Ford International Files, Dearborn, Michigan. 27 Details on Ford’s experience are in Acc. 38, Boxes, 37 and 40. 28 Wilkins, The Maturing, 188. 29 Heinrich Albert to Sorenson, 13 January 1938, Acc. 38, Box 40 (emphasis in the original). 30 Acc. 38, Box 40; see also data at Highland Park (HP): International Purchasing Acc., Box 8.

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Japan. These were areas beyond its intra-MNE- designated “export territories,” which included Austria, Hungary and Czechoslovakia.31 After the war started in Europe, Ford Motor Company in the United States asked the British (30 January 1940) for an exemption from the provisions of the Order in Council (28 November 1939) on shipments of German merchandise (transmissions, bearings, wheels, axles, glass, speedometers, and so forth), which were used in Ford’s U.S. export production. Of course, the British Ministry of Economic Warfare said “no.”32 From September 1939 Ford Motor Company’s huge British company was producing to aid the British cause, while its smaller German affiliate was on the other side of the war. During the 1930s, many foreign companies with affiliates in Germany had used their international business networks in coping with the absence of adequate foreign exchange. Standard Oil of New Jersey, which had a marketing organization in Germany, required foreign exchange to pay for oil imports. The company’s affiliates in other countries arranged for the sale of German products abroad. Its German affiliate (Deutsch-Amerikanische PetroleumGesellschaft, DAPG) mixed German synthetics with petroleum products to help supplement its imports.33 Like Ford in September 1939, Standard Oil of New Jersey’s international business was on both sides of the war. Under National Socialism, IBM followed the same pattern as Ford, substituting domestic output for imports; its German subsidiary opened in 1934 a new factory in Berlin to make Hollerith machines for tabulating IBM cards. Before 1934, the German subsidiary (Dehomag) had imported nearly all the machines, leasing the imported machines and paying a royalty to New York on the revenues from the leases. Now it would make an all German product; it developed its own designs, with the D-11 tabulator production.34 Like all MNEs, IBM had in 1933 a global strategy and structure that involved legal, financial, administrative, and operating governance arrangements.35 And, as with IG Farben, Ford, and Standard Oil of New Jersey, changed world conditions meant restructuring. Thus, in the altered environment, Dehomag, which IBM had confined to sales and leasing within the German market, was allowed by the New York parent to service more of IBM’s European affiliates (it now had a manufactured product, which had not been the case earlier). In 1933/34, IBM’s four German subsidiaries (based on its prior historical experience) had been united in the new Dehomag.36 There was much talk about how “German” the “new” company was. In 1935, IBM transferred its European head office from Paris to Geneva. Political con31 See Report of Business during 1937; Minutes Board Meeting of Ford Motor Company, AG Cologne, 20 April 1938, Acc. 38, Box 40. 32 HP, International Purchasing Acc., Box 8. 33 Larson, et al, New Horizons, 334, for details. 34 See Chapter 8; Black, IBM, 60. 35 It had in the early 1930s business in 78 countries. Fortune, January 1932, 38. 36 Black, IBM, 61–62, 101.

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siderations were surely part and parcel of the Swiss location choice.37 Lars Heide shows the development of demand for statistical data (and tabulating and sorting machine technologies) that was linked with the growth in Germany.38 Not only did Dehomag produce the machinery, but in 1935 Dehomag installed specialized printing presses for punch cards, substituting for card imports.39 The German affiliate offered courses for card punchers and tabulator and sorter operators. It received technical assistance from the IBM in the United States.40 Like many foreign MNEs in Germany, there was no attempt on IBM-U.S.’s part to second-guess the economic and political conditions, only the will to do the business that the firm knew how to do, within the constraints of intense nationalism and foreign exchange controls. If it was to continue to sell in Germany, it had little choice but to manufacture there. The naiveté on the part of the U.S. companies on the outcome of German rearmament was very apparent. Perhaps less naive, many European MNEs followed a similar course. The Swedish company SKF had no qualms about expanding its German manufacturing in the 1930s, at the same time as it was enlarging its worldwide business activities.41 The Basle-headquartered MNE Hoffmann-La Roche had a German plant right across the Swiss border in Grenzach. A manager could live in Basle and take a commuter train to Grenzach.42 In the mid 1920s, Grenzach had been Hoffmann-La Roche’s largest plant.43 In 1928, the head of Hoffmann-La Roche, Emil Barrell, married a half-Jewish Russian-German opera singer.44 By 1933, Hoffmann-La Roche was experiencing difficulties in payments between its individual subsidiaries and its Basle head office. As time went on, this very international company began to worry that “NationalSocialist Germany might unleash armed conflict.” As the company’s historian has put it, Barrell “hoped for the best, and realistically planned for the worse.” In 1934, Hoffmann-La Roche had given serious thought to closing the Grenzach operation, but did not do so. Yet, its strategy was to move “the centre of operations westward.”45 While it raised its production in Basle (in 37 Ibid, 123. 38 See Chapter 8 and Black, IBM, 87–88, for the broad customer base and for the rise of production. 39 Black, IBM, 117, says that between 1935 and 1937, IBM installed 59 presses in Germany to manufacture IBM cards; see also 122. 40 Ibid., 118. 41 Birgit Karlsson’s presentation at Odense dealt with SKF during the war period. See Wilkins, The History, for SKF in the United States. On SKF in general, see Ulf Olsson, “Securing Markets. Swedish Multinationals in a Historical Perspective,” in The Rise of Multinationals in Continental Europe, ed. Geoffrey Jones and Harm Schröter (Aldershot: Elgar, 1993), 101–102, 105. 42 Hans Conrad Peyer, Roche:A Company History 1896–1996 (Basle: Roche, 1996), 40–41. 43 Ibid., 88. 44 Ibid., 117. 45 Ibid., 141.

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absolute terms and relative to Grenzach), it also greatly enlarged its facilities in Britain and in the United States.46 When in 1938 the Germans moved into Austria, Sapac, Hoffmann-La Roche’s Liechtenstein-based holding company was shifted to Panama. Barrell himself would move to New York in 1940, but remained in close touch with the corporate management in Basle.47 The German group’s management desired “to subordinate Roche affiliates in countries occupied by Germany to the Berlin office” and complained vigorously to German authorities that Hoffmann-La Roche’s Basle-based management was attempting to influence Roche affiliates in an “anti-[German] government manner.”48 The German affiliate produced throughout the war. In the 1930s, as Germany put new emphasis on exports in order to get foreign exchange and as the dictatorship pushed both outward and inward MNEs to export, often as an incentive, sales abroad were subsidized. There were concerns in the United States over German dumping (selling below costs or domestic price).49 The concerns over dumping were directly associated with foreign exchange matters. I was impressed that when in 1937 U.S. Treasury agents visited Germany to investigate “foreign dumping” in the American market, IG Farben debated calling for help from the German government. Its commercial committee met (20 August 1937) and decided to try “to settle the matter amicably with the [U.S. Treasury] agent without informing him of any details of our business.” At this time, IG Farben was telling everyone who cared both in Germany and the United States that it had no direct investments in the United States – and technically speaking (aside from the retainer fee paid to Chemnyco), it did not, although, in fact, it had very important affiliates with significant operations in America. On the occasion of the U.S. Treasury agent’s visit, IG Farben’s management decided it was “inappropriate at the present time, to suggest to the German authorities that a general decree prohibiting [the giving of] information should be issued.”50 If the first big issue that was distinctive in relationship to MNEs in Germany was the differential effect of foreign exchange controls, a second topic was related to technology transfer. For manufacturing MNEs typically a key element is/was their technological know-how, their firm-specific competence, their knowledge. The specific technology (of product and process) is what usually gives the manufacturing MNE its advantage in its interna46 47 48 49

Ibid., 138. Ibid., 150. Ibid., 153. See Alfred E. Eckes, Opening America’s Market: U.S. Foreign Trade Policy since 1776 (Chapel Hill: University of North Carolina Press, 1995), 264–266, for context; Secretary of Treasury Henry Morgenthau used anti-dumping rules as “a weapon in the internationalist arsenal.” Roosevelt agreed, telling Morgenthau, in the spring of 1936, “If it is a borderline case … I feel so keenly about Germany that I would enforce the countervailing duties.” 50 Minutes of I.G. Farben Commercial Committee, 20 August 1937, RG 238, T301, Reel 36, NI-4927.

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tional operations. The “social” technology, how to carry on the business activity, is what provides all MNEs with advantage in their business operations. MNEs if they acquire foreign technology must have the ability to use that technology and absorb it. As we look at the autarchy in Germany this clearly clashes with the global approach of the MNE. IG Farben in the United States introduced Americans to its technological innovations, but at the same time it also learned and had the know-how within its parent company to incorporate (and improve on) the latest in American advances. The German state intervened. Often IG Farben did not meet the terms of its contractual relationships with its American partners, based (or so it said) on German government edicts. I am not sure that this was entirely the case, and at times there is evidence that IG Farben for competitive reasons did not wish to disclose its technology.51 The German government wanted the foreign automobile companies to share their know-how with domestic companies and standardize parts. Ford and presumably GM were not ready to comply, seeing their intra-enterprises’ technologies as part of their competitive advantage. IBM had proprietary technology that made it important to the German regime; as it manufactured more in Germany, it copied its parent’s technology but the affiliate also innovated. Charles Cheape, writing of the Norton Company in Germany in the 1930s, tells a story of a “high tech” American business, with superior products. The Norton Company had long been international. Like all the enterprises that I have been discussing, it had been in Germany before the advent of Hitler and met with the same foreign exchange problems as the others. Cheape explains to comply with the German government demands for a “German product” meant a sharing of “fundamental manufacturing secrets.” Like Ford and IBM, Norton’s German plant and subsidiary had depended on imports. “Norton historically had compelled its overseas plants to purchase abrasive grain from its American furnaces.” In the Norton case, this preserved the proprietary formulas, keeping them secret. With the shortages of foreign exchange, Norton was forced during the 1930s to replace exports from its works in Worcester, Massachusetts, with all-German-made goods. As a result, Germany got access “to the up-to-date bonded abrasives techniques and technologies essential for precision, high-volume production.”52 Numerous issues of technological transfer arose in the context of the German dictatorship. (Often the German government hesitated on allowing German outward MNEs to export technology; yet, the interchange of technology, the two-way street, was the way these companies were able to absorb new 51 Wilkins, The History. The latter discusses the numerous technological transfers that took place involving IG Farben in the 1930s. It suggests that sometimes IG Farben blamed the German government for blocking technology exports, when it did not want to share the technology with Americans for fear of their competition. 52 Charles Cheape, “Not Politicians but Sound Businessmen: Norton Company and the Third Reich,” Business History Review 62 (Autumn 1988): 48–49.

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technologies). Nazism put a premium on technological progress (it was part and parcel of the need for self-sufficiency, for autarchy); state policies affected MNEs – outward and inward – in a special fashion. In a short chapter, I can only introduce this topic, but it does appear to be one wherein German dictatorship had impact on MNEs that were technologically advanced in a manner different from that of purely domestic companies. German autarchic policies and German emphasis on technological development were made possible because of a sizable German domestic market. Outward and inward MNEs wanted to be involved in German economic growth. The Spanish dictatorship, for example, had no comparable impact on MNE behavior. The Italian dictatorship story is also quite different. Thus, we are back to the initial question of whether it was “dictatorship” per se that was key, or alternatively the country-specific rules and regulations of a particular sovereign state? Dictatorship, it could be argued, gave added clout to the country-specific rules and regulations in Germany and enforced the restrictions on the choices facing MNEs. In the period September 1939 to December 1941, when the United States was still not “at war,” the problems for outward and inward MNEs mounted. During the time before American entry into the war, a collection of new circumstances faced outward German MNEs. The German acquisition of territory created added difficulties, especially for the MNEs headquartered in The Netherlands and France. Enterprises were divided, with European MNEs and U.S.-headquartered MNEs’ having affiliates on both sides of the European war. At the outbreak of war in Europe in September 1939, IG Farben had taken added steps to cloak its U.S. connections, for which it needed and received a green light from the German government.53 Other German outward MNEs took similar steps.54 Indeed, when war broke out in Europe, and Germany and the United Kingdom became “enemies,” German dictatorship meant that all European MNEs’ activities were restructured to deal with the circumstances created by the war. The principal/agent conflicts came to a head in an extraordinary manner during these years. Thus, with IBM, in June 1940 as the Germans moved into France, its chief executive officer, Thomas Watson returned to Hitler a medal he had earlier received. The reaction at IBM’s German affiliate was “revolt.” Their “boss,” the head of their parent company, took a “stupid step.” Should the affiliate’s management continue in light of this “deliberate insult”? One member of that affiliate’s management wrote a key figure in the German operation “I have assumed that our first duty and obligation is to place all our strength at the disposal of this enterprise [the affiliate] which is so important for the conduct of the war. It is imperative that this company [IBM – Germany] meet all the tasks that the German economy has imposed on it, particularly in time of war. Moreover, 53 Wilkins, The History. 54 Ibid.

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there is no reason to cause the Dehomag [the IBM affiliate] and its employees any harm merely because of the personal hatefulness and stupidity of one American [Thomas Watson].”55 So, much for “control” from abroad! In conclusion, I have only touched the surface in considering two of the major issues (foreign exchange restrictions and their consequence and technology transfer) that relate to MNEs as they did business under the German dictatorship in the 1930s and at the start of the subsequent decade. Foreign exchange controls and technology transfer were matters that affected MNEs (outward and inward) differently from purely national German companies. It would be worthwhile considering whether there were other circumstances where the existence of MNEs made a substantial difference. There undoubtedly were. I do not know enough to discuss whether as antiSemitism raised its ugly head in Germany, whether any, or to what extent, outward and inward MNEs were able to move valued Jewish personnel to safety and new positions within the MNE organization. There is some scattered evidence that this was on occasion done (or in some cases not done) by outward MNEs.56 There is little material on inward MNEs in this regard that I have seen. If undertaken, this task would have been accomplished sub rosa and would probably be very hard to document. What other instances were there where MNEs were different from purely domestic companies in the German case? Within MNE organizations people knew one another across national borders. In most cases, MNEs were staffed by nationals of the countries in which they operated. Thus, there were personal networks that were distinctive in particular businesses. Sometimes businessmen were loyal to the MNE before the nation; and sometimes, probably more often, just the opposite. The U.S. parent Standard Oil of New Jersey could not have been very happy when with the German invasion of France, the management of its French affiliate destroyed the French refinery rather than let it fall into German hands.57 Were the foreign governments (the governments of the countries where outward MNEs operated and the governments of countries where inward 55 Hermann Rottke to Willy Heidinger, 10 June 1940. This letter between the two Germans is quoted in Black, IBM, 218–219. Black indicated that he found it in IBM files; he provides no indication, however, about when (or how) it got into IBM files. Black also cites a letter from H. Rottke to Thomas Watson, 10 June 1940, in IBM files. Did Rottke send Watson his letter to Heidinger? 56 Christopher Kobrak, National Cultures and International Competition: The Experience of Schering AG, 1851–1950 (Cambridge: Cambridge University Press, 2002), has some interesting evidence on this score in relation to Schering. Dean’s Chapter 6 herein suggests that Jewish firms that had outward investments had better opportunities to provide for refugees. I do not know much about the refugee problems, but with what I do know, I could add to his storyline. There is much more material on outward MNEs than on inward MNEs on this subject. 57 Wilkins, The Maturing, 246–247, for these “personal” experiences as the Germans went into France (the cases of National Cash Register, Standard Oil of New Jersey, and Ford Motor Company).

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MNEs were headquartered) important in shaping MNE history in Germany? A 1923 U.S. – German Treaty of Friendship, Commerce and Navigation guaranteed U.S. companies in Germany “national treatment.” When in 1933 there were strong anti-foreign sentiment, the U.S. government evoked this treaty. Did the treaty “guarantee” of national treatment materially influence the behavior of the German government or that of the inward American MNEs? It may have in 1933; it is doubtful that it did later. National treatment meant limited foreign exchange, “all German” products, and contributions to German technological developments. There was no contradiction in applying such treatment to domestic and foreign firms alike. Clearly, MNEs have the ability to reallocate resources in a manner different from a purely domestic firm. On the surface, this would seem to give them more bargaining power vis-à-vis all the governments under whose jurisdiction they operated than would accrue to a purely domestic firm, albeit how and what manner in the 1930s such “bargaining power” was effectively exercised (and if it was exercised) in Germany requires a set of studies, which we do not have available. Once the United States entered the war after the bombing of Pearl Harbor in December 1941, circumstances changed radically. Many MNEs broke apart completely, sometimes voluntarily, and more often, involuntarily reforming or having had reformed (without their say-so) their financial, legal, administrative, and operational activities. That story is for another study, and for someone else to write. What is indisputable is that under German dictatorship, MNEs were manipulated by the German government; government plans imposed rules; yet within that framework, typically German parents and foreign affiliates could make profits. It seems that outward and inward MNEs instead of exercising “bargaining power” were tamed; and even if the inward ones could not remit profits and royalties, their parents’ management miscalculated, assuming (hoping) that in the future this would be possible. While nationalism (autarchy) and the internationalism of MNEs in effect clashed, until war actually broke out MNEs worked out ways of meshing their international organization (legal, financial, administrative, and operating structures) on to – to conform with – the strictly national political conditions. Information that spread across borders was partial, incomplete, and imperfect. But, German policies do seem to have brought to Germany substantial technological development, once more blending German national talents with technological inputs from abroad. After World War II ended, in time the fractured outward MNEs restructured and German-headquartered MNEs reemerged. So, too, most inward MNEs repaired their splintered enterprise governance to be able to flourish in West Germany and then in a united Germany, incorporating their postwar business activities in a democratic Germany into their global strategies and structures.

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PART II

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Authoritarian Regimes as Competitive Advantage and Liability

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CHAPTER 3

Competition and Collaboration among the Axis Multinational Insurers: Munich Re, Generali, and Riunione Adriatica, 1933–1943

❖ Gerald D. Feldman

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The Concerns and Their Leaders The German-Italian Axis has not gone down in history as the most successful of political and military alliances, but it could boast some success in at least one field that has been sorely neglected by historians, namely, insurance. What “success” means, of course, is a complicated question, but the history of what might be called the “insurance axis” certainly is worthy of study for the remarkable degree of concerted activity and collaborative expansion among the great German and Italian insurance companies during the Fascist period. On the one hand, these companies strove to maintain liberal business principles and conduct “business as usual.” On the other, they responded to the conditions determined by the Fascist regimes, above all Germany, to restructure their relationships to their best possible advantage. This chapter will deal with the relationships among the three most important insurers during the decade when both countries were ruled by Fascist dictators, one of them German, the other two Italian. The first of these companies and certainly the most powerful was the Munich Reinsurance Company (Munich Re). Founded in 1880, by its General Director until 1924 Carl von Thieme and the banker Wilhelm von Finck, Munich Re had risen under Thieme and his successor, Wilhelm Kisskalt

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to become Germany’s most important reinsurer. In 1890 its leaders founded the Allianz Insurance Company, which became Germany’s most important direct insurer, especially under the leadership of its General Director after 1921, Kurt Schmitt, who acquired Allianz’s major competitors prior to 1933 and thus turned Allianz into one of Germany’s major concerns. Schmitt left Allianz to become Hitler’s second Reich Economics Minister in June 1933. After an unhappy year in office, Schmitt was able to use illness as a reason to resign, and he succeeded Kisskalt as General Director of Munich Re in 1935. This only helped cement the close relationship between the two concerns, however, Munich Re not only serving as Allianz’s major insurer but also as its partner in acquisitions at home and abroad. Indeed, the power of Munich Re rested in its strong influence over a host of companies through various combinations of reinsurance contracts and capital participation. It was a very international business staffed by a number of highly cosmopolitan and sophisticated executives, the most prominent of which were Alois Alzheimer, Gustav Mattfeld, and Walter Meuschel. One of their most important achievements had been to persuade both the late Weimar Republic governments and the Nazi regime to give the insurance industry a special status with respect to the foreign exchange laws so that it could continue to operate on the international scene. Munich Re also controlled some very important companies outside Germany, the most significant being the Union Reinsurance Company in Zurich, which proved especially useful during the war for the cloaking of Munich Re operations in countries hostile to Germany. Munich Re’s chief competitor was the Swiss Reinsurance Company in Zurich which, depending on how strength was calculated at various times, was the largest reinsurance company in the world. Whatever, the case, the capital of Munich Re in pound sterling at the end of 1938 was £15.5 million, that of Swiss Re £10.8 million, and that of the next competitor, Cologne Re, £2.8 million. Munich Re’s premium income was 210 million Reichsmark (RM) as compared to the 45.56 million RM premium income of Cologne Re.1 As was the case in Germany, the Italian insurance business had become highly concentrated before World War II. The great Italian private insurers, the Assicuranzioni Generali, and the Riunione Adriatica di Sicurta, which controlled, respectively, 32 percent and 22 percent of the Italian insurance business in 1938, were founded in the 1830s and owed their existence to Jewish merchants of Trieste. Because of their roles in the Austrian and then Austro-Hungarian Empires, the companies were extremely active in Central 1 There is a valuable account undertaken by the U.S. Board of Economic Warfare of June 15, 1943 in the U.S. National Archives (NA), RG 60 230/1/6/64. It should, however, be used with some caution. On Allianz and Munich Re, see Gerald D. Feldman, Allianz and the German Insurance Business, 1933–1945 (New York: Cambridge University Press, 2001), chaps. 1 and 7.

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and Eastern Europe and the Balkans, and their leaders were both multilingual and cosmopolitan and were as home in Vienna, Budapest, Bucharest, Belgrade, Athens, and Warsaw as they were in Rome. Indeed, in many respects Vienna was and remained a second major headquarters for them. Jews played a major role in both companies until the Italian anti-Jewish legislation of 1938, but a few key Jewish directors continued to be active behind the scenes. Prior to 1940, Generali already had a worldwide network of over one hundred subsidiaries and branches, and a controlling interest in some sixty independent companies, some of which were in Asia, Africa, and the United States. It was a major player in Vienna, where it controlled Erste Allgemeine Unfall, but was very active in all the territories of the former Austro-Hungarian Empire as well as in Poland and Germany. Like all the other private insurance companies in Italy, Generali had a particular interest in cultivating the Fascists after they came to power in 1922 in order to block both the application and the extension of a law of 1912 that sought to create a government monopoly in life insurance. The Jewish Chairman of the company’s board of management, Edgardo Morpurgo, whose family had dominated Generali, had no difficulty in dealing with Fascists and bringing well-connected Fascists into the company. This apparently proved very useful in 1935 when Mussolini sought to gain control of all foreign currencies and securities held by Italians and Italian companies in order to finance his Abyssinian adventure. Generali took a leading role in getting the Italian insurers exempted from this effort, a cause aided by the taking on of Gino Baroncini, a well-connected Fascist, as a general manager. When Morpurgo was dismissed in 1938 for “racial” reasons, Mussolini personally ordered the appointment in Morpurgo’s place of the former Finance Minister, Count Volpi di Misurata, who was both powerful and talented and a major figure in business circles. Volpi undoubtedly strengthened his position mightily by placing a donation of a million Lire at the disposal of the Duce.2 Volpi was much more interested in expanding Generali’s business, however, than he was in anti-Semitism, and there is good evidence that the departure of Morpurgo was in part welcomed because of the latter’s lack of energy and initiative. The qualities were abundantly possessed by another Jew in the company, however, Michaele Sulfina, who was of Romanian origins but had become an Italian citizen in 1919 and had done so brilliant a job of organizing Generali’s foreign business since 1914 that he became a general manager despite not being a member of the Morpurgo-Ara family interests that had dominated the company. In 1938, he and his family lost 2 Aktennote Meuschel, 13 September 1938 and Aktennote Reininghaus, 20 September 1938, Firmenhistorisches Archiv Allianz AG (FHA), Munich Re (MR), A 1/2. There is very useful material on the Italian insurance companies and their leaders in NA, RG 84 350/62/3/1/161.

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their citizenship, but Volpi intervened personally with Mussolini to keep him on the job and pleaded with Sulfina to stay long enough to train another general manager and to act as a consultant to Volpi. The latter was particularly interested in expanding Generali’s interests in Italy and other foreign countries and promised Sulfina a passport to Switzerland or Portugal when his work was finished. This promise was not kept when Sulfina was summarily dismissed in 1943 as a consequence of Italy’s changing sides and the German occupation, although Sulfina did manage to escape the Germans. Sulfina was not the only Jew kept on after 1938, since another director named Coen was retained because he had joined the Fascist Party in 1921. Indeed, employment in insurance companies was one of the few areas from which Jews could be exempted from the usual barriers to their employment.3 Although smaller than Generali, the Riunione could also boast a formidable network of some eighty branches and agencies and controlled a variety of companies at home and abroad. Most notable among the latter were the Internationale Unfall- und Schadensversicherung Gesellschaft in Vienna, La Foncière in Budapest, Piast inWarsaw, La Protectrice Accidents and La Protectrice Vie in Paris, and Münchener Lebensversicherungs-Anstalt A.G. in Munich. Its President until the anti-Semitic laws forced his formal retirement in 1938 was Arnoldo Frigessi di Rattalma, the scion of a prestigious Jewish family and a businessman of extraordinary talent and international reputation who had expanded the company’s interests not only in Europe but also in Latin America and Australia. He was replaced by his friend Fulvio de Suvich, a former Riunione director, Foreign Ministry official, and Italian Ambassador to Washington, who had opposed the pro-German policy of Mussolini. As in the case of Volpi, Suvich took the occasion of a personal audience with the Duce to make a contribution of a half million Lire to one of Mussolini’s charitable causes. Frigessi’s dismissal apparently in no way diminished his attachment to the Riunione or the attachment of its leaders to Frigessi. He continued to play a major role in guiding the fortunes of his company as an adviser to Riunione’s General Director, Enrico Marchesano and conducted a lively and remarkably interesting business correspondence with the heads of the Riunione branch offices in Central Europe and the Balkans as well as with Austrian and German business associates. He seems to have had a particularly friendly association with Alois Alzheimer of the Munich Re, and Alzheimer and his wife paid social visits to Frigessi during the war at the latter’s home in Cortina di Ampezzo. All this ended in 1943 when Frigessi was forced to go into hiding, but it demonstrates not only the limits of Italian anti-Semitic policy but also the extent to which the higher echelons of the insurance industry could, circumstances permitting, 3 Susan Zuccotti, Under his Very Windows. The Vatican and the Holocaust in Italy (New Haven and London: Yale University Press, 2002), 44.

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attempt to operate in a world apart from the barbarism surrounding them even while collaborating with it.4

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Competition in Austria: The Battle for the Phönix Insurance Company The insurance business was obviously a very international business and since one of its most important aspects was the sharing of risk, there was a considerable amount of collaboration among the various great European insurers. This certainly was true of the relations among Munich Re, Generali, and Riunione, which went back to before World War I. Following the war, however, the Trieste companies became Italian while retaining important interests in Vienna and were naturally interested in strengthening their position and using a truncated Austria as a base from which to build on their experience and reconstruct their business in Central Europe and the Balkans. It was natural for the Austrians to look to Munich Re for help in maintaining the “German” character of the Austrian insurance business and as a counterweight to the aggressive Italians. The focus of much of the foreign interest in Austrian insurance was the Phönix Insurance Company, which was divided into Phönix Elementar, handling property insurance, and Phönix Life. Founded in 1882, the company had come under the effective leadership of a remarkable personality, Wilhelm Berliner, before the war. A man of manifold talents, shrewd political capacities, and strong speculative inclinations, Berliner guided the Phönix through the postwar crisis by selling some of its assets in the successor states and then pursuing a policy of expansion, first by investing in the insurance portfolios of some small foreign insurance companies and also acquiring some small companies that were operating at a deficit or were illiquid. It also took over a very large portfolio of policies in Czechoslovakia at a very unfavorable exchange rate and became active in Germany as well. Indeed, it did business in practically every country in Europe and in the Near East as well and was the third largest insurance company on the European continent. There was much smoke and mirrors in the way Berliner did business, but he was very frank about the fact that one could not handle existing obligations if one did not cover them through expansion and the 4 In addition to the materials mentioned in note 2, much can be learned about the Italian insurance scene and relations with the Germans from the remarkable papers of Arnoldo Frigessi di Rattalma in the Archivio di Arnoldo Frigessi di Rattalma (Frigessi Papers), Archives of the Banca Commerciale Italiana (BCA) in Milan. As late as June 9, 1943, Alzheimer, who seems to have paid visits to Frigessi in Contina d’Ampezzo with his wife, thanked Frigessi for the friendly reception he had received in Trieste and the opportunity to discuss business matters; see Alzheimer to Frigessi, 9 June 1943, Frigessi Papers, BCA, cart. 62, fasc. 5.

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high costs entailed by this policy. Needless to say, Phönix was always in need of money but its leadership worried that it might be swallowed up by those who gave it. In 1919, the danger appeared to come from Riunione, which was buying up Phönix shares, and Berliner appealed to the Munich Re, which had done significant reinsurance business with Phönix since 1893, to help counter the Riunione. He apparently also used his government connections to block a foreign takeover with the result that Frigessi was forced to back down. The result was an “eternal” agreement between Phönix, Munich Re, and the Riunione that took effect on 1 January 1921. In return for selling 20,097 shares of Phönix to Munich Re and for so long as it held 2,000 Phönix shares, Riunione was to get, along with certain other concessions, 15 percent of Phönix’s direct and indirect business in the succession states to the previous Dual Monarchy. This was to include any new branches of insurance into which Phönix might venture in these countries. The contract was revised in 1937 to give Riunione a minimum of 7.5 percent of Phönix’s business, but its “eternal” character and thus its status as an asset in the Riunione balance sheet remained.5 The joys of investing in Phönix, however, were very limited and even questionable as Munich Re repeatedly discovered in the ensuing years. The problems with Phönix Life were particularly severe thanks to bad management oversight and a bloated staff. In 1927, Munich Re reduced its reinsurance quota and sold back its shares to Phönix, and in 1930 Munich Re’s director Gustav Mattfeld, who had been assigned to the Phönix Auditing Committee, initially refused to sign the audit. Mattfeld’s analysis of the situation led Munich Re’s General Director Kisskalt to withdraw from the Administrative Board of Phönix Life and to reduce the reinsurance quota to a mere 10 percent.6 The depression, of course, did not help matters, and if the situation of the Phönix Elementar – the property insurance side of the concern – was better than that of Phönix Life, it was primarily because the latter owed it money and its liquidity was guaranteed by Munich Re, the Austrian Creditanstalt – which had collapsed and had to be reconstructed in May 1931 – and Phönix Life, which of course was really illiquid. If Phönix Elementar, whose management was in fact improving substantially in the early 1930s, was to be saved, then its fate was going to have to be separated from Phönix Life and a major new member of the guarantee syndicate was needed. Between 1933 and 1935 some thought was given to bringing Allianz, which was closely bound to Munich Re by various contractual ties, into the picture. Allianz’s General Director Hans Hess, and his colleagues Eduard Hilgard and Rudolf Schloessmann rejected 5 For the contract and related documents see FHA, MR, A 2.13/47. 6 Notiz for Dr Klein, 11 October 1979, and other related documents in FHA, MR, A 2.13/48.

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the idea in June 1935, however, fearing that Phönix Life would bring nothing but difficulties and being certain that the German Government would not allow Allianz to expend the foreign exchange required. This was viewed as a great pity since Allianz had some first-rate Jewish directors whom it could no longer employ in Germany but who could be expected to do a good job in reconstructing Phönix.7 Such inhibitions and problems were not shared, however, by Generali, whose then general director Morpurgo had been spending a great deal of money on new investments and found Phönix attractive because it had an already existing portfolio and thus required less expense. Munich Re had worked closely with Generali over the years, and Morpurgo was also interested in collaborating with Munich Re “because no one knows what will happen in Austria and, in the case of an Anschluss, the German partnership in Phönix will also be valuable for Generali’s own business in Austria.”8 The idea was welcome news to the Creditanstalt, which was anxious to reduce its engagement in Phönix, but it was strongly resisted by Berliner, who also refused to allow a proper outside audit of his books. The situation changed entirely in early 1936 thanks to the unexpected death of Berliner on 17 February 1936 and the scandalous revelations that followed. On the one hand, a list was found naming the recipients of his bribes. The head of the Austrian Supervisory Office for insurance, Oechsner, for whom Berliner had done many kindnesses and whose office had not done an audit on the Phönix since 1921, committed suicide. On the other hand, the true balances were handed over to Berliner’s successor, Dr Eberhard Reininghaus by the chief accountant of the concern. The accountant, along with some other directors, was to end up in jail. The result of the exposures, needless to say, was a major international scandal, reminiscent of the collapse of the Frankfurter General Insurance Company in 1930, which was then taken over by Allianz, and the Creditanstalt failure of 1931, and Nordwolle-DANAT bank failure in Germany that followed. By now, governments were well practiced and authoritarian in economic matters, however, and Chancellor Kurt Schuschnigg himself discussed the affair in a major speech on April 1 that stressed the primary importance of protecting policyholders, and the need for legislation increasing supervision and eliminating speculation by insurance companies. Legislation was issued creating an insurance fund based on contributions from all the Austrian insurance companies as well as from foreign companies operating in Austria. The goal here was to avoid government guarantees and force the private interests to take collective responsibility for guaranteeing that the policyholders would 7 Aktennote, 1 June 1935, FHA, MR, A 2.13/46. The role played by foreign exchange considerations in inhibiting such international business transactions deserves attention. An effort by Berliner to increase his liquidity by selling his Czech holdings in early 1933 failed because of his inability to get the Czech crowns necessary. See Aktennote, 21 April 1933, FHA, MR A 2.13/46. 8 Aktennote Kisskalt, 17 September 1935, FHA, MR A 2.13/46.

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be protected.9 Frigessi’s old enthusiasm for Phönix had diminished considerably by this time, and he found it “outrageous” to have to contribute to Phönix’s reconstruction and had little sympathy with the policyholders who had benefited from Berliner’s excessively low premiums. Nevertheless, he knew that solidarity was essential if confidence was to be maintained and excessive government interference was to be avoided.10 On 8 April 1936, a special law was passed placing the Phönix Life policies in a new corporation, the Österreichische Versicherungs-AG (ÖVAG), participation in which was made attractive by the aforementioned collective guarantee of the Austrian insurance business and various restrictions on repurchase of insurance policies by their holders. Among its important shareholders were the Wiener Städtische, the Italian Generali, and the Munich Re, which received a special dispensation for Reichsbank President Hjalmar Schacht to use foreign exchange in order to participate. As Frigessi noted without the slightest envy, Generali seemed very anxious to pick up Phönix portfolios, not only participating in the ÖVAG but also buying the Phönix portfolios in France and the Netherlands and showing interest in the Egyptian portfolio. In Frigessi’s view, perhaps with the exception of Spain, most of the portfolios were not covered by real values. He did not want Riunione engaging in “experiments”11 and was quite happy to leave the joys of investing in the ÖVAG and other Austrian life insurance companies in trouble to Generali and Munich Re. At the same time, the new legislation arising from the Phönix scandal did make it possible to do something about Phönix Elementar in which Riunione did have an interest but in which Generali was now becoming increasingly active. On the one hand, Phönix Elementar had now been liberated from its engagement with Phönix Life, however unpleasant the manner in which this transpired. On the other, the government terminated its practice of forcing Phönix and other insurance companies to overman, overpay, and overpension insurance employees for social reasons. On 22 April 1936 Generali, Munich Re, and the Creditanstalt joined in a syndicate to guarantee Phönix Elementar for at least three years, the first two concerns with 56,000 shares each, the Creditanstalt with 27,555 shares.12 Thanks to these developments, the reconstruction of the Austrian insurance business and the Phönix now seemed possible and considerable progress was indeed made prior to the Anschluss in March 1938. 9 For a general discussion, see, Gerald D. Feldman, “Insurance Company Collapses in the World Economic Crisis. The Frankfurter Allgemeine Versicherungs-AG (Favag) and the Austrian Phönix,” in The Interwar Depression in an International Context, ed. Harold James, [Schriften des Historischen Kollegs. Kolloquien 51] (Munich, 2002), 57–76. 10 Frigessi to General Director Reismann, 30 March 1936, Frigessi Papers, BCA, cart. 103, fasc. 1. 11 Frigessi to Reismann, 2 April 1936, ibid. 12 Syndikats-Vereinbarung, 22 April 1936, FHA, MR, A 2.13/46.

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The Anschluss, of course, had been made possible by the Axis between Italy and Germany, as Frigessi made clear in a congratulatory note to his directors in Vienna:

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Through the decisions of yesterday, Austria is now permanently and firmly tied to the great German Reich. Please accept, in this significant hour, in which Italy stood fast in loyalty to the German Reich, heartfelt wishes for the future fortune of the Austrian lands, to which our corporation is bound through a century-long bond of successful work in the area of promoting the idea of insurance care.13

Changes were obviously in the offing, and Frigessi expected solutions to be found, as they had been in the past. It soon became quite clear that the expectations of his colleague Morpurgo that collaboration in the Phönix syndicate would serve the interests of Generali in Austria in the event of an Anschluss were not very realistic and that Riunione could not count on past agreements either. Thus, at a meeting on 23 May 1938 in Venice with the Generali leadership – Edgardo Morpurgo, Michele Sulfina, and Camillo Gentilli, who represented Generali on Phönix’s Administrative Council – the representatives of Munich Re, Kurt Schmitt, former General Director of Allianz, Reich Economics Minister in 1933/34, and General Director of Munich Re since 1935 and Director Walther Meuschel announced that the problems of Phönix, whose shares had suffered a reduced real value because of the overvaluation of the Schilling and which was expected to continue to suffer business losses, could best be solved by collaboration with Munich Re’s sister corporation, Allianz. Allianz would serve Phönix Elementar through the provision “of an industrious man in the leadership who knows the methods commonly employed in Germany and can bring them to fruition and that the Allianz then deliver its name, leadership, and responsibility, so that there will be a relationship similar to that of the Bayerische Versicherungsbank.”14 The big difference, for the time being at least, was that the latter company, which was a daughter company of Allianz, made a profit, while Phönix was in bad shape. Schmitt pointed out that something could be made of Phönix, the name of which he claimed a willingness to retain, if it had the support of Allianz and also Allianz Life and was spared competition from Allianz in Austria and other areas where Phönix was active. If Generali wished to remain a participant, it could do so, provided Allianz assumed the leadership. Alternatively, Generali could sell out and Phönix would then be divided between Munich Re and Allianz. Schmitt also suggested a variety of combinations that would keep the Creditanstalt involved, something he knew the Italians wanted. Generali’s leaders raised no objection to this proposal and to Allianz becoming the leading participant in Phönix, but insisted that Generali had made a heavy investment that justified some compensation. It did not want to lose 13 Frigessi to Fey and Fieger, 14 March 1938, Frigessi Papers, BCA, cart. 68, fasc. 1. 14 Aktennotiz, Venice, 23 May 1938, FHA, MR, A 2.13/46.

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money and was more interested in participating as a reinsurer of Phönix in its Austrian and Czech business, and also in the Old Reich, than as a shareholder. Generali, after all, was an insurance company and not a bank. When Morpurgo suggested that the organization Generali had built up in Austria needed to be taken into account in calculating the compensation due Generali, the Germans dismissed the idea, pointed out that the organization of Phönix in Austria was largely Jewish and had already been “cleared out.”15 The fact was that Morpurgo was himself Jewish, and there was no more room for Jews in Austria and limited room in Italy, so that an “Aryan” was now needed to head Phönix. Obviously, there was no point in Generali pursuing its Austrian ambitions, and Morpurgo informed Schmitt on 9 June 1938 that Generali had decided to sell its entire holding in Phönix so that the majority group would have greater freedom of action and also agreed to the appointment of the Allianz director Hans Schmitt-Polex as General Director of Phönix. Reininghaus, who was not a “pure Aryan,” and had supported the old Austrian regime, was sent off to Munich, where he served Munich Re as its chief negotiator throughout the war and was to emerge as its General Director right after the war. Generali also agreed to the alienation of its shares in Polish and Romanian companies held by Phönix but received a percentage of Phönix’s reinsurance business in Yugoslavia and Czechoslovakia as well as in Austria. Its desire to procure such business in the Old Reich, however, was denied.16 Manifestly, Generali’s leadership would have preferred to hold on to its position in the Phönix but had been compelled to yield to the situation created by the new constellation of political and economic forces in Austria. Nevertheless, the takeover of Phönix by Allianz and Munich Re was as complete as it could be, and it cannot be said that the Austrians were treated with much friendliness either. Thus, the Creditanstalt was actually compelled to sell its shares in Phönix and other enterprises by the German government, and the chief Austrian shareholder was thus eliminated. At the end of October and beginning of November 1938, Schmitt met with Hess, Hilgard and others to discuss policy toward the Phönix. The latter was to be ruled jointly by Allianz and Munich Re with the goal of making it profitable. The new management was to run Phönix “like a branch of Allianz,” and was to build up the direct business, while Munich Re was to control the indirect business. In the end it was unified with the Vienna branch of Allianz.17 Indeed, it was not long before the very name “Phönix” was eliminated and replaced by “Wiener Allianz.” Phönix had a bad name, and Berliner was a Jew. The last straw, 15 Ibid. 16 Morpurgo to Schmitt, 9 June 1938; Generali an Munich Re, June 28, 1938; Vertrag, 6 July 1938, FHA, MR A 2.13/46. See also the very good account of the Allianz takeover in Marita Roloff and Alois Mosser, Wiener Allianz gegründet 1860 (Vienna: Wiener Allianz Versicherungs-Aktiengesellschaft, 1992), 240–247. 17 Aktennote Schmitt, 2 November 1938, FHA, MR, A 2.13/46.

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apparently, was a picture of the Phönix building in the “Deutsche Volksblatt” with the name of the company in Hebraic-style lettering.18 There was yet a final step to be taken in excluding the Italians from the Wiener Allianz since Riunione continued to have rights to a portion of Phönix business outside Austria under the 1921 and 1937 agreements as well as a quota of its direct business. Kisskalt, who had made the agreement, and Schmitt were anxious to have a “friendly” renunciation of the Riunione asset, and while the arrangement had cost Riunione money, Frigessi was not prepared to eschew potential profit from it and to surrender its shares without respectable compensation. After months of hard bargaining, an agreement was reached in Trieste in March 1939.19

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From Competition to Collaboration If Generali and Riunione were more or less driven out of the Phönix succession, they were treated much more favorably with regard to their other interests in Austria, where the German insurers otherwise forced out foreign interests and strove to Germanize the Austrian companies. Initially, Generali was not so certain of whether it had any future in Austria at all, but when Director Gentilli tested as to whether Munich Re might not want to buy out Erste Allgemeine Unfall, Generali’s chief remaining holding in Vienna, Alzheimer indicated that Munich Re would only consider a minority interest. Germany and Italy, were allies after all, a point stressed by Volpi in thanking Schmitt for the latter’s congratulations on his appointment to head the Generali in September 1938, and both men emphasized that the links between their concerns were old and valued ones.20 Subsequently, the two concerns turned in very friendly partner-like negotiations to the issues surrounding Erste Allgemeine, which was undergoing a reorganization in 1938/39 designed to deal with the territorial reorganizations that were taking place with respect to Austria, the Sudetenland, and then what became the Protectorate of Bohemia and Moravia. The way was smoothed by economic negotiations between the two Fascist governments in which Generali was apparently quite successful in gaining promises from the Reich Economics Ministry that it would be treated like a German company. Generali had every intention of “standing powerfully in 18 See Schmidt-Polex’s remarks at the extraordinary shareholder’s meeting on 28 November 1938 and the Administrative Council meeting on 19 January 1939, Wiener Allianz Archive. 19 The agreement is to be found in FHA, MR, A 2.13/46. See also the correspondence between Kisskalt, other Munich Re directors and Frigessi of 1938–1939 in FHA, MR A 2.13/47. 20 Aktennote 3 September 1938, and Schmitt to Volpi, 24 September 1938 and Volpi to Schmitt, 27 September 1938, FHA, MR A 1/2.

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the Great German space.”21 Indeed, Generali was anxious to expand its business in Germany via Erste Allgemeine, and especially to get lucrative industrial insurance contracts. It believed, quite correctly, that working with Munich Re could be helpful in this respect. For example, Generali had been an insurer of some of the Austrian companies gobbled up by the Reichswerke Hermann Göring in 1938/39, and when Allianz was asked by the Reichswerke to form an insurance consortium, Generali was anxious to make sure that it had a place in the consortium. Director Haase of Allianz was uncertain as to how to respond and made inquiries with Alzheimer of Munich Re, who urged Allianz to negotiate a place in the consortium for Generali and thereby provide compensation for its surrender of its old exclusive contracts. He described Generali as having “not only a very strong hunger for business … but above all also very pronounced prestige needs.” Furthermore, Alzheimer had the impression “that all official agencies are making an effort not to annoy the Italian corporations, and especially not Generali over which Count Volpi presides.”22 Indeed, Munich Re officials assisted Generali in establishing a reinsurance company in Holland and encouraged plans to expand in Britain, while also supporting the consolidation between Erste Allgemeine and the Generali-controlled companies in the Sudetenland and the Protectorate, Securitas-Prague and Moldavia-Generali. Finally, in early February 1939, an agreement was reached between Munich Re and Generali in Venice under which the former acquired 20 percent of the shares of Erste Allgemeine while Generali was compensated in part with 25 percent of the shares of the Pace Insurance Company in Milan in which Allianz and Munich Re had been and remained controlling shareholders. Munich Re owed Generali an additional 3.3 million Lire, and Munich Re promised that Schmitt would use his influence with the Reich Economics Ministry to wave the foreign exchange barriers so that Generali could pursue its investments in the Netherlands.23 The role played by Munich Re in reorganizing the affairs of Generali and Erste Allgemeine in Germany and Central Europe naturally concerned Riunione, whose own Interunfall was in a position somewhat analogous to that of Erste Allgemeine. It must have been with some relief that Frigessi learned from Rudolf Weydenhammer, the President of Interunfall, that Kurt Schmitt had reassured him in a private discussion in early June 1939 that Munich Re’s agreements with Generali would in no way be allowed to prejudice its freedom of action with respect to Riunione. As in the case of Erste 21 Comment by Director Schaefer of Erste Allgemeine reported by Meuschel, 19 January 1939, FHA, MR A 1/9. 22 Haase to Alzheimer, 26 April 1939 and Alzheimer to Haase, 29 April 1939, and see also the lengthy report by Alzheimer on negotiations between Munich Re and Generali leaders in Rome of 7–9 March 1939, FHA, MR A 1/2. 23 The contract and related documentation is to be found in FHA, MR A 1/9. On the Pace, see FHA MR A 28/32.

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Allgemeine, Munich Re was initially interested in a small participation in Interunfall and general collaboration with Riunione.24 A special problem arose with respect to Interunfall, however, because of its interest in another important company in Germany that had been controlled by British interests, the Allgemeinen Feuerassekranz AG (Allgefeuer). Prior to the outbreak of the war in August 1939, Riunione had been negotiating with the North British & Mercantile Insurance Company to acquire the majority interest in Allgefeuer with the purpose of fusing it with Interunfall. Munich Re was unaware of these negotiations, which were near completion, and used the outbreak of hostilities to take over the majority of Allgefeuer in order to maintain the latter’s operations. After being made aware of the Riunione option, Munich Re expressed itself willing to cede the majority of Allgefeuer to Riunione in return for a larger interest in Interunfall and maintenance of its reinsurance rights. An agreement was reached in December 1939 as the result of negotiations between Alzheimer and Frigessi under which Munich Re was sold a significant participation in Interunfall while Riunione was given 56 percent of Allgefeuer and the right to manage the company. At the time, the assumption was that the war would soon end – Italy had not yet entered into the war – and that Riunione could administer Allgefeuer until the war was over and a settlement could be reached with the British. As it turned out, Italy entered the war, which dragged on, and in 1942, a new arrangement was worked out between Riunione and Munich Re under which Allgefeuer was merged with Interunfall. Back at the turn of 1939/40, however, the significance of the agreement was the way in which it cemented the cooperation between Riunione and Munich Re, and Schmitt made a special point of writing to Suvich about the significance of the event, pointing out that not only the agreement but also the spirit of the negotiations between Alzheimer, on the one hand, and Frigessi and Marchesano, on the other, marked “a new epoch in the relations between our two great enterprises” because it anchored the association in a business relationship that had a much “broader basis” than ever before. Schmitt promised to work not only toward maintaining Riunione’s interests in Greater Germany, but to be able to “deepen them and make them profitable.”25 Indeed, much more than “Greater Germany” was involved because of the outbreak of the war, and Schmitt was very anxious for Germany and especially Munich Re to take the lead in reorganizing the European insurance business. He and his colleagues at the Munich Re began discussing the idea of creating a reinsurance community to replace the role of Lloyd’s of 24 Weydenhammer to Frigessi, 5 June 1939, Frigessi Papers, BCA, Cart. 108, fasc. 4. 25 Schmitt to Suvich, 7 December 1939; agreement of 6 December 1939; Alzheimer to Ostman of Interunfall, 7 April 1942 in FHA, MR A 1/21. See also Schmitt to Alzheimer, 31 January 1940 and other related correspondence in Frigessi Papers, BCA, Cart. 62, fasc. 3.

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54 Gerald D. Feldman

London and other British firms on the continent in the late summer of 1940. This, it is important to note, was no easy task given the previous role played by the British, the vast increase of insurable risks on the continent during the war, and the inability of the Germans alone to assume responsibility for them. One had to mobilize the conquered and the neutrals to serve the needs of Europe’s new masters. Furthermore, Schmitt and Alzheimer found independent enthusiasm for such a step among their Italian partners. Thus, when Alzheimer met with the Riunione Adriatica di Securtà (RAS) leaders Frigessi and Marchesano in Venice in October 1940, Alzheimer remarked:

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[I]t should at the present time be the task of the German and Italian insurance companies to create an institution that can as far as possible take over the position of the English Lloyd’s. In most areas, the continental reinsurers have understood how to replace the English market … . But even for these it is desirable to set up continental coverage possibilities on the basis of a consolidation of a large number of insurance carriers in the form of a consortium in which groups of insurance carriers voluntarily sign up. The initiative for this should come from the Italian and German companies.26

Alzheimer informed Frigessi that these ideas were already being discussed in Munich, but that one also wanted to bring in the Swiss along with the Italian and German markets. Schmitt himself held discussions with leaders of the other major Italian concern, Generali, as well as with the Swiss Re, and he seems to have won them over by the end of 1940. This idea was to create a community of all the insurance carriers on the continent for the purpose of covering those risks whose size and character were such that they could not be covered by existing mechanisms. He thought it important that the community have a continental and not a purely German-Italian character, but he also felt that the management had to be centered in Germany, which was the largest and most central power, and he suggested that it be placed in Munich under von Reininghaus. The Association for the Coverage of Large Risks was only to deal with risks that could not be dealt with under existing market conditions and not to take over risks which were uncovered because of the refusal of the customer to pay an appropriate premium. Furthermore, the liability was to be shared in proportion to the contribution made by the individual members, and these were not to be fixed but to vary as the companies took stock of the situation and how much liability they were undertaking. Schmitt was anxious to maintain private initiative and use the founding of the Association to prevent the formation of state reinsurance bodies or institutions specifically for the purpose of replacing Lloyd’s. Rather, he wanted to make sure that his projected Association should serve as an organization which all insurance companies could join that would function 26 Aktennotiz, 2 October 1940, FHA, MR, B 15/23.

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as a kind of clearing agency for specific risks otherwise not coverable in any single market.27 After a meeting was held among leading insurance companies in early 1941, Schmitt was able to announce the formation of the Association formally in March and invite the various European insurance companies to participate. Schmitt, not surprisingly, was made Chairman of the Association, and its management was located in the Munich Re, but its governing body was to be representative of the leading continental European insurance companies. The announcement stressed the voluntary nature of the organization, the need to maintain a healthy insurance market and act only where conditions so required. Reininghaus was sent off to France and Belgium to recruit for the new Association, finding considerable interest in France but having some difficulties in Belgium, where some companies did not want to do anything suggesting they accepted the “new order.”28 By mid-May Schmitt was able to announce a pecking order of companies to be favored in instances where insurance was required for great risks. At the top of the twelve German, Italian, and Swiss companies listed stood Munich Re and Swiss Re, each with 25 percent participation, followed by Cologne Re with 10 percent, Frankona with 10 percent and Generali and Riunione, with 5 percent each. Should more help be needed, however, clients of the Association could turn to large primary insurers like Allianz and Nordstern. While the new organization did insure a storehouse filled with furs in Norway worth 600,000 Norwegian Krone and eleven Finnish electrical machines for the making of paper from wood worth between five and 58 million Finnish markka, which were illustrations of the sort of “large risks” it was set up to handle, the organization did not in the end do a significant amount of business.29 The wartime cooperation and collaboration among the German and Italian insurers, however, was far more important. One of their chief common goals was to minimize state interference both in their respective companies and in the countries where they operated. The Italian private insurers had their scrape with socialization schemes when the Nitti government passed a law for the establishment of a life insurance monopoly back in 1912, and were most grateful to Mussolini for abandoning the scheme in 1923. He did, however, maintain the monopoly organization, the Instituto Nazionale Della Assicurazioni, which had the right to claim up to 40 percent of the risks of private companies and had become extremely powerful. In Germany, the private insurers were in a constant state of war with the well-placed and 27 Aktennote Schmitt, Zurich and Milan, 15–21 November 1940, FHA, MR, B 15/23. It is interesting to note that Frigessi would have preferred less identification with the Munich Re by locating the Association in Vienna or Hamburg. 28 Aktennote Reininghaus, 26 March–8 April 1941, FHA, MR, B 15/23. 29 Aktennote Schmitt, 12 May 1941, FHA, MR, B 15/23. On the extent of the business done by the organization, see Martin Herzog, “Was Dokumente erzählen können,” Bd. 3, S. 1219–1222, FHA, MR.

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56 Gerald D. Feldman

influential advocates of the nationalization of the insurance industry and proponents of the publicly chartered companies. Thus, both the Italians and the Germans had a strong interest in promoting discipline and rationalization among the private insurers so as to ward off the nationalizers and stifling government schemes to skim insurance profits or take the initiative in regulating the industry wherever they appeared.30 A good illustration of such efforts was provided by Frigessi, who complained to Alzheimer in January 1941 that the government official in charge of insurance in Prague had held a meeting with the insurers, told them that the Czech business was going to be rationalized and consolidated, that “the insurance business is not to be viewed as a productive occupation, that is, the officials in it do not perform productive work … No consideration can be given in the concentration of the insurance enterprises if a few hundred or thousand officials are eliminated and retrained, for that is in the interest of the economy.”31 Since Munich Re was the largest reinsurer in the Protectorate, Frigessi warned Alzheimer, it would be well for it to promote an orderly rationalization of conditions there.32 In another discussion with Alzheimer in October 1940, Frigessi pointed to other problem spots, Greece, for example. The Greek Government had irritated not only the German and Italian insurance companies but also the British by passing a law creating a state reinsurance company that compelled all primary fire insurers to reinsure at a level of 50 percent of their policies with the government company for which the companies received a very low commission and which then reinsured with Lloyd’s of London and an Argentinean company while charging a much higher commission for itself and thus pocketing the difference between the commission it paid to the primary insurers and received from the reinsurers. Fundamentally, the state reinsurance monopoly provided no services at all except to collect money for the government while excluding foreign reinsurers who could do the job more cheaply and increasing the costs of insurance in Greece for all concerned. The German and Italian insurers had a policy of refusing to deal with the state company, and also collaborated in opposing the creation of a similar institution in Yugoslavia. In these cases, the problem was ultimately solved by the expansion of the war and the conquest of the two countries in 1941, but Frigessi was also distressed by French government efforts to force reinsurance through the state in connection with normal transportation insurance. France had been conquered, but the government in the unoccupied area had considerable latitude 30 Thus, the head of the Reich Group Insurance, Eduard Hilgard, made a point of feeding the authorities with information about the abolition of the projected Italian monopoly, see Hilgard to Mattes, 20 July 1938, SM 1458/1/94/Bl. 107–110. The struggle with the Party radicals is discussed in some detail in Feldman, Allianz, 150–189, 304–344. 31 Report to Frigessi, 21 January 1941, Frigessi Papers, BCA, cart. 108, fasc. 3. 32 Frigessi to Alzheimer, 3 January 1941, Frigessi Papers, BCA, cart. 62, fasc. 4.

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in such matters, and Frigessi urged cooperation between the Germans and Italians in trying to pressure the French to alleviate such burdens.33 Manifestly, however, the most important issues for these German and Italian insurers arose from the fact that they were on the offensive rather than the defensive, and here Frigessi and Alzheimer in their October 1940 conversation set down a line of moderation:

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Munich Re and Riunione are agreed that it is the natural interest and obligation of the insurance companies of both countries participating in this foreign business to be more strongly active in these areas, but that this activity should have a reasonable technical basis and not take the form of an aggressive premium rate and business policy and should not bring about a dangerous foreignization of the insurance industries of the affected countries. This holds true for activity in the area of direct business as well as for the development of reinsurance relationships. It is especially advisable not to work against the tendency toward an improvement of the premium levels in France since in the last analysis this will not only be to the disadvantage of the companies doing direct business but especially damaging to the reinsurance interests of the participating companies.34

The effort to coordinate policy was placed on a formal basis at a meeting of the German-Italian Insurance Committee on 27–29 January 1941 in a formal agreement signed by the Allianz director Eduard Hilgard for the Reich Group Insurance and President A. Paolini of the National Fascist Federation of Insurance Companies. The basic agreement provided for regular exchanges of information and meetings between the two chairmen and their experts with particular attention to understandings on the control of German-Italian competition in the countries where both insurance industries did business. A first supplementary agreement provided for consultation in the event that a problem of sufficient coverage arose in some country so that an understanding could be reached to meet the demand from the Italian or German side or, if necessary, through some other nation’s insurance. The explicit purpose was to head off state or semi-governmental intervention, and they agreed to take a common position in the event of such intervention. A second supplementary agreement was aimed at cooperation in disciplining the insurance business and insuring “normal and healthy competition.” The obvious purpose here, of course, was self-policing and especially looking after the interests of reinsurers. The third and final supplementary agreement had as its goal the regulation of the transportation branch, obviously of great importance in wartime, and was specifically directed at providing the reinsurance needed for companies in France so as to undermine French government efforts to force use of its reinsurance 33 Report on a discussion between Frigessi, Alzheimer, Marchesano and Weydenhammer in Venice, 2 October 1940, FHA, MR E 14/30 and Alzheimer to Daniel (RWM), 16 June 1941, FHA, MR C 2/9. 34 Venice discussions of 2 October 1940, FHA, MR E 14/30.

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58 Gerald D. Feldman

facilities and also to force the French direct insurers to charge appropriate rates.35 Manifestly, the purpose of the agreements was to maintain as much of the old liberal order in insurance as possible through business self-regulation and a measure of corporatist organization. The implementation of these agreements led to the licensing of the Italians to operate in areas occupied by the Germans and a dividing up of markets in the areas under Axis control. It is important to note, however, that much of the expansion involved the taking over of British portfolios in the occupied areas. Thus, in the summer of 1941, negotiations were held in Munich, agreements were reached with respect to the Netherlands, France, and areas of Southern Carinthia and the Steiermark taken from Yugoslavia. The Germans promised to support the Italians in taking over 20 percent of the British business on the insurance exchange market in that country. In France, the Italians were to be given access to the British portfolios not already taken over by German companies, and promised that the Military authorities and German trustees would assist them. Some important concessions to the big Italian companies in areas of special interest were also made. Allianz agreed to cede its portfolios from the Commercial Union Assurance Company Ltd. Group to Generali, which had expressed a special interest in them, while Riunione was given the right to join a pool sharing the portfolios of the Leseleuc group in which it had a long-standing interest. More generally, they agreed to work together in “disciplining” the French insurance market, which was regarded as overcrowded and having excessively low premiums. Finally, Generali, through Erste Allgemeine, and Riunione, through Interunfall, were permitted to do business in the annexed Yugoslav territories and to take over former Yugoslav companies provided they each used only one of their respective organizations for these purposes.36 A great deal of the energy of the German-Italian insurance negotiators went into reducing the risks involved in their engagements. They strove, for example, to reduce the full liability automobile insurance requirements in France and Belgium. Their biggest headaches, however, were in Southeastern and Eastern Europe. The utterly chaotic conditions in Greece and the Yugoslav succession states, especially Croatia, led them to seek to protect themselves against “extraordinary damages,” although it soon became hard to tell what an “ordinary damage” was.37 Perhaps the most unappetizing area of cooperation between Munich Re and the two Italian countries, however, was in Poland. The position of the Munich Re in Poland was an active and powerful one since, often by cloaking its role and working with Generali, the two companies controlled the 35 For copies of the agreements dated 4 February 1941 and related correspondence see FHA, MR C 2/10. 36 Protocol of meetings of 16–18 July 1941 in Munich, FHA, MR C 2/10. 37 Protocol of meetings of 20–21 September 1942 and other related documents, FHA, MR C 2/10.

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majority of the largest Polish insurance companies, the Generali-PortPolonia Insurance Company, the “Patria” Insurance Company, and the Warsaw Insurance Co., all domiciled in Warsaw, and the “Florjanka” Company in Cracow. Taken together, they accounted for half Poland’s insurance business.38 Riunione was also involved in Poland, both with its own agencies and as the owner of the Piast company. Whatever the case, the Germans and Italians participated in the carving up of the Polish Insurance business, and Riunione had the dubious distinction of having a 10 percent quota in a consortium insuring the facilities in the forced labor camp of Krakow-Plaszow although firms in which Generali had a stake were also involved.39

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Conclusion Thus, sooner or later the criminality of the National Socialists and the Italian Fascists enmeshed even the insurance companies, many of whose leaders had tried to keep their businesses as “normal” as possible. The Italians, of course, left the war in September 1943, and the arrangements discussed here became very shaky indeed, although some aspects of them were maintained thanks to the rump Fascist regime of Salo. It is interesting to note, however, that Mussolini dissolved the existing insurance organizations and was clearly moving in the direction of a more “Socialist” state before he disappeared from the scene entirely. In the balance, however, the insurance Axis described in this paper had functioned rather well, and its functioning was eased by the political alliance between National Socialist Germany and Fascist Italy. The insurance Axis certainly was based on a foundation of mutual agreement about the desirability of a liberal and disciplined economic order in the insurance business as well as pandering and accommodation to the Fascist rulers of the two countries. The Germans gained from the considerable organizational achievements, experience, and skills of their Italian counterparts; the Italians gained from a special position in the European insurance business dominated by Germany. This meant special advantages with respect to clearing arrangements and foreign exchange regulations as well as a share in the German expansion for as long as it lasted. One could also argue, however, that the insurance Axis functioned well despite rather than because of the ideological and political circumstances. 38 Munich Re an RWM, 28 September 1939, FHA, MR, A 2.14/55. As the documents in this file and in FHA, MR, A 2.14/54 show, the Munich Re often used straw men to cloak its role and it also used Generali as a cover. 39 BVB Krakau an den SS- und Polizeiführer im Distrikt Krakau, 26 February 1943, Bundesarchiv Berlin-Lichterfelde, NS 3/688, Bl. 63f. The workers in Oscar Schindler’s factory came from this camp.

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60 Gerald D. Feldman

Indeed, the recent and very detailed investigations of the Swiss insurance industry, and especially of the Swiss multinationals like Swiss Re and Swiss life insurance companies operating in Germany demonstrate that the insurance companies of a democratic society were neither inhibited nor prevented from working together with their counterparts, especially the Germans.40 Indeed, Germany was the most important continental market for Swiss insurers, and the Swiss insurers enjoyed special clearing arrangements with the Germans throughout the National Socialist period and engaged in some very dubious business deals in violation of agreements with the Allies during the last months of the war. Swiss and German managers maintained friendly social and personal as well as business relations, and the Swiss sought to accommodate themselves to German demands as much as possible. This went so far as to “Aryanize” their offices in Berlin, to turn over Jewish insurance assets to the German Finance Ministry, and to insure German and other war plants and factories in the occupied areas of Western Europe and even become involved in supporting the fight against sabotage. As shown above, Swiss Re was a leading player in the Association for the Coverage of Large Risks, and it is worth noting that the Swiss did take over some British and American portfolios in the occupied areas. Switzerland was also an important location for the cloaking of German-owned and controlled insurance companies, and this was done with the knowledge and collusion of Swiss bankers and insurers. Indeed, a Swiss company, Helvetia, was even a member of a consortium headed by the German Agrippinia corporation that competed with the Allianz-led consortium for the contracts insuring SS factories in the concentration camps. In fact, Swiss companies and courts had more freedom of maneuver than their Italian or German counterparts, and some of them took advantage of this to take a dilatory approach to German demands or to oppose German measures against Jews and against their interests openly. On the whole, however, Swiss insurers tried to make the best of an uncomfortable situation and to look after their interests as best they could. They shared with their German and Italian counterparts considerable concern about the “socialist” tendencies of the radical National Socialists and Fascists and with them sought to demonstrate that the private insurance business was worth fostering and preserving. While the Swiss ended up accepting Allied demands for the elimination of German control of various putatively Swiss insurance enterprises after the war, they were serving their own interests as well, and the fundamental thrust of Swiss insurance company policy after 1945 was to maintain and ultimately strengthen their ties with Germany. Given this record of the Swiss, there is no reason whatever to 40 See the wealth of material in Stefan Karlen, Lucas Chcomeli, Kristin D’haemer, Stefan Laube and Danel C. Schmid, Schweizerische Versicherungsgesellschaften im Machbereich des “Dritten Reichs”, 2 Vols. [Veröffentlichungen der UEK/ Publications de la CIE, Vols. 12/1–2], (Zurich, 2002) and Feldman, Allianz, 324–325, 371–372, 427–429, 431–434, 438–440.

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assume that the German-Italian insurance axis was based either on ideology or political affinity to any serious degree. The multinational insurance companies of all three countries had a long historical record of competition and collaboration with one another and adapted as best they could to the peculiar political and international circumstances of the early post-World War I Europe. From this perspective, continuity after 1945 should come as no surprise. The three concerns to which this paper has largely been devoted emerged from the debacle and have survived and prospered to this day. Their leaders also reemerged despite the danger Frigessi and Sulfina faced as Jews between 1943 and 1945 and desperate and futile Allied attempts to have Frigessi and Sulfina purged as “undesirables” because of their collaboration with the Fascist regime.41 Schmitt and Alzheimer underwent trying denazifications, but also emerged in leadership roles. Their Swiss friends showed great interest and concern for their fate, testified on their behalf, and ultimately resumed their old relations with the German companies.42 This story is thus another example of the continuities in modern European business history despite the experience of Fascism.

41 See the materials in NA, RG 84 350/62/3/1/161. 42 See Feldman, Allianz, 479–480, 490–493.

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CHAPTER 4

Market Assessment and Domestic Political Risk: The Case of Degussa and Carbon Black in Nazi Germany, 1933–1939

❖ Peter Hayes

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Industry will surely have the money, if Göring personally converses with the chairmen of the supervisory or managing boards. Johannes Eckell

Managing political risk in dictatorial environments involves corporations in attempting to calculate many imponderables. Among these are, obviously, the relative dangers of pursuing or declining to cooperate with the policies that an authoritarian regime favors. Moreover, such a cost-benefit analysis must factor in not only prospects of governmental reprisals or punishments, but also expectations about likely future market conditions for the products concerned. This chapter traces the response of the AG Deutsche Gold- und Silber-Scheideanstalt vormals Roessler (better known by its acronym Degussa, which became the firm’s official name in 1980) to these challenges as they arose between 1933 and 1939 in connection with the manufacture of a rather obscure but eventually quite profitable substance that the Nazi regime had an intense interest in fostering: carbon black. To anticipate: the story told here is an ironic one, in that it reveals a firm which embarked eagerly on research and development of the product, grew cautious and reserved in its approach, acceded under protest to pressures from state agencies to expand investment and output rapidly, became as a result enmeshed in the criminality of the Third Reich, and yet emerged with indispensable experience and know-how that served as a cornerstone of the enterprise’s postwar success.

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Some preliminary biographical and background information is necessary to help readers follow the case study presented here and place it in context.1 On the corporate side of the story, the three central figures are Ernst Busemann, Hermann Schlosser, and Ernst Baerwind. Busemann was elected to the managing board in 1919, when he was forty-three years old and fresh from his service as head of the War Metals Corporation in Berlin, and he dominated Degussa from the early 1920s until his death in 1939, first as primus inter pares and then officially as chairman after 1930. Cultured, pragmatic, and adept as a financier and negotiator, he was the architect of the two guiding principles of Degussa’s course in the Nazi era: commercial diversification and political accommodation. Beginning in the late 1920s, he presided over a program of mergers and acquisitions intended to break Degussa out of its traditional, heavy dependence on two chief lines of business, the separation and refining of precious metals and the manufacture of the key active ingredient in the famous detergent Persil. Though he never joined the National Socialist Party, he also set the tone for the firm’s generally acquiescent stance toward Hitler’s regime, which he once encapsulated with the remark that “it is pointless to swim against the stream.”2 Fourteen years younger than Busemann, Schlosser succeeded him as managing board chairman just after the conquest of Poland and already was his heir apparent in the first years of Nazi rule. A salesman by training, expert in negotiating cartel agreements and dedicated to the form of organized capitalism they epitomized, he also cherished romanticized notions of Frontkämpfer solidarity that he had imbibed during World War I and that disposed him to look favorably on the Nazis’ pledge to create a “people’s community.” Though kept out of the NSDAP on a technicality in 1933, he was, as Degussa’s supervisory board chairman put it a few years later, the board member who “had always stood closest to the ideas of the Party.”3 Finally, Ernst Baerwind who supervised operations at Degussa’s core factories, represented a far different sort of person – introspective, self-effacing, aloof, even (some thought) professorial. Painstakingly attentive to detail, he was plagued by self-doubt, literally engendered by his suspicion that he owed his position in the company to his mother’s membership in its founding family, but later aggravated in the Nazi context by the fact that his paternal grandmother had been born a Jew. On the government side of the events narrated here, the individual protagonists (Hermann Göring as head of the Four Year Plan and Johannes Eckell, who is identified further below) figure so powerfully because of the Nazi regime’s 1 The material presented here is drawn from Peter Hayes, From Cooperation to Complicity: Degussa in the Third Reich (New York: Cambridge University Press, 2004), Chapter 4. 2 Degussa Unternehmensarchiv [henceforth: DUA], IW 22.5/4–5, Busemann to Herzog, 30 July 1937. 3 DUA, Biographische Unterlagen [henceforth: BU] Dr Fritz Roessler, “Zur Geschichte der Scheideanstalt” [1937], 138.

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64 Peter Hayes

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success between 1933 and 1937 in constructing a carrot-and-stick economy. In this system, a mix of official controls on access to capital and raw materials, threats to prefer or create enterprises willing to do the government’s bidding, and offers to compliant firms of subsidized price levels, guaranteed rates of return on investment, and accelerated depreciation all combined to displace competition in the Nazi state from the market place to the political sphere.4 The result was an increasingly cameralist economic framework, the reality of which was grasped in early 1937 by the chairman of Degussa’s supervisory board, who pithily observed, “The executive will work in the future in the truest sense ‘for the King of Prussia,’ only now one says: for the people’s community.”5 The history of Degussa’s involvement with the manufacture of gas-based (later styled: active) carbon black (Gasruß or Aktivruß) provides an almost prototypical demonstration of how the Nazi regime’s priorities molded the firm’s commercial development during the 1930s. As a key component of durable rubber tires, the granular, soot-like product engaged the attention of Hitler’s new government almost immediately. It wanted to foster German motorization but faced the problem that the Reich imported most of the additive from the United States, thanks largely to the price and quality advantages conferred on American manufacturers by their ample supplies of cheap natural gas, a raw material that would-be rivals in Germany lacked. Among those rivals was Degussa, which just before the Nazi takeover had acquired its own reasons for wanting to break the American hold on the German market. In November 1932, Ernst Busemann’s search for investment opportunities and Hermann Schlosser’s quest to extend Degussa’s marketing program led to the purchase of the August Wegelin AG, which controlled about half of the existing, but largely obsolescent and unused German capacity to make carbon black from coal.6 Operating at only 15 percent of its potential, the new subsidiary could offer Degussa little more than a slightly better return on its sales apparatus and short-term tax benefits unless the 4 For a description of this process, see Peter Hayes, Industry and Ideology: IG Farben in the Nazi Era (New York: Cambridge University Press, 2nd edition, 2001), as well as Peter Hayes “Polycracy and Policy in the Third Reich: The Case of the Economy,” in Re-evaluating the Third Reich ed. Thomas Childers and Jane Caplan, (New York: Holmes & Meier, 1993), 190–210, and Peter Hayes “Industry under the Swastika,” in Enterprise in the Period of Fascism ed. Harold James and Jakob Tanner, eds. (London: Ashgate, 2002), 26–37. Also essential in this regard is Avraham Barkai, Nazi Economics (New Haven: Yale University Press, 1990). 5 DUA, BU Dr Fritz Roessler, “Zur Geschichte der Scheideanstalt” [1937], 128–129. 6 This and the following paragraph rest, unless otherwise indicated, on DUA, DL 13.3/1, K. Bonath, “Russ. Geschichte der Verfahren, der Produktion, der Entwicklung und der Forschungsarbeiten,” dated July 1969, especially 13–14, 17–21, and 40–44; as well as DL3.H.Schlosser/3, Schlosser’s memo Russgeschäft Degussa, 18 December 1941, enclosing Federlin’s Notiz für Herrn. Dr Achterath betr. Ruß, 2 December 1941. For Schlosser’s reasons for favoring the purchase of Wegelin, see DL 5/35, Schlosser’s Notiz betr. Wegelin, 10 September 1932.

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Market Assessment and Domestic Political Risk 65

main plant at Kalscheuren near Cologne could be converted to turning out a substance that challenged the American one effectively. Accordingly, while Schlosser bought time during 1933 by assembling the other German manufacturers into a new cartel and getting Kalscheuren’s production quota raised, Degussa responded to prodding from the German Economics Ministry and launched a feverish research effort in Frankfurt.7 At a cost of some 370,000 Reichsmarks (RM) a team led by Dr Harry Klöpfer overcame the main hurdle, identifying a domestically available raw material to substitute for natural gas, and solved the principal manufacturing problems in remarkably short order. By June 1934, Degussa had a mass producible form of carbon black, dubbed CK3, that equaled the American product in quality but resulted from gasifying naphthalene, a distillate of coal tar. Klöpfer’s technical virtuosity (he accomplished in less than a year what a division of IG Farben had been trying unsuccessfully to achieve since 1928) presented Degussa, however, with new difficulties. His discovery was not yet price-competitive, had no track record with potential buyers, and would require substantial new plant investment. Unless the Economics Ministry was prepared to put its money where its mouth was, the task of turning Degussa’s potential contribution to national self-sufficiency into a profitable venture remained intimidating. Consequently, during the summer of 1934, the enterprise lobbied the Nazi regime for assistance and won it, after hard bargaining, in two rather circumscribed forms. First, acting economics minister Schacht issued an order prohibiting the reactivation, construction, and expansion of any German carbon black plant unless specifically authorized by him, thus partially insulating an attempt to actualize Degussa’s invention from additional domestic competition.8 Second, the Economics Ministry guaranteed a price of one Reichsmark per kilogram for the first twenty-four hundred metric tons of output under Degussa’s new process for the first two years, which would cover the costs of going over to large scale production and thus relieve the firm of immediate risk. These undertakings smoothed the way for Degussa’s decision to authorize work in October 1934 on a suitable installation at Kalscheuren, with an initial capacity of six hundred tons per year but a built-in possibility of quick expansion to twice that level. But in return for insuring Degussa’s growth, the government demanded the right to determine its pace, extent, and form: not only had Kalscheuren to be operational within six months, but also another plant capable of three thousand tons per year and located in a less militarily exposed region east of the Rhine, had to be completed by October 1935.9 Nor were these the only 7 DUA, DL3. Baerwind/17, Baerwind’s Aktenvermerk betreffend Aktivruss, 2 November 1933, records the decision to undertake the research effort. 8 DUA, GPT 4/1, Schacht’s Anordnung über das Verbot zur Errichtung von Anlagen zur Herstellung von Ruß, 17 August 1934. 9 DUA, DL3.Baerwind/18, Baerwind’s memo on Grossfabrikatorische Herstellung von Gasruss ab April 1935 beziehungsweise ab Oktober 1935, 24 August 1934.

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66 Peter Hayes

ways in which the Nazi Reich proved an uncongenial partner. Degussa’s designated contacts at the Economics Ministry constantly changed their projections of German demand for carbon black and the appropriate ways of meeting it, toyed with other possible suppliers, dallied over imposing tariffs on American imports, displayed favoritism toward a parallel, ultimately impracticable pilot project by Degussa’s HIAG division to make the substance from methane, and even on one occasion called Degussa “punishable” for its failure to apply for construction permits by the government-established deadlines.10 As a result, within only six months of Klöpfer’s triumph, even Hermann Schlosser, ever the believer that “one can make something out of anything,” was inclined to restrict Degussa’s carbon black venture to Kalscheuren while waiting to see how the market developed, though for tactical reasons he assured the Economics Ministry that the firm would “immediately seriously investigate” four named sites in central Germany for a second plant. Ernst Busemann, moreover, had grown very pessimistic.11 In January 1935, he concluded that “the CK3 process looks simply hopeless in the long run,” since the supply and price of naphthalene were uncertain, the prospects of attaining price parity with American carbon black doubtful, and, in that event, the Economics Ministry’s commitments unreliable. Frustrated, as well, that his firm had expended some RM 2 million on carbon black to date (including HIAG’s pilot program), without achieving a sure return, he moved to shift part of the accumulated and all of the future costs of development onto Degussa’s newly acquired and momentarily cash-rich subsidiary, Degea AG (earlier and later again known as the Auergesellschaft). In January 1935, he sold Frankfurt’s stock in Wegelin, along with all production responsibilities for carbon black, to Auergesellschaft at 70 percent of par plus reimbursement for the research and development expenditures to date on CK3, and he billed Wegelin for the first RM 200,000 in new construction costs at Kalscheuren. Degussa retained responsibility for selling the output, which shortly began to pile up in warehouses because tire manufacturers proved slow to place orders.12 Meanwhile, at the end of February 1935, Degussa and Auer pled raw 10 DUA, GPT 4/1, Schlosser’s Aktennotiz. Betr. Russ, 18 October 1934. 11 Ibid., and Schlosser’s Besprechung im Reichswirtschaftsministerium über Russ, 26 January 1935; his optimistic remark is quoted in DUA, DL 13.3/1, Pichler’s undated memo on Übertragung unserer Russinteressen auf die Auergesellschaft 1935 und Rückübertragung 1938. 12 Busemann’s reservations are listed in DUA, IW24.5/2, Busemann to Schlosser, 28 January 1935. The sale to Auergesellschaft, formalized the following day, is detailed in the same volume; see especially Bernau’s memo on the Auergesellschaft, 21 January 1935; Busemann and Bernau to the Direktion der Degea AG (Auergesellschaft), 23 January 1935; Schlosser’s Übergang des Aktienbesitzes, 23 January 1935; and Busemann’s Aufsichtsratsitzung der Degea am 29. Januar 1935, dated 1 February and enclosing the memo from Auergesellschaft’s management to the members of its supervisory board, 24

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material shortages as an excuse for declining to pursue further the idea of building a second CK3 plant.13 For a time, the second thoughts of Wegelin’s old and new owners seemed to make an impression on the economic authorities in Berlin. Having repeatedly refused to authorize Kalscheuren’s expansion to twelve hundred tons annually unless Degussa/Auergesellschaft broke ground on a second plant, they backtracked so far during 1935 that yearly production at the initial site rose to eighteen hundred tons.14 To be sure, mounting inventories drove Degussa in April 1936 into price concessions that reduced prospective income on this output: in return for assurance that the tire manufacturers would buy at least fourteen hundred tons per year, Kalscheuren agreed to charge only seventy-five pfennigs per kilogram.15 Even so, Busemann’s financial worries eased. If the long term outlook for CK3 remained uncertain, the product appeared on the verge of at least paying for itself and for Degussa’s acquisition of the Wegelin firm, after which it would be returning a profit, however insecure. But, the respite from official pressure to sink more resources into the substance did not occur in deference to such private commercial considerations. It stemmed rather from temporary circumstances, primarily the Economics Ministry’s continuing inability to gauge Germany’s likely carbon black needs or to gamble on one or all of several possible production processes for the gas-based variant of the product: CK3; IG Farben’s similar procedure, which came on line at Ludwigshafen in 1936; and a method being developed by the Continental Rubber Co. of Hanover in cooperation with Krupp to obtain carbon black from residues of anthracene, another distillate of coal tar.16 With the inauguration of the Four Year Plan in September 1936 and the appointment of an apparatus to direct it that included an office for German raw materials, this impasse was broken. Both Luftwaffe Lieutenant Colonel Fritz Löb, the new head of the office, and Johannes Eckell, a former employee of IG Farben who now led the chemicals section within it, brought considerable fervor to their new duties, which developments with regard to active carbon black gave them occasion to demonstrate within only weeks of assuming their posts. The impetus came from the maturation of the Continental-Krupp pilot project. By October 1936, it had recorded sufficient

13 14 15 16

January 1935. On the HIAG project, conducted in cooperation with the Hibernia mine, see GPT 4/1, Róka’s Stand der Rußversuche bei der Scheideanstalt, 13 November 1934. On the accumulation of inventory in 1934, DL3.H.Schlosser/3, Federlin’s Notiz für Herrn Dr Achterath betr. Ruß, 2 December 1941, 6. DUA, IW 24.5/2, Schlosser’s Russ. Aussprache mit der DEGEA in Berlin, 26 February 1935. See DUA, GPT 4/1, Hagemann of the Economics Ministry to the Scheideanstalt, 1 February 1935, for the final refusal to authorize expansion at Kalscheuren. See DUA, DL13.3/1, Bonath’s Russ report, 24; and DL3.H.Schlosser/3, Federlin’s memo of 2 December 1941, 6. On the competing processes, see DL13.3/1, Bonath’s Russ report, 22 and 41.

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success that the rubber company was offering Krupp a six-figure amount for complete control of the production rights and had put together a consortium of tire manufacturers (Ideuka) to build a corresponding plant on the outskirts of Dortmund, on the east bank of the Rhine, for which the land and the gas supply already had been purchased. The partners’ need for an exemption from the standing prohibition on new carbon black plants – which would amount to an authorization to enter into competition with Degussa – now presented Eckell with a dilemma that he turned into an opportunity. Though eager to enlist industry behind his goal of producing enough additional tons of gasbased carbon black from German resources annually to emancipate the domestic rubber industry from American imports, Eckell had contradictory information about the available production processes. The Ideuka procedure enjoyed the advantage of being based on a cheaper, slightly more plentiful raw material than Degussa’s CK3, but the latter’s machinery was less liable to breakdown, indeed had been thoroughly tested over months of smooth operation.17 Given this, Eckell applied what became virtually standard practice under the Four Year Plan: he coupled his approval for the new factory with peremptory stipulations: the owners would have to provide the full six thousand tons that he currently wanted, and they would have to mix or merge their processes so as to do so in the promptest and cheapest feasible manner. In short, the consortium of tire manufacturers got enough of a green light to threaten Degussa with exclusion from a burgeoning market unless the Frankfurt firm entered into some sort of partnership with them, while the maker of CK3 got the chance to limit its losses by demonstrating the superiority of its production method, even when applied to a different raw material. The result, worked out in intense negotiations during November 1936, was a three-part agreement between Degussa and the rubber firms.18 First, the Auergesellschaft, as the nominal owner of Wegelin’s Kalscheuren plant, agreed to assume half the stock capital of a new carbon black firm, the Rußwerke Dortmund, and the consortium members divided the remaining RM 2 million worth of shares, with Continental taking 29 percent of the total, German Dunlop 7 percent, and seven other companies (Deka, Englebert, Phoenix, Fulda, Vorwerk, Metzler, and the German branch of Michelin) 1–3 percent each. Degussa got the right to name the new entity’s business manager for operations (Dr Backe), and the tire manufacturers for sales (Dr Hermann); while the ten voting seats on the supervisory board were split 17 Ibid., 22–24; on the raw material supplies, see also DL3.Baerwind/20, Aktenvermerk betreffend Russbesprechung beim “Rohstoff- und Devisenstab”, 20 October 1936. 18 See DUA, DL 11.5/40, Schlosser to Kemnitz, 19 November 1936, in which the Degussa manager argues that the new firm being discussed “for us … seen from a private economic perspective not only is completely unattractive, but also constitutes in many respects a substantial burden” and goes on say “that we even today would be completely ready to leave the field to the tire makers alone.”

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evenly, with the non-voting chairman, a lawyer named Georg Kemnitz, regarded as neutral. Second, the tire manufacturers promised to abide by the earlier agreement of April 1936 and to purchase the first fourteen hundred tons of carbon black needed annually from Kalscheuren. Third, Degussa licensed its CK3 process to the new enterprise at a fee of two pfennigs per kilogram of output, and the Rußwerke contracted to furnish the rubber firms directly with up to six thousand more tons per year at a price that reflected only manufacturing costs plus an allowance for full amortization of any new installations within ten years and 5 percent annual interest on the invested capital. Once the facilities were paid off, the tire manufacturers were free of further obligation to buy from the new firm; meanwhile, any output beyond what they needed would be sold by Degussa on commission.19 In other words, by exploiting its head start in the production of carbon black, Degussa managed to co-opt a competing technology, gain access to the proceeds on growing demand (via both license fees and dividends from the new firm), and limit its exposure to possible changes in international market conditions or national economic policy (through the pricing scheme). The agreements of November 1936 were later the source of some controversy within Degussa. Charges that its managers had unnecessarily “given away” the chance to control all production of gas-based carbon black in Germany became sufficiently audible after World War II that both Schlosser and Ernst Baerwind, who had judged the Continental-Krupp project viable “even without our cooperation,” wrote memoranda in 1952 defending their decision to ally with the rubber consortium.20 As late as 1969, one Degussa expert concluded, however, after reviewing Continental’s own records of the negotiations, that the tire manufacturer had “mightily bluffed.”21 But the critics were being wise with hindsight – and missing the historical point. Schlosser and Baerwind had to react quickly in 1936 to events that took them by surprise. Indeed, Baerwind seems scarcely to have known what hit him that October, when Eckell summoned him with only two days’ notice to a “dictatorially” scheduled meeting in Berlin to deal with the carbon black situation.22 Measured by market position, the two Degussa executives probably salvaged as much as was possible, if not more, during the ensuing month. 19 DUA, D2/20, Summary of the carbon black agreement for the American occupation authorities, 1947; DL 13.3/1, Bonath’s Russ report, 24–26; DL 11.5/40, Schlosser to Degea AG, 21 November 1936; and PCA 2/10, Federlin’s Vertrauliche Notiz betr. Russwerke Dortmund GmbH, 30 November 1936, and Kemnitz to Amt für deutsche Roh- und Werkstoffe, 27 November 1936. 20 DUA, DL 11.5/40, Schlosser’s Betr. Deutsche Gasrußwerke Dortmund, 29 July 1952 (in which the first quoted remark appears), and Baerwind’s Notiz betreffend die Entstehungsgeschichte der Deutschen Gasrusswerke Dortmund, 31 July 1952 (which is the source of the second quoted passage). 21 DUA, DL 13.3/1, Bonath’s Russ report, 24. 22 DUA, DL3.Baerwind/20, Aktenvermerk betreffend Russbesprechung beim “Rohstoff- und Devisenstab”, Berlin, 20 October 1936.

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The arrangements they secured proved, after all, both lucrative for Degussa until the end of the Nazi era and a sufficient basis, following World War II, for the enterprise to establish its status as the second largest producer of the substance worldwide at the end of the twentieth century, with an international market share of about 15 percent.23 The chief costs to the firm of what happened, which went unmentioned apparently in the postwar internal discussion, concerned its autonomy, and they became ultimately, as a result, moral rather than material. Degussa now became inescapably enmeshed in a governmental decision-making process that paid scant regard to commercial considerations because the product involved was essential to the Nazi regime’s expansionist course. Carbon black production henceforth had to increase continuously in order to feed the Wehrmacht’s growing appetite for tires, an appetite which powered the foreign policy of the Third Reich – and came to be powered by its barbaric exploitation of human beings. That a contingent of concentration camp inmates drawn from in and around Auschwitz was put to work between 1942 and 1945 at a carbon black factory in Silesia owned by the (by then renamed) Rußwerke symbolizes the close connection of this product, and thus of the firm, with the terrible toll Nazi aggression would exact.24 At its inception, however, the fateful outcome of Degussa’s new partnership was all but beyond anticipation; more immediately and obviously troublesome were its financial requirements, at which Busemann bridled, and the tensions that arose from working with the tire manufacturers and the Four Year Plan administration. The nub of both problems was that Degussa was laboring to apply its carbon black production process to a new raw material (anthracene residues). This worked quickly in small-scale tests but took time to translate into industrial practice. In order to perfect the relevant machinery so as to assure an uninterrupted, cost-efficient flow of the output (labeled CK4 in order to distinguish it from Kalscheuren’s CK3); Degussa’s builders envisioned erecting a factory consisting of four free-standing production halls, each fabricating fifteen hundred tons. These were to be constructed in sequence, with each new hall designed to improve upon experience gained in operating the previous one, thus saving on outlays and simultaneously reducing unit costs and widening profit margins. Though logical to an enterprise worried about recovering its investments in what was still an uncompetitive product under open market conditions, such planning 23 On Degussa’s postwar expansion of carbon black production see Mechthild Wolf, Im Zeichen von Sonne und Mond (Frankfurt am Main: Degussa AG, 1993), 170 and 292. For the figures for the firm’s international market share and ranking, see Verschmelzung Degussa AG und Hüls AG künftig Degussa-Hüls AG [1999], Teil B: Verschmelzungsbericht, 53. 24 See Hayes, From Cooperation to Complicity, Chapter 6, for a detailed discussion of the matter, and the same author’s “Degussa and the Holocaust,” in Lessons and Legacies V: The Holocaust and Justice ed. Ronald Smelser, (Evanston: Northwestern University Press, 2002), for a briefer treatment.

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was bound to run foul of the considerations that dominated in Eckell’s office. There speed was of the essence, and one thing alone mattered: getting the Dortmund factory fully operational in tandem with IG Farben’s synthetic rubber (buna) plant at Schkopau, started a year earlier.25 Moreover, while this goal made Eckell a constant source of pressure to build quickly rather than prudently, Colonel Löb’s insistence on design changes to render the new installation impervious to air attack also pushed the cost estimates for the Rußwerke plant upward.26 This made Degussa’s managers, who were exclusively responsible for constructing the new factory, all the more intent on wringing every possible saving from a deliberate building tempo. Thus, for a full year after the founding of the Rußwerke, the Raw Materials Office and Ernst Baerwind of Degussa wrangled over the construction timetable until their mutual frustration erupted into an open test of wills.27 Eckell’s patience had been stretched to the limit by his office’s reckoning that the Reich’s annual carbon black needs had grown to twenty thousand tons, Baerwind’s by his staff ’s arithmetic that the total expense for the new installation had swollen to nine million Reichsmarks, a sum vastly exceeding the rather arbitrarily set figure of four million Reichmarks that the partners had invested a year earlier. Thus, Eckell insisted on the immediate completion of all four manufacturing halls, while Baerwind countered with a “rough, commercially reasonable (naturally non-binding) program – in contrast to the precipitate one of the Raw Materials Office” that foresaw starting up the first hall in the middle of 1938 and the second one toward the end of that year, at which time final decisions would be made about the design and equipment of the remaining two.28 At a meeting with four representatives of the Rußwerke on 19 November 1937, Eckell reiterated his conviction that the Reich’s needs demanded that “even commercially fully justified considerations must be consciously suspended” and declared that he could not countenance a delay in reaching full production until the end of 1939 or the beginning of 1940. He, therefore, moved to break Baerwind’s resistance by threatening to reallocate supplies of iron and steel to the expansion of IG Farben’s acetylene-based carbon black output and away from Dortmund, thus endangering the completion of that installation and with it the recovery of its owners’ investments.29 25 On the struggle between IG Farben and the Four Year Plan administration over this plant, which paralleled Degussa’s experience with carbon black, see Hayes, Industry and Ideology, 148–151, 188–191. 26 See, on both Eckell’s adamant stance concerning the building tempo and the costs of air defense, DUA, DL3.Baerwind/20, Aussprache beim Rohstoffstab über die Errichtung der Dortmunder Russfabrik, 23 January 1937. 27 For example, see DUA, DL3.Baerwind/20, Besuch beim Rohstoffstab, 15 March 1937. 28 DUA, DL3.Baerwind/21, Aussprache im Kreise des Aufsichtsrates der Russwerke, 18 November 1937. 29 DUA, DL3.Baerwind/21, Verhandlung über die Weiterentwicklung der Dortmunder Russfabrik beim Rohstoffstab, 20 November 1937.

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This gambit adroitly opened a split between Degussa and its tire-making partners. Even after Baerwind’s sounding of IG Farben revealed that firm’s lack of interest in increasing its carbon black production, they found other reasons, above all an interest in Eckell’s later cooperation with regard to pricing, to justify concessions to his sense of urgency.30 Baerwind grudgingly consented, but Degussa and the Auergesellschaft now selected a new ground on which to make their stand: the issue of financing the Rußwerke beyond the four million marks at which it had been capitalized.31 They flatly rejected the tire firms’ suggestions that the investors double their respective shareholdings or back a bank loan of comparable size to pay for the accelerated completion of the plant. Instead, arguing that the commercial viability of the installation could not be assumed, the Degussa/Auergesellschaft members of the Rußwerke supervisory board took the position that “if the Raw Materials Office forces the construction of the factory against commercial considerations, then it must effect a governmentally guaranteed loan” to fund the plant.32 The upshot was perhaps the most decisive of the Pyrrhic victories that punctuated the history of Degussa’s carbon black operations during the Nazi period. In July 1938, the Rußwerke received a Reich-guaranteed loan of RM 5.5 million from a consortium led by the Dresdner Bank, repayable at sixmonth intervals between 1940 and the end of 1948 with an annual charge for interest and administration equal to the prevailing Reichsbank discount rate plus 2 percent.33 But the stringent conditions attached virtually transformed the company into an agency of the German state, reducing Degussa’s role, in effect, to an advisory and administrative one. Not only did the loan contract stipulate that “the firm has primarily to serve the public good for the entire duration of its existence and without regard to its legal form or its owners” and that it “is obligated to execute at any time the measures that the Reich considers necessary to the purpose of the contract,” but also the terms gave the government ample means of enforcing these provisions: it could audit 30 DUA, DL3.Baerwind/21, Aussprache mit der Farben-I.G. über das Russgebiet, 30 November 1937, and Sitzung des Ausschusses der R.D., of the same date. 31 DUA, DL3.Baerwind/21, Aufsichtsratssitzung und Gesellschafterversammlung der Russwerke Dortmund, 4 December 1937, enclosing his Für den Aufsichtsrat bestimmter Kommentar, 3 December 1937. 32 DUA, DL11.5/40, Protokoll der Aufsichtsratssitzung der Russwerke Dortmund GmbH, 3 December 1937. For the terms governing such loans, see DL11.5/40, Finance Minister Schwerin von Krosigk’s Bürgschaftserklärung, 8 March 1935, his Zusatzerklärung zu der Bürgschaft, 5 January 1937, and his Zweite Zusatzerklärung zu der Bürgschaft, 4 April 1938. 33 For these and the other terms, see DUA, DL11.5/40, Vertrag zwischen der Deutschen Revisions- und Treuhand AG, namens und im Auftrag des Deutschen Reiches, und der Russwerke Dortmund GmbH, 8 July 1938 (with a note that Bernau, one of Degussa’s representatives on the Rußwerke supervisory board, had approved it on 13 June), and Dresdner Bank to the Russwerke, 19 July 1938.

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the firm at any time, alter the management on four-weeks notice, lay claim to the sales income as security, and appoint two members to the supervisory board (one of whom turned out to be Johannes Eckell). Perhaps most tellingly, the regime chained the corporate owners of the Rußwerke to its fate; they were forbidden to dispose of their shareholdings without the government’s consent. In return for all this, Degussa gained only momentary release from having to bankroll the Rußwerke’s initially underestimated building costs and a precedent for seeking outside funding, in case Eckell’s hunger for carbon black mounted. That hunger, indeed, had shown no signs of slackening following the clash of November 1937. Briefly around the end of the year, Eckell held open the possibility of relenting about completing the fourth production hall at Dortmund, providing the Rußwerke could present proof that stepped up operations at the other three would bring forth the targeted six thousand tons annually.34 But he soon reneged, and by March 1938, Degussa’s managers at the site had committed themselves to both full completion of the works and an elevated output of nine thousand tons, as well as to the growth of Kalcheuren’s production to three thousand tons annually, only to be told that they were “chasing the horizon”: after 1939, German needs for domestic carbon black would approach thirty thousand tons because of the Volkswagen program and the realization that synthetic rubber tires required a 25 percent larger admixture of the substance than those made from natural rubber.35 While Eckell developed plans to narrow the impending shortfall by encouraging an additional entrant into the carbon black field (he wooed the Bayerische Stickstoffwerke to assemble a new plant that would operate on the basis of acetylene and carbide in conjunction with another synthetic rubber factory destined for Fürstenberg an der Oder), and shortly after the tire manufacturers delivered a pessimistic projection that Dortmund would not return an annual profit until 1942 and work off its accumulated losses until 1947, Degussa found itself compelled to relieve the financially overextended Auergesellschaft of the Rußwerke and Kalscheuren.36 For just over RM 4.4 million, Frankfurt eased its subsidiary’s cash flow problems, spared it several impending tax payments, and resumed full responsibility for the Degussa concern’s carbon black interests (indeed, the parent company promptly dissolved the Wegelin AG and 34 DUA, DL3.Baerwind/21, Besuch im Rohstoffstab, 13 January 1938, enclosing Kemnitz to the members of the supervisory board of the Rußwerke, 12 January 1938. 35 DUA, DL3.Baerwind/21, Besuch beim Rohstoffstab, 7 March 1938. For the authorization raising Kalscheuren’s capacity to 3,840 tons per year, see GPT 4/1, Hoffmann of the Economics Ministry to Degussa, 29 November 1937. 36 DUA, DL3.Baerwind/21, Gespräch mit Dr Eckell über die Pläne für die Vergrösserung der Fabrikationskapazität in deutschem Aktivruss, 7 May 1938; and Russwerke Dortmund-Kalkulation, 9 May 1938.

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absorbed the now profitable Kalscheuren works) – all just in time for Eckell to up the ante once more.37 On July 5, 1938, Eckell dropped the first hint to Degussa that “he had in mind” the construction of a third CK3/4 plant, either in central Germany or the vicinity of Berlin, with a capacity of three thousand or six thousand tons. To Baerwind’s objection that not enough anthracene residues were available to generate such output, Eckell could only reply that he was looking into the matter. But to the Degussa manager’s response that his firm had no funds left to put into such a project, Eckell had a sharper, bullying retort: “industry will surely have the money, if [Field Marshall] Göring personally converses with the chairmen of the supervisory or managing boards.”38 Ten weeks later, Eckell thought he had found the appropriate location, one which underlined the personal interest of the head of the entire Four Year Plan, namely Salzgitter, where the newly founded Hermann-Göring-Werke would generate the necessary coal tar and provide half the capital for a new plant for four to five thousand tons of active carbon black, with Degussa putting up the other 50 percent. Having only hours before secured an increase in the set price of CK4 to eighty-five pfennigs per kilogram, and thus hastened the day when the Dortmund plant would finally break even, the Frankfurt firm now was being asked to advance still more money in the name of autarky.39 Schlosser thought he had no choice but to try to strangle this notion at birth: he emphatically told Eckell “that we – as a result of the extraordinary demands on our concern for other projects of the Four Year Plan – could in no case for the foreseeable future take part in financing a new carbon black factory,” though the firm would be willing to investigate the feasibility of the Salzgitter project as a courtesy.40 This may have been the occasion when the ever impatient Eckell, as Schlosser later recalled, “threatened me with the charge of economic sabotage.”41 But, if so, the crisis soon past. By October, Eckell’s interest in the Salzgitter project was declining because it would take far too long to realize – his calculations meanwhile had revealed that buna output would begin to outstrip inventories and production of carbon black in July 1939, so that stopgap solutions had to be found.42 37 DUA, DL11.5/40, Auszug aus Protokoll über eine Besprechung bei der Auergesellschaft, 26 June 1938; IW 24.5/5, Feldman’s Betr.: Steuerliche Auswirkungen eine evtl. Rückübertragung der Russinteressen an die Degussa, 29 June 1938. On the integration of Kalscheuren into Degussa, DL13.3/1, Bonath’s Ruß report, 21. 38 DUA, DL3.Baerwind/22, Besuch von Herrn Dr Eckell in Frankfurt, 9 July 1938. 39 See DUA, DL3.Baerwind/22, Sitzungen des Ausschusses und des Aufsichtsrates der R.D., 17 September 1938, on the pricing agreement. 40 DUA, DL3.Baerwind/22, Gespräch mit Herrn Dr Eckell über eine eventuelle dritte CK3-Gasrussfabrik, 19 September 1938. 41 DUA, DL11.5/40, Schlosser’s Betr. Deutsche Gasrußwerke Dortmund, 29 July 1952. 42 DUA, DL3.Baerwind/22, Aussprache bei der Reichsstelle für Wirtschaftsausbau, 21 October 1938.

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For once, Eckell’s sense of urgency made him more cooperative with the Rußwerke’s owners, especially with Degussa. Desperate for the quickest possible increase in output, he rapidly went along with their proposals simply to expand both Kalscheuren and Dortmund by fifteen hundred and five thousand tons per year, respectively, despite the intensified concentration of carbon black production in the exposed western parts of Germany that this entailed.43 As earlier, however, the sticking point was financing, with the tire manufacturers again willing to provide half the necessary capital and Degussa not.44 Since Eckell had the rubber firms cowed by his threat to press for more carbon black from acetylene, which would raise their raw materials costs, if they did not pay for the new CK3/4 facilities, he could afford to take Degussa’s side in a series of disputes with the consortium in early 1939 as a means of leveraging Frankfurt into opening its wallet. Thus, when the tire producers tried to argue, for example, that Degussa was not entitled to license fees on output over the Rußwerke’s original six thousand tons, since it embodied no additional inputs of knowhow, Eckell threw his weight behind Degussa, and the compromise formula arrived at gave Frankfurt 2 pfennigs per kilogram for each of the first six thousand tons produced in Dortmund, 1.66 pfennigs for the next six thousand, 1.50 for the next, and 0.75 for any additional tons.45 These and other financial arrangements paved the way for another government loan, this time of RM 4 million, but also for an increase in the Rußwerke’s capital by RM 2 million, half from Degussa and half from the tire consortium, to which Semperit-Gummi-Werke of Vienna and the Veith-Werke of Frankfurt were added as replacements for the German branch of Michelin, which had withdrawn during the preceding year.46 Eckell’s maneuvering thus enticed Degussa into a further commitment of capital, even though various financial restrictions were simultaneously reducing the annual expected interest rate on Degussa’s existing investment to 4.25 percent in 1939/40, rather than the 5 percent provided for in the founding contract of 1936.47 Ironically, however, Eckell’s partiality toward Frankfurt also may have contributed to driving the rubber firms finally into sympathy with Degussa’s relatively slow-paced approach to expansion, thus underlining the enduring 43 DUA, DL3.Baerwind/22, Russbespechungen in der Reichsstelle … und im Reichswirtschaftsministerium, 27 January 1939; and DL3.Baerwind/23, Besuch bei der Reichsstelle, 2 May 1939. 44 DUA, DL11.5/40, Konecke and Assbroicher of Continental Gummi-Werke to the Scheideanstalt, 28 March 1939, and Busemann and Federlin of Degussa to Continental, 12 April 1939. 45 DUA, DL3.Baerwind/23, Besuch bei der Reichsstelle, 2 May 1939; DL11.5/40, Niederschrift über die Sitzung der Kommission für die Erweiterung der Russwerke Dortmund, 15 May 1939. 46 Ibid., also Rossel’s Kapital-Beteiligung Russwerke Dortmund GmbH, 22 June 1939; and, on Michelin’s withdrawal, DL13.3/1, Bonath’s Russ Report, 24. 47 DUA, DL11.5/40, Russwerke Dortmund GmbH, 9 June 1939, 2.

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gap between the thought processes of business leaders and those of the Nazi regime’s economic policy-makers. In August 1939, only three weeks before Hitler launched World War II, one of Continental Rubber’s delegates to the Rußwerke’s supervisory board outlined to Baerwind a series of practical grounds for turning against the rapid expansion of Dortmund, including lagging buna production, delayed building materials, and the high local cost of gas, and argued for a pause in the work, during which a different site should be reconsidered, after all.48 It was as if the speaker had slept through the preceding three years, during which the government had swept aside every virtually every commercially motivated reason for caution, then pushed and pulled the producers into augmenting their output targets to levels (from twelve hundred tons in early 1935 to seventy-eight hundred in 1936 to twenty-two thousand in 1939) that became more, rather than less financially risky than their predecessors, by virtue of being all the more remote from any conceivable estimate of “normal” demand. That Continental’s director still thought he could inject even a measure of commercial rationality into this spiral, even as it was about to be accelerated by war, reflected a surprisingly widespread delusion of the German business elite. Hermann Schlosser certainly shared this delusion, and even the temperamentally less sanguine Ernst Baerwind could not shake it. The emotional and professional consequences of doing so would have been paralyzing. Yet, the history of Degussa’s role in carbon black production from 1933 to 1939 reveals nothing more strikingly than how thoroughly the role of most German businesses and businessmen had been reduced in the interim to a narrowly reactive one. Having embarked on producing the gas-based product in order to cash in on the Nazi regime’s desires, the manufacturers were now largely prisoners of them. The pivotal year in this case study of Degussa and carbon black production – 1937/38 – proved to be the period in which firm’s leaders, first, ceased being able to behave with consideration toward Jewish employees and property-owners and, then, largely lost control, without comprehending it yet, over the direction of their own enterprise.49 During the first four years of Nazi rule, as the regime concentrated on reviving employment and production in Germany by means that intruded only marginally – and allegedly temporarily – on corporations’ autonomy, Degussa could remain focused on Busemann’s diversification program. Thus, the firm’s annual investments in 48 DUA, DL3.Baerwind/23, Sitzung des Aufsichtsrats-Ausschusses, der Geschäftsführung und der Bauleitung der R.D., 7 August 1939. 49 On Degussa’s role in the Aryanization of posts and property formerly possessed by Jews, see Hayes, From Cooperation to Complicity, Chapter 3, as well as Peter Hayes, “Die ‘Arisierungen’ der Degussa AG: Geschichte und Bilanz,” in “Arisierung” im Nationalsozialismus: Volksgemeinschaft, Raub und Gedächtnis, ed. Irmtrud Wojak and Peter Hayes, (Frankfurt am Main: Campus Verlag, 2000), 85–123.

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new buildings or machinery never exceeded yearly levels of depreciation during this period, and most of the fruits of economic recovery could be directed toward acquisitions and retained earnings.50 But in the context of slumping international trade and the Reich’s foreign exchange policies, the prospects for diversification perforce focused increasingly around statedriven domestic demand. The case of carbon black indicates that by 1937/38 the most Degussa could do to reduce the resulting political risk was to spread it through a partnership and to defer it through loans. The Reich’s cumulative success in creating an economic framework through which a militarist, expansionist government could push and pull corporations in the directions it preferred had by now reached the point that Degussa was enmeshed inextricably in what one scholar trenchantly has called the “deeply deformed growth” of the German domestic economy in the Nazi years.51 Busemann’s corporate strategy – indeed, any independently defined one – henceforth took a backseat to coping with incentives and pressures from Berlin that increasingly dictated the enterprise’s financial decisions and reconfigured its activities. For the rest of the Nazi era, Degussa’s managers would struggle to regain control of events, deluded by their operational responsibilities and swelling earnings into thinking that they were laboring to retain it. But in truth, to modify Richard Grunberger’s memorable metaphor, they already had been demoted from being drivers of the corporate bus to being mere fare-collectors.52 The Primacy of Politics proclaimed by the Third Reich increasingly determined not only where the firm was headed, but also the speed and conditions of the journey. The assessment of political risk became a matter that Degussa’s managers could factor into such marginal judgments as whether or not to take on board particular properties in occupied countries after 1938 (outside of the Protectorate of Bohemia and Moravia, Degussa generally avoided such acquisitions), but not a consideration that the firm dared (or could imagine how to) act upon otherwise.

50 See Hayes, From Cooperation to Complicity, Appendix B, for the development Degussa’s sales, fixed capital, portfolio of subsidiaries, and surplus of assets over liabilities, 1933–1945. 51 See Christoph Buchheim, “Die Wirtschaftsentwicklung im Dritten Reich – Mehr Desaster als Wunder,” Vierteljahrshefte für Zeitgeschichte 49 (2001), 653–664, especially 662, from which the quoted phrase is taken, as well as the same author’s, “The Nazi Boom: An Economic Cul-de-Sac,” in The Third Reich Between Vision and Reality, ed. Hans Mommsen, (Oxford: Berg, 2001), 79–94. 52 Richard Grunberger, The 12-Year Reich (New York: Holt, Rinehart and Winston, 1971), 184.

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PART III

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The Perception and Management of Political Risk in Dictatorial Business Environments: Outward Investment and Capital Flight

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CHAPTER 5

German Pharmaceutical Companies in South America: The Case of Schering AG in Argentina

❖ Jana Wüstenhagen Crescentem sequitur cura pecuniam. (With accumulation of money comes worry.)

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Introduction The interaction between politics and the economy has been discussed for centuries. Whereas Adam Smith strongly defended the concept of a laissezfaire policy and his vision of the “invisible hand” as an economic regulator in the eighteenth century, about 150 years later, John Maynard Keynes fought for an economically active state policy. Since then, economists, philosophers, political scholars, and historians have been concerned with the discussion of the extent of state intervention necessary in economic processes. In this context, the concept of “political risk” is of interdisciplinary interest. The term is mainly used by economists to define risks which companies have to face as a result of state measures, such as finance, production, or trade restrictions, embargoes, or others. In the worst case, these might even lead to expropriation. For multinational companies the problem is twofold, since the risks are not only restricted to the host country. The firm’s business affairs can also be affected by political measures within their home countries, a fact that is still often ignored.1 1 C. Kobrak, “Home-Country Political Risk: The Case of the German Chemical Industry,” European International Business Academy (EIBA) Conference Proceedings (1998), 2–3.

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From the perspective of the historian, the analysis of profit and loss is probably not as important as the individual interests of involved actors. For the most part, these stemmed not only from economic, but also from bureaucratic and government circles within the host or home countries and thus pursued individual goals. The often problematic connection between political and economic interests becomes especially obvious in international crises, such as the two world wars or worldwide depressions. In these cases, state intervention in international trade relations increased noticeably. But only World War II with its enormous expansion of economic warfare produced an unprecedented scale of government intervention in worldwide economic relations. The Latin American market in particular provides a clear example of this type of development. On the U.S. government’s initiative and with the support of American businessmen, several programs had been elaborated in order to eliminate the industry of the Axis powers that had settled there. The success of these projects often depended on how economic and political representatives worked together. The example of the socalled “Axis Replacement Program” of 1942, which aimed to remove German chemical companies from Latin America, proves that a program could fail completely due to diverging interests.2 The purpose of this chapter is to discuss Schering’s motivation and activities, as well as to show how the company’s efforts to protect its subsidiaries against various sorts of political risk depended on its ability to maintain close links with the relevant German authorities and good relations with the German National Socialist Workers’ Party (NSDAP). The Argentine market had been of great importance for Schering’s export business before World War II. The first section of this chapter focuses on that period of Schering’s activities in Argentina. When international tensions increased at the end of the 1930s, the management in Germany tried to cloak the subsidiary in Buenos Aires. These camouflage attempts will be dealt with in the second part. The third section examines Schering’s development after 1945 when German industry had to face drastically changed domestic and international conditions. In the conclusion, this paper returns to the issue of political risk discussing the question of whether or not Schering was an extraordinary case for the period.3

2 G.D. Taylor, “The Axis Replacement Program: Economic Warfare and the Chemical Industry in Latin America, 1942–44,” Diplomatic History 8 (1984): 145–163. 3 Schering did not operate under the name Schering AG until 1937. From 1871 to 1927, the company was called Chemische Fabrik (Vormals E. Schering), later Schering-Kahlbaum. This study will refer to the enterprise as Schering, Schering Berlin etc., or Schering AG; to the Química Schering, SA as Schering Buenos Aires, Schering Argentina, and so on.

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Schering’s Argentine Subsidiary in the 1930s The beginning of Schering’s involvement in Argentina can be traced back to the late nineteenth century, when the company first allowed a local agency to distribute its products. In the early 1920s, the German management began to send its own employees from Berlin to Buenos Aires thus pushing the sales figures up. In order to avoid paying Argentine import taxes for finished products, a small laboratory was established in 1925. Berlin continued to deliver all necessary raw materials. One year later Schering founded the Química Schering, SA, its own subsidiary in Buenos Aires.4 Throughout the 1930s, the importance of the Argentine business for the parent company in Berlin increased at a steady pace. The volume of sales of pharmaceutical specialties and chemical products grew from 1.5 million in 1932 to more than 2 million Pesos in 1935. Although, after the devaluation of the Peso in November 1933, the percentage of profits made in Argentina in comparison to Schering’s total profits worldwide decreased from 4.91 to 3.85 percent in 1934, it grew again to 4.01 percent in 1936.5 Trade relations were backed up by the Nazi government’s initiatives. In response to the persistent shortage of foreign exchange, the president of the Reichsbank, Hjalmar Schacht, announced the “New Plan” in July 1934. According to the plan, Germany would import goods only from those countries that it exported products to as well. Consequently, German foreign trade focussed on states in southeastern Europe and in Latin America.6 In 1934/1935, agreements with Argentina, Brazil, Chile, and Uruguay were signed that enabled all partners to trade without foreign exchange. On special clearing accounts, the values of the foreign partners’ supplies were credited in Reichsmark (RM). In return, they could import German goods of the same value. In the next two years, the Third Reich gained importance as a supplier to Latin American states. Germany even displaced the United States in Brazil and Chile as the leading source of imported goods.7 Doing business with Argentina proved to be more problematic. In the clearing and trade agreement of 1934 both states agreed upon an equivalent trade balance. The Argentineans were, however, not able to reduce their 4 For details see A. v. d. Becke, “Geschichte des Schering-Geschäfts in Argentinien,” Schering-Blätter, 2 (1961): 28. Schering Archive (hereafter SchA), S9. 5 Numbers according to lists provided by the Department for Statistics, 3 August 1937, SchA, B6-0109. 6 H.-J. Schröder, “Die ‘neue deutsche Südamerikapolitik’: Dokumente zur nationalsozialistischen Wirtschaftspolitik in Lateinamerika von 1934–1936,” Jahrbuch für Staat, Wirtschaft und Gesellschaft Lateinamerikas 6 (1969): 337–451. 7 J. Müller, Nationalsozialismus in Lateinamerika: Die Auslandsorganisation der NSDAP in Argentinien, Brasilien, Chile und Mexiko, 1931–1945 (Stuttgart: HansDieter Heinz, Akademischer Verlag, 1997), 282–283.

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credit balance of 55 million RM. Moreover, the complicated clearing instructions and foreign exchange control regulations of both partners hindered their trade relations.8 Still, German capital played an important role in Argentina. As shown by Newton, there was a clear German hegemony within the banking and energy sectors. Germany’s IG Farben dominated the chemical and pharmaceutical industrial sectors.9 From a political point of view, the companies did not have to fear much from their host country. Whereas some elements of the population protested against the National Socialist Jews policy (Judenpolitik), the Argentine government hardly attacked the Nazis until the second half of the 1930s.10 From an economic point of view the situation was different. To strengthen the national economy, the Argentine government implemented strict state regulations. For instance, Química Schering, SA had rented three locations in order to be able to handle the growing production volume. But the production process did not meet local regulations. Some of the production took place in a garage, which also served as a car park.11 Therefore, Schering feared that the subsidiary would be shut down by the local health authorities and that the company’s Argentine competitors would profit from Schering’s absence from the market. Another problem was the Argentine import taxes for semi-finished and finished products, which the Berlin management preferred, for obvious reasons, to avoid.12 All these reasons made finding a fourth location in Buenos Aires imperative. After Dr Herbert Rohrer, a member of Schering’s management board, had inspected the local conditions during his trip through Latin America in summer 1936, it was decided to build new plants in Argentina and Brazil.13 By 1937, a suitable plot of land was purchased in Buenos Aires (about 3,500 square meters).14 But still, the company had to overcome bureaucratic hurdles in Germany. First, there was the danger of being accused of industrial flight or abduction 8 M. Schönwald, Deutschland und Argentinien nach dem Zweiten Weltkrieg: Politische und wirtschaftliche Beziehungen und deutsche Auswanderung 1945–1955 (Paderborn: Ferdinand Schoeningh, 1998), 23–24. 9 R.C. Newton, The Nazi Menace in Argentina, 1931–1947. Stanford: Stanford University Press, 1992), 103–106, and Schönwald, Deutschland und Argentinien, 120–121. 10 Müller, Nationalsozialismus in Lateinamerika, 286–353. 11 Letter from the Schering-Kahlbaum AG, Law Department, from 18 December 1936, to the Foreign Exchange Department of the Reichshauptbank, to Mr Reichsbankrat Reiss, SchA, B6-0112. 12 Ibid. On the Argentine state’s intervention into economic processes during the 1930s, see G. Cramer, Argentinien im Schatten des Zweiten Weltkriegs: Probleme der Wirtschaftspolitik und der Übergang zur Ära Perón (Stuttgart: Steiner, 1999), 21–40. 13 File: Fabrikneubau Argentinien, SchA, B6-0112. 14 Schering Argentina S.A. Dokumentation der Firmenhistorie: 14, SchA, B1-738. (Henceforth, Firmenhistorie).

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(Betriebsabwanderung or Industrieverschleppung, typical terms used by the Nazi administration to describe efforts to transfer industrial assets abroad.). Thus, Schering needed the approval to expand from the Wirtschaftsgruppe Chemische Industrie (Economic Group for Chemical Industry). After Rohrer had talked to the responsible official, the company got the permission in August 1936.15 Second, Química Schering, SA planned to finance the undertaking with a loan. The principal advantage of this was that it required no German foreignexchange approval. This meant that under the existing foreign-exchange laws the parent company in Berlin needed no special state permission to build the plant. However, on 21 October 1936, the government closed this loophole in management’s discretion with circular 152/36. Henceforth, the Reichsbank had to agree to all credits raised by foreign subsidiaries of German enterprises in order to finance building and construction projects abroad.16 Although circumstances had fundamentally changed, it took only two months for the German management to achieve its goal. On 13 January 1937, the Reichsbank approved the required credits based on three conditions. First, all foreign exchange not belonging to the working capital (Betriebsmittel) of Schering Buenos Aires had to be remitted to the Reichsbank (according to circular 152/36). The Reichsbank insisted on the right to check these resources. Second, the value of exports to the foreign subsidiaries from the parent would not decline because of the investment. Third, the foreign-exchange duties should not be reduced by the building plans.17 Given the strictness of the official regulations, the question comes to mind, how did Schering manage to get the bureaucratic permission from Nazi regulators so quickly? The answer was a concerted effort combining adaptation to Nazi policies and persistent pressure on the relevant authorities. On the one hand, the corporate management was clever enough to make compromises, even if these would have a direct impact upon the business operation. Schering, for instance, did not only officially oblige itself to restrict its advertising budget in Argentina, but actually stuck to this. Accordingly, the advertising budget for Fortamin, an appetizer introduced to the market in 1935, was not supposed to exceed one fourth of the average expected sales profit for the years 1937 to 1945. When it seemed clear that this limit was going to be exceeded in 1938, an internal memo ordered an appropriate reduction in expenditures for the coming years.18 Since Schering 15 Copy (no date). File: Fabrikneubau Argentinien, signed Rohrer, Stüve, and Wilcke, SchA, B6-0112. 16 Note. 27 January 1937, File: Fabrikneubau Argentinien, SchA, B6-0112. 17 Copy of a release confirmation from the Reichsbank to Schering-Kahlbaum AG, 13 January 1937, SchA, B6-0112. 18 File note No. 133, 15 November 1938, Fortamin/Argentinien, SchA, B6-0112, and copy to the Law Department, 25 November 1938, SchA, B6-0112.

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knew that there was always the possibility of state authorities examining the foreign-exchange accounts, it did not want to take that risk.19 On the other hand, the management put pressure on the authorities concerned with the matter. Schering did this mainly by emphasizing the advantages for the German economy that would accrue from its expansion and investment in South America. For example, with the new plant opened in Argentina, the company expected to increase profits up to 75,300 Pesos in 1945. Another forecast mentioned 68,400 Pesos, a third, as much as 174,500 Pesos. These figures were given to the Reichsdevisenstelle (Ministry of Economics’ Foreign Exchange Office), which, as a result, could expect to get more foreign exchange.20 Additionally, the corporate management would emphasize the importance of the request. If approval was not granted as soon as possible for the projects in Buenos Aires (and Rio de Janeiro), the subsidiaries would not acquire financing, the offer of which was at very favorable terms but only valid for a short time. The subsidiaries had to wait for their parent company in Berlin to approve the loans and the amounts (500,000 Pesos, and 1,500 Contos respectively), something the Berlin office could not do until the terms had been approved by the German authorities. As Schering put it in December 1936, any delay could be damaging for both the company’s and the Reich’s interests.21 Furthermore, Schering’s location in Berlin might have been advantageous as well. It enabled it to make the necessary personal contacts with the relevant authorities very quickly. On 9 and 18 December 1936, for instance, Schering applied to the Reichsbank for the approval of the credits for Argentina and Brazil, and for a transaction between the subsidiaries in London and Paris. The Reichsbank insisted that the Reichsstelle für Devisenbewirtschaftung (Ministry of Economics’ Office for Foreign Exchange Control) had to approve the application first. The Ministry’s office was located nearby, in the center of Berlin. On 22 December 1936, a highranking Schering delegation made its way there in order to explain the company’s intentions orally to the Oberregierungsrat Dr Daniel, who, in turn, demanded a written proposal. On the very same day, Schering’s legal department produced the required document.22 According to the Reichsbank, Schering also had to submit the written agreement of the Wirtschaftsgruppe Chemische Industrie, which was also located in Berlin. The official in charge was Dr Ungewitter, who had a good personal relationship with Schering’s representative Herbert Rohrer. In summer 1936, they had met to discuss the 19 Copy (no date) (Rohrer, Stüve, Wilcke). File: Fabrikneubau Argentinien, SchA, B60112. 20 See, for example, the letter to the Foreign Exchange Office, 22 December 1936, SchA, B6-0112. Comparisons for Plans 4a, 4b, and 4c, 2 November 1938, SchA, B6-0112. 21 Letter to the Foreign Exchange Department of the Reichshauptbank, 18 December 1936, SchA, B6-0112; and letter by the Law Department to the Reichsstelle for Foreign Exchange Control, 29 December 1936, SchA, B6-0012. 22 For a copy see SchA, B6-0112. Rohrer himself had the conversation.

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building plans for the new plants in Argentina and Brazil. Within a couple of hours, the approval was received, and Schering was able to submit a copy to both the Reichsbank and the Foreign Exchange Office on 22 December. Rohrer also asked for help from the higher authority of the Wirtschaftsgruppe Chemie, the Reichsgruppe Industrie (Reich’s Group Industry), also located in Berlin, on 30 December. The Reichsgruppe supported Schering with the Foreign Exchange Office and pressed for the application to be processed quickly.23 It was through the Reichsgruppe that Schering learned on 4 January 1937 that it was very likely that the Reichsbank would approve the company’s applications for Argentina and Brazil.24 Two weeks later, the approval was indeed formally granted. With it Schering could continue to pursue its interests in Argentina. Although Química Schering was subject to Argentine foreign exchange control, the funds necessary for imports from Germany were usually granted without any restrictions, as Germany was a privileged trading partner of Argentina. Moreover, the import of pharmaceuticals and chemicals, in particular, was considered essential for the country’s economy.25 Thus, even an Argentine state tax audit of Schering’s foreign exchange transactions in the summer of 1937 aroused little concern. The disclosure of overly high writeoffs and the resulting supplementary tax payments was not considered ‘of great significance’.26 Additionally, Química Schering had close connections to other subsidiaries of the German chemical industry in Argentina. They tended to keep each other well informed about the tax authorities’ activities and corporate countermeasures.27 23 Reichsgruppe Industrie to the Schering-Kahlbaum AG on 4 January 1937, SchA, B6-0112. The Reichsgruppe Industrie was the largest of seven industry groups and was divided into 31 economy groups and numerous subject groups, sub-subject groups, and subject departments. On the National Socialist policy of “synchronizing” all employers’ associations (Gleichschaltung), see A. Barkai, Das Wirtschafts system des Nationalsozialismus, Ideologie, Theorie, Politik. 1933–1945 (Frankfurt/M.: Fischer Taschenbuch Verlag, 1988), 120–131. 24 Reichsgruppe Industrie to Schering-Kahlbaum AG, 4 January 1937, SchA, B60112. 25 The Argentine foreign trade policy was famous under the slogan “comprar de quien nos compra” (to purchase from those who purchase from us). See Cramer Argentinien im Schatten, 20. For Schering see Schering, Buenos Aires. Zusammenstellung der wichtigsten Erfordernisse für die Zuteilung von Devisen für den Import. [Compilation of the most important requirements concerning the allocation of foreign exchange for import goods. Attachment to a letter to Forinvent, 27 May 1941, J.W.], SchA, B6-0122/2. 26 Letter No. 79 to the Board of Directors of the Schering-Kahlbaum AG, Buenos Aires, 14 July 1937. Second mail, SchA, B6-0109. At the same time, the Argentine authorities checked whether or not there were any hidden dependencies of companies located in Argentina on supply enterprises overseas. 27 These controls were initiated because foreign chemical companies had reported high turnovers, but only low profits. The investigations were cancelled at the end of 1937. Letter No. 93 from Química Schering SA, 27 April 1938, SchA, B6-0109.

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Under these conditions, the construction of the new plant in Argentina was quickly completed.28 On 25 June 1938, the new plant in Buenos Aires was placed in service.29 For the German company, this was the first large subsidiary in Latin America, and for Argentina it was not only the first German but one of the first foreign plants of this kind.30 Having grown into one of the five most important foreign markets for Schering, further investment in Argentina was a logical step.31 In 1934, the capital of Química Schering had been doubled to 400,000 Pesos (m$n).32 Since its creation in 1926, the company’s profits had increased from m$n 1,632 to almost m$n 65,000 in 1937. By 1939, it reached nearly m$n 132,000.33 After the outbreak of World War II, the importance of the Argentine subsidiary grew significantly, because it had to supply most of the Latin American market. At this time, Química Schering SA was officially acting as a Swiss company and had become part of a carefully planned camouflage process, which will be examined closer in the next section.

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Between Company Interests and Party Doctrines Even before the war started, Schering’s management in Berlin had planned to secure its foreign interests if international circumstances changed. A specially founded Swiss holding company would take over the shares of Schering’s foreign subsidiaries, but control of them would still remain under German management. At first, the crucial point was the intention to let the subsidiary in the United States (Schering Corporation, New Jersey) appear as totally independent from the German parent company. Several considerations, varying from tax regulations to the American boycott of German products to the U.S. anti-dumping laws, led to this strategy. Given the massive German rearmament, Schering’s experiences during World War I, when its introduced brands had been confiscated as enemy property, also clearly 28 At the same time, an almost endless story about the financing modalities started. Schering’s plans were changed several times. The controls by Schering itself and by the Reichsbank got more and more complicated and were cancelled finally in January 1942. See the extensive correspondence and individual plans on this issue, SchA, B6-0112. 29 It is not known to date whether Schering had started with the first construction work before receiving the Reichsbank’s approval. 30 Firmenhistorie: 15, SchA, B1-738. On the date of the inauguration, see ibid.: 14. 31 H.-J. Hamann, “Argentinien,” Aus Berlin in alle Welt. Die Schering AG 1949–1971 (Berlin: Schering Aktiengesellschaft, 1998), 174. 32 The Argentine Papierpeso (Paper Peso) has been declared as moneda nacional (m$n). Schering would have liked to increase this sum, but the German foreign exchange regulations did not allow that. Química Schering S.A., Buenos Aires/Kurskontrakte, SchA, B6-0122/2. 33 This constituted the climax. Balance report 1944, SchA, B6-0165.

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played a role. All these considerations can be found in Schering’s extensive correspondence with the responsible German authorities.34 Gerhard Wilcke, who attended the negotiations for Schering in Switzerland in 1937, provides another explanation. According to him, Schering’s original motive was to prevent by all means that the Schering Corporation, New Jersey, fall under circular 152/36.35 For Schering, who gained 60 percent of its turnover abroad,36 the circular meant that practically every action required an application to the responsible German authorities and that all means exceeding the ongoing business activities of its subsidiaries had to be remitted to the Reichsbank. In order to avoid this, Schering tried to prove that the Buenos Aires subsidiary was not controlled by them.37 In that case, the foreign subsidiary’s profits could not be absorbed by the German state any more. In other words, Schering was trying to protect its own interests against the grip of the German government. The fact that the management had obviously already been considering the “Swiss model” since 1935 but had not followed through until 1937, tends to support this line of argument.38 Schering applied to the Reichsstelle für Devisenbewirtschaftung for the founding of a holding company on 20 May 1937.39 This was after the circular of autumn 1936, which seemed to have a rapid impact upon Schering’s business abroad. Nevertheless, the above-mentioned issues, in particular the losses due to U.S. taxes, certainly also contributed to Schering’s commitment to the camouflage operation.40 After the official application had been submitted to the Reichsstelle für Devisenbewirtschaftung, negotiations started with all parties involved. Schering was represented by its board members Herbert Rohrer and Hans Hartenstein, who had worked for the foreign exchange authorities before. His connections made many negotiations easier for Schering.41 The other two negotiators were Gerhard Wilcke, the head of the Legal Department for 34 On details, see Z. Jakli, “Geschichte der Schering Corporation in den Jahren 1917–1942” (unpublished manuscript): 8–9, SchA, B1-0740/1. See also C. Kobrak, National Cultures and International Competition: The Experiences of Schering AG, 1851–1950 (New York: Cambridge University Press, 2002), 282–295. 35 Rough draft, 7 February 1946: 8. Interrogation of Gerhard Wilcke and Werner Uhde at Reichsbank, interrogated by Irving J. Levy of the U.S. Department of Justice, a.m. session, SchA, B8-0069/1. 36 Berlin, 20 May 1937, File note: “Gründung einer ausländischen Holdinggesellschaft mit Kapitalaufbringung im Ausland und Ablieferung von ca. 1 Mio. $ in freien Devisen,” SchA, B8-0039/1. 37 Wilcke, rough draft, 7 February 1946, a.m. session: 8. 38 Jakli, “Geschichte der Schering,” 9 footnote 15. 39 Berlin, 20 May 1937, “Gründung einer ausländischen Holdinggesellschaft,” SchA, B8-0039/1. 40 According to Schering’s calculations, American tax claims between 200,000 and 500,000 RM could be expected from the U.S. business between 1929 and 1937. Jakli, “Geschichte der Schering,” 8 (with sources). 41 Kobrak, National Cultures, 287–295.

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Foreign Countries, and the head of Schering’s Foreign Exchange Department, Stüve. Between early May and the beginning of December 1937, more than 70 meetings and discussions took place, an indication of how demanding the whole process was. First, the Reich’s Foreign Exchange Office wanted to gain additional foreign exchange from the business. Second, the investors, a Swiss bank (Schweizerische Bankverein) and the Ciba, (Chemical Industry Basle) wanted their payment offset by a balancing investment from Schering. And third, the Swedish Enskilda Bank, which was meant to function as the trustee of the Schering shares, was worried about a 1936 loan for several million Reichsmarks owed by the Schering subsidiaries in New Jersey, London, and Bombay – precisely those subsidiaries, which were now to be included in the holding company. On 30 November 1937, the time was finally right. Expecting RM 4 million to be transferred into Germany, the Reichsdevisenstelle approved the application, which called for this exact amount to be deposited with the Swiss bank. Schering sold its British and American subsidiaries to Chepha (Chemical and Pharmaceutical Enterprises Ltd.), located in Basle and especially created for this purpose.42 For the Latin American market, another company had been founded: the Forinvent (Foreign Investments and Invention Company Ltd.), also located in Switzerland.43 Its management was Swiss,44 the exact circumstances surrounding its creation are not known. What is known, however, is that the Schering Corporation, New York, founded Forinvent on 16 February 1937.45 According to Wilcke, this step was intended to protect the other Schering holding in the U.S., the Schering Corporation, New Jersey.46 On behalf of the parent company in Berlin, the chairman Karl Maisel transferred the New Jersey shares to Forinvent on 14 April 1937.47 42 On the course of the negotiations as well as on the foundation of the holding company, see Jakli, “Geschichte der Schering,” 7–15. 43 In 1946, Wilcke stated that the location of Forinvent was Lausanne. Rough draft, 7 February 1946, p.m. session. However, a letter by the Schering A.G. to Química Schering SA, 7 October 1938 says Zürich was the location, SchA, B6-0111. In the correspondence after 1939, Basle is mentioned as the location of Forinvent. For example, letter from Rohrer to Wilhelm Anhalt and Professor von der Becke in Buenos Aires, 25 July 1939, SchA, B6–0111. Also copy, subject: Química Schering SA Buenos Aires on 27 August 1941 to the management of the Forinvent AG, SchA, B6-0121. 44 These were Albert Diener, Ernst Schneider and one Mr E. Naber. Memo, subject: Química Schering SA, Buenos Aires. Zürich, 12 May 1948, SchA, B6-0125/1. 45 Wilcke, 7 February 1946, a.m. session. 46 If the shareholder of the Schering shares, Karl Maisel, had dropped out or passed away, Forinvent could have taken over his shares. This did not happen. Wilcke, 7 February 1946, p.m. session. Rohrer, however, wrote in 1939, that the aim of founding Forinvent was its participation in the business abroad. Rohrer to Wilhelm Anhalt and Professor Dr Alejandro von der Becke, 25 July 1939, SchA, B6-0111. 47 The agreement about the handover of the Maisel shares, SchA, B8-0034/2.

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In July of 1939, also under the supervision of Schering Berlin, the Schweizerische Bankverein purchased the Forinvent shares for SFr 1.8 million, which Schering had previously put into an account of the Swiss bank. Subsequently, the Schweizerische Bankverein granted a loan for the same amount to Forinvent, which, in turn, paid the money back to Schering. Prior to this action, Schering had sold to Forinvent the shares of its companies in Argentina, Brazil, Colombia, Chile, Caracas, Mexico and in Bombay, Johannesburg, Sydney, Wellington, Bangkok, and in Canada.48 This was of no advantage at all to the Nazi state, as no foreign exchange loss or gain had been produced. Accordingly, the Foreign Exchange Office’s attitude towards Schering’s activities was skeptical.49 Nevertheless, the German authorities not only allowed these transactions but also supported Schering’s camouflage attempts during the following years. One explanation can be found within the general correspondence between economic, state, and party interests. The Schering management, the Ministry of Economics, the Reichsstelle für Chemie (Reich’s Office of Chemical Industry), and the NSDAP Auslandsorganisation (overseas office of the Nazi Party) all shared at least one objective: the protection of German assets abroad, even though there were discrepancies in terms of how to achieve this. In general, the Ministry of Economics and the Reichsstelle für Chemie supported Schering’s camouflage strategy. When, shortly after the outbreak of the war, supplementary supplies for the Latin American holdings were short, Schering wanted to send goods worth about RM 3 million to its Latin American sales organizations. If this failed, Schering warned the Reichsstelle für Chemie that there would be extensive private as well as national losses. Competitors from neutral and enemy states would soon permanently replace German products. Moreover, Schering provided detailed reports of the profits that the German state received from its Latin American holdings. Schering argued that, even after the outbreak of the war, payments had been made regularly and always on time. Accordingly, the company received RM 223,000 from Argentina; RM 232,000 from Brazil; RM 65,000 from Colombia; RM 60,000 from Venezuela; RM 30,000 from Ecuador; RM 6,000 from Central American Countries; RM 123,000 from Mexico; RM 28,000 from Uruguay; and RM 2,000 from Peru between 1 September and 21 October 1939.50 At the end of 1939, Schering received permission for the delivery of goods worth RM 2 million to Latin America.51 The Ministry of Economics 48 In September 1939, Cuba, Ecuador, and Costa Rica came in as well. List Forinvent (no date), SchA, B6–0017. 49 Kobrak, National Cultures, 285. 50 Hartenstein and Stüve to the Supervisory Board of the Chemical Industry, Mr Born, 21 October 1939, SchA, B8-0042. 51 Letter from Wilcke to Beckmann. Berlin, 11 October 1940. Subject: Verschiffung von Fortamin nach Südamerika über Japan und Portugal, SchA, B8-0042.

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also responded to Schering’s argument by giving permission for exports to Latin America for about RM 500,000. In return, Schering had to present documentation for every single shipping consignment at the end of each year.52 When it became increasingly difficult to ship goods to Latin America after the U.S. had entered the war, the company contacted the ministry again in 1942. A couple of kilograms of Oestron for the hormone business had to be shipped to Brazil or Argentina via Portugal. But the Portuguese customs duties had to be paid in foreign currency. In wanting to save these costs, Schering’s interests were consistent with those of the Reich. The solution was a duty-free transport by the courier service of the Foreign Ministry, possible only because of permission from the Ministry of Economics.53 In contrast, the overseas office of the NSDAP and its Argentine CountryGroup in Buenos Aires (Landesgruppe) rather disapproved of Schering’s camouflage strategies. On the one hand, this was due to the general policy of the NSDAP not to support any camouflage activities of German companies building subsidiaries abroad. It does not come as a surprise then that the party did support cases that went the other way around, in other words the camouflage of takeovers of foreign companies by German enterprises.54 The NSDAP was explicitly dissatisfied with the camouflage methods Schering used, trying to break the still existing connections to its foreign holdings in the spring/summer of 1940 (such as the payment of supplies to Schering in Berlin), for instance. The Auslandsorganisation (AO) suspected that Schering would try to deprive the German economy of their assets abroad, and this would not be in the Reich’s interests. Finally, it agreed only because “after the war, we will have the necessary means to efficiently prevent related efforts of the Schering company.”55 Party representatives demonstrated a similar awareness of its power in the company’s personnel management. When Schering wanted to send a Swiss representative to Buenos Aires in July 1941 in order to manage the export business for Latin America locally, the NSDAP’s overseas office immediately raised their objections.56 For them, only German nationals (Reichsdeutsche) would guarantee the possibility of reversing the camouflage process in the future. Fuming about the “rudeness” of the NSDAP’s reaction, Schering formulated a three-page counterstatement. The Swiss representative who was, according to this memo, proGerman, had a fine character, had been working for Forinvent for more than a year and would thus be an excellent specialist for Schering’s business in 52 Aufsichtsbüro (Examining Bureau) Chemical Industry to Schering, Chemical Department (no date), SchA, B8-0042. 53 Schering on 3 March 1942 to RWM, Regierungsrat Pfeiffer, SchA, B8-0042. 54 Ibid. 55 Note from 15 May 1940. Department for Auslandsorganisation in the RWM to the Referat V Dev. 2. SchA, B8-0042. 56 Here and hereafter letter from Hartenstein, Wilcke and Dörge to the Auslandsorganisation, 17 July 1941, SchA, B6-0122/2.

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Latin America. The basic guidelines of the AO suggested that a Swiss should not be working in any high position. Since Schering did not intend to place him in such a high rank anyway, the company argued that “it was selfevident that it would be following the guidelines”. According to Schering, the reaction was “unjustified” since the company had already laid off employees after the AO had intervened.57 Additionally, via Forinvent, the management in Berlin had already pressed on the search for a national German for the Latin American export business in Buenos Aires.58 When in 1942 German– Argentine tension increased, Schering first asked the AO before employing another Argentinean (F. Brugger) in the management of Química Schering.59 This must be interpreted as a direct reaction to previous problems the company had had with the party’s Landesgruppe in Buenos Aires. In the end, the Auslandsorganisation tolerated the camouflage activities of Schering for different reasons. One aspect has already been mentioned in this chapter. They were convinced of their ability to eventually influence the situation, if necessary. A second aspect resulted from the real financial advantages that Schering created for the Third Reich. Well aware of this aspect, the management in Berlin stressed the fact to the party’s overseas office. One letter to its Chief Secretary reads, not without irony, “[i]t might be of interest to you that the camouflage strategy through the Forinvent – which is so useless in your opinion – brought the Reichsbank no less than SFr 1.5 millions [as of July 1942] in free foreign currency.”60 These were profits from the Latin America business, which had been made by Atlantis, a subsidiary of the Forinvent located in Panama.61 The very same argument even enabled Schering to gain support from the AO in Berlin against the Party’s Landesgruppe in Buenos Aires. The latter had called for the total exposure of the Argentine holding of Schering in the summer of 1942. Camouflage in Argentina, according to the local group, would be “useless and dishonorable.” Moreover, the German embassy could not even intervene in the case of confiscation, since, according to Argentine law, only the Swiss delegation was responsible. As a result of this camouflage, even the Berlin office concluded, Schering was without diplomatic protection in 57 This applied to the special case of Mr Gregorius, for instance, who had been working for Schering in Egypt and was fired by 31 December 1940. It still has to be examined, if it really was the personnel policy regulations of the NSDAP Auslandsorganisation that caused the employment of 22 new employees with German surnames in Argentina between 1 September 1939 and 17 July 1941. 58 Letter from Hartenstein, 17 July 1941, SchA, B6-0122/2. 59 File note, 26 October 1942. Subject: Fernando Brugger/Buenos Aires. Signed Hartenstein, SchA, B6-0122/1. So far, the German Wilhelm Anhalt and Alejandro von der Becke, who was born in Argentina, had led the business activities. 60 Schering AG (Berckemeyer and Wilcke) to the NSDAP Auslandsorganisation, 21 July 1942, SchA, B6-0122/1. 61 Ibid. Atlantis SA had been bought in April 1940 by Schering. During the British blockade, it supplied the South American Schering/Forinvent companies with U.S. goods. See also Kobrak, National Cultures, 286–287.

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Argentina. Therefore, the subsidiary’s true ownership had to be revealed soon.62 Schering based its defense on three points. First, both the Ministry of Economics and the AO had agreed on every step of the camouflage. Second, to some extent, the revelation had already occurred in summer 1941, when Schering separated from the Schweizerische Bankverein. Formally, the Latin American subsidiaries were still the property of Forinvent, but in terms of their ultimate possession, they belonged to Schering Berlin and fell thus again under German foreign exchange law (circular 152/36).63 A further step toward exposure was taken in 1942, when Schering sold its Forinvent shares to the Swiss company Transpharm AG, which was located in Glarus, Switzerland. This change was meant to avoid Swiss tax claims. During this transaction, an Argentine holding, Arcofina, which had been interposed between the companies, was removed from the structure of Schering and its Latin American holdings. According to Schering an immediate re-takeover by the Berlin office was not possible, since difficulties would have emerged for the Schweizerische Bankverein. Third, the defense went on, Schering had contributed so tremendously to the amount of foreign exchange the Reichsbank was receiving, that diplomatic protection of its subsidiaries and staff abroad should not be denied for formal reasons.64 The discussion about the revelation, however, went on until October 1942. It was mainly due to Hartenstein and Wilcke that the Berlin headquarters of the Auslandsorganisation finally instructed the Argentine Landesgruppe that an exposure would be “inopportune” because of possible dangers to Schering’s business abroad.65 To a great extent, the powerful position Schering had with the German authorities resulted from the fact that the Química Schering verifiably made profits until 1944,66 although it was also subject to state interference. After the U.S. had joined the war, in June 1942 the Argentine government introduced controllers into 13 German companies. The protests of Química Schering were to no effect.67 From then on, two controllers were monitoring 62 Letter from the Auslandsorganiation of the NSDAP to Schering, 15 July 1942. SchA, B6-0122/1. 63 Before that, the British had encouraged the Schweizerische Bankverein in early 1941 to introduce Forinvent into an American–Canadian trust. Otherwise, Forinvent would remain on the “black list.” See Schering during the War (no date), SchA, B6-0018/2. 64 Letter from Berckemeyer and Wilcke to the Auslandsorganisation of the NSDAP, 21 July 1942, SchA, B6-0122/1. 65 The topic was planned to be discussed again at the end of 1943. Letter from the Auslandsorganisation of the NSDAP to Direktion of the Schering AG, 17 October 1942, SchA, B6-0122/1. 66 The reported profit amounted to m$n 46,456,92 in 1942; m$n 56,144,15 in 1943, and m$n 21,015,85 in 1944. Balance report 1944, SchA, B6-0165. 67 Schönwald, Deutschland und Argentinien, 122. Also report from Fernando G. Brugger: 1–6, Buenos Aires 1949, (Hereafter, Brugger), SchA, B6-0111.

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the enterprise’s financial transactions until the end of 1944. However, the company’s normal business activities were not disrupted by their work. According to the German embassy in Buenos Aires, these measures were only to be seen as “concessions of a more theoretical nature to [the] PanAmericanism.”68 Even the breaking off of the diplomatic relations between Argentina, and Germany and Japan on 26 January 1944 had no impact upon the company’s relations to the Argentine authorities. Only the administrative board (Consejo de Administración), which had been established in November 1944, brought a dramatic increase in state intervention into the business activities of Química Schering. This happened for obvious reasons. The administrative board had great influence on the choice of companies that were to be expropriated or put under Argentine administration. As representatives of the Argentine industry, its members were often competitors of the companies that were to be examined. It comes as no surprise, then, that the Química Schering was targeted. Since January 1945, so called “state trustees” were in charge of monitoring the company.69 They attended the meetings of management and shareholders (for the first time on 27 March 1945), had access to documents, and demanded precise reports on every single business activity. The latter fact in particular was “seriously threatening” for Química Schering since it made the purchase of goods practically impossible. The company had not succeeded in being taken off the Allied “black list.” Thus, many purchases had to paid for in cash and in secrecy. This argument even convinced the “trustees,” and, from mid January 1945 onward, Química Schering could proceed with its material purchases as usual. In February and March of 1945 the Argentine government enforced further decrees. As a result of these, Química Schering had to transfer their bank deposits to an account of the Argentine Central Bank (Banco Central de la República Argentina). Additionally, it now had to apply to the Ministry of Trade for the distribution of dividends and submit a working plan there every three months. An application had to be submitted before employing personnel for longer than one year, and the upper limit of the salaries of directors and management was fixed at $1,500 per month.70 Química Schering’s control through the Argentine state had increased drastically. Argentina’s declaration of war on Germany and Japan on March 27, 1945 further intensified the situation for local German companies. Having been blamed for 68 Cramer, Argentinien im Schatten, 169. 69 “State trustees” were also placed in the subsidiaries of Merck, Bayer, Mannesmann and others. See Newton, The Nazi Menace, 239. 70 Brugger: 9–10. Furthermore, a new income tax law in 1944 caused a tax increase of 100 per cent for the Química Schering retrospectively until 1 January 1943. On 1 January 1945, the Argentine government enforced the foundation of a pension fund for commercial employees. The Schering management in Buenos Aires was worried about “considerable” burdens for the enterprise resulting from this step. Balance 1943, Química Schering, SchA, B6-0165.

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supporting the Axis powers by the U.S. in previous years, the Argentine government now tried to placate the U.S. government.71 On 31 March, a new decree made all subsidiaries of German companies in Argentina subject to the administrative board. Moreover, the Argentine government could draw on the company’s assets for war compensation and block funds and private accounts of leading employees and directors. By October 1945, the authority responsible at the time, the Commission of Vigilance and Final Disposition of Enemy Property (Junta de Vigilancia y Disposición Final de la Propiedad Enemiga), had liquidated five German companies. Eight others were in the process of liquidation, and 61 companies were under full control through the Argentine government.72

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Schering after the War Química Schering, SA and its Laboratorio Químico Biológico, SA belonged to the latter group of companies. On 11 September 1945 at 11 a.m., a committee accompanied by the police had appeared in the company’s location in Buenos Aires and declared the company confiscated. This was not a complete surprise for the management for only one week earlier, the Argentine Siemens subsidiary had made the headlines, when the management refused to hand over the company voluntarily. Only police intervention could force the handover. Being forewarned in this way, there were no problems during the handover of Química Schering, SA. But, as Fernando G. Brugger remembered some years later, “we would never have imagined that such a drastic action could be applied to our Argentine company.”73 Since 1942, Brugger had been one of the three managing directors of Química Schering. As the company’s representative, he tried to reclaim the confiscated properties. Throughout his 1949 activity report, he emphasized the purely Argentine nature of Química Schering and its total independence from the German parent company. However, in the summer of 1948, the Supreme Court of Argentina did not accept the argument that Química Schering was owned by a Swiss company and could thus not be regarded as enemy property.74 The enterprise remained, just as the Laboratorio Químico Biológico and about 30 other German companies, under the administration of the state holding company DINIE (Dirección 71 On the U.S. efforts to unite all Latin American states and make them stand up against Germany and Japan, see Schönwald, Deutschland und Argentinien, 40–46. 72 Ibid., 123–125, and Newton, The Nazi Menace, 366–367. 73 Brugger: 35. 74 According to Brugger: 90, the trial about the Argentine holding of the German pharmaceutical enterprise Merck had been crucial for the failure of Schering. As a precedent, the Merck trial would have determined all later verdicts.

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Nacional de Industrias del Estado).75 Only a few months later, in February 1949, DINIE suggested its collaboration with the Schering AG in Berlin in the field of hormone production. The negotiations in Buenos Aires remained without results since Schering did not intend to provide Argentina with details of its production method. At the end of August 1950, DINIE broke off its contacts with Berlin.76 Still, this action sheds light on an interesting aspect of the Argentine Enemy Law. The official reason for the confiscation of Química Schering was the company’s contact with the enemy in the form of the German Schering AG.77 For this very reason, all attempts to sue for restitution had failed in Argentine courts. DINIE’s step to suggest collaboration must thus have resulted from the massive economic problems of the state. By 1949, it became increasingly obvious that the economic policy of President Juan Domingo Perón had failed. Increasing workers’ wages on the one hand but neglecting the agricultural industry on the other, together with the decline of agricultural production rates that had been intensified additionally by the 1949 drought, and an increasing domestic consumption cut the export business. The profits Argentina expected to make of the trade with Western Europe in connection with the Marshall Plan were far lower than the U.S. had originally predicted. The war in Korea, which the Argentine government hoped would initiate an increase in the prices of its goods on the world market, as was the case in World War II, did not help tremendously either. At the climax of the crisis, Argentina’s trade deficit amounted to about $455 million. The country had been replaced by the U.S. as a leading wheat export nation.78 West Germany, in contrast, recovered soon with American support. In response to the start of the Cold War, as well as in order to reduce the high occupation costs, from 1947, the U.S. supported foreign economic relations in the British- and American-occupied zones. Through the Joint Export Import Agency (JEIA), German foreign trade was now organized by the British and Americans working together. The Agency began to enable Schering to export goods in 1948 and also helped to maintain transport through the “air corridor” during the blockade of Berlin.79

75 Founded on 1 July 1947 on the base of decree 18.991, DINIE held all those firms that were of special interest for the Argentine economy. Schönwald, Deutschland und Argentinien, 128–129. 76 Letter from the Schering AG (Gahn and Hamann), 14 June 1951 to Arnold Spitta, Studiengesellschaft für privatrechtliche Auslandsinteressen e.V., Bremen, SchA, B6-0125/2. 77 See Brugger: 88. 78 Schönwald, Deutschland und Argentinien, 67–68. 79 H.-J. Hamann, Die Schering AG 1945–1949, Ein Unternehmen kämpft um sein Überleben. 2nd ed. (Berlin: Schering Aktiengesellschaft, 1997), 47.

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In spring 1949, the JEIA signed Schering’s first trade agreement with Argentina.80 Shortly after that, German and Argentine authorities negotiated the possible restitution of German companies’ trademarks for the first time.81 Wanting to negotiate the problem of confiscated German property in Argentina at the same time, German industry pressed its government. Effected companies had founded the Work Forum Argentina (Arbeitsgruppe Argentinien) within the Studiengesellschaft für privatrechtliche Auslandsinteressen e.V. in Bremen. Wilhelm Borner, the representative of Schering, was one of the founding members.82 Both the West German government and the Studiengesellschaft agreed that the problems could be solved quickly by Perón himself. “Symbolic gestures” of goodwill for instance could create a beneficial atmosphere, as the former German ambassador Wilhelm von Pochhammer, who was living in Argentina, suggested.83 The Studiengesellschaft picked up on the recommendation. In August 1951, it suggested that the members of the Arbeitsgruppe Argentinien make such a “gesture” to the president’s wife, María Eva Perón. Evita’s commitment to social care work was well known, so a medical-support train with German products was regarded as an appropriate gift. According to this suggestion, Mrs Perón, who was against the restitution of German properties in general, would be appeased. Just ahead of the next elections, President Perón could impress the country; the German community of Buenos Aires, which was mostly constituted by the former employees of German companies, could stress their loyalty to the President and the First Lady.84 Schering was generally willing to support the plan with its pharmaceutical specialties. There was only one problem. Its trademarks had been taken over by the DINIE. “As a result of this step, which was initiated by the President, as we know, we cannot send any products of our trademarks to Argentina at the moment.”85 80 On extensive details about the re-establishment of the German-Argentine trade relations, see Schönwald, Deutschland und Argentinien, 137–157. Obviously, Schering did not supply its former holdings until 1949. Between 1949 and 1951, however, their value amounted to DM 500,000. Letter from Schering AG to the Studiengesellschaft (A. Spitta) from 14 June 1951, SchA, B6-0125/2. One of the former managing directors of Química Schering, Wilhelm Anhalt, worked as the agent for the supplies to DINIE. He could arrange that most of the calls for tenders could be won by Schering AG. Firmenhistorie: 26. 81 Schönwald, Deutschland und Argentinien, 273–274. 82 The Studiengesellschaft had been founded in summer 1948. On details, see H.-D. Kreikamp, Deutsches Vermögen in den Vereinigten Staaten: Die Auseinandersetzung um seine Rückführung als Aspekt der deutsch-amerikanischen Beziehungen 1952–1962, (Stuttgart: Deutsche Verlags-Anstalt, 1979), 44–48. 83 Schönwald, Deutschland und Argentinien, 278–280. 84 Letter from the Studiengesellschaft to the members of the Arbeitsgruppe Argentinien, Bremen, 8 September 1951, SchA, B6-0125/2. 85 Schering AG to the Studiengesellschaft, 29 August 1951, SchA, B6-0125/2. After the outbreak of her disease and Eva Perón’s withdrawal from politics, this idea was not considered further.

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It was only at the beginning of 1953 that Perón ordered the first partial releases of German trademarks and patents. After that, Schering got 30 trademarks back from DINIE. However, this step was only important in terms of propaganda, since these trademarks were rarely used and thus not of high value.86 Only Perón’s change toward a more liberal economic policy in summer 1953, under the impact of the country’s economic crisis, allowed an agreement with Germany. But the realization of the basic agreement, which had been signed in August 1953 and planned the restitution or sale of DINIE holdings to the German parent companies, was prevented by the overthrow of Perón in September 1955.87 It was not until 25 November 1957 that Pedro E. Aramburus’ government signed an agreement with the German government allowing the official auctioning of the DINIE companies. Despite strong public criticism, the new government under Arturo Frondizi honored the agreement.88 On 23 June 1958, the first three, formerly German, DINIE companies were auctioned: Guenther Wagner, Merck, and Schering.89 The parent company in Berlin had been preparing for this event for a long time already, even outside the Studiengesellschaft. On behalf of Schering, one of the former managing directors of Química Schering, Wilhelm Anhalt, got the foundation of the Berlimed, SRL notarised on 30 May 1957. The new company’s capital amounted to 2,000 (new) Pesos. It was located in his flat in Buenos Aires. Anhalt registered new products with the Argentine health care authorities and ordered imports of raw materials in order to prepare a smooth start for the Schering business once the Química Schering had been bought back. In March 1958, the Berlimed was renamed Schering Argentina, SRL, and its capital was raised to 200,000 (new) Pesos. Six months ahead of the auction, Hans-Jürgen Hamann, the director of Schering’s Foreign Department, and four other colleagues from Berlin, went to Buenos Aires in order to plan the takeover together with the former managing directors of Química Schering, Professor Dr Alejandro von der Becke, and Wilhelm Anhalt. It soon turned out that Schering was the only company interested in buying Química. So Schering bought back its former holding company and the Laboratorio Químico Biológico at the price of 17.2 million Pesos. On 1 September 1958, Schering officially celebrated the return of the “lost” holding into the conglomerate in the company’s former office in Buenos Aires.

Conclusion In retrospect, it is hard to determine what contributed most to Schering’s success: private sector initiatives or the state’s negotiating skills. From a 86 87 88 89

Schönwald, Deutschland und Argentinien, 289. Ibid., 297–305. Ibid., 309–310. Firmenhistorie: 29–30, SchA, B1-738.

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contemporary point of view, the return of the German trademarks seemed to provide the only ground for negotiations with Argentina, at first. As the Studiengesellschaft had decided in Bremen, this problem was supposed to be solved by talks between both governments. That is why, in March 1951, Schering declined to assign its own lawyer to the negotiations with DINIE in Buenos Aires.90 Convinced at this time that this was the only way to pursue the company’s interests, the management actually restricted its own scope of action. A similar strategy can be observed for the period of the Nazi regime, when Schering deliberately agreed on a limitation of its propaganda budget in Argentina. However, the course of Química Schering’s camouflage process indicated that the German parent company did not always have to comply with the Nazi Party’s Auslandsorganisation expectations. This can be interpreted in different ways. On the one hand, Schering could count on the support of the Reich’s Ministry of Economics. On the other hand, Schering’s management maintained good personal relations with the important state authorities in the Third Reich, such as the Reichdevisenstelle, the Reichsbank, or the Reichsgruppe Chemie. Finally, and probably most importantly, the economic advantage the state hoped to gain and actually achieved through Schering ensured the company a certain extent of entrepreneurial freedom. Obviously, the situation was not very different in Argentina. Química Schering had been subject to numerous state interventions (taxes, state controllers, social care laws, and so on) before and after the outbreak of the war. Recent research results indicate that foreign companies could not expect to get much support from the Argentine government throughout the 1930s. However, compared to other Latin American countries, for example Mexico and its nationalization policy, foreign enterprises and their subsidiaries found little to complain about in the Argentine government’s attitude towards them.91 In 1942, for instance, it was the pro-German attitude of the Argentine government that made the very lax controls by supervisors possible. In 1945, the Química Schering management could continue with its anonymous method of purchasing goods, even though it was against Argentine law. The reason can be attributed to the Argentine authorities’ interest in keeping the company’s business going. At the end of this study the question can be posed as to whether Schering’s case should be regarded as exceptional or in fact, typical. It is well known that every German company stood under the totalitarian control of the National Socialist regime. A set of rules and regulations changing every now and then restricted the ground for entrepreneurial actions to a minimum. The war additionally curbed industry. For German multinational 90 Borner to Edwin Reinhold, Buenos Aires, 10 March 1951, SchA, B6-0125/2. 91 Cramer, Argentinien im Schatten, 29.

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companies, it became almost impossible to communicate directly with their subsidiaries abroad. Telephone calls could only be made from a phone registered with the authorities. Letters had to be submitted in duplicate to a specific post office at a specific time. It was forbidden to mention business details. Any failure to follow these orders risked being deprived of permission and privileges granted by the Nazi Party and the state or being sued for negligent high treason.92 Political risks at home were compounded by those in host countries. One example of the impact that political conditions had upon the business of multinationals is provided by the case of E. Merck Chemische Fabrik in Darmstadt. After terminating the “joint venture” with its former Argentine distributor, Schering’s biggest German competitor had founded a subsidiary in Buenos Aires in 1930. Like Schering the company decided to expand and build a new plant. But although Merck had started only a little later, in 1938, it found itself surrounded by a public anti-German mood, which delayed the deal. To get credit in Argentina proved almost impossible. According to Merck, the potential creditors were of Jewish or American origins and therefore rejected its approaches.93 As a matter of fact, the company suffered consequences from the “Patagonia affair” (a hoax published in March 1939 by the Argentine press contending that the Nazis intended to annex a portion of the pampas) and Nazi anti-Semitic policies, which were heavily criticized in the Argentine press at the time. While one might see Merck’s decision as the result of bad management and timing, this argument does not explain the company’s fate at the end of the war. Together with Schering, its Buenos Aires subsidiary had been confiscated and put under the administration of the Argentine state. But whereas Schering’s controllers let the company’s old employees do their job, Merck later complained of controllers ruining the company’s business through their corrupt and unqualified management.94 After the war, in 1958, both companies could buy back their former subsidiaries in Argentina having followed the same strategy by joining the Studiengesellschaft in Bremen. Certainly, more parallels can be found in their development but are not discussed at this point. Nevertheless, the present sources indicate that Schering was not an exception. Like other German companies it was undoubtedly exposed to extensive state regulations in 92 For details see the circulars regarding the regulations for international mailing and telephone calls, Landesarchiv Berlin (LAB) A Rep. 229, No. S/119, S/124, S/162. 93 See the correspondence in the Merck Archive, R 15/191. For Merck’s history see I. Possehl, Modern aus Tradition: Geschichte der chemisch-pharmazeutischen Fabrik E. Merck (Dreieich: HMS Druckhaus, 1994). 94 Note from Wilhelm Hahn concerning Merck Química Argentina, 1 September 1979. Merck Archive H 1/86.

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Germany as well as in Argentina. But it seems that the state’s bureaucratic regulations only meant more work and time efforts for the management in order to be able to manage all necessary talks and correspondence. While this condition may have delayed the realization of certain interests of the enterprise, it certainly did not prevent it.

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CHAPTER 6

Multinational Jewish Businesses and the Transfer of Capital Abroad in the Face of “Aryanization,” 1933–1939

❖ Martin Dean* The extent of the control over life that economic control confers is nowhere better illustrated than in the field of foreign exchange. Friederich A. Hayek, The Road to Serfdom, 1944.

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Introduction The intensification of German foreign currency restrictions and the aggressive campaign for the “aryanization” of German business placed Jewish owners in an unenviable situation. They faced considerable bureaucratic hurdles and the prospect of a miserable return on the legal transfer of capital. In addition, the introduction of blocked accounts as the repository for the proceeds from “aryanization” made it increasingly difficult for Jews to emigrate with anything more than a small fraction of their wealth.1 Under these circumstances of rigorous currency controls and the “legalized theft” of their source of income, Jewish businesses with branches overseas had certain limited opportunities to save at least part of their original capital. The export of capital abroad was necessary, however, if Jewish businesses were to * The opinions stated in this essay are those of the author alone and do not necessarily reflect those of the United States Holocaust Memorial Museum or of the United States Holocaust Memorial Council. An Italian language version of this paper was published in Passato e Presente, Numero 59-maggio/agosto 2003, 99–122. 1 In 1938 new regulations stipulated that all proceeds from “aryanization” had to be paid into a blocked accounts, see Alex Bruns-Wüstefeld, Lohnende Geschäfte: Die Entjudung der Wirtschaft am Beispiel Göttingens (Hannover: Fackelträger, 1997), 104.

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survive and provide an income for their owners under the difficult conditions of emigration. This chapter will examine several examples of “multinational” Jewish businesses that attempted to export capital – some successfully and others not. These case studies are not necessarily representative of the overall pattern among Jewish businesses, or even of those with international connections. Nevertheless, a careful analysis of the records examined, which include documentation from the Currency Offices (Devisenstellen), the Gestapo, the Chambers of Commerce and the Financial Administration, serves to reveal some of the practical obstacles that had to be overcome and those tactics that proved most effective. Among the case studies to be examined are those of a paper mill and a paintbrush factory with branches in Britain and the failed attempt to establish a screw-manufacturing business in Italy. The frustration expressed by the Gestapo in reports written about certain Jewish businessmen can be judged as some small degree of success. In the face of radical persecution from a dictatorship wielding sweeping legal and executive powers, it took considerable skill to extract the remnants of a business abroad to start afresh. This could, however, be facilitated by the founding of a foreign branch that then provided a basis for a subsequent transfer of capital. The cases concerned are not really “Multinationals” in the traditional sense of large-scale corporations with operations in many different countries. Rather the focus here is on smaller family businesses that traded internationally, and for this reason opened branch offices abroad. With regard to the existing literature, most reliance has been placed upon the works of Raul Hilberg and Frank Bajohr for the historical framework of “aryanization” together with the more recent studies of Gerd Blumberg regarding the operation of the currency control laws.2 The question of capital export in the face of government expropriation policies raises a very delicate moral issue, touched on by Frank Bajohr in his analysis of “aryanization” in Hamburg. When is it justifiable to react against the discriminatory policies of a dictatorship with subterfuge and

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.

2 Frank Bajohr, ‘Arisierung’ in Hamburg (2nd ed. Hamburg: Hans Christians, 1997); Raul Hilberg, Die Vernichtung der europäischen Juden (Frankfurt am Main: Fischer, 1961, 1982) 3 vols.; Gerd Blumberg, “Die Zollverwalltung und die Devisenstelle im Dritten Reich“ in Geschichte der Finanzverfassung und -verwaltung in Westfalen siet 1815 ed. Wolfgang Leesch et al, (Münster: OFD, 1998), 289–353; G. Blumberg, “Etappen der Verfolgung und Ausraubung und ihre bürokratische Apparatur” Verfolgung und Verwaltung: Die wirtschaftliche Ausplünderung der Juden und die westfälischen Finanzbehörden in Alfons Kenkmann and Bernd-A. Rusinek, (Münster: Oberfinanzdirektion, 1999), 15–40. Harold James, The Deutsche Bank and the Nazi Economic War against the Jews (Cambridge: Cambridge University Press, 2001) also contains several interesting examples of capital transfers by Jews assisted by banks involved in the “aryanization” process. Large projects are now underway on the operation of the regional Financial Adminstrations in Hessen, Bavaria and Lower Saxony during the Third Reich.

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even a disregard for “state laws” that are themselves a negation of basic human rights? With respect to Germany’s harsh currency laws, a Hamburg court made a precedential ruling in 1953 that “illegal” measures to save property were justified self-defense responses, since Jews were forced to emigrate if they wanted to avoid a “completely uncertain personal fate.”3 For the purposes of immigration, the U.S. government came to a similar conclusion much earlier. In early 1939 the State Department ruled that, in the light of Germany’s harsh fiscal discriminatory policies, offences by Jews against German currency laws did not constitute “moral turpitude” that would exclude them from immigration into the United States.4 This unusual ruling made in the immediate wake of Kristallnacht may assist us in placing the sometimes “illegal” actions of Jewish businessmen in their correct historical perspective, irrespective of our current acute awareness of the fate of those who failed to emigrate in time.

Discriminatory Measures Applied Against Jewish Economic Life A summary of some of the main instruments applied against German Jews is presented here to provide the context within which Jewish businessmen had to operate. This selection is not exhaustive, but demonstrates the variety of Nazi repressive measures imposed against the Jewish “racial” minority:

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The Reich “Capital Flight Tax” (Reichsfluchtsteuer)5 The Reich Flight Tax was introduced in 1931 as a measure aimed at preventing capital flight during the economic crisis. At that time it was not intended as a specifically anti-Jewish measure. However, its harsh provisions – entailing the confiscation of 25 percent of all domestic wealth – meant that it soon became a severe obstacle to the transfer of Jewish capital out of Germany, once the large-scale emigration of Jews commenced in 1933.

Currency Transfer Restrictions and Levy Another main obstacle to emigration was the exorbitant levy claimed by the Reich on any legal currency transfers which could only be conducted via the Deutsche Goldddiskontbank (Dego.) from blocked emigrant accounts (Auswanderersperrkonten). This levy was 20 percent in 1934, but it was increased successively to 65 percent and then 68 percent in 1935, reaching 81 3 Bajohr, ‘Arisierung’ in Hamburg, 156–158. 4 National Archives and Records Adminstration, College Park MD (NARA), RG238, T-120 (German Foreign Office), Roll 4653, frame K338557. 5 See also, Dorothee Mussgnug, Die Reichsfluchtsteuer (Berlin: Duncker & Humblot, 1993).

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percent in October 1936 and 90 percent in June 1938. From September 1939 the rate was increased to an excruciating 96 percent – leaving only 4 percent of the actual value at the disposal of an emigrant in foreign currency overseas.6

Currency Transaction Approvals A further complication was the system of currency transfer approvals by the Currency Offices that from 1935 onwards was directly linked to a declaration from the relevant tax authorities that no outstanding taxes remained to be paid (Steuerliche Unbedenklichkeitsbescheinigung).7 Surmounting this hurdle became increasingly difficult once further special taxes and levies were introduced towards the end of the 1930s.

The Blocking of Accounts (Sicherungsanordnungen) In December 1936 the powers of the Customs authorities were extended to enable them to block accounts even on the mere suspicion of plans to emigrate abroad, in many cases thereby serving to complicate and delay such plans.8 From August 1939 onwards almost all Jewish bank accounts were subjected to restrictions such that only a small amount could be withdrawn monthly for subsistence, with all other withdrawals subject to approval by the Currency Offices.9

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The “Punitive Tax” (Sühneleistung) on Jewish Property (also known as the Judenvermögensabgabe or JuVa.) The “Punitive Tax,” applied to all Jewish property over RM 5000 in the wake of Kristallnacht, ultimately seized 25 percent of registered Jewish property, raising RM 1.1 billion.10 Much of this was collected in the form of securities, which even had an impact on the level of the German stock market once the government commenced the resale of securities via the Prussian State Bank.

“Aryanization” The transfer of business ownership from Jews to non-Jews was accomplished successively by a combination of direct pressure and concrete legal measures. The compulsory transfer of ownership was not given a formal legal frame6 Bajohr, ‘Arisierung’ in Hamburg, 153–154. 7 Blumberg, Die Zollverwaltung, 324. 8 Blumberg, “Etappen der Verfolgung,” 25; see also Blumberg, Die Zollverwaltung, 326–327. 9 Blumberg, “Etappen der Verfolgung,” 31–33. 10 Stefan Mehl, Das Reichsfinanzministerium und die Verfolgung der deutschen Juden, 1933 – 1943 (Berlin, 1990) in Berliner Arbeitshefte und Berichte zur sozialwissenschaftlichen Forschung Nr. 38, 78.

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work until the issuing of a series of decrees during the course of 1938. However, the effects of boycotts, exclusion from government contracts and other discriminatory measures forced an increasing number of Jewish businesses to be sold or placed predominantly under “aryan” control. In this process the Regional Economic Advisor of the Nazi Party played an increasingly active role, assuming the right to approve “aryanizations.”11 Under these conditions of mounting duress, the price received by Jewish owners was generally considerably under the market value.

Coerced Emigration Following the “Kristallnacht” pogrom on the night of 9/10 November, 1938, some 30,000 Jews were arrested, with many being sent to concentration camps. Some of these men were subsequently released only after they had signed an undertaking to leave the country within a set period of a few weeks or months.12 This policy combined with the obvious shock of the pogrom itself caused a further upsurge in emigration that coincided with the introduction of the final laws regulating the compulsory aryanization of Jewish businesses on December 3, 1938.13

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Denaturalization Less well known is the effect of the intensified denaturalization of Jewish emigrants by the late 1930s that caused their remaining property in Germany to be confiscated. In the cases of some emigrant businessmen, denaturalization was applied as a direct means for seizing their business assets, in an attempt to forestall any protection that might be offered by the acquisition of the citizenship of another country.14 Many other aspects of Nazi economic persecution could be mentioned, but these examples demonstrate clearly the climate of extreme hostility 11 Bajohr, ‘Arisierung’ in Hamburg, 96–103, 174–186. 12 Kurt R. Grossmann, Emigration: Die Geschichte der Hitler-Flüchtlinge 1933–1945 (Frankfurt am Main: Euopäische Verlagsanstalt, 1969), 115; for an example of this practice see Politisches Archiv des Auswärtigen Amtes, Berlin (PAAA), Inl. II A/B, R 99921 Denaturalization proposal of Gestapo Neustadt a.d. Weinstrasse against G.I.H. on May 19, 1941. Trustees and liquidators were often appointed to Jewish businesses while their owners were under arrest, see Frank Bajohr, Parvenüs und Profiteure: Korruption in der NS-Zeit (Frankfurt am Main: S. Fischer, 2001), 117. 13 J. Walk ed., Das Sonderrecht für die Juden im NS-Staat, 2nd edition, (Heidelberg: C.F. Müller, 1996) III 46. 14 See Michael Hepp ed., Die Ausbürgerung deutscher Staatsangehöriger 1933–45 nach den im Reichsanzeiger veröffentlichten Listen (Munich, New York, London, Paris: K.G. Saur, 1985) 2 vols. and Martin Dean, “The Development and Implementation of Nazi Denaturalization and Confiscation policy up to the Eleventh Decree to the Reich Citizenship Law,” in Holocaust and Genocide Studies, Volume 16, No. 2 (Fall 2002): 217–242.

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towards Jewish economic activity. Under these conditions of duress, it became a major concern for Jewish businessmen to find a way of salvaging something of their assets in the face of this maze of interlocking persecutory regulations and policies? As Frank Bajohr has demonstrated, the surprising thing is rather how few resorted to the “illegal” methods that the Nazis repeatedly denounced as being ”typically Jewish.”15

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Strategies for the Export of Capital Under these increasingly harsh circumstances the temptation to attempt “illegal” transfers of foreign currency by Jews wishing to emigrate rose commensurately. On an individual level a number of methods for the export of capital were developed that also became familiar to the German customs and currency authorities charged with the task of thwarting illegal transfers. For example, the purchase of expensive photographic equipment just prior to emigration was known by the Gestapo to be a preferred smuggling device that might also offer a prospective livelihood on arrival at the emigrant’s chosen country of refuge.16 Other valuable items that could be smuggled out for sale abroad varied from rare postage stamps to diamonds.17 Another very effective “illegal” method, if a suitable partner could be found, was the direct exchange of property, such as real estate with a nonJewish partner who was returning home to Germany from abroad.18 A similar exchange could be made with cash, if for example an emigrating Jew left his remaining funds to an impoverished Jewish family in Germany, whose relatives then made foreign currency available to the emigrants overseas in return.19 Available legal records reveal the case of one emigrant lady who attempted to pay off the debts of foreign companies in Germany using her own money, in order to collect the equivalent in foreign currency directly from the companies overseas. Clearly this operation did not remain undetected, 15 F. Bajohr, “‘Arisierung’ als gesellschaftlicher Prozess,” in ‘Arisierung’ im Nationalsozialismus: Volksgemeinschaft, Raub und Gedächtnis ed. Fritz Bauer Institut, (Frankfurt am Main: Campus, 2000), 21. 16 PAAA, Inl. II A/B, R 99887 Gestapo Aachen Denaturalization proposal in the case of G.H.H. on 22 July 1940. 17 See Susanne Meinl, “The Expropriation of Jewish Emigrants from Hessen during the 1930s,” paper presented at the Symposium “Confiscation of Jewish Property in Europe, 1933–45” hosted by the Center for Advanced Holocaust Studies, U.S. Holocaust Memorial Museum on 22 March 2001. A copy of the papers from this symposium can be obtained from the Center for Advanced Holocaust Studies. 18 Blumberg, “Die Zollverwalltung,” 323. 19 Hilberg, Die Vernichtung, 150; for the case of an attempt to transfer money from a Jewish account in Germany to a German – American partner that was uncovered by the Currency Office, see PAAA, Inl. II A/B, R 99921 Denaturalization proposal of Gestapo Karlsruhe against F.I.B. on 16 May 1941.

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although proceedings against her were not opened until after she was safely abroad.20 Especially suspect for the currency officials were those Jewish businesses that had regular contact with other businesses abroad. For example, a memorandum prepared within the Economics Ministry for a meeting with the Heads of the Currency Offices on 22 November 1938 noted that the general permissions issued previously to Jewish transport companies for making payments to foreigners were difficult to police with regard to illegal payments. Therefore, the author of the memorandum recommended that consideration should be given to the withdrawal of such general permissions, or the taking of other measures, in order to plug this potential loophole in the currency regulations.21 The Haavara – Transfer Agreement that operated from 1933 right up to the outbreak of war offered the best opportunity and conditions for the export of Jewish capital overseas.22 More than 50,000 German Jews took advantage of this opportunity, some 36 percent of which fulfilled the immigration requirements for “capitalists” entering the Mandate of Palestine, namely that they could demonstrate possession of £1,000 (Vorzeigegeld) on entry.23 They still faced many bureaucratic hurdles, as well as the difficult political, economic and even climatic conditions in Palestine. For instance one applicant was keen to have his application approved in time for the rainy season, as he planned opening a business specializing in the chemical waterproofing of clothing using German products for the process.24 This agreement represents an important special case of capital export, but as much has already been published on it, the details will not be repeated here. In spite of the comparatively favorable terms available for the transfer of capital, it is likely that those who had relatives, friends and business contacts in Palestine enjoyed better prospects for planning their investments and establishing a viable business there.25 Looking beyond Palestine, one method employed by Jewish businesses that appears to have enjoyed some success was that of establishing a branch or at least a depot outside the country – that might subsequently be used as a base for the transfer or smuggling out of different forms of capital at the 20 Landesarchiv Magdeburg – Landeshauptarchiv- Rep. G 11 Devisenstelle Nr. 4309, 64–66. The case was uncovered when some of the German creditors recognized the illegal nature of these payments, probably fearing punishment when it was detected in their accounts. 21 Bundesarchiv, Berlin-Lichterfelde (BAB), R 7/3153. 22 This is demonstrated most explicitly in the Table prepared by Werner Feilchenfeld, see Werner Feilchenfeld, Dolf Michaelis and Ludwig Pinner, Haavara-Transfer nach Palästina und Einwanderung Deutscher Juden 1933–1939 (Tübingen: J.C.B. Mohr, 1972), 69. 23 Ibid., 77. 24 Brandenburgisches Landeshauptarchiv Potsdam, Rep 36A (Devisenstelle) A 529. 25 See Hilberg, Die Vernichtung, 148–149.

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time of emigration. Jewish publishers and booksellers were confronted almost immediately after the Nazi seizure of power with the banning of their products and the threatened closure of their businesses. Thus, they were among the first group to take active measures in response. For example, a publishing company in Halle/Saale, owned by Martin F., established a branch office in Prague at the end of 1933. According to a German investigation it then forwarded books and journals with an actual value in excess of RM 100,000 to this address with a fraudulent customs description claiming that they were only free samples or propaganda material. In this way it was possible for the hard-pressed bookseller to transfer some of his capital abroad.26 A branch office or production facility overseas also opened up a number of possibilities for transferring capital or protecting it from German confiscation. Overseas plant, stocks, existing contracts, debts owed by international clients and even good will were all assets that could be realized abroad if necessary. Here they were generally protected from the most sweeping German measures of confiscation and extortion and retained their real market value. Successful tactics used by emigrant businessmen included the diversion of payment for outstanding debts and even the transfer of contracts and patents to the overseas branch. For example, a wine exporter migrated to Britain and collected almost RM 10,000 of money owed to him there from his previous export activities.27 In order to counteract “illegal” transfers the German authorities conducted spot checks and frequently examined the accounts of those companies trading overseas. Frank Bajohr has concluded from an examination of the results of these investigations in Hamburg that actually most Jewish companies complied with the repressive German currency regulations.28 The ingrained habit of obedience to legal authority made it difficult for many Jews to adjust to the reality of a state organized threat to their very existence. The following five case studies of the attempted export of capital by Jewish businesses, some successful and some not, shed new light on both the nature of the process and particularly the comparative advantages gained by those who were able to establish a branch overseas in advance.

26 According to the available records, the outcome of the currency case opened against the bookseller was a fine of RM 10,000; see Landesarchiv Magdeburg – Landeshauptarchiv – Rep. G 11 Devisenstelle Nr. 794, 12–15; for another similar case see PAAA, Inl. II A/B, R 99664, Fiche 6388 Denaturalization proposal against B.K. on 18 February 1937. 27 PAAA, Inl. II A/B, R 99877 Denaturalization proposal of Gestapo Frankfurt am Main against L.S. on 8 May 1940. As Hilberg demonstrates, aryanized Jewish businesses with foreign branch offices had the possibility of making good their claims against the new owners by blocking remaining assets held in those branches, see Hilberg, Die Vernichtung, 149. 28 Bajohr, ‘Arisierung’ in Hamburg, 158.

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The Failed Attempt to Establish a Screw Manufacturing Business in Milan In November 1935 the businessman, W.F.,29 made an application to the Currency Control Office for the export of RM 25,000 (in Lira) for the purpose of emigration to Italy, requesting also additional permission to export machinery with a total value of RM 40,000 for the establishment of a screw manufacturing plant in Milan. The application was signed by the Lord Mayor and Currency Advisor, the non-Jewish Dr G., who also traveled to Milan on behalf of the applicant and helped to prepare the paperwork. The original plan envisaged the emigration of the family of the applicant’s wife, whose living costs would also be financed from the expected profits from the new business. W.F. hoped to take advantage of the prevailing favorable transfer arrangements with Italy.30 According to the supporting statement of Dr G. there was strong demand for a screw factory in Milan as the Siemens plant there reported difficulties in obtaining screws. In Italy most screws at that time were purchased from Switzerland. Dr G. argued that the establishment of the new business would help the export of German machine products to Italy, setting an example that could well lead to further export business in the future. The emigrant, however, would need to export some production equipment and cash reserves to establish his new company in Milan in order to secure his own existence and also further German economic interests. Negotiations were conducted with the German Company of Hahn & Kolb for the required machines that would guarantee production of 15,000 screws per day by each of 5 machines to be exported. The necessary legal steps towards the establishment of a company in Italy were initiated with the assistance of a local Italian lawyer. The emigrant, W.F., was described in the application as being well suited by his personality and his previous experience for the direction of such an enterprise. He apparently had some relevant technical knowledge (he was an experienced motorist!) as well as job experience in marketing (for the coal industry) and a good knowledge of languages. In addition, he had a number of friends in Milan who would be able to help him through the difficult initial transition period. The application prepared by Dr G. estimated that RM 40,000 would be required to pay for the machinery. These machines would produce an income of RM 36 per day to set against raw material costs of RM 22 per day, enabling a profit of RM 14 per day per machine. The estimated costs in terms of depreciation, rent, personnel costs and other fixed running costs would leave a net income of RM 4 per machine per day or RM 6,000 per year. 29 The full names of persons are concealed in this and other case studies in accordance with confidentiality agreements required by certain German archives as a condition of access to their files. 30 See Bajohr, ‘Arisierung’ in Hamburg, 155.

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This income was deemed to be sufficient for him to live reasonably well, in spite of his large family, in view of the lower costs of living in Italy. An additional cash transfer of some RM 25,000 was proposed to cover his initial costs until the company started to make a profit. The application was accompanied by a supporting certificate issued by the Information section of the Emigration Advice Office (Auskunftsabteilung der Vereinigung für Deutsche Siedlung u. Wanderung- Auswanderungsberatungsstelle). An additional supporting letter from the German Chamber of Commerce for Italy advised that the planned factory would provide the applicant with the possibility of maintaining himself there and would not be contrary to German economic interests. One problem with the application, however, was that the start-up capital envisaged consisted almost exclusively of W.F.’s share in an inheritance (real estate) that was currently leased out and therefore not immediately available to be cashed in. Essentially the applicant was planning to take out a new loan of RM 100,000 backed by his share of the property in order to finance his emigration plans. The application was assessed by the local Currency Office, which in December 1935 requested the expert advice of the regional Chamber of Industry and Commerce, asking whether the planned investment would be in the interests of the German economy. In its reply, the Chamber of Industry and Commerce expressed concern that the Swiss producers of most Italian screws were already using German parts and therefore the Chamber would like to see existing contracts ensuring that the Milan Company would also order these from Germany, in order to be certain that the new company would be serving Germany’s economic interests. On the basis of this reply, the Currency Office wrote to W.F. at the end of January 1936 regretting that it would have to deny the application. Dr G., however, approached the Chamber of Industry and Commerce requesting the opportunity to discuss the matter with them personally. In March 1936, however, the Chamber of Industry and Commerce returned the file to the Currency Office with the comment that they considered the case to be closed. In April 1936 Dr G. wrote again to the Currency Office now applying for the transfer of only RM 45,000 in cash on behalf of his client W.F. requesting the most favorable application of conversion deductions. He explained that “the long duration of the emigration preparations had already seriously damaged the interests of the applicant.” Hopes of transferring the full amount from W.F.’s share of his inheritance had now been dashed, as the property had since been sold, producing only a fraction of the originally expected amount. Nevertheless W.F. still planned to open a smaller screw factory in Milan, if the transfer of the RM 45,000 was approved. This meant that he was now unable to include his relatives in the emigration project, as the resulting income would also be much less. In a last appeal Dr G. argued that this plan

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would definitely benefit the German economy, as W.F. still planned to purchase the screw manufacturing machines in Germany. However, in May 1936 the Currency Office once again denied the application stating that currently the transfer of funds abroad from the named account for emigration purposes was not possible.31 The exact reasons for the denial of this investment plan cannot be deduced from the files. Yet the key role of the regional Chamber of Industry and Commerce is clear. Arguments of economic nationalism were advanced as the main reasons for denying the application, but it is possible that this may have been a cover for anti-Semitic sentiments, despite the avowed Nazi intention of furthering Jewish emigration. In this case the absence of an existing branch overseas almost certainly made it harder to achieve the export of capital. Insufficient funding and a certain lack of practical experience were additional obstacles to success. However, the main hurdles were the difficulties in obtaining permission for the transfer of funds and the still disadvantageous rate of exchange. The poor return on the sale of Jewish real estate, due partly to the need to sell in a hurry, in turn prevented the emigration of needy family members.32 This failed case (examined for the purposes of comparison) demonstrates several of the main hindrances to international capital investment under the uncertain economic climate prevailing in Nazi Germany.

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The Case of a Paintbrush Factory in Nuremberg with an Overseas Branch in Britain Correspondence uncovered in the files of the Finanzamt Moabit-West illustrates how the denaturalization of Jewish emigrants increasingly became a surrogate for costly legal proceedings, permitting also the confiscation of remaining property inside Germany. Among the detailed denaturalization proposals prepared by the Gestapo in the period 1936 to 1937, mostly dealing with alleged political opponents of the regime, there are also cases based primarily on economic grounds. The case of a family of 5 Jews from Nuremberg, all with the surname R., provides a good example of this type of case. 31 Brandenburgisches Landeshauptarchiv, Potsdam, Rep. 36A (Devisenstelle) A1073 W. F. This file, which is the main source for this case study, does not explicitly refer to the Jewish race of the applicant, but his sister who is mentioned in the file was subjected to the “Punitive Tax” applied only against Jews. 32 For examples of the effects on the value of Jewish real estate after 1933, see Britta Bopf, “Economic Discrimination and Confiscation: The Case of Jewish Real Estate,” unpublished paper presented at the Symposium “Confiscation of Jewish Property in Europe, 1933–1945: New Sources and Perspectives” hosted by the Center for Advanced Holocaust Studies at the United States Holocaust Memorial Museum on 22 March 2001.

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The family owned a paintbrush manufacturing business in Nuremberg and received permission in 1931 to establish a subsidiary plant in Britain, with the intention of assembling German paint-brush parts there to boost German exports. In response to Nazi economic persecution, members of the family then began to emigrate successively. They used their international business contacts to build up capital in Switzerland, in defiance of the strict German currency laws. When the Nazi authorities confiscated the passports of the last two remaining brothers to prevent their emigration, they fled illegally to Czechoslovakia. According to the Gestapo report, in an attempt to regain their confiscated passports the family “threatened” to close down the factory in Nuremberg, if the passports were not returned. Clearly the Nazis preferred an orderly “aryanization” to closure involving local job losses. The German response was to impose the Flight Tax on family members and initiate denaturalization proceedings against all of them. As the Gestapo recommendation concluded: “in order to thwart the plans of the Jews R., the most important aspect is to get hold of their property and thereby also their business through the denaturalization case.” This was particularly urgent, as one of the brothers had applied for British citizenship, which might interfere with the confiscation or even prevent it. The proposed denaturalization was supported by the local Reichsbank office, the Currency Office, the Chamber of Industry and Commerce, the Regional Economic Advisor and the Customs Investigation Office in Nuremberg. In political terms it was only known that two of the brothers had been members of the “Association for Defense against Anti-Semitism.” Apart from the currency offence charged against one of the brothers, the main motivation for the denaturalization proceedings was the currency losses anticipated for Nazi Germany through the migration and closing down of this Jewish business.33 It is not hard to see the circular nature of the argumentation of the Gestapo: punishing those who had been driven out by discrimination with the confiscation of their remaining property for “alleged” sabotage of the German economy.

The Case of a Jewish-owned Paper Mill in Stuttgart with an Overseas Branch in London The complete files containing the denaturalization proposals of the Gestapo, held in the German Foreign Office Archives in Berlin, also contain further examples of the use of daughter companies abroad to extract certain economic assets from Germany on emigration. In May 1939, the Gestapo in Stuttgart proposed the denaturalization of a Jewish man (F.). The reasons given had nothing to do with his political activity. Rather, in the view of the 33 Landesarchiv, Berlin (LAB) A Rep. 092/50479, 117–124 Denaturalization proposal of the Gestapo Nuremberg on 30 June 1937.

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Gestapo, “the entire behaviour” of the Jewish owner (F.) had resulted above all in “considerable damage to German currency and economic interests.” The report concluded that the preconditions for his denaturalization and the seizure of his remaining property in Germany were therefore fulfilled, in accordance with the new broader guidelines for denaturalization issued by Heinrich Himmler on 30 March 1937.34 F. was the joint-owner of a paper manufacturing plant near Stuttgart that also had a branch in London. The company was “aryanized” in March 1939, but the Jewish owners had emigrated and were now denying the aryanizers access to existing sales contracts. In addition they were blocking all further payments to Germany of amounts owed by the London branch to the new “aryan” owners. The Gestapo feared that due to the loss of existing contracts, nearly all of the valuable export business would be taken over by the now independent former subsidiary in Britain. The exact details of the “aryanization” and the terms of the separation of the companies are not included in the Gestapo report. It is clear, however, that the transfer of existing stocks and sales contracts to a subsidiary abroad could be used as a means for a business to export itself abroad. Outstanding payments from foreign customers could also be collected on accounts outside Germany, beyond the clutches of the Gestapo and the Reich’s confiscatory financial regulations.35

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The Case of Two Brothers who Jointly Owned Two Manufacturing Companies in Berlin with a Branch Office in Manchester36 This complex case of “aryanization” will be examined in some detail as it illustrates many of the problems encountered by Jewish businessmen in Nazi Germany who did not wish to go out of business completely. Their only realistic option was emigration. The export of a small fraction of the original capital was in this case facilitated by the existence of a branch company in Britain prior to the onset of “aryanization.” The brothers C. owned two clothing companies in Berlin, one of which had a branch in Manchester. Tax records from 1935 indicate that the company shares owned by one brother, R.C., were valued at some RM 370,000. Following the emigration of the brothers in 1936, trusted employees continued to run the companies. Soon the pressure for “aryanization” increased, as a former agricultural estate owner, H., made efforts to take 34 See Dean, “The Development and Implementation,” 221–223. 35 PAAA, Inl. II A/B, R 99805 Denaturalization proposal of Gestapo Stuttgart against D.M.F. on 2 May 1939. 36 Regarding this case, see (LAB) A Rep. 092/5696 especially for the contracts of January 1938 and June 1938, as well as the Devisengenehmigung of April 1938; additional details can be found in Oberfinanzdirektion (OFD) Berlin, Restitution Files 1-12001/59, 1-12000/59.

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over the companies. The actual “aryanization” was completed by the means of two successive contracts, signed on 6 January and 20 June 1938. This was at a critical juncture in the “aryanization” process. If the “aryanization” had occurred only a few months later the outcome certainly would have been different.37 For the C. brothers one of the main aims of the contracts of sale was to split off their British subsidiary factory as a separate company with no remaining obligations in Germany.38 The initial January contract stated: “both parties are agreed that the Manchester branch has not been sold and remains Mr C.’s property. It is thereby legally and economically separated from the previous main company.” Thus the agreements included the cancellation of debts worth RM 20,000 owed by the British branch to the Berlin company for materials exported to Britain, as well as a cash loan of £1,400. In exchange the Berlin Company was to be relieved of £2,400 in debt owed to a Dutch bank. Even though the nominal value of the main company in Berlin was RM 200,000, it was sold for only RM 20,000. Much of this sum was then used to pay off the remaining obligations of the C. brothers to individuals in Germany, such as the Jewish lawyer who had negotiated the contracts. It was already clear to the brothers in 1938 that receiving Reichmarks on a blocked account would not be of any use to them personally. A very important aspect of this “aryanization” was the concern that the collection of outstanding debts from the Reich Flight Tax might cause the companies to go into liquidation, resulting in the loss of jobs. The aryanizer, H., used this argument to persuade the Financial Administration (Currency Office) to approve the contract in April 1938, which effectively enabled the C. brothers to retain that part of their capital they had already exported overseas. In turn the aryanizer, H., following negotiations with the Gestapo, was compelled to pay the remaining Flight Tax debts of the emigrants in installments.39 37 As Frank Bajohr notes the “freedom of action” of Jewish owners had sunk to nothing by the end of 1938 in the wake of “forced aryanization” under Göring’s new legislation, Bajohr, Parvenüs, 114. 38 See the contract of 6 January 1938. 39 Following the signing of the first contract in January 1938 H. attempted to get the Flight Tax payments owed by the C. family annulled. At the time of the signing of the contract in January these debts amounted to RM 121,915. But this sum was constantly increasing due to fines for late payment. H.’s efforts to annul the tax were unsuccessful and thus if he wanted to keep the two companies in his own hands he was forced to take on the obligation to pay the outstanding Flight Tax himself. This was done through the complex means of the repayment in instalments of a “loan” supposedly received from the C. brothers. It is not exactly clear from the documentation if this loan was ever made as intended (as the securities on which it was based were already blocked), but subsequently a number of “repayments” were made on the loan. The use of such a loan may have been a device to protect the Company’s main capital reserve from confiscation at a key point in negotiations.

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The accelerating pace of Nazi “aryanization” measures, however, meant that in spite of the approval of the Currency Office, the buyer, H., still had to act quickly to secure his booty in the face of threatened confiscation by the state. The decree on the registration of Jewish property issued on 26 April 1938 set a deadline of 30 June 1938 for the registration of all Jewish property, which also applied to the domestic property of emigrant Jews.40 Towards the end of June the Nazi authorities put pressure on the factory management to complete the “aryanization” of the two companies threatening that otherwise they would be taken under state control without compensation. At the same time, in June of 1938, the opening of denaturalization proceedings against members of the C. family had caused the Finanzamt Moabit-West to secure (block) all of their remaining property (much of it for the second time) in preparation for its complete confiscation. Thus, there were two key reasons for H. to act quickly and complete the “aryanization” in June of 1938 to prevent the companies from being confiscated. Under these circumstances he traveled to London at the end of June and concluded the contract of implementation on 20 June 1938. Another contract of implementation was signed with the other brother in Prague, on 30 June 1938. This legal transfer of ownership at least saved the companies from confiscation by the state. The actual outcome of the “aryanization” process remains unfortunately even more confusing than the contracts that set it up. Only a letter dated August 1938 from the lawyer tasked with negotiating the deal in Berlin hints at some of the subsequent developments. The letter accuses H. of not sticking to his agreements. The only thing he had done was to cancel the remaining sureties (obligations) of the two brothers in Germany. Thus formally at least the contract was intact and Manchester was free of any further liabilities towards the Berlin Company. It also appeared that the main Berlin Company was not as profitable as had been believed, as it made a loss of RM 12,000 in the first six months of 1938. One reason for this net loss, however, was the level of salary the owner was now paying to himself. A report by tax inspectors revealed that the “aryanizer,” H., was paying himself a salary of RM 28,000 per year for his management of the two companies, which actually exceeded their reported net losses. Under these circumstances the German authorities considered that H. should be able to resume his by now lapsed payments of the outstanding Flight Tax debts of the brothers.41 On 11 May 1939 H. was informed 40 Regarding the genesis of this decree see Hans Safrian, “Expediting Expropriation and Expulsion: The Impact of the ‘Vienna Model’ on Anti-Jewish Policies in Nazi Germany, 1938” Holocaust and Genocide Studies, 14 no. 3 (Winter 2000), 396. 41 The main accusation of C.’s lawyer was that H. had not paid off the Flight Tax. However, from tax records it appears that a number of instalments on the loan were paid by H. and these do seem to have been applied towards the Flight Tax as agreed.

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of the confiscation of all German property of the C. family due to denaturalization. H. had several meetings with the Gestapo in which he explained that he was not able pay the Flight Tax without access to the blocked securities (in the name of the main Company) formerly belonging to the C. brothers. By March 1942 the smaller of the two companies, a ladies clothing factory had been converted to the production of uniforms for the Wehrmacht and had expanded to employ several hundred workers at more than 200 machines. In 1941 the factory had a turnover of RM 660,000 and the takeover of an “aryanized” company in the Netherlands, as well as another company in Vienna was underway. At this point, with the German Army in great need of new uniforms on active service from the French coast to the depths of Russia, it might appear that the “aryanizer” had gained the better end of the deal. However, as both companies were located in the Soviet sector of Berlin and were taken into state control without compensation at the end of the war, it is possible that the timely relocation to Britain, where the brothers continued in manufacturing, was actually the better long-term investment decision. In this case, the establishment of a base overseas again provided the opportunity for exporting some capital, at the expense of surrendering the main company in Berlin for just a token sum. But the burden of the Flight Tax and the impending denaturalization complicated the case. The new owner, H., was forced to accept some responsibility for these debts in order to retain control of the company in the face of threatened confiscation. He resorted to his own subterfuge in “cooking the books” to try to minimize the damage. The Jewish emigrants drew some benefit from the time pressure exerted on the “aryanizer” to disentangle their British branch from remaining liabilities in Germany, if ultimately denaturalization wiped out their remaining assets there anyway.

Emigration Ending in Deportation: A Case of Emigration to the Netherlands The bicycle parts import/export business of Labowsky & Co. in Hamburg was one of the few Jewish businesses to remain highly profitable after the Nazi’s seizure of power. In 1937 the company still brought in almost £15,000 in foreign currency for the Reichsbank. The company’s downfall began, however, with the opening of a currency investigation against the co-owners for the unauthorized transfer of just RM 80 at the end of 1937. Shortly afterwards the owners began preparing their emigration to Amsterdam. Following an inspection of the company’s books, the Currency Office imposed a Security Order against it on 20 January 1938, blocking the bank accounts and requiring approval for all further commercial transactions. This measure applied against an import/export business made further

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business activity almost impossible. In response, the owners left for Amsterdam and collected outstanding foreign debts there, in order to open a new company called Novex Trading. As they wrote to their attorney in Hamburg: “you know the circumstances that caused us to leave Hamburg, and you can imagine that it is with very heavy hearts that we give up a company that exclusively represents our life’s work.” Attempts to obtain reasonable compensation for the company were denied by the Currency Office. As Frank Bajohr notes, the Jewish owners in fact demonstrated a surprising readiness to co-operate with the Currency Office, paying not only a fine of RM 4,100, but also paying back some of the foreign currency they had collected (£660) in Amsterdam. Ownership of the company was transferred to the attorney in Hamburg at no cost and he was even permitted to retain cash balances in excess of RM 70,000. The new Dutch Company, however, did not benefit from its cooperation and was put on a “black list” in 1939 prepared by the Reich Export Office with the aid of the Currency Office. Following the Nazi occupation of the Netherlands in 1940 even their attempted emigration did not enable the businessmen to escape the Nazi net. The former owner of the Company, Walter Labowsky, was deported to the Theresienstadt ghetto in 1943 and did not survive the war. The fate of his business partner, Sally de Leeuw is not known. In this case the extensive powers of the Currency Office affected “aryanization” by forcing the owners abroad. Despite the ability of the Jewish owners to start a new business in Amsterdam using some capital they managed to salvage, the unfortunate choice of destination still left them exposed to the final and genocidal stage of Nazi racial persecution.42

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Conclusions The close relationship between the economic measures taken against the Jews by the Nazis and the subsequent policy of destruction was apparent to some contemporary observers. The non-Jewish emigrant, Sebastian Haffner, wrote in Britain in 1939 with regard to Nazi Jewish policy: “If someone is systematically ruined and deprived of all possibilities of supporting himself, he must eventually starve to death. To deliberately let someone starve, I would call killing, wouldn’t you?”43 These few case studies are by no means exhaustive but illustrate an economic phenomenon that has been largely overlooked hitherto. While reliable conclusions cannot be drawn from this admittedly small sample on how widespread or even effective this practice was, certain points can be made. 42 Bajohr, ‘Arisierung’ in Hamburg, 200–201. 43 Sebastian Haffner, Geschichte eines Deutschen: Die Erinnerungen 1914–1933 (Stuttgart, München: Deutsche Verlags-Anstalt, 2000), 199.

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The long-term preparation of emigration through the establishment of overseas production facilities, or at least a distribution office, provided a possible basis for continued business activity after emigration, in spite of very high costs. In particular, the possibility of building up stocks, cash reserves and business contracts outside Germany could provide a capital fund to be drawn upon on emigration. These case studies demonstrate clearly that the combined effects of “aryanization,” discriminatory taxation (the Flight Tax and Punitive Tax) and the stringent currency regime rendered capital transfers extraordinarily difficult. Even in successful cases well over 50 percent of original capital fell victim to the terms of “forced sale,” special taxes and transfer costs. The value of the original plant and other assets in Germany usually had to be abandoned completely, as by mid 1938 the proceeds of the sale could only be paid into blocked accounts. Transgression of the strict currency laws offered the opportunity of getting capital out of the country, but this was generally a “once only” opportunity. Illegal transfers had to be linked closely in time to emigration, as prosecution and denaturalization usually meant the confiscation of all remaining assets in Germany. The case of the brothers C. was fortuitous in that apparent competition between a private aryanizer and the threat of state confiscation may have put some pressure on the buyer. Under these unusual circumstances Jewish migrants could gain certain limited concessions. Once “aryanization” had become fully regulated and compulsory at the end of 1938, the chances of foreign currency transfers or even the equalization of debts being authorized by the Currency Offices was very slim. The failed attempts studied, especially the case of W.F., indicate the many obstacles and uncertainties that dogged plans to export capital during emigration. The key role of the Chambers of Industry and Commerce, as well as the Currency Offices in the approval process for business transfers must be stressed. In addition, the problems involved in the sale of Jewish property, the value of which steadily declined due to discrimination, compounded by the burdens of special taxes and bureaucratic regulations meant that many emigration plans were sadly abandoned due to lack of sufficient time or money to complete preparations. Certainly the effects of the harsh taxes applied after November 1938 and other intensified forms of persecution (arrest and denaturalization) made the export of capital virtually impossible. The outbreak of the war in September 1939 saw trade relations with enemy states broken off and within a year even those removal goods left behind by emigrant Jews that had become trapped in the ports were released for confiscation and sale.44 44 Robert Holzbauer, ‘“Einziehung volks- und staatsfeindlichen Vermögens im lande Österreich.” Die “VUGESTA” – die “Verwertungsstelle für jüdisches Umzugsgut der Gestapo”’ Spurensuche 1–2/2000, 38–50.

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If there is a positive note to be drawn from this story at all, it can only be the tone of exasperation to be detected in the Gestapo reports complaining about the “illegal” export of capital abroad. If the frustration of your enemy is a measure of success, then these Jewish businessmen deserve some recognition for denying vital currency reserves to the Germans in their preparations for war.

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CHAPTER 7

Siemens in Eastern Europe: From the End of World War I to the End of World War II

❖ Wilfried Feldenkirchen In my youth I was excited by the idea of founding a world-wide enterprise in the manner of Fugger, an enterprise that would bring not just myself but also my descendants power and respect throughout the world and would give me the means to raise the standard of living of my siblings and their immediate relatives to a higher level.

Letter from Werner Siemens to his brother Carl, 25 December 1887.

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Siemens up to the Outbreak of World War II The development of electrical engineering and the growth of Siemens have been closely interrelated from their beginnings. The telegraph construction company founded in 1847 under the name of “Telegraphen-Bauanstalt von Siemens & Halske” developed within a short space of time into one of the world’s leading electrical companies, which by the 1850s was already planning a systematic approach on world markets, setting up a network of trade agencies and building plants abroad as early as the 1860s. With its two parent companies – Siemens & Halske (S&H) (telecommunications) and Siemens-Schuckertwerke (SSW) (energy) – as well as a number of subsidiaries and affiliated companies of varying legal status – the largest German electrical company had developed into a multinational concern even before the World War I, covering the whole range of electrical engineering. In 1913 Siemens had net revenues of M 410 million and was employing 82,000 people, 15 percent of them outside Germany, and was one of Germany’s biggest and most important industrial companies in regards to total assets, net revenues and number of employees.

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Whereas in 1913 more than a third of world electrical production and almost half the world’s trade in electrical goods were accounted for by the German electrical industry, after 1918 it could not even come close to regaining this position. Reasons were: • the emergence of a new electrical industry1 in its former outlet markets during World War I and in the immediate post-war period • the loss of most of its foreign holdings and foreign patents2 • the closing of foreign markets to German goods3 • the restrictions – such as the one-sided most-favored nation clause – that German foreign trade in general was subjected to by the Treaty of Versailles4 • increasing problems with the supply of raw materials • the much worse financial situation of the German electrical industry following the end of the war.

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In particular, the marked tendency in the electrical industry after World War I to nationalize itself and make itself independent of other countries, to manufacture the machines for the generation and conversion of electricity itself, and to produce the most frequently used equipment and apparatus for lighting, 1 Favored by armaments orders, subsidies and the discontinuation of imports, a number of countries which had previously imported large numbers of electrical engineering products were able to build up or expand their own electrical industry during World War I. On the situation of the Japanese market after the end of World War I cf. Siemens Archives (SAA) 11/Lf 291 Köttgen Papers. While Siemens before 1914 mainly had to reckon with American competition, after 1918 it had to face increased Japanese competition, since domestic industry had expanded considerably during the war. Köttgen wrote: “If people still talk today of the poor quality of Japanese manufactures, the time will soon come when there is no longer any question of this because of Japan’s systematic approach and cooperation arrangements with foreigners in the field of production.” 2 Cf. SAA 4/Lf 591 and 4/Lf 647; SAA 11/Lg 713 and 11/Lg 724 Franke Papers; SAA 20/Ls 958. On the provisions of the Versailles Treaty in this respect cf. also the annual reports of the Zentralverband der Elektrotechnischen Industrie (ZVEI) as well as SAA 11/Lf 291 Köttgen Papers; Harm G. Schröter, Aussenpolitik und Wirtschaftsintresse (Frankfurt, 1983), 323–328. 3 Siemens had foreseen this development and requested as early as 1915 its Technical Bureaux abroad to report on possible efforts to oust German goods. The reports stressed that a large section of the national industries had profited from the difficulties of the German economy and exploited the improved sales opportunities to expand existing or create new areas of manufacturing. Already in 1915 this was seen as the greatest danger for German industry if the war was to be of long duration. Cf. SAA 50/La 534. 4 According to a letter dated 9 March 1928 from S&H director Fellinger to the ZVEI S&H had set up its own factories in Switzerland, in Italy, Czechoslovakia and France in order to evade import restrictions. The French branch was explicitly justified with reference to the high tariffs. Cf. SAA 29/Lp 428.

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telegraphy and telephony at home, made it difficult for the traditionally export-oriented German electrical industry to do so, forcing it to turn to hitherto less developed areas and special articles. The deteriorated export situation5 in relation to the pre-war period was brought about by heightened international competition, new producers, and also by the commercial policies enforced by the victorious powers, which sought by means of prohibitive tariffs, that were far higher than those of the pre-war period, to hinder the importation of German electrical products or to prevent it altogether.6 In many cases these attempts to obstruct exports made it only possible to do business indirectly through foreign subsidiaries or branches; these, however, frequently had to be created anew because of the losses suffered abroad after 1918 as a result of the provisions of the Treaty of Versailles. The development of German foreign trade in electrical products in the interwar period was still favorable in comparison to foreign trade as a whole. A considerable contribution to the upward development of the German electrical industry that preceded the reorientation of German foreign economic policy under the National Socialists was made by the international business which had played such a decisive role in the expansion of the German electrical industry before World War I. Even if the paramount position which it had occupied in the world market in 1913 and which in any case would have been unsustainable in the long run could not be regained, Germany did become the world’s biggest exporter of electrical goods again after 1925. While before World War I about a quarter of German electrical production was sold abroad, after 1918 – leaving aside the atypical and purely inflationdriven rise of the years 1922 and 1923 – this proportion fell to less than a fifth. If almost 40 percent of German production went abroad during the Depression at a time while earnings were clearly falling, this only shows that domestic demand had dropped even more steeply. The difficulties experienced by German exports were aggravated after 1933 by political developments in Germany.7 A major role was also played, 5 Electrical exports nevertheless fared better than exports as a whole. A comparison makes clear that the share of the electrical industry in world trade was always higher than that of total German exports and also rose faster after 1925. The German share of exports of electromedical equipment (73%), electrical auto parts (57%), measuring instruments (56%), electric heating apparatus (54%) and electrical carbon products (50%) was particularly high (all figures for 1932). Cf. Peter Czada, Die Berliner Elektroindustrie in der Weimarer Zeit (Berlin, 1969), 144. 6 The tariff rates on German electrical goods in France and Poland, for example, were extremely high, much more so than on the electrical products of other countries. Cf. SAA 11/Lf 415 Köttgen Papers; SAA 29/Lp 428. Cf. also the report of S&H AG’s Wernerwerk F dated 25 February 1928, containing a list of the countries which imposed tariff barriers against German electrical imports. 7 It was above all the calls to boycott Jewish shops and institutions that affected foreign attitudes to Germany and the willingness to purchase German goods. Cf. BA Potsdam 31.02 Reichswirtschaftsministerium nos. 13859–13863.

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however, by competitors in countries with devalued currencies, which forced export prices down.8 An additional export procedure was therefore introduced with a view to help tide German export companies over their difficulties so that they could export and thus earn the foreign currency the country needed. For this purpose scrips and dollar bonds were initially made use of.9 The exporting electrical companies were exhorted to “pay more attention to the cultivation of their foreign outlet markets being mindful of the importance of exports for the German economy” and, in awareness of their “responsibility for the nation as a whole” to take special care in their dealings with foreign customers, especially as the electrical industry, like chemicals and mechanical engineering, made a major contribution to German exports. Although the National Socialists were anxious to earn foreign currency from possible exports, domestic demand, particularly on the part of the

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8 Cf. minutes of the meeting of the SSW supervisory board held on 11 July 1933: International business has shown a certain decline. The reasons for this decline are sufficiently well known. Everywhere we are encountering raised import tariffs; in certain countries import quotas or a currency embargo, i.e. import restrictions, have been introduced. The international business was very much impaired by the fall in the pound, to which the Scandinavian currencies were pegged. This has not only impaired our exports to these countries, but enabled them to compete more successfully against us in the rest of the world market. Recently the dollar has also fallen. This has not directly affected our sales activities so much, since we do not export to the United States. But we do have many international agreements which were concluded in dollars, not least of which is our whole Russian business, based on dollar bills … on top of all this is the strong animosity in the world against Germany and German manufactures. This animosity is not just caused by the raised tariffs we ourselves have introduced in Germany to protect our agriculture, but has, as we all know, other reasons as well. 9 Increasing intervention on the part of the state was supposed to ensure the exports needed to earn foreign currency. An additional export procedure was intended by the Reich government to help German exporters to bridge the costs not covered by export earnings. Subsidies of up to 50 percent were granted in many cases. It was the obvious solution to ensure the necessary increase in the earnings of the German export industry by means of a subsidy and to provide the necessary funds by foreign-currency measures. At first the so-called scrips and dollar bonds were used for this purpose. These were the names given to the interim certificates issued under the German currency controls by the Konversionskasse für deutsche Auslandsschulden (Clearing House for German Foreign Debts) to the foreign holders of blocked mark accounts. These were to be redeemed by the Deutsche Golddiskontbank in accordance with the foreign currency available. As a result of these measures, which were implemented in a bureaucratic manner, the additional export procedure continued into the first years of the war, until the shortage of raw materials and the declining interest in the currencies of certain countries rendered it more or less obsolete. In the early years, however, during which the export promotion assessment fluctuated between 1.8 and 2.5 percent of sales, surpluses of RM 21.6 million remained for the period 1935/36–1939/40. Cf. SAA 11/Lf 104 Bingel Papers; SAA 11/Li 389 von Buol Papers.

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government, for the products of the electrical industry was so great and at the same time the raw material allocations for exports so low, that exports had to take second place as a result. Siemens was among those companies that were hit hard in their field by the event and outcome of World War I. Siemens lost about 45 percent of its assets. Only three foreign production facilities remained. Particularly grave was the loss of the two companies in Britain10 and Russia,11 where Siemens had set up large factories soon after its founding. Despite these substantial handicaps Siemens realized that the German market was quite inadequate to sustain the existing electrical industry and that the company’s survival could only be ensured in the long term through international competition. Thus the company decided in 1919 to make a bid for old and new export markets and to set up new distribution companies and production facilities. Relatively good business opportunities were perceived in eastern and southeastern Europe, in Scandinavia and, overseas, in China. No evaluation of possible political risks involved can be found in the files at the Siemens Archives (SAA) which are the basis for this chapter. In contrast to the situation at the end of World War II, when the scale of Siemens’ losses of foreign assets and rights was far greater, the decision to go for the world market was not disputed within the company in the early 1920s. The result of this policy is illustrated by the fact that in 1939 Siemens, which for a German industrial company had a unique worldwide network of agencies, was again employing about 26,000 people in Europe (excluding Germany) and overseas, despite the fact that the international organization had had to be rebuilt after the end of World War I. There were branch offices of S&H and SSW in most countries of the world. Before the outbreak of war in 1939 S&H had a total of over 42 branch offices, including sub-offices, and SSW as many as 135 including sub-offices. The international organization consisted of about 200 companies, of which 109 were in Europe, 13 in Africa, 27 in Central and South America, 33 in Asia, 10 in Australia and New Zealand, and 3 in the U.S.A.

Siemens in Central and Eastern Europe: Developments from the End of the World War I to the End of the World War II The USSR The state-controlled amalgamation of all Siemens facilities in the USSR to form a single corporate complex in March 1919 concluded a process which 10 Since Siemens Brothers had been expropriated by the British government and the Siemens Brothers Dynamo Works incorporated in English Electric, Siemens Schuckert Great Britain had to be set up from new. 11 Cf. SAA 68/Li 153.

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had already begun shortly after the outbreak of the war with a press campaign urging the liquidation of German companies in Russia. Bowing to public pressure, the Siemens facilities agreed shortly afterwards to the appointment of government inspectors to supervise their works. The “socialization” of the Russian Siemens facilities finally pushed through in September 1918 was based on a dual “legal” foundation:

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• a decree by the Soviet government ordered the nationalization of all industrial plants12 • an annex to the peace treaty of Brest–Litovsk stipulated that Russian factories in which German capital was tied up should be transferred to the USSR in return for a payment of RM 6 billion to Germany. Siemens naturally hoped to obtain some of these funds as compensation for its nationalized assets. In the event, however, neither this compensation nor the demands totaling 41 million Rubles made in 1922 to the German Reich Economic Tribunal by Siemens for the damages it had sustained from the expropriation of its Russian plants were ever paid. After reaching a climax in the spring of 1917, output and sales dropped significantly in the wake of the March Revolution and fell to a record low as government orders stalled and private demand dried up. Despite all efforts, production had come almost to a complete standstill when the Siemens works were taken over by the government, the workforce dropping to 190. When it took over the works, the USSR was unable to dispense with the experience and competence of the former management and specialist employees, so that some German managers and supervisors remained in their previous jobs even after the October Revolution. The technical director of the Russian Siemens-Schuckert AG in St Petersburg, Leonid Krassin, placed the experience he had gained at Siemens at the service of the new government. After 1917, he acted as trade and industry commissar and was also a member of the Presidium of the Supreme Economic Council before representing the USSR on the foreign policy front in the 1920s.13 Krassin nevertheless offered his services to Siemens in Berlin as a middleman for establishing new business contacts, which Siemens was keen to pursue despite the expropriations of its works. Access to the Russian market and the restoration of traditionally good trade relationships was a particular priority for the company, which remained in contact with its former employees still in the USSR. As for Krassin, he was greatly interested in 12 All nationalized electrical companies in Russia were amalgamated in Elektrotrust, which comprised subgroups for power and communications equipment as well as accumulators. Cf. SAA 11/Lf 449 Köttgen papers. 13 Leonid Krassin (1870–1926) was, after leaving Siemens, chairman of the special commission for supplying the Red Army (1918), head of the Russian trade delegation in London (1920), member of the Russian Genoa delegation (1922), USSR ambassador in Paris (1924) and USSR ambassador in London (1925).

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economic cooperation with Germany and met a number of company representatives on several occasions in the years between 1918 and 1920, often in neutral Sweden.14 Among them was Hermann Görz,15 who had directed the Russian Siemens works from 1893 to 1914 and had worked for Siemens & Halske in Berlin from 1919. On 22 May 1921 a meeting was held in Berlin to prepare the ground for resuming business with Russia.16 The agenda included demands by the German side for damage compensation as a precondition for further agreements. Krassin saw the “return of nationalized property to its former owners as serving no purpose,” as “the latter would be unable to do anything with their property under the present circumstances because they could not restart their operations without government support.” He would not exclude certain compensations, in the first instance by the granting of concessions, but pointed out that: “No government would be prepared to issue a public acknowledgement of obligation toward foreigners today.” When it came to claims for damage compensation, the USSR wanted to include its war damage in the calculation.17 Siemens & Halske in Berlin began to reorganize its sales activities in Russia as early as 1919. In the first place, a “Technical Office East” was established with the specific task of exploring the situation in Russia and the resulting opportunities and conditions for trade and business.18 Despite these efforts, however, no business deals were concluded in the first few years after the war. This was due to the chaotic circumstances prevailing in a country in the throes of civil war and subsequently paralyzed by a trade blockade, and also to the fact that the Soviet Union had decreed exports to be a government monopoly since 1918, making any direct cooperation with Soviet industry impossible. So the establishment of a Russian trade delegation in Berlin in 1921 was an important precondition for German-Soviet trade: it was a forum where offers were tendered and quotations could be submitted by German suppliers and companies.19 In view of its limited competitiveness and the restricted accessibility of its other traditional markets Siemens saw a good chance of rebuilding its Russian business.20 The company’s first contracts with the Soviet Union were 14 Cf. SAA 4/Lk 162 Wilhelm von Siemens’ papers: Results of the meeting with director Krassin in Stockholm on 16 to 22 February 1918 regarding the Russian Siemens works. 15 On Hermann Görz (1861–1930) cf. SAA 13/Lt 143; SAA 9111: Letters of Hermann Görz about his activities in Russia from 1893 to 1914. 16 The Russians were represented by Stomiakoff, the head of the Russian trade delegation in Berlin, and Krassin, whereas the German side comprised Deutsch (AEG), Görz, as well as representatives of Krupp and Stinnes. 17 Cf. SAA 4/Lf 685 Carl Friedrich von Siemens: Rußland. 18 Cf. SAA 9111: 50 Jahre Technisches Büro Ost der SSW (Manuscript, 1944); SAA 10756: Chronik des TB Ost (Manuscript, 51 pp.). 19 Cf. SAA No. 8182: Manuscript of a lecture by Dr Reyss on the development of trade relations with Russia. 20 Thus a note of 30 March 1922 states:

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signed at the end of 1920 indirectly via mediators and so-called “mixed companies.” These companies held a concession for export trade within the framework of the state’s export monopoly and each was assigned contingents for the import of foreign products. In the initial period, German licensed companies already operating in the Soviet Union also acted as buyers of Siemens products, as did the Railroad Commissariat. Siemens established close contacts with the Russian trade delegation in Berlin, so that the orders acquired in this way reached a considerable volume. By means of private agreements, Siemens granted the trade delegation discount credits with terms of three, six or nine months, the credit risk being carefully calculated in each case, as the political risk was clearly seen.21 Political developments in the early 1920s brought new impulses to the Russian business, which was of sustained interest to the entire German economy in view of unsatisfactory domestic demand.22 Within the framework of the treaties of Rapallo signed in 1922, Germany and the Soviet Union concluded a most-favored nation agreement. It was the first of its kind and put an end to the political and economic isolation of the Soviet Union. The first German–Russian economic agreement of 1926 eased the situation considerably: Germany declared itself prepared to assume a guarantee of 60 percent vis-à-vis the supplying companies within the framework of a RM 300 million loan.23 This credit deal secured Siemens orders worth It is inadvisable for SSW to await [changes in] today’s conditions. So far the constant monitoring of events in Russia from Berlin has shown, … that there was as yet no basis for business operations and that the subsequently pursued policy of attentive waiting has proved to be the right one. A significant change in Russian conditions now seems to be on the cards. The recognition of private ownership and exploitation rights by the Soviets and permission to trade with foreign countries … show that there has been a change of mind in Russia and the point is approaching when circumstances will permit the resumption of business. If SSW wishes to secure for itself the position due to it in the expected upturn, then now is the time to make positive decisions and not merely to follow developments from afar, but to become involved in them, codetermine them and grow with them. If would be premature to create an independent Russian department, a preparatory office will suffice, which should also observe the activities of other companies. Cf. SAA 11/Lg 735–738 Henrich papers. The ASEA had dispatched a commercial commission to Russia in 1921 in order to put the local factories back into operation with the agreement of the Soviet government. Cf. SAA 4/Lf 685 Carl Friedrich von Siemens: Rußland. 21 Cf. SAA 10756: Chronik des TB Ost, 6. 22 Cf. SAA 9111: Germany’s interest in rebuilding Russia. Vol. 1 of the series of papers issued by the Central Office for Promoting the Common Interests of Germany and Russia, Berlin n.d. (1926). 23 Since the end of the 1920s, business transactions by German industry to Russia were financed by Ifago (Industrie-Finanzierungs-Akt.Ges.). Both Siemens companies were, like most industrial companies, cofounders and shareholders of Ifago. A large part of the Russian business was secured by indemnity bonds of up to 70 percent issued by the Reich government.

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Figure 7.1 German Exports to the Soviet Union in million RM RM 32 million. The first Pjatakoff agreement produced another boom in bilateral business by increasing the Reich guarantees for German competitors in the Soviet Union to 70 percent. The agreement led to the placement of total orders worth some RM 600 million, around RM 33 million being accounted for by Siemens-Schuckertwerke.24 In view of the magnitude of the credit risk, which was some RM 40 million, and because of some reservations concerning the future political developments in the USSR, Siemens exercised a certain reserve in acquiring orders from the Soviet Union. The volume of orders would otherwise have been significantly higher – particularly in view of the start of the second Soviet five-year plan. Another spurt in orders from Russia was triggered by the second Pjatkoff agreement, which granted credit terms between 14 and 23 months and resulted in orders for Siemens of over RM 11.4 million in the fiscal year 1931/32, still reaching almost RM 4 million in the fiscal year 1932/33.25 Once again, the new German-Russian economic agreement signed in 1935 with the designation “Special business 1935” ensured full order books for Siemens, and orders still reached over RM 2 million in the fiscal year 1935/36. The Russian business changed dramatically as a result of an eco24 German–Russian exports rose strongly after 1927, with a significant German export surplus. The crucial factors were the economic agreements of 1931 and 1932. Cf. SAA 11/Lf 292 Köttgen papers. 25 At the height of the global depression in 1931/32, around 15 percent of the total sales of the Industry Department (AI) were accounted for by the Russian business. Unlike the other AI business, which ran at a loss, TB Ost attained a positive operating result, corresponding to net profit margins of 6–7 percent. Cf. SAA 11/Lf 44 Bingel papers.

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Figure 7.2 Profit and loss account of Siemens-Schuckertwerke Technical Office East in 1000 RM nomic agreement concluded on 19 August 1939. Special credit arrangements such as 100 percent Reich guarantees and cash payments now made transactions with the Soviet Union an attractive cash business, regulated merely by the Russian commodities lists and the stipulations of the German authorities. An extension to this agreement signed in February 1940 ultimately provided for the mutual exchange of goods up to a one billion RM limit. Thus the political and economic situation in Germany in the 1920s and 1930s eased and promoted business with the USSR. There was no pressure by the respective governments to sell to the USSR, but it was rather in the interests of firms like Siemens or its major German competitor AEG that they took the opportunity. Given this economic and political framework, the Russian business surged for Siemens in the 1920s and 1930s thanks to orders for several large installations. These included the hydroelectric plant of Zemo-Avtshaly and the construction of a dam on the Kura River near Tiflis (1924 to 1926), a cooling-water installation for the power plant in Kovno (1924) as well as a stage illumination system for the State Theater in Odessa (1925). Even if Siemens was unable to recover its previously strong position in Russia, it was again the most significant representative of the German electrical industry in the Soviet Union between the wars. A large part of the orders, which mainly comprised power engineering installations such as power stations, was issued by the state. The Soviet government, which was evidently well disposed towards Siemens, also initiated the establishment of a Siemens consulting office in 1928 whose task was to keep the USSR’s state purchasing organizations continuously informed about Siemens products and services and to advise them of import opportunities. This office gave

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Figure 7.3 Orders received and sales of SSW Technical Office East in 1000 RM Siemens its own representation in the Soviet Union for the first time after eleven years.26 Among the highest-profile projects for Siemens was the Moscow subway, whose planning began in 1926. Although the company’s contribution was limited to design activities and expert opinions, the experience it had acquired over many years, including the construction of subways such as those in Budapest and Berlin, flowed into this project. The contracting company in this case was Siemens-Bauunion (SBU), a subsidiary founded by Siemens & Halske in 1921 specifically for the construction of the Shannon hydroelectric power plant in Ireland.27, 28 In the ensuing period, SiemensBauunion was involved in the implementation of numerous large contracts29 such as the construction of the Dnjeprostroj power plant (1927 to 1932),30 where it carried out all the excavation and concreting work required for the power engineering equipment subsequently installed by SiemensSchuckertwerke, the energy branch of the Siemens conglomerate.31 A glance 26 On the risks of the Russian business, the volume of reserves required and the profits recorded in the years 1926–1943 see SAA 11707. 27 Cf. Lothar Schoen, Studien zur Nutzung hydroelektrischer Energienutzung. Die Elektrifizierung Irlands, Technikgeschichte in Einzeldarstellungen, 38; (Düsseldorf, 1979). 28 Cf. SAA 9869: Festschrift 40 Jahre Siemens-Bauunion (1937); Festschrift 50 Jahre Siemens-Bauunion (1971). For the company foundation, see SAA 8041–8043. 29 Cf. SAA 9111: Overview of the most important projects carried out by SBU in and for Russia from 1923 to 1932; SAA 9869: Siemens-Bauunion GmbH Kommanditgesellschaft. Ausgeführte Bauten (publication, 1925). 30 Cf. SAA 11/Lf 138–140 Köttgen papers. The file contains documents on the SBU contract for Dnjeprostroj and negotiations with Russia’s Elektrotrust. 31 Cf. SAA 9989: Design of the construction site installations at Dnjeprostroj. Prepared by Siemens-Bauunion GmbH Kommanditgesellschaft BerlinSiemensstadt (printed manuscript, 1927); SAA 10754: Major SSW orders.

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Figure 7.4 Germany’s share of Russia’s imports/exports in percent at the order lists preserved from that time lets us conclude that Siemens was significantly involved in creating the Soviet Union’s heavy industry through the supply of oil transformers, generators and turbo sets for power plants, of ferrosilicon, ferrochromium and ferrotungsten furnaces for electro-chemical applications, of electrical rolling mills as well as switchgear and drives of all types for combined plants.32 To these must be added numerous examples of comprehensive consulting services and building supervision work such as in the construction of the dam installations at Istra near Moscow. In contrast, contracts in the sector of communications technology such as the installation of an automatic telephone system via a high-frequency link with audiofrequency dialing were less common for Russia. During the global depression, which affected the Soviet Union less seriously, the country developed to become a particularly important market for Siemens. Thanks to the company’s success in obtaining large orders, the serious effects of the depression in Germany could be at least partially mitigated.33 Not until the end of the 1930s was there a noticeable decline in Russian trade before the special economic situation resulting from the Russian campaign significantly increased markets for Siemens products in Russia. Although the Technical East Office made great efforts to acquire orders in Russia, by the second half of the 1930s it had almost completely lost its formerly good position as an important supplier to Russia. Thus the offers submitted in both fiscal 1936/37 and 1937/38 amounted to around RM 10 million at customer prices, whereas the orders received comprised only a fraction of this, namely RM 575,000 and RM 75,000 respectively. The decline in orders 32 Cf. SAA 10756: Chronik des TB Ost, 22–27 with an overview of the most important supplies delivered by SSW to Russia. 33 Cf. SAA 6876: Correspondence of the USSR trade delegation in Germany with Siemens 1932–1933.

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Figure 7.5 Provisions for risks in the Russian business in 1000 RM was due to avowedly excessive prices and the fact that its German and Swiss competitors were able to undercut the company by up to 40 percent, but also to a certain reserve exercised by Soviet foreign trade commissar Mikoyan in assigning orders before the conclusion of a planned new German–Russian credit agreement.34 The declining order volumes were also due to Siemens increasingly shifting orders to Britain and the U.S.A. in the course of the 1930s.35 The start of the war against the Soviet Union in June 1941 initially appeared to exacerbate this situation still further. Thus, the Technical Office East was left with an unfinished stock of 620 orders worth a total of RM 32 million, which had to be secured and transferred to new customers.36 The losses from open book debts were compensated by the Reich government by as much as 80 percent and full compensation and in some cases fixed remuneration between 2 and 3.5 percent was granted for losses from cancelled orders. Finally, within the scope of the decision to rebuild the Ukraine at the end of 1941, the first orders were received by Siemens-Schuckertwerke from the army departments, the Todt Organization and the German Mining and Furnace Construction Company for machines and materials. This was followed by orders from the trade organizations established specifically for the reconstruction program such as Energiebau Ost, Berghütte Ost, the 34 Cf. SAA 10756: Report on the business situation of TB Ost of SSW, 24 January 1939. 35 Cf. SAA 10756: Chronik des TB Ost, 11. 36 Of unfinished orders worth RM 32 million, RM 14.5 million were transferred to new customers via German business agencies; RM 4 million were transferred to the “Ostgesellschaften”; RM 6.3 million were cancelled at no cost, as manufacture had not yet started; RM 7.2 million were cancelled with costs, as manufacture was already far advanced. Data from SAA 10756: Chronik des TB Ost, 14.

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central trade company and others.37 The orders acquired by SiemensSchuckertwerke in conjunction with the reconstruction of the Ukraine, for turbines, locomotive generators, rolling mills, motors, cables, lines and installation material, amounted to some RM 23 million. In addition, over 50 special fitters and engineers were deployed on-site. Parallel to this, Siemens began to set up its own sales organization for the Ukraine. Thus the company established its own offices in Kiev, Nikolajev, Stalino and Dnjepropetrovsk with warehouses as well as large workshops for repairing machines and equipment and for manufacturing cables.38 In addition to these operating facilities, Siemens-Schuckertwerke built an installation equipment works39 in Kiev and also supervised an existing cable works there.40 After a consolidation phase, these operations were merged in a specially established company, Siemens Ukraine GmbH Kiev.41 However, it had no future in view of the military situation. Thus Siemens began to dissolve its recently established sales and manufacturing facilities at the end of 1943 and increasingly in 1944. The “Ostgesellschaften” initially tried to honor their orders from the Technical Office East and to secure the semi-finished products and materials in special depots, but the dramatically changing military circumstances soon forced them to completely cancel all orders. In view of agreements between Siemens and the Ostgesellschaften, this led to the cancellation of orders worth some RM 9 million and suspension of others worth over RM 2 million. A residual volume of orders worth over RM 3 million was still outstanding up to 1 October 1944. Their production was far advanced and they had to be liquidated at high cost. At the end of the war the Technical Office East was closed and all outstanding orders were cancelled.42

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Poland Siemens & Halske was active in Poland long before the first agency was set up in 1879 and before the first local sales offices were founded after 1896.43 As early as the spring of 1853, the company obtained an order from the 37 Cf. SAA 10756: Chronik des TB Ost, 14f. 38 Cf. SAA 9701: Orders processed abroad in wartime, with a report on Siemens activities in the Kiev electrical repair works; Situation reports (1942–1944) on the operations in Nikolajev, Odessa and Kiev in SAA 9484. 39 Cf. SAA unsigned files in the intermediate archives: Memorandum on the establishment and extension of the Kiev facility for a SSW installation equipment works (1943). 40 Cf. SAA 11414: Trust agreement on the Kiev cable works. 41 Cf. SAA 10756: S&H/SSW circulars of 5 August 1943; on Siemens Ukraine GmbH cf. SAA 11583, 11604, 11639 and 11641, including assets/liabilities documents. 42 Cf. SAA 10727: Liquidation of TB Ost. 43 Cf. general SAA 47/Lk 836: History of the Polish Siemens enterprises as well as SAA 49/Lb 458: Robert Haiduk, Koncern Siemensa, jego mie5 dzynarodowa dzia´lalno´s´c ze szczególnym uwzgle5 dnieniem Polski i firmy Siemens sp. z o.o. – Warszawa. Diploma thesis at the Warsaw School of Economics (Warsaw, 1993).

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Russian government to construct a railroad telegraph line from Warsaw to the Prussian border. The restoration of Poland’s political independence after World War I initially led to chaotic sales conditions for Siemens, as the new state comprised regions which had formerly belonged to Germany, such as Danzig, West Prussia and parts of Upper Silesia, to Austria in the case of Galicia, and the largest part which had formerly belonged to Russia. The important task for Siemens in reentering the Polish market was thus to harmonize and coordinate three separate production and sales organizations. A Siemens company founded in Danzig in 1919 with agencies in Kattowitz (Katowice),44 Posen (Poznan), Bromberg, Graudenz and Gdingen covered those sales regions whose transfer to Poland had been agreed or was envisaged, whereas the Galician technical offices in Lemberg (Lwów) and Cracow (Kraków) previously run by the Austrian Siemens-Schuckertwerk (ÖSSW) continued to form an independent company.45 However, the formerly Russian part of Poland was covered by the Aktiengesellschaft Polnische Elektrotechnische Werke Siemens (PEW),46 which had been founded back in 1912. Its future was already the subject of negotiations with a Polish bank consortium in 1919. It was ultimately closed in 1922 and reconstituted as Polnische Siemens-Schuckertwerke Aktiengesellschaft47 (after 1923 Polnische Siemenswerke Aktiengesellschaft48) with capitalization of 50 million Polish marks.49 S&H, SSW and ÖSSW held 50 percent of the capital, and a Polish consortium the other 50 percent. In the ensuing period, the sales situation in Poland for Siemens was affected by the tensions in German–Polish relations arising from the transfer of territories. Working conditions thus differed considerably from those in Russia, where a political rapprochement was found very quickly in the early 1920s. After the final drawing of the borders following the plebiscites, the Katowice office, hitherto managed by the Danzig Siemens GmbH, had to replace its former German company name by a Polish one as ordered by the Polish Minister of Justice. 44 Cf. SAA 9454: Janusz Sitarz, Historia filii Siemensa w Katowicach (unpublished manuscript, Katowice, 1996). 45 Galizische Siemens-Schuckert GmbH/Galicyjska Siemens-Schuckertowska Spó´lka z o.o. 46 Aktiengesellschaft Polnische Elektrotechnische Werke “Siemens” (PEW) / Towarzystwo Akcyjne Polskich Zak´ladów Elektrotechnicznych “Siemens” initially based in Warsaw, later in ´Lód´z, equity capital of 1 million rubles and branches in Warsaw and ´Lód´z. 47 Polnische Siemens-Schuckertwerke Aktiengesellschaft/Polskie Zak´lady SiemensSchuckert Spó´lka Akcyjna. 48 Polnische Siemenswerke Aktiengesellschaft/Polskie Zak´lady Siemens Spó´lka Akcyjna (PZS). 49 The area covered by the company was “Congress Poland” and Galicia including the part of Austrian Silesia ceded by Austria and excluded all the regions ceded by Germany, which were covered by Danziger Siemens GmbH. The Galician Siemens-Schuckert GmbH was similarly incorporated.

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Figure 7.6 Sales and orders received by the Polish cable works in million Zloty The German blockade of exports to Poland also had an unfavorable effect on business developments and required the establishment of local factories to maintain the company’s competitiveness in the Polish market. Thus Siemens opened a cable works with attached repair shops in Ruda Pabjanicka near ´Lód´z in 1923. In spite of the political tensions and the political risks involved Siemens invested in Poland, which was seen as an attractive market, at least in the long run. German companies in Poland came under increasing pressure after 1931. One form which this took was the activity of “demobilization commissars” whose job it was to oust German-speaking salaried employees from their jobs. Ultimately, political developments in Poland led to a noticeable downturn in business and to major financial losses. But the tariff war waged between Germany and Poland since 1925 and the failure to ratify a trade agreement submitted in 1930 by Germany had an equally negative impact on the business situation as the general economic crisis did. Nevertheless, in 1931 Siemens-Kabelgemeinschaft (SKG) acquired a share in the Polish Cable Works Warsaw (PFK)50 which later moved to the nearby town of Ozarów.51 Even before this step, Siemens & Halske had concluded license agreements with this company and ultimately came to an understanding with AEG, Felten & Guilleaume and Siemens-Schuckertwerke on 50 Cf. SAA 7291: Polish Cable Works Warsaw Polskie fabryki kabli i walcownie miedzi (PFK) 1932–1933; Business Agreement and Share Agreement cf. SAA ‘ 8655: Cable Works Ozarów 1930–1940. 51 Cf. SAA 8306: Cable Works Ozarów 1931–1944 with information about the SSW capital stock and the allocation of the shares; SAA 8658: Documentation about the meetings of the Supervisory Board and the Shareholders Meetings of the Cable Works Ozarów 1936–1937; SAA 9860: Articles of Incorporation and Annual Reports of the Cable Works Ozarów 1932–1940.

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the allocation of the Polish cable market.52 The negotiations were concluded with the establishment of the Polish Cable Works by these three companies, each of them holding a share of 33 1/3 percent.53 Siemens brought its existing cable factory in Ruda Pabjanicka into the new company. In the 1930s, the increasing political tensions between the two countries, which could not be eased by the rapprochement between Hitler and Pi´lsudski in 1934, led to further measures by the Polish government against German companies operating in the country. In a government circular of 1933, Polish authorities were instructed to cease ordering goods from Siemens. This ultimately led to a breakdown in contacts between the parent companies in Berlin and the Polish Siemens works. As a consequence, the Central Department of the Technical Offices (ZTB) responsible at company headquarters for looking after the foreign sales offices fired the sales staff and representatives of the Polish Siemens works. The de facto independence of the Polish Siemens works from Berlin after this time marked a crucial breach. The Polish market was now serviced by the Austrian SiemensSchuckertwerke or by Siemens & Halske Vienna. At the same time, the Polish Siemens works began to clear and sell off their inventory stocks and concentrated increasingly on the sale of locally manufactured products. The World War II brought a change in business opportunities for German companies. Immediately after the end of the Polish campaign, Siemens reestablished its technical office in Kattowitz54 covering the regions of Eastern Upper Silesia and Galicia.55 From 1940, all sales activities in the newly formed “Generalgouvernement” and in Galicia were handled by the former Polish Siemens works,56 which was renamed the Polish Siemens AG, later the Warsaw Siemens AG and finally, when the company headquarters was transferred to Cracow in 1942, it became Siemens Elektrizitäts-Aktiengesellschaft Cracow.57 The company, equipped with share capital of 2 million Z´loty had formerly held shares in the Polish Trunk Cable Company TKD up to its liquidation in 1938.58 As late as the fiscal year 1944, Siemens ElektrizitätsAktiengesellschaft Cracow maintained extensive business contacts with over 120 major customers such as Ostrowiec Hochofen AG and Karpathenöl AG Lemberg, to whom it supplied high-quality industrial equipment.59 52 On the cable cartel cf. SAA 8305: Polish Cable Works 1930 as well as SAA 8306. 53 Cf. SAA 8307: Cable interests in Poland 1928–1937; SAA 8661: Shares of the Polish Cable Works. 54 Cf. SAA 11551: Balance sheets TB Kattowitz 1940–1944. 55 The operating region of the technical offices of S&H and SSW in Kattowitz covered Eastern Upper Silesia, the districts of Sosnowiec, Da5 browa and Be5 dzin, the Olsa region and Galicia. 56 On the Siemens sales organisation in the “Generalgouvernement” cf. SAA 8152. 57 Cf. SAA 11561: Balance sheets of Polish Siemens AG Warsaw and Cracow 1940–1944. 58 Cf. SAA 8657: Liquidation of the Polish Trunk Cable Company TKD 1938. 59 Cf. SAA 11561: Balance sheets of Polish Siemens AG Warsaw and Cracow 1940–1944.

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At this time, Siemens-Bauunion also undertook the above and underground works required on the large building sites for several major projects such as the construction of the Cracow streetcar system. In the second half of the war, Siemens also transferred a series of manufacturing facilities exposed to air attacks to safer locations such as Czechoslovakia, and also to Poland. After the military defeat in 1945, Siemens manufacturing and sales activities in Poland as well as in the German regions to the east of the Oder and Neisse rivers later placed under Polish administration came to a provisional end. In these regions, Siemens lost all its manufacturing facilities and technical offices as a result of confiscation or expropriation.60

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Czechoslovakia The commitment of Siemens & Halske and Elektrizitäts-Aktiengesellschaft vorm. Schuckert & Co., which had merged with the power engineering department of Siemens & Halske in 1903 to become Siemens-Schuckertwerke GmbH, in the Czech lands dates back to the time of the first practical application of power engineering in the 1880s. The orders, which covered the electrification of entire towns including power plants, public lighting installations and streetcars, were in the main planned and implemented by Siemens & Halske Vienna, by the Austrian Siemens-Schuckertwerke and especially by Schuckerts Elektrizitäts-AG. The loss of the greater part of its markets by the breakup of the Habsburg monarchy after the World War I forced the Austrian Siemens companies to reorganize their sales and manufacturing operations in the successor states. These also included Czechoslovakia,61 whose Bohemian heartland was regarded as a particularly attractive market in view of its high level of industrialization. The Berlin parent company of SSW and the Austrian SiemensSchuckertwerke initially disagreed on the restructuring of the Czech market. The two companies repeatedly submitted duplicated offers and thus competed with one another.62 This unsatisfactory situation only ended when the Austrian Siemens-Schuckertwerke established a Czech sales facility in 1920, Siemens & Co. KG with headquarters in Prague, thus defining the respective spheres of responsibility on the sales side. Accordingly, the entire Czech market remained in the hands of the Austrian Siemens-Schuckertwerke or the sales company that it had established together with its branches in Brünn 60 Cf. SAA 10722: Liquidation of the Technical Offices in Breslau, Görlitz and Stettin 1945–1947; SAA 10723: Liquidation of the Technical Offices in Danzig, Glatz and Waldenburg 1945–1947. 61 On the question of servicing the regions of the former Austro-Hungarian monarchy after the World War I, cf. SAA 9352: Sales in Austria 1903–1934. 62 Cf. SAA 68/Li 212: Letter of ÖSSW Vienna to SSW Berlin of 19 January 1920.

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Figure 7.7 Net annual profit of SEAG Prague in 1000 Crowns (Brno), Karlsbad, Mährisch-Ostrau, Pilzen, Prague, Reichenberg, Rumburg, Teplitz and Troppau.63 In 1926, the Austrian Siemens-Schuckertwerke greatly expanded their power-engineering activities and founded Siemens Elektrizitäts AG (SEAG) by merging Siemens & Co. KG Prague with Elektrizitäts- und Maschinenbau AG Müglitz.64 In 1924, ÖSSW had already acquired 76 percent of the share capital within the framework of a syndicate agreement, which it was able to increase to 92 percent by April 1925.65 The new company was initially based in Müglitz, and – after this works was sold to the Berlin parent company of Siemens-Schuckertwerke – later in Prague, Bratislava and Poprad. Although it was unable to recover its pre-war position on the Czech power-engineering market, it supplied electrical engineering equipment and locomotives to a series of larger industrial facilities such as Brno’s first engine works and government agencies such as the railroad administration. SEAG manufactured large and small transformers as well as switchgear in the works in Bratislava, which had been ceded to the Slovakian half of the Czechoslovak state by the peace treaty, and electrical motors in the 63 Cf. SAA 68/Li 212: ZV notification no. 521 of 6 September 1920: Regional and organizational questions of the Austrian SSW Vienna. 64 Cf. SAA 10735: SEAG Prague and Bratislava 1924–1945; SAA 68/Li 212: SSWZV/ZW circular of 4 December 1926. Elektriziäts- und Maschinenbau AG Müglitz was formed in 1918 from Elektrizitäts- und Maschinenbaugesellschaft Gustav Braß und Dr R. Doczekal. 65 Cf. details on this topic in SAA 68/Li 269: Friedrich Tupy: Die Geschichte der ÖSSW. Die Gründung der ÖSSW-Tochtergesellschaften. CSR (unpublished manuscript); SAA 8476: Matters concerning Elektrotechna AG 1928–1934.

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Müglitz works.66 These two local factories employed some 340 workers (as of 1939). Despite the global depression, which also hit Czechoslovakia, SEAG was able to book a series of large orders during the 1930s thanks to the government’s increased efforts to electrify Slovakia. Among them was the extension of the power plant in Bratislava. The favorable development of business in the second half of the 1930s was helped by the upturn in the machine construction industry as well as the generally growing demand for electrical domestic appliances. The rearmament program energetically pursued by the Czech government after the annexation of Austria by Nazi Germany also stimulated the business. At the end of the 1920s, the communications engineering sector of the Austrian Siemens company again operated an extensive network of branches and sales offices for communications products in Czechoslovakia, including those in Brno, Karlsbad, Kaschau, Mährisch-Ostrau, Prague, Pilsen, Bratislava, Reichenberg and Teplitz.67 These Technical Offices had been set up by the Viennese works of Siemens & Halske AG since 1923 under the designation “Siemens & Co. KG, Schwachstromabteilung”, which also managed them.68 Finally, a separate company was founded in 1930 to handle the growing sector of communications engineering: Elektrotechna AG, with headquarters in Prague and share capital of 16 million Crowns.69 Siemens & Halske held a 76 percent share in the company, the remaining 24 percent being owned equally by the Moravian Bank and the Czech Agricultural Bank.70 Its establishment concluded the lengthy preparations for the company’s entry into the Czech market for automatic telephony, which had previously been held back by ITT’s influence on communications standards in Czechoslovakia and by the industrial protection policy of the Czechoslovak state.71 The founding of Elektrotechna with its manufacturing premises thus satisfied the precondition for setting up local factories to supply government 66 Cf. SAA 68/Li 212: Siemens Elektrizitäts-Aktiengesellschaft (publication, Prague, 1930). 67 Cf. SAA 11106–1: Employment and working conditions in the Viennese works 1924–1945. 68 Cf. SAA 68/Li 212: Addendum 3 to notification no. 392 CTB concerning the Prague/Vienna works of 12 June 1923. 69 On Elektrotechna AG Prague, extensive files are found in the Siemens Archives in Munich. Cf. SAA 8478: Founding of Elektrotechna AG 1930–1933; SAA 10832: Founding of Elektrotechna AG 1930; SAA 10833: Equity holding in Elektrotechna AG 1930; SAA 8463: Articles of Incorporation of Elektrotechna AG Prague; SAA 8464: Elektrotechna AG (Advertising publication with business data, in Czech, around 1934); SAA 8462: Annual Reports of Elektrotechna AG 1930–1941; SAA 8466: Balance sheets of Elektrotechna AG 1930–1944. 70 Cf. SAA 8476: Matters concerning Elektrotechna AG 1928–1934; SAA 10835: Equity holding in Elektrotechna AG 1930. 71 Cf. SAA 8478: News service of the economic policy department no. 32, 8 August 1930.

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agencies. Siemens considered the acquisition of the foundation license and the inclusion of members of the Czech Ministry of Posts, Railroads and Defense on the administrative board of Elektrotechna as a success. Shortly afterwards, in 1931, Elektrotechna transferred its telephony business to Radiotechna AG, a factory for wireless telegraphy and telephony equipment located in Přelouč, 75 percent of whose capital was held by Elektrotechna and 25 percent by Kresl & Co. in Prague.72 Another company, Technische Industrie AG (TIAG), was also founded by Elektrotechna at this time to distribute electromedical equipment in Czechoslovakia. This company was formed from its predecessor, Ärztlich-Technischen Industrie AG Prag (Atiag), which had been acquired by Elektrotechna in stages since 1925 by means of several share purchases. The aim was also to handle government orders, and especially the army business including field telephones and ground-based antiaircraft equipment, under the cover of TIAG.73 The deliberate exclusion of military business from the communications equipment plants in Czechoslovakia corresponded to the similar structure set up within the parent company with the founding of Gesellschaft für elektrische Apparate (Gelap). The transfer of the holdings in Elektrotechna from Siemens & Halske Vienna to Werner Works Z of Siemens & Halske Berlin in 1931 finally paved the way to settling the still unresolved differences in opinion about the responsibilities and work sectors of the two companies – Siemens & Halske Berlin and Vienna – in Czechoslovakia.74 Accordingly, Elektrotechna left the group of Vienna companies and the investments previously made by Siemens & Halske Vienna in Czechoslovakia were transferred to Siemens & Halske Berlin.75 In the fiscal year 1930/31, when the communications side of the business was concentrated at the Berlin parent company for the first time, new investments by Siemens & Halske Berlin in Czechoslovakia amounted to some RM 9 million.76 The first large order was awarded in May 1931 by the Ministry of Posts and Telegraphs for the supply of automatic telephone equipment throughout the country.77 In view of this success, the decision to give the Prague Siemens company a Czech identity by founding Elektrotechna in order to obtain a larger share of the domestic Czech business was regarded in contemporary reports as very worthwhile.78 Elektrotechna sub72 Cf. SAA 8467 and 8480: Founding of Radiotechna AG 1930–1931. 73 Cf. SAA 8476: Letter from Wernerwerk für Fernsprechtechnik to Carl Friedrich von Siemens of 8 December 1930. 74 Cf. SAA 8479: The question of task sharing between S&H Berlin and Vienna as regards activities in Czechoslovakia. 75 Cf. SAA 8476: File note, 1 December 1931 regarding the transfer of the investments in Czechoslovakia by S&H Vienna to Werner Works Z. 76 Cf. SAA 8476: File note on Czechoslovakia, 2 December 1931. 77 Cf. SAA 8478: Agreement between the Czech Postal and Telegraph Administration and Elektrotechna, 8 May 1931. 78 Cf. SAA 8478: Berliner Tageblatt of 24 November 1931 regarding negotiations on syndicating the Czech communications engineering industry.

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Figure 7.8 Orders and sales at SEAG Prague in 1000 Austrian Schillings sequently concluded agreements with Czech communications engineering companies on setting up joint sales offices and regulating sales quotas. The Munich agreement of September 1938 with the consequent annexation of the Sudetenland by Germany had a considerable impact on the organization of SEAG, whose headquarters now had to be transferred from Müglitz in the Sudetenland to Prague. The Siemens companies in Slovakia, which had become an independent state at the same time as the creation of the “Protectorate of Bohemia and Moravia”, were also managed by the headquarters in Prague. In the communications engineering sector, the newly annexed Sudentenland territories were serviced from the geographically adjacent Technical Offices in Germany, i.e. from Munich, Dresden and Breslau.79 In the power-engineering sector, the demise of the Austrian Siemens-Schuckertwerke meant that all its rights were transferred to the SSW parent company in Berlin. On the whole, the new political constellation led to considerable complications at SEAG. The annual accounts for the three sovereign regions of the Sudetenland, the Protectorate and Slovakia had to be kept separately. The fact that Czechoslovakia was spared military action until late into the war permitted unrestricted business activity for a relatively long time, so that the operation of the Bratislava works was able to continue until the end of March 1945 and of SEAG Prague until the beginning of May 1945.80 The number of Siemens production facilities operated in Czechoslovakia increased considerably in the second half of the war. This was because the intensification of allied air attacks on the greater Berlin area necessitated the transfer of facilities to the Sudetenland, which was considered to be less risky. The largest operations of this kind included those in Zwodau near 79 Cf. SAA 68/Li 212: Circular D no. 87, 18 October 1938. 80 Cf. SAA 68/Li 212: Report on events in the Bratislava works in the period from 29 March to 1 April 1945; Report on the revolution in Prague.

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Falkenau a.d. Eger and in Graslitz, where manufacturing from the aviation equipment plant at Hakenfelde, a Siemens subsidiary, was concentrated.81

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Conclusion The Eastern European markets were changed fundamentally after the German defeat in the World War I, especially as a result of the Russian Revolution, the loss of extensive German territories and the disintegration of the Habsburg Empire. Siemens was thus forced to comprehensively restructure its former business contacts and its manufacturing and distribution activities in the countries concerned after the end of the World War I and the conclusion of the peace settlements. Not only did the company have to set up completely new sales structures in Russia, Poland and Czechoslovakia, as described above, and fill the gaps created in production and distribution by the confiscation of its former property, it also had to restructure its business operations in countries such as Hungary, Bulgaria, Yugoslavia and Romania. In all cases, local companies and factories were established from the 1920s, so that the sale and at least partial production of goods was secured. However, the political situation in these countries did not fundamentally affect the company’s business activities. Siemens has always adapted to the prevailing political situation – and this also applied to Germany after 1933. In Russia, the confiscation of companies had already started with the revolution of 1917 and led to the complete disappearance of Siemens from the country after a presence lasting more than 60 years, a fate shared by other German companies. The expropriations carried out after Germany’s military defeat and by the country’s new political rulers led to the loss of its manufacturing facilities. Siemens was consequently unable to recover its former market position there during the interwar period. A series of government agreements established after the 1920s then led to renewed business contacts, to the establishment of a representation and to the construction of new factories. The resulting sales fluctuated considerably, due largely to the Soviet Union’s changing trade policies. However, the high provisions formed for the Russian business in the 1920s, which were liquidated in the global depression, contributed to the fact that Siemens was able to weather the crisis relatively unscathed. In Poland, the stipulations of the peace treaty on the creation of the Free City of Danzig and the loss of West Prussia as well as the plebiscites about the future political status of provinces such as Upper Silesia greatly changed the sales structures for Siemens. Despite this, the company was able to con81 Cf. SAA unsigned files in the intermediate archives: Transfers 1944; SAA unsigned files in the intermediate archives: SSW reports no. 21–30 (1946) to the British and U.S. occupation forces with an overview of SSW production facilities in Czechoslovakia.

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tinue extensive business activities there, largely thanks to the maintenance of technical offices as well as the establishment of local companies and holdings in the 1920s and 1930s. In contrast, highly diverse working conditions emerged for Siemens in the successor states of the Austro-Hungarian Empire. Whereas the company could set up a well-functioning distribution network and establish or acquire an interest in a series of companies in Czechoslovakia and Poland, the volume of business in Yugoslavia, Hungary and Romania fell behind that recorded in these territories before 1914. In particular, the company could no longer match the business volumes attained with the electrification of large parts of south-eastern Europe since the 1880s. In the early years of the World War II, Siemens set up extensive sales operations in the allied and occupied countries, and in cases such as the Ukraine this program was further reinforced by the construction of major facilities. The transfer of manufacturing plants from Berlin, which was subject to particularly heavy air attacks in the second half of the war, to the Sudetenland, Upper Silesia as well as to locations such as Slovenia also generated considerable business activity. Then, from the end of 1944 and increasingly at the beginning of 1945 Siemens began to pull back its operations as Allied troops approached from the east and south-east. The expropriation of all the company’s facilities at the end of the war brought its business activities in the countries lying behind what was to become the Iron Curtain to a provisional end.

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PART IV

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The Problem of Foreignness

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CHAPTER 8

Between Parent and “Child,” IBM and Its German Subsidiary, 1910–1945

❖ Lars Heide We have firm trust in our physician and will follow his orders blindly, because we know that he will lead our nation towards a great future. Hail to our German people and their Führer.1

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Introduction The above quote was from a speech by the head of the German IBM subsidiary, Willy Heidinger, at the inauguration of a new punch card machine factory in Berlin in early 1934, attended by representatives from Staat und Bewegung. The “physician,” of course, was the German Führer, Adolf Hitler. Heidinger’s enthusiasm for the Nazi regime was clear. The question remains: To what degree was his view shared by the managers of his parent company, IBM in New York? In the book IBM and the Holocaust by Edwin Black, this speech was a key component of his circumstantial evidence to prove IBM’s direct complicity in the Holocaust. Nevertheless, his book documents that Heidinger as head of the IBM’s German subsidiary had several conflicts with the company’s U.S. managers. In 1940, he even sided with the Nazi regime in its struggle against IBM in New York for power over the German subsidiary.2 Recent studies of the internal relations in current multinationals confirms significant 1 W. Heidinger, Denkschrift zur Einweihung der neuen Arbeitsstätte der deutschen Hollerith Maschinen Gesellschaft m.b.H. in Berlin-Lichterfelde am 8. Januar 1934 (Berlin: Dehomag, 1934), 40. 2 E. Black, IBM and The Holocaust: The Strategic Alliance between Nazi Germany and America’s Most Powerful Corporation (New York: Crown Publishers, 2001), 8–11, 75–86, 98–101, 161–168, 218–222.

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distinctions between the agendas of multinationals’ headquarters and their foreign subsidiaries. Particularly, these studies found distinctions based on the subsidiary’s national business network, its own technological development and its relations to its national government.3 Though Black alludes to an independent role of IBM’s German subsidiary, he does not expand the scope of his simple two party perception of the relations between IBM and Nazi Germany. As the subsidiary, Deutsche Hollerith Maschinen Gesellschaft mit begrenzter Haftung (German Hollerith Machine Company, abbreviated Dehomag), held nearly all contact with German businesses and the German authorities, it is crucial to extend the analysis to include Dehomag in order to understand the mechanisms of the relations between IBM and Germany. The objective of this chapter is to outline the role played by the subsidiary in IBM’s overall relationship to the Third Reich. The analysis is based upon the primary source materials available to me and those used by Edwin Black.4 In addition Edwin Black had access to and reported from copies of the board papers from 1933 to 1941 of Dehomag at New York University. I conclude that Willy Heidinger’s management of Dehomag played an important role in making the German subsidiary IBM’s most successful affiliate, which gave the German management a relatively high degree of autonomy in the otherwise tightly-controlled, centralized U.S. firm. This success included development and production of machines distinct from those produced in the United States. This case both contributes to the discussion of the roles of multinationals in dictatorship, the subject of this book, and provides a rich case for business studies of the relations between corporate headquarters and subsidiaries in international companies. Moreover, it contains data useful for those interested in the problems of technology transfer and the special problems of foreign companies operating in host countries.

3 C. Prahlberg, Subsidiary – Headquarters Relationships in International Business Networks (Uppsala: Department of Business Studies, Uppsala University, 1996), is a fine set of studies providing an introduction to this field. 4 This chapter is based primarily on the archives of the surveillance of enemyowned property during the two world wars: Der Treuhänder für das feindliche Vermögen (World War I), in Geheime Staatsarchiv, Berlin-Dahlem (GS), and the Reichskommisar für de Behandlung feindlichen Vermögens (World War II), in Bundesarchiv, Berlin-Lichterfelde (BAB). Also, I used the archives of the Reichsministerium für Rüstung und Kriegsproduktion, in Bundesarchiv, BerlinLichterfelde (BAB), (copies of) the archives of the Reichsministerium für Rüstung und Kriegsproduktion and the Oberkommando der Wehrmacht, in the National Archives (NA), Washington, DC, the Siemens Archiv, München (SA), and papers of the board and the engineering departments of the in the IBM Archives, New York. In addition, Edwin Black had access to and reported from copies of the board papers from 1933 to 1941 of Dehomag at New York University.

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The Emergence of the Punch Card Business in Germany and the Effects of World War I In the United States, IBM was a technology-based, punch card prime mover from 1890 through the 1950s. It was dependent on efficient salesmanship and ingenious technology improvements. Punch card systems were based on storing information as combinations of holes on single cards, to be processed by several stand-alone machines, of which the most important were punchers, sorters and tabulators. Each job required punch cards to be processed in an established succession by the different machines. For example, one card was needed for each entry to issue invoices in the early 1930s. The cards were punched on a key puncher, and the perforations were verified by use of a separate verifier. Then a sorter was applied to sort the cards into a specific succession for the subsequent tabulation on a tabulator. There was a combined calculating machine and printer that could perform the additions (and for advanced versions subtractions) needed in each case to reach the total amount and print the invoice. The initial punch card technology was created by the inventor and entrepreneur Herman Hollerith (1860–1929) in the United States during the 1880s. He incorporated his business as the Tabulating Machine Company (TMC). In 1911, he sold the company to a conglomerate, which kept the Tabulating Machine Company as its punch card brand, until it was renamed IBM in 1924.5 In the period from 1914 to 1956, Thomas John Watson, Sr (1874–1956), was in charge of this company. He established the well-known IBM sales organization and a development department. The American company became departmentalized, but delegation was restrained. Watson remained in firm control of all business in the United States. The transformation of the Hollerith punch card business into a multinational company was no simple matter. The initial attempt to sell his products in Europe dated back to 1889, but the first European agency was not established until 1904 in Britain. It was based on local unsolicited capital. In 1910, Hollerith entered into an agreement with the American engineer Robert Neil Williams, who was based in Paris, to construct a European sales network to sell the U.S. produced machines. This network was a simple extension of the company’s business in the United States. Williams approached the heads of several other big companies in Germany to find investors, but they declined, as they did not anticipate much punch card business in Germany. Williams also approached Willy Heidinger (1875–1944), who owned a small company selling U.S. mechanical office machines in Germany. Heidinger saw the potential of the punch card trade and raised the money in Germany to establish the Dehomag agency. The 5 The conglomerate’s name from 1911 to 1924 was the Computing Tabulating Recording Company, CTR.

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new company negotiated the right to market U.S.-produced punch card machines in return for a 25 percent royalty paid to the U.S. company. While the punchers were to be sold, the larger machines, sorters and tabulators, were to be leased, remaining the property of the U.S. company. In addition, the agency could sell German-produced punch cards, but it was not allowed to produce the U.S. machines.6 In addition to capital, Heidinger contributed a business network for selling office machines, and with which Dehomag soon built up a customer base, both in public statistics offices and industry, where punch card processing of operational statistics became a great success.7 At the same time, however, the machines were rejected by several companies for bookkeeping applications because the machine could not print numbers.8 At the start of the World War I, Germany expected a swift victory. The failure to achieve a quick victory had profound implications for Germany and Dehomag. Planning for a long war required managing scarce resources. In order to achieve this, a comprehensive system was established to share resources and raw materials, organized within the Ministry for War and through several special war companies.9 This process in turn called for extensive operational statistics and bookkeeping; since manpower was in short supply due to general mobilization, these efforts relied on machines to the largest possible extend. Punch cards became a tool with which to process operational statistics.10 Expansion of business was difficult, however, during the World War I, as supplies from the U.S. were interrupted in 1917 following their entry into the war. But by then Dehomag had a substantial number of punch card machines 6 Transcript of the agreement on 22 November 1910 between the Tabulating Machine Company, and Deutsche Hollerith Maschinen Gesellschaft, m.b.H.; letter, W. Heidinger to Zwangsverwalter, 13 June 1918; both in GS, file I.HA/Rep. 120 C VIII 1 Nr. 84 adhib. 18 Beiheft 2104; Festschrift zur 25-Jahresfeier der Deutschen Hollerith-Maschine Gesellschaft, (Berlin: Dehomag, 1935) 6–8, 68–70; W. Heidinger, Beirat, 12 June 1943, 1, in BAB, R-87/6248, Akte 921/45, vol. 1, 310–311. 7 Hollerith Mitteilungen, No. 1–2, 1912; Festschrift, 69; H. Petzold, Rechnende Maschinen, (Düsseldorf: VDI Verlag, 1985), 200. 8 Pavel, “Zur Feststellung des Gütersolls durch Verkehrskontrollen,” Zeitung des Vereins deutscher Eisenbahn Verwaltungen, 1912, 470; O. Müller, “Das Lochkartenverfahren und seine Verwendung im Eisenbahndienst,” Zeitschrift für Verkehrswissenschaft, vol. 3 (1925), 222–223; Festschrift, 68–70. 9 K. Hardach, Wirtschaftsgeschichte Deutschland im 20. Jahrhundert (Göttingen: Vandenhoech & Ruprecht, 1976), 20–21. 10 F. Krause, “Bericht No. 1. Betrifft: Zwangsverwaltung deutsche Hollerith Maschine G.m.b.H.,” 24 June 1918, Anlage 1, in GS, file I.HA/Rep. 120 C VIII 1 Nr. 84 adhib. 18 Beiheft 2104; Festschrift, 10, 70–71; Rudelsdorff, “Übersicht über die Vorarbeit zur Einführung des Lochkartenverfahrens für die Mob-Planung und Friedensrohstoffbewirtschaft,” 1 October 1937, in NA, T-77, Roll 339, frames 176, 473–476.

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in Germany, and the company improved dividend payments from 4 percent in 1915, to 8 percent in 1916, and to 10 percent in 1917.11 The United States entry into the war brought Dehomag under the control of a custodian, as some of its shares were U.S. held, but according to IBM, the custodianship did not curtail Dehomag’s business.12 Much effort was put into keeping all the machines running. In 1918, Dehomag bought a small factory in the small city of Villingen in Schwarzwald to rebuild old machines and produce spare parts. The lack of authorization to produce the American machines limited Dehomag’s growth. To circumvent this limitation, Dehomag even tried, in vain, to obtain a German government order to break this clause in its agreement with IBM New York.13 A government order would have relieved the company of the responsibility of breaking its contract with the parent company. Consequently, Heidinger used the war to cut himself off from Tabulating Machine Company and to otherwise improve his economic position vis-à-vis the U.S. mother company. The objective of becoming more independent was behind Dehomag’s attempt to establish its own technological basis by building its own punch card machines. These efforts were based upon designs by the engineer Heinrich Tolle, who had been hired in 1916 with experience in calculating machine and punch card sorter development.14 Tolle’s development work aimed at the construction of independent punch card machines, which had not been accomplished by the end of the war.15 In the years just after the armistice, the company finalized the design of two completely new machines: a sorter and a puncher. The most important achievement was a number printing unit that could upgrade the non-printing tabulators already available from the Tabulating Machine Company. This innovation could 11 Krause, “Bericht,” 24 June 1918. 12 Note, Treuhänder für das feindliche Vermögen to Minister für Handel und Gewerbe, 25 March 1918, in GS, Signatur, 1./HA/Rep. 120 C VIII 1, Nr. 84 adhib. 18 Beiheft 2104; Black, IBM and the Holocaust, 43. 13 Letter, W. Heidinger to F. Krause, 13 June 1918, in GS, file I.HA/Rep. 120 C VIII 1 Nr. 84 adhib. 18 Beiheft 2104; Festschrift, 11; Petzold, Rechnende Maschinen, 205. 14 H. Tolle and F. Bauer, “Einstellvorrichtung für Rechnenmaschinen und ihrliche Maschine,” [German] Patentschrift, No. 316,962 (1920, filed 1914); H. Tolle, “Kontaktvorrichtung für elektromotorisch angetriebene Maschinen mit begrenztem Stellweg,” [German] Patentschrift No. 300,935 (1917, filed 1915); H. Tolle, “Vorrichtung für elektrisch angetriebene Maschinen mit begrenztem Arbeitsweg,” [German] Patentschrift, No. 306,519 (1918, filed 1915); H. Tolle, Berlin, “Maschine zum Sortieren gelochter Karten für statistische Zwecke mit einer Abtastvorrichtung für nur eine beliebig einstellbare Kartenspalte,” [German] Patentschrift, No. 324,110 (1921, filed 1916); Festschrift, 11, 18. 15 H. Tolle, “Tastenmaschine mit Kraftantrieb,” [German] Patentschrift, No. 335,645 (1921, filed 1917); H. Tolle, “Schreib-, Druck- u.dgl. Maschine mit Kraftantrieb, Zusatz zu Patent. 335,645,” [German] Patentschrift, No. 345,366 (1921, filed 1920).

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have enabled the German company to win those customers requiring a printing capability.16 However, they were never produced. From 1923, Dehomag received American-produced number printing tabulators.17

Collapse and Recovery

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Dehomag did well during World War I in spite of Germany being cut off from the United States and its failure to build its own machines. Tabulator and sorter leasing yielded incomes as long as they were in use. However, as they remained the property of the Tabulating Machine Company, Dehomag was required to pay U.S. dollar royalties. During the war, Dehomag was unable to pay these royalties due to currency restrictions. As Germany’s inflation grew, the Reichmark (RM) value of the blocked dollar royalties grew and new royalties on post-war sales accrued. Dehomag’s position became critical in the years immediately after the war. Willy Heidinger tried to postpone payment until the Reichmark regained its strength, in order to save his own investment in the company, which comprised 91 percent of Dehomag’s equity shares. But the RM continued to fall, and in 1922, the debt totaled $104,000 (RM 41 million) rendering Dehomag insolvent.18 At the same time, the Tabulating Machine 16 H. Tolle, “Zehnerschuttwerk für Zählwerke,” [German] Patentschrift, No. 346,478 (1922, filed 1920); H. Tolle, “Einrichtung zur Steuerung von statistischen und ähnlichen Maschinen durch zwischen Walzpaaren hindurchgeführte Lochkarten oder Lochstreifen,” [German] Patentschrift, No. 367,982 (1923, filed 1920); H. Tolle, “Zählwerk für Addition und Substraktion mit Wendegetriebe,” [German] Patentschrift, No. 375,563 (1923, filed 1920); H. Tolle, “Typensegmentschribvorrichtung für Rechenmaschinen,” [German] Patentschrift, No. 371,085 (1923, filed 1920); H. Tolle, “Sortiermaschine, besonders für gelochte Zählkarten,” [German] Patentschrift, No. 375,189 (1923, filed 1921); H. Tolle, “Einrichtung zur Stillsetzung von mechanische angetriebenen statistischen Maschinen u. dgl. in der Nullstellung,” [German] Patentschrift, No. 376,058 (1923, filed 1920); Dehomag, “Tabelliermaschine mit Kraftantrieb,” [German] Patentschrift, No. 391,467 (1924, filed 1922); Dehomag, “Kartenlochmaschine,” [German] Patentschrift, No. 402,967 (1924, filed: 1922); Dehomag, “Druckvorrichtung, besonders für statische Maschine,” [German] Patentschrift, No. 403,229 (1924, filed 1922); Heinrich Tolle, “Tabelliermaschine mit hin und her gehenden Einstellzahnstangen,” [German] Patentschrift, No. 407,382 (1924; filed 1920); Dehomag, “Rotationsdruckmaschine zum Herstellen von Karten aus Papierbahnen u. dgl.”, [German] Patentschrift, No. 411,108 (1925, filed 1922); Dehomag, “Durch Lochkarten gesteuerte statistische Maschine mit Druckvorrichtung,” [German] Patentschrift, No. 412,191 (1925, filed 1922); Dehomag, “Stromkreisüberwachung für elektrisch angetriebene Tabelliermaschinen,” [German] Patentschrift, No. 415,053 (1925, filed 1922); Dehomag, “Zählwerk für TabellierMaschinen,” [German] Patentschrift, No. 416,834 (1925; filed 1922). 17 Festschrift, 11. 18 F. Krause, “Bericht No. 1,” 24 June 1918; W. Heidinger, Bericht, 18 June 1943, in BAB, R-87/6248, Akte 921/45. In this document, Heidinger buffed the 1922 debt

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Company pressed to receive its money. In 1922, Thomas J. Watson arrived in Germany to settle the matter.19 He had a good case and was well-equipped. Through the merger in the United States in 1911, which created the company later named IBM, an international subsidiary structure had been introduced, since one of the merged companies had established companies abroad. Two years before Watson’s travel to Germany, the U.S. company had considered replacing Dehomag with a new subsidiary and had authorized the acquisition of a German factory for this purpose.20 The Tabulating Machine Company planned to take advantage of the opportunity to replace the foreign-owned agency with their own subsidiary. On the other hand, Dehomag’s success was a strong argument against breaking off the relationship and starting from scratch in Germany, as IBM later did in Norway in 1935, where a subsidiary succeeded an unsuccessful agency.21 The 1922 settlement made Dehomag a subsidiary of the Tabulating Machine Company, which acquired 90 percent of the German company’s shares, while Heidinger kept the remaining common equity. This ensured that he remained in the company and he kept de facto control of the company as long as his success lasted.22 Assigning operational autonomy to the nationals leading the subsidiaries emerged as a key element in the IBM strategy and was encountered in several European subsidiaries and agencies, in sharp contrast to the limited delegation in IBM in the United States. At the same time, however, Watson closely controlled the Dehomag board.23 This strategy was designed to harness the crucial networking abilities of Heidinger, who had proved his ability to produce profits for Dehomag and revenues for the U.S. company. The decentralization of operational control would continue to provide substantial revenues to Watson’s company in the United States. Though Watson probably never learned of Heidinger’s double-dealing, Heidinger’s attempt during World War I to use the German government against the American company indicated that his lack of loyalty could cause problems if a conflict

19

20 21 22 23

up to be RM 450 1012, which was based on a later exchange rate, probably from August or September 1923. Exchange rates from Jürgen Schneider, Oskar Schwarzer, and Friedrich Zellfelder, eds. Währungen der Welt, vol. 2: Europäische und Nordamerikanische Divisenkurse 1914–1951 (Wiesbaden: Franz Steiner Verlag, 1997). Early in World War I T.J. Watson got the power to reduce the royalties paid by Dehomag for tabulating and sorting machines while the war was in progress. (CTR board meeting minutes, 27 July 1915, IBM Archives.) No record was found of an implementation of this decision. CTR special executive and finance committee meeting minutes, 18 May 1920, IBM Archives. Gunnar Nerheim and Helge W. Nordvik, “Ikke bare maskiner.” Historien om IBM i Norge 1935–1985 (Oslo: Universitetsforlaget, 1986), 26–27. CTR Special Executive and Finance Committee Meeting minutes, 15 June 1922, and CTR Executive and Finance Committee Meeting minutes, 13 February 1923, IBM Archives; Festschrift, 12; W. Heidinger, “Bericht,” 18 June 1943, 313–314. Black, IBM and the Holocaust, for example, the notes on 432–435.

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Figure 8.1 Dehomag turnover, selected years 1910–1942, logarithmic scale.

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(Sources: 1910–1935: Dehomag sales units in Festschrift, 9. 1936–1939: Letter, Dehomag [Rottke/Hummel] to Reichskommissar für die Behandlung feindlichen Vermögens, 20 January 1942, Bericht, BAB, R-87/6248, Akten Nr. 921/45, Band 1.)

again should arise between German and the United States. Heidinger’s resentment of Watson’s acquisition of his company never diminished. Following the stabilization of the RM, economic growth in Germany was reflected in Dehomag’s rising turnover (Figures 8.1 and 8.2) that by 1925 was 50 percent higher than in 1919. This growth accelerated during the rationalization wave during the rest of the decade, which became the basis for renewed German machine development and production, to which IBM as the majority shareholder gave its consent. In 1924, Dehomag bought a machine works in Sindelfingen in the industrialized Stuttgart area, and moved its machine repair and spare part production from Villingen.24 In the ten years following 1925, the main Dehomag development endeavor was to improve its punch card machine calculating capacity, reflecting its expectations for an increasing punch card role in bookkeeping. The German company developed numerical punch card machines with calculation capabilities that were unsurpassed elsewhere. At the same time, however, the absence of a letter capability is striking. Until the outbreak of World War II, there was little interest in punch card based letter printing in Germany.25 24 IBM, Executive and Finance Committee meeting, 29 April 1924, IBM Archives; Festschrift, 11; Bericht, Dehomag (Rottke/Hummel) to Reichskommissar für die behandlung feindtlichen Vermögens, 20. Januar 1942, in BAB, R-87/6248, Akten Nr. 921/45, Band 1; Petzold, Rechnende Maschine, 198–199. 25 H.A. Weinlich, “Debit and credit tabulator,” [U.S.] Patent, No. 1,917,002 (1933, filed 1927); Festschrift, 1935, 19; F.W. Kistermann, “The Way to the First Automatic Sequence-Controlled Printing Calculator: The 1935 DEHOMAG D11 Tabulator,” IEEE Annals of the History of Computing, 17 no. 2 (1995): 42.

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Figure 8.2 Dehomag employees, selected years 1910–1942, logarithmic scale. (Sources: see Figure 8.1) From an organizational perspective, the resumption of machine developments was important, as it highlighted the freedom bestowed upon a successful IBM subsidiary. It is crucial for understanding the relations between IBM and Dehomag as business relations with Germany began to deteriorate with the introduction of autarchical policies to the German economy in the early 1930s.

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Autarchy During the world economic crisis, which began in 1929, German right-wing governments of the early 1930s chose to concentrate on the balance of payments by introducing government import controls. This contributed to a fall in imported industrial goods, in particular. Between 1929 and 1932, the value of imports fell by 45 percent.26 When the Nazis assumed power, they promised full employment, through the creation of new jobs. They promoted “self-sufficiency” and “independence from the world economy,” by strengthening the previous governments’ import restrictions, thus, causing further reductions in imports of manufactured goods.27 These Nazi objectives made Dehomag vulnerable. The introduction of punch cards was frequently justified because it saved on manpower, nearly all of the company’s machines were imported, and the company was 90 percent foreign-owned. Even before the Nazis came to power, probably in 1931, the company sped up its machine development efforts to encompass the complete design of machines. Its achievements culminated in 1935 with the D11 26 1928 prices: H.S. Ellis, Exchange Control in Central Europe (Cambridge, Massachusetts: Harvard University Press, 1972), 381–382. 27 Norbert Frei, Führerstaat: Nationalsozialistische Herrschaft 1933 bis 1945 (Munich: Deutscher Taschenbuch Verlag, 1987), 85–90.

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numeric tabulator, which could handle positive and negative figures, as well as multiplication and division functions. This tabulator was produced in Germany from 1935 to 1960. By the end of 1943, a total of 1,120 such machines were delivered.28 The high number of D11 tabulators produced indicates that their advanced calculating capability provided access to many German contracts. In the summer of 1933, Dehomag managers felt that their machine development work would bear fruit but that new manufacturing capacity would be required. The company bought a site in Berlin and built a new factory with explicit IBM consent. Opened in 1934, from 1935, this factory housed the production of the highly successful D11 tabulator, which became the major reason for Dehomag’s fast growing turnover during the second half of the 1930s and which led to increases in its workforce, which jumped from 462 in 1933, to 1100 in 1936.29 This accomplishment enabled Dehomag to avoid conflict with the Reichswirtschaftsministerium (Reich Ministry for Trade and Industry) that controlled foreign trade. Dehomag’s competitor, in contrast, Powers’ subsidiary, had to commence production in Germany of U.S.-designed machines, in order to avoid importing complete machines, but Powers was in a less favorable position, because it did not develop machines in Germany. Dehomag’s management used the opportunity of the opening of the new Berlin factory in 1934 to voice its allegiance to the new regime and to stress the company’s “Germanness” in order to enhance its connection with the regime. Director Willy Heidinger’s praise for the new regime has already been cited above. The company further emphasized its “Germanness,” in 1935, in a publication commemorating Dehomag’s twenty-fifth anniversary.30 The German origin of punch cards was stressed, based upon a spurious assertion that Herman Hollerith was German, because his parents were German emigrants – in the text his first name was (mis)spelled with a double “n” according to German tradition. He was referred to as a “GermanAmerican,” though he was born in the United States and had never lived in Europe. Finally, the company drew attention to its own development and production work. On the other hand, before 1945, development and production did not carry enough status within the company for an engineer to gain a seat on the board of directors. The Germanness of Heidinger’s address and the Dehomag publication may have been strident, but the expressions used were not unlike those seen during the contemporary transformation of the Bull company in Paris into a French company. The delegation of authority to national leaders within the multinational company eased the requisite adaptation during the chauvinistic mood of the 1930s. 28 “Hollerith-Tabelliermachinen Type D11 und Type D9,” Hollerith Nachricten no. 74 (1937), 1022–1024; Kistermann, “The Way to the First,” 44–46. 29 IBM, Executive and Finance Committee minutes, 5 June 1933, IBM Archives; Festschrift, 16, 42. 30 Festschrift.

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The second Dehomag director, Hermann Rottke, also used the 1934 factory opening, attended by Nazi party and Deutsche Arbeitsfront representatives, to claim that Dehomag punch card systems were job creators, as people with Dehomag punch card training easily got jobs in spite of the high unemployment. But he avoided any discussion of whether punch card machines would save jobs.31 With these expressions of support, Dehomag was well positioned to take advantage of Germany’s first and second four year plans and its drive for rearmament. The experience of German industry with that country’s rearmament policy varied greatly among sectors. Industries of military importance, like the Siemens concern, experienced rapid growth.32 Dehomag experienced an even bigger growth than Siemens. Between 1936 and 1942, Dehomag’s turnover grew by 19 percent more than Siemens’s. Dehomag also experienced equivalent relative increases in its work force. Punch cards became increasingly important for the arms build up and later for warfare. But between 1933 and 1940, Dehomag’s high profits even caused IBM problems. Repatriation of funds was impossible, and the German shareholder, Willy Heidinger, demanded his dividends. Declaring the profit was delayed and when it was declared only the payment to Heidinger made. The portion owed to IBM had to be reinvested in the operations or in property.33 Hitler’s coming to power in 1933 signaled the start of the establishment of a totalitarian state and a special opportunity for Dehomag. Punch card based control became a major sales argument for Dehomag. In 1935, Dehomag stated that punch cards were well adapted for use in mass organizations. That year, NSDAP reached 2.5 million members, requiring substantial administration. Dehomag supplied equipment for the statistical control of the number and other information about the members – for example, their distribution according to age, profession and relation to other party organizations like SA, SS, Hitler Youth, and League of German Maidens. The members of these organizations were also surveyed through the use of punch cards. The expansion of the German army after the reintroduction of general conscription in 1935 was supported through detailed military statistics of the recruits.34 These vast applications are remarkable for their limited ambitions, however, compared with their simultaneous introduction in France and the United States of punch cards for records management. In Germany, the use of punch cards was confined to statistical processing, and would remain so for several years. The German army staff had started their preparations for a new largescale war in 1924. A significant component was to establish and maintain 31 H. Rottke in Denkschrift, 35–37. 32 W. Feldenkirchen, Siemens 1918–1945 (Munich: R. Piper, 1995), 663, 680. 33 Black, IBM and the Holocaust, 71–175, 209–217, 282–294, 346–347, 371–372, 390–391. 34 Frei, Führerstaat, 257; Festschrift, 74.

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control of those German industrial capabilities crucial for modern mass warfare. For this purpose a “Statistics Office” was established in 1926 by the army staff. Around 1930, they set up index card registers of industries important to the military, one organized alphabetically according to company name, another organized according to location, and, finally, a register of machines requisite for armament production, like capstan lathes, drills, and planing machines.35 In 1937, the people in charge of this work proposed the transfer of these registers to punch cards. An obvious advantage was that the two industry registers could be reduced to one set of punch cards, to be sorted as requested. Other considerations included improved possibilities to control raw materials and semi-manufactured articles, for which the raw materials had previously been monitored by manual means. The punch cardbased register processing was assigned to a new army punch card service (Maschinelle Berichtswesen). From the outset, the punch card registers were conceptualized as purely numerical, which required all information to be coded. The industry register demanded a new company number suitable for punch cards, codes for geographical districts were introduced, and, also, each raw material and semi-manufactured article was given a number.36 Before the outbreak of World War II, the army punch card service transferred the registers for monitoring industry, raw materials, and semi-manufactured articles to punch cards. They also took charge of compiling the army health statistics, the statistics on the psycho-technical tests of new conscripts, as well as the inventory control of the military equipment at the various units, and the use of raw materials for the arms build-up. From 1939, the statistics relating to armament workers were also punch card processed.37 Most of this work involved the processing of statistics, but punch card registers were introduced for controlling industry and raw materials. These catalogues differed from the United States Social Security registers and the planned French Army service registers by only being numerical. This enabled standard Dehomag machines to be used and, but it limited the tabulator printout to numbers. In the United States during the 1930s, public utilities were a prime field for the introduction of alphanumerical systems. From 1935, Dehomag 35 “Grundlage für eine Geschichte der deutschen Wehr- und Rüstungswirtschaft” (c. 1942), 19–20, NA, T-77, Roll 5, frames 717,725–717,726; G. Janssen, Das Ministerium Speer: Deutschlands Rüstung im Krieg (Frankfurt a.M.: Verlag Ullstein, 1968), 13–15. 36 Minutes of the Army Lochkarten-Ausschuss meetings between 10 Oct. and 31 Dec. 1937; Rudelsdorff, “Übersicht über die Vorarbeiten zur Einführung des Lochkartenverfahrens für de Mob-Planung und Friedensrohstoffbewirt–schaftung,” 1 October 1937; all in NA, T-77, Roll 339, frames 176,421–176,486. 37 W. Lauersen, “Organization und Aufgaben des Maschinellen Berichtswesens des Reichsminister für Rüstung und Kriegsproduktion,” manuscript, Hamburg, 5 December 1945, BAB, R-3/17.a, 3, 41–42, 44; K. Passow, “Das ‘Maschinelle Berichtswesen’ als Grundlage für die Führung im II. Weltkrieg,” Wehrtechnische Monatshefte, 62 (1965), 3–6; Petzold, Rechnende Maschinen, 246–257.

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mounted an offensive in Germany to expand the energy supply installations to cover the calculation of consumption, the amounts to be paid and bill printing. This was based upon the improved calculating capacity of its machines and their upgraded ability to control the movement of the forms on the tabulator during the printing, although they continued to address the consumer bills through the use of addressing plates.38 During the late 1930s, Dehomag continued to improve the numerical capability of their machines.39 The company also considered expanding further into alphanumerical machines. Here, it had three possibilities: Dehomag could import alphanumerical tabulators produced in United States, it could start producing IBM-designed alphanumerical tabulators, as the French IBM subsidiary did, or it could develop its own alphabetic tabulator (allowing numerical and alphabetic printing in separate printing positions). The company chose to develop an alphabetic version of the numeric D11 tabulator, but the decision does not seem to have had much impetus. Development ran into problems, and a prototype was not finished until 1944.40 It is not clear whether these difficulties were caused by a lack of company commitment or insufficient engineering competence to address the technical complexities, but low demand was certainly a major reason. The limited demand from government bodies was discussed in the previous section. Only high government demand might have enabled imports, and the absence of a Dehomag production of an IBM-designed alphanumerical tabulator can only be explained by a lack of company interest. New orders during the war reversed this situation. By the late 1930s, Dehomag’s technical Sonderweg enhanced Heidinger’s position within IBM, simultaneously strengthened by the German autarchy. Dehomag was highly profitable and had its own production, which made the German company less sensitive to parent’s views. Ironically, however, IBM’s position would have been strengthened decisively had demand emerged in Germany for punch card technology beyond Dehomag’s capability – for example, for alphanumeric tabulators. It appears that only in 1939 did IBM 38 Meckenstock and Schüssler, “Das Lochkartenverfahren beim ‘Hebedienst für Elektrizität, Gas und Wasser’ in Frankfurt a. M.,” Hollerith Nachrichten, No. 61 (1936), 831–848; F. Abendroth, “Die Anwendung des Hollerith-Lochkartenverfahrens im Einziehungswesen Der Berliner Städtischen Wasserwerk A.G.,” Hollerith Nachrichten, No. 66 (1936), 918–920; P. Görl, “Technisierung der Administration. Maschinelle Datenverarbeitung und die Rationalisiering der Verwaltung in Deutschland 1924–1945,” unpublished M. A thesis (Munich, 1993), 87–90. 39 “Der Hollerith-Rechenlocher,” Hollerith Nachrichten, No. 80 (1938), 1137–1138; Kistermann, “The Way to the First,” 46. 40 Fellinger, “Niederschrift über die Entwicklung der Beziehungen zwischen der Dienststelle M.B. und der Dehomag,” 8 October 1943, 8; W. Heidinger, “Aktennotiz betr. MB-Dienststelle,” 2 March 1944; both in BAB, R-87/6249, 418, 544e–h; Fellinger, “International Business Machines Corporation, Teilbercht 6,” 10 August 1945, 3, 7–8, BAB, R-87/6250, 733, 737–738.

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bring an alphanumeric tabulator to Germany, where punch card users were just starting to appreciate its improved capability.41 Interest in the American technology grew with war needs.

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War The outbreak of World War II in September 1939 caused increased demand for punch cards to control production and to manage warfare. Dehomag’s turnover increased by 26 percent from 1939 to 1940 (see Figure 8.1). In 1939, the army economic office, headed by General Georg Thomas, stepped up its planned economic mobilization for a general war.42 This created new tasks for the army punch card service. Monthly statistics were established for the stock and turnover of 350 types of weapons, ammunition and military equipment, as well as their production figures and estimates of completion within the next six months.43 Further, the already existing monitoring of raw materials was developed into full-scale bookkeeping of raw materials encompassing all their producers and users, as well as the three services.44 During the war, the applications of punch cards for control were intensified to enhance war planning. In the summer of 1941, the transition from traditional means to punch card processing of monthly employment statistics in important areas of the armament industry began, encompassing 90,000 companies and their 10 million employees. This represented an early attempt to improve the information available to key authorities about actual industry production. The company was still the unit for keeping these statistics.45 This application involved numerical punch card based statistical processing of data, similar to the previous army punch card service applications, but it also introduced the first step towards punch card registers. The punch cards holding the information on employment, raw materials, coal and semi-manufactured articles for any month were kept in order to compile the tables showing the development over the coming months. During the autumn of 1941, the failed Russian campaign made the low armaments production evident.46 In December 1941, the Reich Armaments 41 Black, IBM and the Holocaust, 180–181. 42 R.J. Overy, War and Economy in the Third Reich (Oxford, U.K.: Clarendon Press, 1994), 242. 43 Lauersen, “Organization und Aufgaben,” 45–51. 44 Lauersen, “Organization und Aufgaben,” 51–52; Passow, “Das ‘Maschinelle Berichtswesen’,” 136. 45 Letter, Rüstungsinspektion des Wehrkreises XVII (Wien), to OKW, “Unterteilung der Personalmeldung nach Gerätegruppe,” 12 August 1941, NA, T-77, roll 470, frame 1633318; Lauersen, “Organization und Aufgaben,” 2, 20–21; Passow, “Das ‘Maschinelle Berichtswesen’,” 136–138. 46 Janssen, Das Ministerium Speer, 33, 38–39.

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and Munitions Minister, Fritz Todt, appointed in 1940, won Hitler’s backing for an overhaul of army production. In cooperation with the Luftwaffe armaments chief, Erich Milch, he adopted a system of entrusting eminent technicians from leading industrial firms with the management of separate areas of armament production.47 Shortly after he succeeded Fritz Todt in February 1942, Albert Speer managed to improve on Todt’s earlier position in relation to the other German planning authorities.48 He extended Todt’s system to a network of “industrial self responsibility.” He formed thirteen vertical committees for managing the various kinds of weapons production, like the armor committee headed by Professor Ferdinand Porsche, and the army weapons committee headed by the Krupp manager, Erich Müller. The allocation of raw materials and intermediate goods were organized through a similar number of horizontal committees, supported through the formation of a special section in the Speer ministry. In addition to these vertical and horizontal committees, Speer established development commissions where army officers met the best designers in industry. These commissions were to supervise new products, suggest improvements in manufacturing, and call a halt to any unnecessary projects. A key element of the industrial self-responsibility network was to ensure that a given plant concentrated on producing only one item at a time, and in setting maximum quantities.49 Punch card technology was essential to Germany’s planning efforts. Transparency of available production capacity, allocation of resources, and production were crucial both in order for Speer to manage this network, and for the various committees to function in tandem with big business. To this end, in April 1942, the army punch card service was transferred to the Speer ministry as a staff function.50 Though the industrial self-responsibility system was the basis for the growth in German armaments and war production from 1942 to 1944, the Speer ministry remained crucial. The network grew in size throughout the period, as did the punch card office. By 1944 the office comprised nine branches and twenty-one offices throughout the Reich, Czechoslovakia, and Poland, employing 833 trained people and 1,055 card machines.51 In March 1942, Hitler impressed upon the companies of military importance that 47 A. Speer, Erinnerungen, (Berlin: Propyläen Verlag, 1969), 233; Overy, War and Economy, 354–355. 48 Janssen, Das Ministerium Speer, 39–40; Overy, War and Economy, 355–356; J. Fest, Speer. Eine Biographie (Berlin, 1999), 182–189. 49 Speer, Erinnerungen, 223–224; Janssen, Das Ministerium Speer, 42–48, 56–57. 50 Passow, “Das ‘Maschinelle Berichtswesen’,” 10; Janssen, Das Ministerium Speer, 52. 51 Tables, “Zahl vorhandenen Lochkartenmaschinen, Oktober 1944” and “Übersicht des fachpersonals, Oktober 1944,” BAB, R-3/1294; Speer, Erinnerungen, 224.

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accurate reports on their key raw materials, intermediate goods employment, and production were crucial to make the Speer system function.52 Insufficient available manpower was, in particular, a growing concern. By the end of May 1942, 9.4 million of the German work force had been conscripted, and of these 800,000 had fallen. There was strong pressure for more troops, but also for workers in industry of importance to the military. By that time 4.2 million foreigners worked in Germany, either forced or of their own accord.53 To improve Speer’s control, in the autumn of 1942 an advanced system of monthly employment reports was started. Companies of military importance were required to report their number of employed specified according to various categories, for example German workers, workers from the “Eastern Countries,” Jews, Russian prisoners of war, and other prisoners of war. The reports were punch card processed, partly on alphanumerical tabulators, probably due to their improved control of table printing. No indication was found of letter printing. Like the 1941 armaments industry report system, the punch cards from each month were kept in a register with a numeric code. This enabled control of the subsequent reports and the table production.54 In December 1942 this scheme was extended to include the building industry.55 Some control of the workforce was desperately needed in this big, non-military industry, as the armed forces were crying out for new recruits. Consequently, the number of building industry employees fell after 1942 in spite of the allied air raids.56 During 1942 the outcome of Speer’s improved armaments production organization was an aggregate monthly production growth of 76 percent. Between February and December armaments production grew each month, an achievement for which data collection and processing played an immense role.57 52 Janssen, Das Ministerium Speer, 64–66. Characteristically, Speer, Erinnerungen, 222 only mentions from the preamble the priority of the armament industry. 53 R. Wagenführ, Die deutsche Industrie im Kriege 1939–1945 (Berlin: Duncker & Humblot, 1954), 139. 54 “Formular AG 310 Beschäftigtenmeldung,” 20 August 1942”; “Formular AG 311: Industriebericht/Umsatz;” numeric wiring scheme (D-11) for processing AG 310, n.d.; “Bearbeitungsplan für Beschäftigungsmeldung und Industriebericht,” 10 November 1942; wiring scheme for an alphanumeric IBM 405 tabulator; all four in BAB, R-3/25; Proposal for report from an un-identified companys, n.d., 39 in ibid.; the text of a lecture by an unidentified individual, “Planung für der Beschäftigenmeldung in den Betrieben der Rüstungswirkschaft,” 29 September 1942, in BAB, R-3/1086, vol. 1. Cirkular, Reichsminister für Bewaffnung und Munition to die deutschen Betriebsführer, “Einführung zum Beschäftigtenmeldebogen,” 28 July 1942; “Notiz für die Presse über die am 14. August 1942 neu durchführende Beschäftigenmeldung mit Industriebericht,” 27 July 1942; both in NA, T-77, roll 470, frames 1,633,473–487. 55 Lauersen, “Organization und Aufgaben,” 27–29. 56 Wagenführ, Die deutsche Industrie, 160. 57 Wagenführ, Die deutsche Industrie, 66–67.

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In early 1943 efforts were introduced to simplify the collection and distribution of information, brought on by the need to reduce administrative staff and the desire to improve the control of the workforce.58 During this process two large alphanumeric punch card registers were devised: an army payroll system, and a national register, which for the time being was restricted to the domestic population.59 The start of the large alphanumeric punch card systems in Germany can be traced through the development of the army payroll system. This was the first time that alphanumeric registers and punch cards were linked. In the summer of 1943, a payroll system was established for the 12,000 civilian workers in the army. Each worker had a typed index card and two punch cards, which enabled the printing of various sorted lists including their full names, date of birth, place of work, and monthly and yearly salaries.60 By the end of 1943, this system started to be extended in order to cover all military personnel – a project that was planned for completion by 1945. For this project, 30 alphabetic tabulators were ordered from Dehomag, but were never delivered. Perhaps this was the reason that the leader of the Speer punch card service, Kurt Passow, made enquiries in the summer of 1943 into the possibility of constructing a full address printing Dehomag tabulator, resembling the IBM 405 tabulator.61 This shows that the Speer ministry punch card people were starting to consider directly addressing individual correspondence by use of punch card based printed individual information. They acknowledged the full potential of alphanumeric punch card registers. The national register was the second major German punch card register. The idea was conceived in early 1943, and the payroll system for the army civilian workers acted as a test case to bring it into being. From late 1943 until the end of 1944, two large-scale trials were carried out. The first trial took place in late 1943 and included workers in selected industries in Breslau, Schlesien (today Wroclaw). The aim was to replace the frequent and detailed statistical reports on the workers to both the Speer ministry punch card service and to the conscription registers. The Breslau register appears to have been organized according to the national company 58 Lauersen, “Organization und Aufgaben,” 143. 59 The construction of a alphanumeric punch card register of ill soldiers appears to date back to 1941. Lauersen, “Organization und Aufgaben,” 40; Passow, “Das ‘Maschinelle Berichtswesen’,” 107–109; G. Aly and K.H. Roth, Die restlose Erfassung. Volkszählen, Identifizieren, Aussondern im Nationalsozialismus, (Berlin: Ritbuch Verlag, 1984), 132 (their allusion to earlier use of the German personal number is not substantiated. The number used in Passow, ”Das ‘Maschinelle Berichtswesen’,” 108 has a different structure.) 60 Passow, “Das ‘Maschinelle Berichtswesen’,” 98–101. 61 Note, W. Heidinger, “Betr.: MB-Diensstelle bzw. Beirat,” 2 March 1944; report, Fellinger to Reichskommissar, “Betrifft: Deutsche Hollerith Maschinen Gesellschaft m.b.H.,” 9 August 1944; both in BAB, R-87/6249, Band 2; Lauersen, “Organization und Aufgaben,” 44–45.

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identification number. Each employee had her or his individual card containing, in addition to this number, her or his name, date of birth, and address. The register produced sorted lists, compared successfully to the many local index card registers. This kind of identification was cumbersome, as easy identification would require a unique individual identification number, along the lines of the existing national company identification number. In addition, the Breslau register only included people who were employed. The Speer ministry punch card people realized that industry reports were not an appropriate tool on which to base a register of the total workforce in Germany.62 The second large-scale experiment included all the inhabitants of the city of Ansbach, Bayern. During this test in the autumn of 1944, the central personal register was defined, consisting of a report form for each individual and one punch card to hold a condensed version of this information – green cards for women, and yellow for men. People were ordered to report, and procedures for changes were established. Each individual was identified through a national registration number containing twelve digits, devised during this experiment. The register held key information from the twenty or so civil registers in the city, as well as the various military registers, and it enabled easy comparison of the information in these registers. Several errors in the existing registers became obvious, especially the information used for food rationing and the age of people. The Ansbach register covered every individual in the city, and it was able to provide more comprehensive information for the reports more quickly than ever before. It was a success and it was decided to establish a national register near Berlin, but this was never implemented. According to one Speer punch card manager after the war, this was due to the lack of trained staff and alphanumerical tabulators.63 The Speer punch card people were the driving force behind this development of punch card applications to monitor the production of military importance and this crucial sector’s employment of manpower. This development could originate in several places, for example, it could be based on experiences in German industry, or it might have been inspired from information on the punch card based French national register, established in 62 “Aktenvermerk Betr. Durchführung der Personaleinzelerfassung bei den Gühring-Werken, Waldeburg,” 29 November 1944, in BAB, R-3/1293, vol. 2; Lauersen, “Organization und Aufgaben,” 32–34; Passow, “‘Das ‘Maschinelle Berichtswesen’,” 143; Aly and Roth, Die restlose Erfassung, 131–132. 63 V. Nullau, “Mitteilung betrifft: Einführung der Personal-Hollerith-Kartei,” 16 January 1945; “Aktenvermerk betr. Personaleizelerfassung,” 16 November 1944; “Bericht über die Personaleinzelerfassung in Ansbach,” 2. November 1944; report, Herbst, “Die Personaleinzelerfassung, Ansbach,” 29 September 1944; report, “Die Reichspersonalkartei, MB,” 1 August 1944; all in BAB, R-3/1293, vol. 2; Laursen, “Organization und Aufgaben,” 33–36; Passow, “Das ‘Maschinelle Berichtswesen’,” 143–144; Aly and Roth, Die restlose Erfassung, 133–140.

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1940.64 However, it originated outside Dehomag, and it created a new demand, which Dehomag had great difficulties in satisfying. The story illustrates the difficult relations between Dehomag and its most powerful customer under the strains of war.

The Dehomag Conflicts

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During the 1930s, the IBM business in Germany had been based upon three sets of actors: IBM, Dehomag and their German customers and authorities. IBM controlled Dehomag, while Dehomag maintained all relations in Germany. Only in a few instances did IBM have direct contact with the German authorities or customers. Examples such as Thomas J. Watson’s meetings with Hitler and the German Minister of Economics, Hjamar Schacht, in 1937, during a visit to Germany as Chairman of the International Chamber of Commerce were rare.65 Between 1939 and 1941 these basic relations remained, as the United States was neutral. However, the expansion of punch card applications in industry and within the armed forces during the first two years of the war, brought about by the extensive warfare, the occupation of several countries, and the growing industrial production in Germany, was partly facilitated by Dehomag’s growing production and reflected in its rising turnover. In addition, the German invaders compelled the various national IBM agencies or subsidiaries in the occupied countries to surrender leasing contracts of punch machines, which were and remained the property of IBM in New York.66 The extension of punch card applications in 1942 caused additional requisitions of IBM leases in Belgium, France, and the Netherlands.67 These 64 L. Heide, “Monitoring People in France: From the Options of French Army Operational Statistics to the Perils of Record Management between 1932 and 1944,” Technology and Culture, 45 (2004): 1–22. 65 T.G. Belden and M.R. Belden, The Lengthening Shadow: The Life of Thomas J. Watson, (Boston: Little, Brown and Co., 1962), 194–195; Black, IBM and the Holocaust, 132–134. 66 “Liste der z.Zt. in Deutschland befindlichen Maschinen der Compagnie ElectroComptable, 15.1.1944,” in BAB, R-3/1154, vol. 1. 67 Group of leasing contracts of the German trustees in Brussels and Amsterdam of the International Business Machines Corporation, New York, with the Maschinelles Berichtwesen concerning various types of machines, 1942, NA, T73, Roll 8, Frames 1,053,937–1,054,002; “Vertrag vom 23.6.1944 zwischen M.B. [Maschinelles Berichtwesen] Berlin und Compagnie Electro Comptable,” BAB, R-3/1154, vol. 1; note, “An firmen … an geliehene bzw. abgegebene CEC [Compagnie Electro Comptable]). Maschinen. 26.6.1944,” BAB, R-3/1154, vol. 1. The historians G. Aly and K.H. Roth accused IBM of having leased punch card machines to Germany after the United States entry. The contract they cite is one of the contracts mentioned above. Aly and Roth, Die restlose Erfassung, 123–124. The contract: NA, T-77, roll 8, frame 1,003,937–938. It is not signed by IBM but by a German custodian.

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leases could only contribute to the Dehomag turnover through punch card purchases. Parallel to this expansion, which was based upon prewar Dehomag development and the stripping of occupied countries, German authorities initiated the establishment of a German-controlled punch card industry, including original development. The setting was “the blinds down policy,” in force since the mid-1930s, of severing business contacts abroad. In May 1940 – early on in the campaign to conquer Benelux and France – the leader of the army punch card service, Kurt Passow, took the initiative to establish an independent, German punch card production. As he had no able technician in his employ, he got the engineer Hermann Voigt, who had headed punch card construction work in the 1930s at Siemens, to head his development work.68 In 1940, tests were conducted on Powers and Bull machines.69 The Bull company in Paris held the only industrial punch card technology under full German control. In 1940, some twenty Bull tabulators and some forty punches and verifiers were taken as spoils of war to Germany. This caused several problems, serious even during a war. These tabulators allegedly infringed the German IBM and Dehomag patents, and Dehomag refused to carry out their maintenance.70 In addition their alphanumeric representation was incompatible with IBM’s alphanumeric system. The German national punch card system project could become a threat to IBM’s business in German controlled Europe. Simultaneously, the German campaign in May–June 1940 provoked pressure on IBM’s relation with its German subsidiary. The conquest of Benelux and France caused Thomas J. Watson of IBM to return a German decoration that he had received in Berlin in 1937 while Chairman of the International Chamber of Commerce working for appeasement with Nazi Germany.71 From June 1940, this act triggered a Heidinger Putsch to regain majority control of Dehomag, apparently supported by the German authorities. However, the IBM majority ownership was rescued by the introduction of enemy company custodianship when the U.S. entered the war.72 The custodianship gave Heidinger’s management free hands, which implied that he had regained his company but for the ownership. While Dehomag’s relations with IBM vanished for the duration of the war, the project of a German-controlled punch card industry remained, 68 Voigt, “Aktennotiz,” 21 May 1940; letter, OKH to Siemens, “Betr.: Patentanmeldungen des Herrn Obering. Voigt,” 7 December 1940; letter, OKH to Siemens, 12. June 1941; all in SA, 21/Lg 889. 69 Organization diagram dated 16 November 1940, BAB, R-3/541. 70 Letter, Fellinger, to Reichskommissar, “Betrifft deutsche Hollerith Maschinen Gesellschaft m.b.H,” 10 October 1943; report, Fellinger, “International Business Machines Corporation. Anlage betreffen Dienststelle Maschinelles Berichtwesen und Wanderer-Werke A.G.,” 25 July 1945; both in BAB, R-87/6249, vol. 2. 71 Belden and Belden, The Leathering Shadow, 195–196, 207. 72 Black, IBM and the Holocaust, 218–258, 270–273, 277–291.

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causing problems to Dehomag. In 1941 the German army signed a contract with the Wanderer-Werke in Chemnitz to develop a series of punchcard machines.73 Wanderer-Werke had produced typewriters since 1902, and during World War I, it started to produce mechanical adding machines.74 In the summer of 1942, three unsettled issues of punch card systems in Germany erupted into a heated conflict between the Speer ministry punch card service and Dehomag. The factor provoking the conflict was war production control improvements from February 1942. This included the transfer of the army punch card service to Speer’s successful management, giving Kurt Passow a higher profile that he was most willing to exploit. The first punch card problem was Wanderer-Werke’s difficulties in establishing their own independent card technology. The Wanderer-Werke enterprise came up against the numerous German patents, which were the outcome of Dehomag’s and IBM’s development work and intended to guard their firstmover position. Exactly the same experience as all contenders to IBM’s punch card, prime-mover position. The second problem was the patent infringement and maintenance of the 1940 booty Bull machines. The final problem was the emerging demand for alphanumeric punch card machines growing out of the Speer ministry work to improve war production control and planning. This problem surfaced in 1942 as the Speer ministry punch card service grew interested in alphanumeric tabulators. For two years, they had gained experience from using the IBM alphanumeric tabulators requisitioned from the occupied countries.75 Kurt Passow probably applied these machines to improve the existing statistics processing and numeric registerbased applications by adding letter specifications to the prints, as shown in several published examples.76 The heated nature of the dispute is clear from Kurt Passow’s high profile accusation of Dehomag, in September 1942, of withholding the alphanumeric IBM machines from the German market. Passow accused Dehomag of accepting instructions to this end from an enemy company (IBM). He raised slanderous doubts about Dehomag management’s loyalty to Germany, which was extremely serious in the midst of the war and which, rightly, infuriated Heidinger who had displayed his enthusiasm for the regime in 73 Voigt to P. Storch, “Betr.: Entwicklungsarbeit auf dem Gebiete der LochkartenMaschinen,” 9 September 1941, SA, 21/Lg 889; Report, Fellinger, “International Business Machines Corporation. Anlage … betreffend Dienstelle Maschinelles Berichtwesen und Wanderer-Werke A. G.,” 25 July 1945, BAB, R87/6250, vol. 2. 74 Petzold, Moderne Rechnendekünstler. Die Industrialisierung der Rechentechnik in Deutschland (Munich: Verlag C.H. Beck, 1992) 92–93, 96–100. 75 The incomplete Maschinelle Berichtwesen archives contains the article “ ‘Wocci’ knows all about the army,” Daily Herald, 23 November 1944, on a British draft service punch card register, BAB, R-3/1293, Akten Nr. 921/45, vol. 2. 76 Passow, “Das ‘Maschinelle Berichtswesen’,” 65, 103, 105, 106.

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the 1930s.77 The only basis for Passow’s attack was the assembly of alphanumeric tabulators by the French IBM company (Compagnie ElectroComptable) for the French market. Seen from the Dehomag perspective, because the German governments had encouraged self-sufficiency from imports and from liabilities in foreign currency, Dehomag had followed this principle in developing the numerical D11 tabulator and in establishing extensive production in Germany. This policy had prevented the kind of conflict with the Reich Ministry for trade and Industry, experienced by the Deutsche Powers Company in the late 1930s due to its objection to move production of tabulators from the United States to Germany. Dehomag’s customers demanded an increasing number of the numerical D11 tabulators, and Dehomag did not experience sufficient demand to complete the construction of the alphabetic version of the D11 tabulator – or to negotiate with IBM in New York in order to get the blueprints to produce the IBM alphanumeric tabulators, as the French IBM company did in the 1930s.78 As time went by, the problems worsened due to the air raids. Punch card machines were destroyed and damaged, and, in August 1943, the Dehomag factory in Berlin was severely hit. Most of the production moved to Hechingen in Würtemberg, 46 km from the Dehomag factory in Sindelfingen. It was housed in a cotton mill, abandoned because cloth production was not of military importance.79 The various parties to the conflict reached a settlement following extensive negotiations between 1942 and 1944 that was never reported to authorities above the parties in the Third Reich hierarchies, e.g. Göring and Speer. This process served to lay open the additional conflict between Dehomag and the Speer ministry over the control of the punched card business in the German-controlled part of Europe, where the Speer ministry used the Wanderer-Werke as their industrial client. Dehomag wanted, of course, to keep their control of the punched card business and in addition gain control 77 W. Heidinger, “Betrifft Beirat,” 18 June 1943; Fellinger, “Niederschrift über die Entwicklung der Beziehungen zwischen der Dienststelle M.B. des Reichsministers für Rüstung und Kriegsproduktion und der Dehomag,” 8 October 1943; W. Heidinger, “Aktennotiz betr.: MB-Dienststelle bzw. Beirat,” 2 March 1944; report, Fellinger, “International Business Machines Corporation. Anlage betreffend Dienststelle Maschinelles Berichtwesen und Wanderer-Werke A.G.,” 25 July 1945; all in BAB, R-87/6249, Akten Nr. 921/45, vol. 2. 78 As neither the Dehomag archives, nor the archives of the German Ministry of Trade and Industry have been found, the blueprint argument rests on the absence of this option in the German monitoring file: BAB, R-87/6249, Akten Nr. 921/45. 79 Report, Fellinger, to Reischskomissar, “Betrifft: Deutsche Hollerith Maschinen Gesellschaft m.b.H.,” 24 November 1943; report, Fellinger, “International Business Machines Corporation, Teilbericht Nr. 6: Deutsche Hollerith Maschinen Gesellschaft m.b.H.,” 10 August 1945; both in BAB, R-87/6249, Akten Nr. 921/45, vol. 2.

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of the business in the orphaned IBM affiliates in the various occupied countries, such as France. The outcome was that Dehomag assigned patent licenses to WandererWerke at reduced rates for the duration of the war and Wanderer-Werke undertook their maintenance. This included both the requisitioned and imported Bull machines. In any case, the legal system would have granted Wanderer-Werke a compulsory license, though this might have delayed the process. Wanderer-Werke assumed production of minor Dehomag punch card machines, while Dehomag was to concentrate on the sorters and especially the tabulators. In 1944 the company concluded the construction of the alphabetical version of the D11 tabulator. A prototype was built, but the alphabetical version never went into production. Dehomag, who had far the best organizational capabilities in the German punch card field, emerged as the major winner. They avoided Wanderer-Werke influence in their management, retained control of the vitally important large punch card machines, and took control of the French IBM company (Compagnie Electro Comptable).80

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The Dynamics of a Multinational in Nazi Germany In their analysis of the role of IBM in the Third Reich, Götz Aly and Karl Heinz Roth focused on the role of IBM punch cards in the location of Jews for deportation. They searched for a substantial Dehomag complicity in the Holocaust, but their studies reduced the issue to the detailed processing of census data, which already in the 1880s had been the basis for the invention and construction of Herman Hollerith’s first punch card system. More importantly, they, Sybil Milton and David Luebke have drawn attention to the importance of various non-punch card registers for locating Jews.81 Edwin Black did not provide any new insight on this issue in his book, IBM and the Holocaust, but he tried to extend IBM’s complicity in the Holocaust to include the alleged use of punch cards by the SS to streamline central control of persecution in the concentration camps.82 At several concentration 80 Reports, Fellinger, to Reischskomissar, “Betrifft: Deutsche Hollerith Maschinen Gesellschaft m.b.H.,” 11 October 1944 and 24 November 1943; Fellinger, “International Business Machines Corporation;” “Teilbericht 5: Compagnie Electro-Comptable, Paris,” 30 July 1945; “Teilbericht Nr. 6: Deutsche Hollerith Maschinen Gesellschaft m.b.H.,” 10 August 1945, “Anlage I zum teilbericht 6 betreffend Dienststelle Maschinelles Berichtwesen and Wandere-Werke A.G.,” 25 July 1945; all in BAB, R-87/6249, Akten Nr. 921/45, vol. 2. 81 Aly and Roth, Die restlose Erfassung; David Martin Luebke and Sybil Milton, “Locating the Victim: An Overview of Census-Taking, Tabulation Technology, and Persecution in Nazi Germany,” IEEE Annals of the History of Computing, 16; no. 3 (1994), 25–39. 82 Black, IBM and the Holocaust, 19–22, 351–372.

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camps, the SS applied numeric punch card registers of the prisoners to provide daily statistics reports to the SS headquarters in Berlin. Each concentration camp prisoner was reduced to the number tattooed on her or his arm. But Black was not able to substantiate that punch cards were used in managing the concentration camps, for example, to locate prisoners for punishment or execution. The concentration camp punch card application was a most telling example of the industrial nature of SS persecution, but IBM’s crucial contributions to the Third Reich were to be found in the less conspicuous punch card applications to manage production in companies, and by the Wehrmacht’s economic office and the Armaments and Munitions Ministry to control national resources and production. Simultaneously, IBM earned money from similar installations in the United States and the British Empire. IBM’s and Dehomag’s conduct during World War II was based on their experiences since 1910. That year, the company was founded as a foreignowned agency, and it became virtually independent from the U.S. parent company during the United States’ participation in the two World Wars, between 1917 and 1918, and from 1941 to 1945. After both wars, Dehomag returned to the role of an affiliate and, in 1922, it was transformed from an independent agency to a subsidiary. These changes and the U.S. parent company’s adhering to the founder of the German company, Willy Heidinger, were the basis for the different, even conflicting, strategies pursued by a multinational company’s corporate headquarters and one of its subsidiaries. Until he died in 1944, Willy Heidinger as leader of Dehomag pursued a dual strategy both of improving his business in Germany and his independence from the parent company. He held dual allegiances. He acknowledged IBM’s leader, Thomas J. Watson, as his master, but considered him a malediction as well, an attitude born after Watson’s conquest of Dehomag in 1922. Furthermore, he owed allegiance to Germany regardless of whether the country was headed by Wilhelm II, Hindenburg, or Hitler. Heidinger’s apt relations with the German authorities lubricated his business, but they had their own agenda. During World War I, they did not find Heidinger’s punch card business sufficiently important to risk a conflict with at the time, a minor foreign company, that would need to be settled after the war. From the 1930s, the German authorities found that the punch card technology had grown an important tool to manage the resources needed to wage a general, modern war, which was a major reason for the endeavor to establish a national German production of punch cards. IBM in New York was not a party to the Dehomag conflicts in Germany between 1942 and 1944, as they had been severed from their German business by the United States’ entry into the war against Germany. But prior to that, IBM’s control of Dehomag was never complete and had diminished since the early 1930s. IBM had tightened its control in 1922 by taking over Dehomag, which gave them the choice between control and quick revenues.

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IBM chose the money and kept Willy Heidinger as leader of its business in Germany, which based upon his previous record would yield good business in Germany and revenues to the parent company. His previous record gave him prestige when dealing with the U.S. company. Furthermore, within a few years, Heidinger’s position was enhanced as Dehomag started to improve IBM machines. By the time the Nazis took over in 1933, Heidinger and Dehomag had additionally improved their position in relation to IBM, by first starting to develop their own complete machines, and then with IBM’s consent, starting to establish machine production works in Berlin. Dehomag’s position was further strengthened during the remainder of the 1930s by the success of its own machines and roaring revenues, based on German rearmament. As the nature of Nazi Germany became apparent to the United States during the campaign in Benelux and France in the summer of 1940, IBM like many other American multinationals, was trapped by its previous deeds. It had a blooming business in Germany, which to a large extent had been severed from the world market through the German autarchy of the 1930s. IBM could severe its ties with its subsidiary, but it risked not only losing future business but also monetary assets blocked in Germany by that country’s repatriation policies. Furthermore, IBM’s business was based on leasing machines, which remained its property, making their investment in Germany comparably larger than other U.S. companies. After the German declaration of war against the United States in December 1941, the State Department could close their embassy in Berlin, evacuate the staff and turn the property over to the protection of the neutral Swiss embassy. By that time, IBM had no U.S. nationals in Germany. It was obliged to leave its business well managed by Germans and its machines that proved crucial in the management of German warfare under the sovereign control of the German government.

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CHAPTER 9

The Great Northern Telegraph Company and Dictatorship

❖ Kurt Jacobsen An international telegraph company such as ours, which works in 10 different states and has links to an even greater number of governments and international organisations, has naturally first and foremost to observe the strictest neutrality in all political matters, and absolute loyalty towards all the governments with which it collaborates. Alfred Schønebeck, to Gosplan, December 31, 1930.

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Introduction On 31 January 1930, the Great Northern Telegraph Company’s (GNTC) representative in Moscow, Alfred Schønebeck, appeared before the supreme Soviet planning commission, Gosplan. His objective was to present a speech on the Danish firm and its long-standing cooperation with Russia and the Soviet Union. It remains unclear why Schønebeck was given access at all to this assembly of Stalin’s top economists, but it undoubtedly took place on his initiative. The Soviet Union had, from the late 1920s, embarked upon the road of industrialization under the first five-year plan. Its progress was accompanied by ideological and nationalistic rhetoric against capitalism and the surrounding world. Foreign companies were facing increasing difficulties as they were put under pressure by the Soviet government to leave the country. Foreign specialists had appeared in the dock during the first show trials of the late 1920s, followed by hard-hitting propaganda against spies and foreigners. Schønebeck was fully aware that GNTC, sooner or later, would be the subject of scrutiny by the Soviet authorities and would probably share the fate of other foreign companies. Instead of awaiting Soviet action against the

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company, he now took the initiative – knowing that his performance might determine the future of his company. Schønebeck praised the Soviet telegraph administration for its efficiency and quality of service. His main objective, however, was to assure Gosplan and the Soviet government that cooperating with GNTC meant both security and other benefits for the Soviet Union. First and foremost, he stressed the company’s political neutrality. Secondly, he stressed the political-administrative and diplomatic advantages of letting a private company be responsible for the Soviet Union’s international telegraph links:1

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In practice, achieving the best operation of international lines requires, when national lines are involved, the initiation of an extensive and complicated official negotiating apparatus. The larger the number of states’ administrations involved in the discussion, the more difficult it is to organize all the practical details that together make for a good telegraph service.

The message was that the Soviet Union could have full confidence in GNTC and, at the same time, avoid becoming involved in negotiations with other capitalist countries if responsibility was left to the Danish firm. The situation and the dangers that were threatening the company, of course, dictated the arguments. But there was more to it than that. In fact, what Schønebeck presented here had been the very foundation of GNTC’s continued existence as an international telegraph company for more than sixty years; the fundamental principle of political neutrality had enabled the company to overcome political crises and revolutions, international conflicts and wars.2 With the coming of Stalinist industrialization and political terror in the Soviet Union, this principle would face its ultimate test – as Schønebeck had obviously realized. At the same time, however, the Company was facing increasing pressure in the Far East from Japanese imperialism and fascism. As the world moved towards war, the Danish company found itself struggling for survival because the dictatorships in the two countries, both essential to its business, demanded a termination of its concessions and landing licenses. In this chapter, I will examine GNTC’s relations to the Soviet and Japanese dictatorships, and I will explain how the company dealt with the regimes in an attempt to preserve its position in the two countries. At the same time, I will analyze the reasons and motives for the attitudes and 1 Alfred Schønebeck: Foredrag i Gosplan, 31.12.1930. Rigsarkivet (RA, The Danish national archive), GNTC archive. 2 For an outline of GNTC’s political neutrality throughout its history, see: Kurt Jacobsen, “The Great Northern Telegraph Company: A Danish Company in the Service of Globalisation since 1869,” in Between National Histories and Global History (Historiallinen Arkisto 110:4), ed. Stein Tønnesson, Juahni Koponen, Niels Steensgaard and Thommy Svensson (Helsinki: Finka Historiska Samfundet, 1997).

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actions of the two dictatorships towards the Danish company, comparing and contrasting the development in the two countries.

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From a Small Neutral Country GNTC was founded on 1 June 1869 by a merger of three telegraph companies connecting Denmark, Norway, Sweden, Britain and Russia through submarine cables. The merger was the final result of a deliberate strategy that took advantage of Denmark’s geographical location. This made it possible to establish a telegraph link between Russia and Britain via Denmark bypassing the German landlines. In this way, the company exercised a monopoly on international telegraphy between Scandinavia, Russia and Britain from the very beginning.3 In 1870/71 GNTC, based upon a monopolistic concession granted by the Russian government, extended its telegraph interests to the Far East laying cables from Vladivostok to Nagasaki, Shanghai and Hong Kong. In a partnership with the Russian telegraph administration the Company, on 1 January 1872, opened a Trans-Siberian telegraph link connecting China and Japan with Europe. The cooperation between the Danish Company and the Russian authorities was extended by the laying of a cable in 1873 between Denmark and France, supplying Russia with a telegraph link to its Western European ally and bypassing not only Germany, but also Britain. In 1882, GNTC’s Russian concessions were extended until the end of 1912.4 The expansion to the Far East was based upon Denmark’s position as a small, neutral country representing no threat to anybody and, simultaneously, a delicate balance between Russian and British imperialist interests in the region. From the point of view of the Japanese leading circles, who after the Meiji revolution were eager to absorb and utilize Western technology, the Danish company was an ideal partner since the country had neither the financial capacity nor the technological capabilities to lay its own cables. On 20 September 1870, GNTC was granted a 30-year concession, including a license to land its cables at Nagasaki and erect its own telegraph station to operate the cables. In 1871 the cables to Russian and China were laid, 3 The founding of GNTC is described in: Kurt Jacobsen, “Diplomacy and International Business: The Great Northern Telegraph Company 1869–1921,” in Business and Society. Entrepreneurs, Politics and Networks in a Historical Perspective, ed. Anne-Marie Kuijlaars, Kim Prouddon and Joop Visser, (Rotterdam: CBG, 2000). 4 The Company’s expansion to the Far East is examined in detail in Ole Lange, Finansmænd, stråmænd og mandariner. C.F. Tietgen, Privatbanken og Store Nordiske. Etablering 1868–1876 (Copenhagen: Gyldendal, 1978); Jorma Ahvenainen, The Far Eastern Telegraphs. The History of Telegraphic Communications between the Far East, Europe and America before the First World War (Helsinki: Suomalinen Tiedeakatemia, 1981).

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connecting Japan to the global telecommunications network. In December 1882, the concession came to include a Danish 20-year monopoly on Japan’s international telegraphy as a “payment” for the laying of a cable between Japan and Korea. In March 1900, the concession, including the monopoly, was extended until the end of 1912.5

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Mutual Dependency and Interests To GNTC, the cooperation with Russia was essential – not because of Russia’s own international telecommunications, but because of the TransSiberian link connecting Europe and the Far East. The structure of the GNTC telegraph system could be divided into the three geographical regions where the company ran its main business: Northern Europe, the Far East and the Trans-Siberian link. It was, however, the Trans-Siberian link that constituted the foundation of the company’s strength and position in international telegraphy by connecting its two cable systems in Europe and the Far East. Without the Trans-Siberian link, the company’s system would be reduced to two regional cable networks. GNTC, therefore, was totally dependent on good relations with the Russian government. On the other hand, Russia was equally dependent on GNTC since all the country’s overseas – and as such the most important – international telecommunication with Western Europe and the Far East ran through the company’s cables. Furthermore, the Russian State received a significant income, in the form of transit revenues, from the Trans-Siberian link. In other words: the two partners were tied together by common interests and – most important - mutual dependency that despite differences and controversies formed the basis of a fundamentally good relationship.6 The same could be said regarding GNTC’s relations to Japan. The company’s main interest was not Japan’s own international telecommunications, but the use of Nagasaki’s position as a stepping stone for the cables between Shanghai and Vladivostok. For this reason, the concession, with its landing 5 The early years of cooperation between the GNTC and Japan is described in: Ahvenainen, The Far Eastern Telegraphs; Daqing Yang, “Submarine Cables and the Emerging Japanese Empire,” unpublished paper presented at the AIB Annual Meeting in Charleston, South Carolina, 20–23 November 1999; Kurt Jacobsen, “In struggle for control over the Far Eastern Telegraphs. The Great Northern Telegraph-Company and Japan 1870–1943,” in Transnational Companies 19th–20th Centuries, ed. Hubert Bonin, Christophe Bouneau, Ludovic Cailluet, Alexandre Ferndandez and Silvia Marzagalli (Paris: Éditions P.L.A.G.E, 2002). 6 The mutual dependency and interests constituted the basis for more than 130 years of cooperation between the GNTC and Russia. This has been outlined in: Kurt Jacobsen, “The Great Northern Telegraph-Company and Russia: 130 Years of Cooperation in the light of the Big Politics.” History of the Motherland, no. 4 (2000), 44–54, no. 5 (2000), 58–69 and no. 6 (2000), 28–43 (in Russian).

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178 Kurt Jacobsen

license and the right to operate the cables from the Nagasaki station, was of great strategic importance to the company, comparable with the importance of the Trans-Siberian link. On the other hand, Japan was just as dependent on GNTC, since the Danish cables were its only telecommunications link to the outside world. Furthermore, the connection to the global telegraphy network was desperately needed by the country in its modernization process, so cooperation with GNTC was of great strategic importance. Thus, as was the case with Russia, the two partners were tied together by mutual dependency and interests, and, for this reason, the relationship was fundamentally solid.7 To GNTC, however, the cooperation with both Russia and Japan was of special importance since the Trans-Siberian link formed the basis of its strategic partnership with the world’s largest telecommunications group, the British Eastern and Associated Companies, that in 1892 owned 45.5 percent of the overall length of submarine cables, as opposed to GNTC’s share of 5.2 percent. By 1871, the British group had established a competing telegraph route between Europe and Hong Kong via India, and, after almost several years of telegraph “war,” GNTC and the Eastern Companies in December 1886 concluded a peace and partnership agreement. At the same time, they took a cartel-like approach that gave them almost total control of telecommunications in the Far East and of the links to Europe.8 The Danish–British alliance was further strengthened when the two companies secretly acquired a majority holding in the American Commercial Pacific Cable Company that in 1903 laid the first and only U.S. telegraph cable across the Pacific Ocean to Hawaii, Guam, Midway and the Philippines. In 1906 and 1907 the cable was extended with links to China and Japan. Through this, the GNTC and the Eastern Companies had gained almost complete control of all international telecommunications throughout East Asia and the Pacific. The alliance was formalized on 26 June 1904, when the two European companies, a few smaller companies and the Chinese and Russian administrations concluded a Pacific Joint Purse Agreement and signed 17 secret agreements regulating telegram traffic and setting tariffs for the Far East and the Pacific region, as well as the links to Europe and U.S.A.9 7 Yang, “Submarine Cables;” Jacobsen, “In Struggle for Control.” 8 The Danish-British telegraph “war” and the road to the 1886 agreement is revealed in full detail in: Ole Lange, Partnere og rivaler. C.F. Tietgen, Eastern Extension og Store Nordiske. Ekspansion i Kina 1880–88 (Copenhagen: Gyldendal, 1980). 9 The formation of the Commercial Pacific Cable Company and the concluding of the Pacific Joint Purse Agreements is outlined in Ahvenainen, The Far Eastern Telegraphs. GNTC’s importance to the British Empire has been outlined in Kurt Jacobsen, “The Great Northern Telegraph Company and the British Empire,” in Britain and Denmark. Political, Economic and Cultural Relations in the 19th and 20th Centuries, ed. Jørgen Sevaldsen (Copenhagen: Museum Tusculanum Press, 2003).

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Japanese Expansionism By the turn of the century, a change had occurred in the relations between GNTC and Japan. In contrast to Russia, Japan had developed the technological capacity to lay and operate its own submarine telegraph cables and demonstrated this by constructing a cable link to Taiwan in 1897–1898. The laying of the cable was a result of the annexation of Taiwan after the SinoJapanese war, an act that transformed Japan into a colonial power. As the incident became a turning point in Japan’s modern history, it also became a turning point in her telegraphic development.10 Japan’s geographical expansionism was followed by telegraphic expansionism, propelled by the desire to create an imperialistic telecommunications “nerve system” and to gain control over the country’s international telecommunications. This brought the country onto a collision course with GNTC, and it was only because the duration of the concession was tied to the Chinese and Russian concessions, which both had been extended until the end of 1912, that the Japanese government in March 1900 accepted a similar extension of GNTC’s Japanese concession.11 The emerging Japanese consciousness and nationalism in telegraphic matters coincided with a generally growing awareness of the importance of telecommunications. Following the Spanish-American War of 1898 and the Boer War of 1900–1902, the Great Powers, as Daniel Headrick pointed out, focused increasingly on the foreign policy and national security aspects of international telecommunications links.12 With the Russo-Japanese War of 1904–1905, this aspect became both acute and evident to the two countries, as well as to GNTC. Japan was worried about GNTC’s close relations with the Russian government and, even though the company remained strictly neutral in the conflict, the Japanese Navy cut the cables between Nagasaki and Vladivostok. They were repaired after the peace settlement, but the conditions for GNTC’s business in the Far East had radically changed. As far as Russia was concerned, GNTC’s relations became further consolidated in 1906 with a 20-year extension of its monopolistic concessions as part of an agreement on laying a cable between St. Petersburg, Libau and Denmark. The Japanese government, however, at this time challenged GNTC when it opened to public traffic a military cable to the Asian mainland that had been laid during the war. GNTC protested, claiming that Japan was violating its monopolistic concession, but the objection was rejected. Instead, the Japanese government invited the company to send a representative to Tokyo 10 Yang, “Submarine Cables.” 11 Yang, “Submarine Cables;” Jacobsen, “In Struggle for Control.” 12 Daniel R. Headrick, The Invisible Weapon. Telecommunications and International Politics 1851–1945, 82–89 (New York, Oxford: Oxford University Press, 1979).

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180 Kurt Jacobsen

for preliminary negotiations over the concession – even though this would not expire until the end of 1912.13 Japan wanted to gain control over its international telecommunications and pave the way for total independence from foreign influence – despite GNTC’s status as a company from a small, neutral state. First and foremost, therefore, the government demanded the termination of GNTC’s monopoly. The company had, in fact, already decided that it was prepared to relinquish this. However, when it came to the Japanese demand that the government should be allowed to lay its own cables to China and use them for all kinds of telegrams, GNTC refused. The company was fully entitled to do this because China, in August 1906, had extended its monopoly until the end of 1930. If Japan wanted to land a cable on the Chinese coast, GNTC, according to its Chinese agreement, had to give its consent, which it denied.14 Referring to its concession from 1882, according to which GNTC “in any case” should enjoy the right to operate its cables in connection with the Japanese domestic telegraphs, the company also refused that its rights to land and operate its cables at Nagasaki be modified and limited in time. The Japanese government pointed out that the word “permanent” had no place in legal documents, but the GNTC stood its ground, claiming that its rights should be considered valid both indefinitely and permanently.15 It was only after six years of negotiations, and after diplomatic assistance and pressure from Britain and several other countries, that an agreement between GNTC and Japan was signed on 23 August 1913. Most important was that GNTC’s right to continue to land and operate its cables in Japan was confirmed – with no fixed time limit. Japan was allowed to lay a cable to Shanghai on the condition that it was to be used exclusively for terminal traffic in Japanese characters and for Japanese/Chinese government telegrams. Furthermore, the Japanese government had to accept that a joint purse should be established for terminal traffic between China and Japan with 64.5 percent of the total revenues from both the Danish and Japanese cables going to GNTC.16 The company had successfully defended its business in Japan and, at the same time, secured the strategic position of its Nagasaki station. Based upon its Chinese concession, the company had simultaneously succeeded in restraining Japan’s telegraphic ambitions and in impeding its rise as a dominant power within the Far Eastern telegraphs. Nevertheless, the company, continued to hope that its neutrality and general standing would still make it an attractive partner to Japan.17 13 14 15 16 17

Yang, “Submarine Cables.” Jacobsen, “In Struggle for Control.” Jacobsen, “In Struggle for Control.” Ibid. Yang, “Submarine Cables.” Jacobsen, “In Struggle for Control.” Jacobsen, “In Struggle for Control.”

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On the contrary, however, the negotiations resulted in a serious worsening of the relations between the two parties. Japan’s position was hardened by GNTC’s obstinate standing on its concessional rights and its unwillingness to comply with the Japanese demands that left no room for future compromises. The conclusion of the new agreement therefore came to mark the beginning of a long and fierce conflict, with Japan in the offensive role constantly seeking to undermine the Company’s position, especially in China. This served to prepare the ground for the final showdown in 1930, when GNTC’s Chinese monopoly would expire.

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The First Soviet Concession For GNTC the continuing controversies with Japan were totally overshadowed when the Tsarist regime was overthrown in 1917 and Lenin’s Bolsheviks took power in Russia. The Soviet government immediately announced that it refused to recognize GNTC’s concessions from the Tsarist period, and, in contrast to the Japanese government, it did not have any respect at all for international agreements.18 The company found itself in a very unsafe and unpleasant situation that, with the outbreak of the Russian Civil War in the summer of 1918, developed into its hitherto worst crisis. The military operations soon resulted in the physical interruption of the Trans-Siberian link, and added to this came the political and diplomatic complications when the Western Powers – and Japan – sided with the “Whites” and implemented an all-embracing blockade of Soviet Russia. Denmark attempted to stay neutral but was forced by Britain to join the blockade, which expressly included post and telegraph. GNTC shared the general dislike of the Bolsheviks, but business interests forced it into a political – diplomatic double game. The company, avoiding any public comment on the Bolsheviks, attempted to maintain links to the Soviet government, even after Western diplomats had been recalled from the Soviet Union. At the same time it supplied the Western powers with telecommunications links to Admiral Koltjak and his government, as well as to the Allied High Commission in Omsk.19 Good relations with Russia, irrespective of whether it was ruled by the Tsar, the Bolsheviks or Admiral Koltjak, were of critical importance to GNTC. Therefore, it decided to back both sides, until the Civil War produced a clear winner. On this basis, the company in late March 1920 broke the international blockade and entered secret negotiations in Copenhagen with the Soviet Deputy Foreign Commissar Litvinov. 18 Kurt Jacobsen, Den Røde Tråd. De Store Nordiske Telegraf–Selskabs storpolitiske spil efter den russiske revolution (Copenhagen: Gyldendal, 1997). 19 The GNTC’s political-diplomatic double game during the Russian Civil War is examined in full detail in Jacobsen, Den Røde Tråd.

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The leading Russian Bolshevik’s reaction was more than positive, since the Soviet government urgently needed to restore the country’s international telecommunications links in both Europe and the Far East, and so within a week an interim agreement was signed. As the reopening of the TransSiberian link was also in the interests of Britain, the Foreign Office soon gave the go-ahead and, thus, the way was paved for GNTC to gain a new Russian concession. In its recommendation to the Soviet government, the Commissariat of Foreign Affairs emphasized that the country needed “reliable telegraph links with the outside world,” and that GNTC – contrary to its British competitors – was “politically, totally independent” and only interested in a “commercial profit.”20 In the Kremlin on 21 July 1921, Lenin signed the concession that would run until the end of 1946. Not only was it the first concession to be granted to a foreign company after the revolution, but the importance to the Soviet government of the reopening of its international telegraph links is apparent from the fact that, in several ways, the concession was more advantageous to GNTC than those granted by the Tsarist government. Furthermore, the Bolsheviks went against their own principles not to grant a concession to a company whose government had refused to enter diplomatic relations with the Soviet Union – Denmark only did so in 1924. Quite remarkably, they also agreed to pay an outstanding debt of 7 million gold francs to the Company, a debt originating from the Tsarist administration.21 In January 1922, GNTC was able to reopen its telegraph cables to Russia and, on 25 March 1922, the Trans-Siberian link was reopened after almost four years of idleness. It was operated by more than 100 Danish and as many Russian telegraph operators on GNTC stations throughout the Soviet Union, from Petrograd to Vladivostok. An official GNTC representative, Alfred Schønebeck, was stationed in Moscow with his own office, staff and residence.

Controversies in Soviet Russia During the first few years, the collaboration between GNTC and the Soviet government was friendly and without any major controversies. In the words of Alfred Schønebeck, the company benefited from its position, that is its coming from “a small and politically harmless country.”22 In the late 1920s the situation, however, started to change. In the spring of 1926, the Soviet authorities announced that, in their opinion, the debt of 7 20 Commissariat of Foreign Affairs to Sovnarkhom, 4 December 1920, State Archives of the Russian Federation, Moscow (GARF), fond 130, opis 5, delo 74. 21 Jacobsen, Den røde tråd, 125–128. 22 Representative in Moscow to Managing Director, 12. February 1923, RA, UM archive (Udenrigsministeriet – the Danish Ministry of Foreign Affairs) 64. Dan. 65.

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million gold francs had been repaid. When GNTC protested, claiming that they still had 2 million gold francs to their credit, the People’s Commissariat of Post and Telegraphy simply threatened to terminate the Company’s concession. At the same time Schønebeck received a confidential communication that the Soviet Supreme Concession Committee was in fact considering changing the concession. Nevertheless, the company stood firm on its position and appealed to the Supreme Concession Committee that, in 1928, settled the dispute in favour of the People’s Commissariat. The decision came as no surprise to GNTC who doubted the impartiality of the Soviet institutions. GNTC, however, kept its concession and even succeeded in including an additional clause that allowed it to duplicate the Trans-Siberian landline, but the controversy nevertheless came to mark a change in relations between the company and the Soviet authorities.23 Since 1926 Schønebeck had felt an increasing “tendency to suspicion and jealousy towards the company.”24 It was an ideological and nationalistic attitude, rooted in the rising stratum of Soviet specialists and bureaucrats who increasingly influenced the government institutions and administration. It was caused, in part by GNTC being a foreign company and partly by the Soviet telegraph administration’s desire to take over the company’s operations themselves. Undoubtedly, it was these personal experiences combined with the overall development in the Soviet Union of the late 1920s that encouraged Schønebeck to appear before Gosplan in January 1930. Apparently his action had the desired effect. GNTC was not exposed to the pressure that was put on other foreign companies to make them leave the country. On the contrary, the Soviet authorities in February 1933 created a special “Lex GNTC” excepting the Company from a new law, according to which Russian- born women married to foreigners working in the country were not allowed to return to the Soviet Union if they traveled abroad – even if it just was on vacation. In May the same year, the managing director of GNTC, Alf Ussing, paid a visit to Moscow, where he was received by the Post and Telegraph Commissar Aleksei Rykoff and a number of high-ranking officials. On his return to Denmark, Ussing reported that he had been treated “with the outmost friendliness” and that the Soviet authorities apparently had a “favourable” view of GNTC.25 23 The controversies between the GNTC and Soviet Russia in the late 1920s are described in detail in Jacobsen, “The Great Northern Telegraph-Company and Russia;” Kurt Jacobsen, “Store Nordiske og Stalin,” in I tradition og kaos. Festskrift til Henning Poulsen, ed. Johnny Laursen, Micahel Mogensen, Thorsten Borring Olesen and Søren Hein Rasmussen (Aarhus: Aarhus University Press, 2000). 24 Managing Director’s Monthly Report to the Board, September 1926, RA, GNTC. 25 Managing Director’s Monthly Report to the Board, March and May 1933, RA, GNTC.

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New Agreement with Japan A striking difference between the situation in Japan and the Soviet Union was, that Schønebeck was given access to one of the most important Soviet institutions – and it was worth the effort. In Japan as early as 1923, the Company had given up trying to reach an understanding of the situation after 1930.26 The Company learned that Japan and China had entered into an agreement to take over the cables between Nagasaki and Shanghai in 1930, so the management realized that the Company was facing what it had feared the most: a Japanese led Sino-Japanese alliance. Japan was obviously intent on ending GNTC’s position in the region, and as stated by the managing director, the GNTC could only hope that “before 1930 it would come to such a change in the political situation in the Far East, that it would be impossible for Japan to carry out its intentions.”27 GNTC got what it was hoping for. Following the military clashes in May 1928 between Japanese forces and the troops of Kuomintang in Manchuria, and the subsequent bombing to death of a Chinese governor by Japanese officers, relations between Japan and China became extremely tense. As a result, the Chinese government gave up its telegraph alliance with Japan and, instead, entered into negotiations with GNTC, as well as the Eastern and Commercial Pacific that also operated in China. A preliminary agreement was reached at the very last moment on 31 December 1930, but a final settlement was delayed by Japan’s launch of a large-scale offensive into Manchuria in September 1931 and the Japanese military operations around Shanghai in February 1932. A conclusive agreement with expiry on 31 December 1944 was signed by China and the telegraph companies in April 1933 – leaving no opportunity for Japan in this period to take over GNTC’s cables. And even though GNTC now had to give up its Chinese monopoly, Japan was still unable to lay its own cables to China because of the tense relations between the two countries. Instead, Japan had no other choice than to enter into a new agreement with GNTC itself. This was done a few months later based on the 1912 concession.28 The Japanese government immediately opened up its existing cable to Shanghai for all kinds of traffic. At the same time it terminated the joint purse agreement with GNTC – thus, as expressed by a then employee of the Japanese telegraph administration, “getting free from one of the fetters that had been impeding the autonomy of communications in Japan.”29 However, when it came to the critical issue of the GNTC’s right to land its cables and operate them from the Nagasaki station, Japan accepted its 26 27 28 29

Jacobsen, “In Struggle for Control.” Managing Director’s Monthly Report to the Board, January 1923, RA, GNTC. Jacobsen, “In struggle for control.” Kaoru Hanaoka, Hundred Years of Submarine Cables and the Pacific 81 (Tokyo, 1969). English version, translated from Japanese by GNTC.

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permanence. Despite its strong dislike of the presence of a foreign telegraph station on Japanese territory, as well as the animosity against the GNTC, the government continued to accept the company’s interpretation of the 1882 concession. Even though the new Chinese and Japanese concession would mean economic losses to the GNTC, the Company’s strategic position in the Far East had been secured – at least until the end of 1944, when the new Chinese concession would expire.

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Stalinist Repression In the mid-1930s GNTC’s relations with both the Soviet Union and Japan underwent a change. In the Soviet Union the change came quite suddenly and totally unexpectedly following the assassination of Kirov in Leningrad on 1 December 1934. GNTC’s station in Leningrad was immediately put under tight surveillance by the NKVD, and several of its Soviet telegraph operators were arrested. In early January 1935, the company was informed that seven of its leading Danish employees in Leningrad were undesired in the Soviet Union and, therefore, had to leave the country immediately. No explanation was given, but the company had little choice but to accept the Soviet position.30 The action in Leningrad was accompanied by a demand from the Commissariat that 14 of GNTC’s Danish employees in the Soviet Union should be replaced by Soviet telegraph operators. The company accepted, but in May 1935, the Commissariat again put forward new demands. This time, the GNTC was asked to give up its station in Moscow and hand it over to the Russian telegraph administration which the company, for obvious reasons, was against. However, it never came to full-blown negotiations because the Commissariat, to the company’s wonder and great relief, suddenly fell completely silent on the matter. But this was only the calm before the storm. On 21 July 1937, the GNTC representative in Moscow was called to the Commissariat where he was informed that the Soviet government “for various reasons” no longer would allow foreigners to work at telegraph stations inside the Soviet Union. The government therefore demanded that the concession from 1921 should be substituted with a new agreement that would ensure the company its usual profit, but that would hand over the operation of the Trans-Siberian landline to the Soviet telegraph administration. It was emphasized that the government considered the matter to be “serious” and thus expected it to be resolved “very quickly.”31 30 The relations between the GNTC and the Soviet Union during the Stalinist repressions are examined in detail in Jacobsen, “The Great Northern Telegraph and Russia;” Jacobsen, “Store Nordiske og Stalin.” 31 The Representative in Moscow to the Managing Director, 21 July 1937, RA, UM Dan 5/53.

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Without doubt, the reason for the Soviet demand had been indicated a few weeks before in an article on “Some methods and tricks of the foreign espionage organizations and their Trotskyite-Bukharinist agents,” printed in the Leningrad Pravda on 11 June, 1937. In the article, written by the local head of the NKVD and one of Stalin’s high-ranking hangmen, Leonid Zakovsky, GNTC was mentioned in connection with German espionage in Russia during World War I. Zakovsky did not directly accuse GNTC of espionage; nor did he refer to their present activities. His message, however, was more than clear: the Danish telegraph company was a threat to the Soviet Union’s national security.32 Despite Zakovsky’s article and the Soviet fear of espionage, the government’s action against GNTC was a violation of the concession that would expire by the end of 1946. However, after consulting the Danish Ministry of Foreign Affairs and several Danish experts on Soviet affairs GNTC realized that they had little choice but to accept. This did not mean, however, that GNTC completely gave up its concession. First and foremost, the Company feared that a renegotiation of the concession might lead to new Soviet demands and maybe even to the closing of the Trans-Siberian link. Under any circumstances, the company would have to inform its partners, both governments and companies, that it had entered a new agreement with the Soviet Union. As a result, a number of countries, including Japan, could demand a renegotiation of their agreements with GNTC. This was also the case with Cable & Wireless (formerly Eastern and Associated Companies that in 1927 had merged with Marconi) and the Commercial Pacific Cable Company. The company also feared the reactions among its customers if it became known that telegrams passing through the Soviet Union would no longer be handled by Danish telegraph operators but Soviet citizens.33 Despite Soviet assurances that GNTC would continue to receive its usual profit, the conclusion of the new agreement would most probably result in serious damage to the company. It therefore suggested an arrangement whereby all its Danish employees should leave Russia and hand over the operating of the telegraph link to the Soviet telegraph administration. The company should still be allowed to have an official office as well as a representative in Moscow. The arrangement should be settled through an amendment to the existing concession that should continue to be valid officially – and everything should be kept secret to avoid unwanted and unnecessary public attention.34 The company explained its proposal by pointing out the considerable economic losses that the Soviet Union would suffer if the traffic on the Trans-Siberian link should decline or even disappear. In 1935, the Soviet 32 Leningrad Pravda 11 June 1937. 33 Jacobsen, “The Great Northern Telegraph-Company and Russia,” and Jacobsen, “Store Nordiske og Stalin.” 34 Ibid.

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State had received 2,163,234 hard-currency roubles in transit revenues and in 1936 the amount was 2,134,318. On this basis the company’s suggestion was supported by the Commissariat of Post and Telegraphy and, especially, by the Commissariat of Foreign Affairs. But since the whole matter was the result of a decision in the Soviet government to “liquidate” GNTC’s concession, the proposal had to be laid before Stalin personally. This happened on 8 September 1937 and, with the acceptance of the supreme leader, the Commissariat was now able to follow the company’s suggestion.35 By the end of March 1938, all GNTC’s Danish employees had left the Soviet Union, but GNTC still enjoyed a favored position in the Soviet Union. As in 1921 it had been the first foreign company to be granted a Soviet concession, it was now the only company that did not have its concession withdrawn in the 1930s. This was all the more remarkable, as the Soviet government in 1937 had abolished the Supreme Concession Committee following a government decision to eliminate the concession sector in the Soviet economy.36

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A Foreign Enclave within Japanese Territory Parallel with the difficulties in the Soviet Union, GNTC was facing increasing pressure in the Far East, where the negotiations with Japan were being handled by the company’s general manager in Shanghai. The difficulties began to accelerate in 1934 when the Japanese telegraph company in the puppet state of Manchuoko, MTT, began to disregard the customers’ via-indications, “Via Northern” or “Via Eastern.” The companies protested, pointing out that it was a violation of the International Telegraph Convention, but apparently to no avail.37 Relations grew more tense during 1935 as the Japanese telegraph authorities launched a campaign trying to attract GNTC’s customers to their own wireless service. GNTC protested, but again with little success. Instead, the Japanese telegraph administration struck back, accusing the Company of having been in direct contact with customers, which was a violation of the 1912 concession It was, of course, a matter of fierce competition – but it was much more than that. As part of Japan’s policy of reducing hard currency payments in order to ensure the inflow of strategic and vital resources, the wireless campaign was 35 Commissariats of Foreign Affairs and of Post and Telegraph to Stalin, 8 September 1937, GARF, fond 085, opis 22a, delo 207. 36 Foreign Policy Archives, Foreign Ministry of Russian Federation, Moscow (AVP), fond 085, opis 22, delo 259. 37 Daqing Yang, “From Cooperation to Conflict: Ending Great Northern Telegraph Company in Japan,” in Transnational Companies 19th–20th Centuries, Ed. Hubert Bonin et al.; and Jacobsen, “In Struggle for Control.”

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aimed at decreasing GNTC’s income from its international cable service between Japan and the rest of the world. In 1935 over 10 million yen were paid to the Company, while Japan, unlike the Soviet Union, had no income at all from GNTC’s transit traffic since the telegrams did not pass through Japanese territory.38 Most important, however, was Japan’s desire to extend its influence throughout Asia that made complete autonomy in its international communications a strategic priority. As pointed out by Kaoru Hanaoka: GNTC’s station constituted a foreign enclave within the territory of Japan … This foreign enclave within Japanese territory was a matter of primary concern as well as a serious and difficult problem for the telecommunications authorities of Japan in the Meiji and Taisho areas. It was also true that, each time a national emergency arose, the national defence and the telecommunication authorities of this country took extraordinary precautions against this enclave.39

In this context, a climax was reached with the government’s adoption in August 1936 of the “Fundamentals of National Policy,” proclaiming Japan to be the stabilizing power in Asia, as the basis of a new imperial strategy directed against British and U.S. influence. The government was worried about GNTC’s close relationship with Great Britain, which was reflected in the Japanese press and the government controlled propaganda.40 The company was referred to as “a British” or “a British controlled” company, and was accused of being “an agent of British influence.”41 In early February 1937, the Japanese Ministry of Communications therefore began to address the GNTC issue in a new and fundamental manner; considering different ways to eliminate the Company’s presence in Japan and Far East.42

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Ending the GNTC in Japan Japan’s full-scale military attack on China in July 1937 was soon followed by Japanese actions against GNTC and the two other telegraph companies whose offices and stations were situated in GNTC’s building in Shanghai. In November 1937, the Japanese military authorities in Shanghai insisted on Japanese military censorship of international telegrams. They also demanded that the companies no longer pay terminal fees to the Chinese government but instead to the Japanese telegraph authorities in China. The companies protested, and so did the consuls-general from Denmark, Britain and the United States as well as the Chinese government, but without result.43 38 39 40 41 42 43

Yang, “From Cooperation to Conflict.” Hanaoka, Hundred Years of Submarine, 84. Yang, “From Cooperation to Conflict;” Jacobsen, “In Struggle for Control.” RA, UM 92.Dan.5/5 II. Yang, “From Cooperation to Conflict.” Jacobsen, “In Struggle for Control.”

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Instead, the Japanese military authorities in July 1938 announced their intention to take over the handling of all international telegrams. Again the three companies and their consuls-general protested; again without success, and instead, the companies officially had to accept the Japanese demands due to force majeure. After this, the three companies were held in an iron grip by the Japanese military authorities that even had their personnel stationed inside the GNTC building. Parallel to the development in Shanghai, ministries and authorities in Tokyo had examined various scenarios for the final elimination of GNTC’s presence in the country. There was a strong and real suspicion of espionage that, however, would be difficult to substantiate despite constant surveillance of the company and its employees. Nevertheless, voices in the Ministry of Communications were raised in support of the use of coercive measures, but, in February 1939, personnel in the Ministry rediscovered the clause in the concession stating that “The Company’s station in Nagasaki shall not be allowed to have direct dealing with the public.” On this basis, the Ministry decided to accuse the GNTC of illegal business methods and to revoke its concession by the end of April 1943, thus giving the company three more years of business, but with the restriction that the cables should be operated by Japanese personnel.44 On 18 March 1940, GNTC’s general manager in the Far East was informed in Tokyo about the Japanese decision. It was emphasized that the decision was “final and without possibility of compromise,” and the Company was furthermore warned against demanding evidence for the allegations of violations of the concession, since this could have “serious consequences” for both individuals and the GNTC. Between the lines it was hinted that some of the company’s employees had been involved in espionage.45 The government demanded an answer – or rather an acceptance – from GNTC within four weeks. The Company’s general manager left for Shanghai, from where he consulted the Danish Ministry of Foreign Affairs and GNTC headquarters in Denmark. After two weeks he was convinced that there was no alternative than to accept the Japanese decision and, on 9 April 1940, he returned to Tokyo to sign the new agreement. On the very same day Denmark was occupied by German military forces, disrupting all the country’s telecommunications links with the rest of the world. Even though the link to the Far East was reopened after a few weeks, the Company’s international telegraph system was broken apart. With the German invasion of the Soviet Union on 22 June 1941 and the Japanese attack on Pearl Harbor on 7 December 1941, GNTC’s Japanese concession was just a piece of paper. When it finally expired on 30 April 1943, it was hardly noticed in the company’s headquarters in Copenhagen.46 44 Yang, “From Cooperation to Conflict;” Jacobsen, “In Struggle for Control.” 45 Managing Director’s Monthly Report to the Board, March 1940, RA, GNTC. 46 Managing Director’s Monhtly Report to the Board, April 1943, RA, GNTC.

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Conclusions The definitive and decisive actions against GNTC in both the Soviet Union and Japan were obviously caused by their preparations for war. An important distinction, however, was that while the Soviet Union was preparing for defense, Japan was preparing for attack. And while the Soviet Union was apparently seeking a new kind of arrangement with the company, Japan was quite openly aiming for the elimination of its presence in the country as well as in the whole region. While reflecting the different national policies of the two regimes – isolationism and expansionism respectively – the actions against GNTC nevertheless had a single important and identical purpose. This was to establish state management of the country’s international telecommunications and, thus, to gain total control over the flow of information in and out of the country. Of course, this was a result of historical circumstances characterized by increasing political tensions and a growing threat of war in both Asia and Europe. Other powers, however, such as Great Britain, France and China, in similar situations reacted with the imposition of temporary, military censorship, which also had been the case in Russia before the revolution. In contrast, however, the arrangements in the Soviet Union and Japan were intended to be permanent, and, essentially, it was a policy rooted in the totalitarian character of the regimes in the two countries. As happened in most other countries, the United States being a notable exception, the governments in both Russia and Japan from the very beginning built and operated domestic telegraph networks themselves, leaving it to private companies to establish and operate their international, overseas telecommunications links.47 In this sense, GNTC in the early years had been an ideal partner for both Russia and Japan. But as the two countries and their national policies changed over the years, their views on international telecommunications – including their cooperation with GNTC – changed as well. As pointed out by Daniel Headrick, the security aspects of international telecommunications per se were “political and organizational of nature.”48 To all governments, it was as important to obtain reliable and confidential information, as it was to prevent other governments and nations from obtaining the same kind of information. In this connection, GNTC’s status in coming from a small, neutral state did not matter much to Stalinist Russia or to fascist Japan. In Japan, the desire for control over its international telecommunications was deeply rooted in nationalism and was as old as the introduction of the 47 In countries such as Denmark, Britain and Germany, the initiative to erect domestic telegraph networks had been taken by private companies, but their systems were soon nationalized. 48 Headrick, The Invisible Weapon, 7.

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telegraph into the country. As soon as Japan had developed the technological capabilities to lay and operate submarine cables itself, the government began to seek autonomy from GNTC. With the simultaneous transformation of Japan into a colonial power, the government recognized the importance of having an imperialistic “nerve system” of telecommunications links, and with the rise of Japanese militarism and fascism, it was only a matter of time before it would happen. The government’s decision, in August 1936, on Japan’s new role in the region and the subsequent military attack on China led to the elimination of GNTC’s Far Eastern cable network, which was situated “inside” the Japanese Empire, in the spring of 1940. In Russia the development was quite different. From the very beginning Tsarist Russia had been a colonial empire, but without the overseas territories that demanded a “nerve system” similar to that of Japan. Fundamentally, Russia was a continental power and the establishment of international, overseas telecommunications links had mainly political purposes. The Russian Revolution did not change the Russian position. The Bolsheviks apparently had confidence in the Great Northern Telegraph Company, and it was only after the development of full scale Stalinism and mass repression that the regime took steps in the mid 1930s to eliminate the Company’s presence in the country. For both Japan and the Soviet Union it was obviously GNTC’s foreign status and the presence of Danish citizens at its stations that was the cause of their concern. In this respect, the Japanese view of the Nagasaki station as being a “foreign enclave” within the country’s territory hardly differed from the Soviet position. Nonetheless, the two regimes had different perspectives in their actions against GNTC. Japan’s goal was the total elimination of the company’s business in Japan and the Far East, while the Soviet Union offered a continuation of the cooperation, based upon a new agreement that would even ensure the company its usual profit. These different perspectives expressed the profound difference in national policies between Japanese imperialistic expansionism versus Stalinist isolationism. While GNTC was a hindrance to Japan’s own telecommunications expansion, this was not the case in the Soviet Union, which lacked such ambitions. Furthermore, the Soviet Union had nothing to gain by eliminating GNTC as long as the Trans-Siberian link would be handled by Soviet telegraph administration. On the contrary, the Soviet government had a financial interest in keeping GNTC in business because of the transit revenues from the Trans-Siberian link – and without doubt this was exactly the point that made Stalin change his opinion on the “liquidation” of GNTC’s concession. When it came to realizing the decisions to end GNTC’s concession, the two regimes also showed some remarkable differences. While the Japanese government spent a long time in search of a formal pretext, the Soviet government did not bother with this at all but simply informed the company of

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the government’s decision. The fact that Stalin did not have any respect for the written concession is not surprising, neither is his reversal of the government’s decision to liquidate GNTC’s concession. The fact that Japan on its part offered GNTC a three-year extension of its landing license seems to have been a case of face-saving.49 The reasons, however, why the Japanese waited for so many years before they finally fulfilled their desire to get rid of GNTC, and why they then found it necessary to legitimate their action by finding a pretext in the concession, are unclear and difficult to understand. This is particularly true if one takes into account the character and general behavior of the Japanese regime. Most likely, the Japanese government feared international complications and, especially, the reaction from the Western Great Powers, which could be expected to side with GNTC. Or maybe the government simply expected that the continuing pressure on the small company from the small, distant country would, sooner or later, force to it to surrender. If the latter was the case, the Japanese government had made a serious miscalculation. “Telegraphy knows no politics” was the motto of the founder of the mighty Eastern and Associated Companies, Sir John Pender. However, the history of GNTC and its relations to Russia and Japan tells another story. From a business point of view, international telecommunications from its very beginning have been subject to what Daniel Headrick has characterized as “politicizing,” meaning to be heavily influenced by state interests and government intervention.50 Not only has the development of telecommunications been a hot issue in domestic as well as international politics, but, as argued by Jorma Ahvenainen, telecommunications played its own political role: “More than any other means of communications the telegraph introduced the time factor into world politics … international telegraphic communication made Weltpolitik possible.”51 As indicated by the development of its relations with Russia and Japan, the GNTC based its business not on ordinary market conditions but, to use Headrick’s phrase, on “politicizing.” It is a development that reveals how governments were concerned about the political and security aspects of the submarine cables, as well as the flow of information they provided. At the same time, it gives a valuable insight in the circumstances under which international telecommunications companies had to do business. What happened in Russia and Japan was that the countries, their regimes and national policies had gradually changed in a way that radically altered business conditions for GNTC. The company’s advantage of coming from a small neutral country no longer counted as the regimes’ previous acceptance of foreign control over their international telecommunications became overshadowed by new and far more important issues on the political agenda. 49 Yang, “From Cooperation to Conflict.” 50 Headrick, The Invisible Weapon, 7. 51 Ahvenainen, The Far Eastern Telegraphs, 7.

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In Japan the change came around the turn of the century, and it was actually quite remarkable that GNTC succeeded at all in withstanding the Japanese pressure for so many years. Of course, the company had little choice but to fight for its existence as it became “trapped” by the technological system-character of the company’s physical facilities and whole business organization. Totally dependent on their submarine cables and the necessity of landing sites in countries such as Russia and Japan, GNTC lacked the possibility of moving in and out of different markets according to the business conditions. To avoid the appearance of “holes” in this system and the possibility of a “domino” effect, GNTC, throughout its whole history did its utmost not to give up cables and stations. In fact, before the outbreak of World War II, the company only gave up two cables: one was the JapanKorea cable (1890–1910), the other was a cable between Norway and Britain (1910).52 Instead, the Company tried to protect itself and its investments through long-term agreements and monopolies, as was the case in both Russia and Japan, and through joint purses and strategic agreements, as was the case with the alliance with the Eastern and Associated Companies. Standing firm on its concessions, GNTC showed persistence and a patience that apparently surprised both the Japanese and the Soviet governments. More generally, the company, since its foundation in 1869, had developed a wide range of managerial capabilities to handle situations like those in Japan and the Soviet Union. These capabilities were more related to international politics and diplomacy than to “ordinary” business, and they were always based upon the fundamental principle of “the strictest neutrality” as it was emphasized by Schønebeck when he appeared before Gosplan in January 1930. It was a principle that not only meant neutrality towards international politics and towards the mutual relations between the different states with which GNTC collaborated. It also demanded neutrality towards the systems and regimes in those countries. So even though the company had no sympathy at all for fascism or Stalinism, it always kept its opinions to itself and avoided any form of public statements. There was simply no alternative.

52 The Japanese taking over of the Korean Cable is described in Yang, “From Cooperation to Conflict,” Jacobsen, “In Struggle for Control.” The taking over of GNTC’s cable by the Norwegian State is described in Jacobsen, Den røde tråd.

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CHAPTER 10

Managing Risk in the Third Reich: British Business with Germany in the 1930s

❖ Neil Forbes

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Where is the Life we have lost in living? Where is the wisdom we have lost in knowledge? Where is the knowledge we have lost in information? T.S. Eliot, The Rock (1934), pt. 1.

Although historical analysis of National Socialism and the Hitler state will continue to stimulate critical debate over ontological and interpretative issues, few would chose to dispute the contention that the Third Reich could serve as a synonym for dictatorship in the twentieth century.1 The threat posed by Nazi policies to the investments of foreign owned companies directly affected a variety of British financial and commercial interests. The large amount of capital at risk in Germany confronted Britain’s bankers and industrialists with the need either to establish some form of cooperation with the regime or to accept severe losses. By studying British business links with Nazi Germany in the 1930s an insight may be gained, therefore, into how political risk was managed in a most extreme form of dictatorial environment. Studies of the interaction of business and politics in the context of Britain’s relations with Germany have been dominated, perhaps understandably, by the analysis of appeasement policy, especially under the Chamberlain government from 1937. It is frequently simply assumed, for example, that German subsidiaries of British multinationals imported raw 1 Michael Burleigh, The Third Reich: A New History (London: Macmillan, 2000), 14–23.

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materials that were essential for Nazi rearmament.2 Similarly, there has also been a clear tendency to condemn City bankers in general and the Governor of the Bank of England, Montagu Norman, in particular for acting as the progenitors of appeasement policies and for facilitating Nazi rearmament.3 More recently, David Kynaston has made a significant contribution to the debate: the argument underlying his analysis of the 1930s is that the City and Norman did no more than reflect the national mood.4 The importance of financial diplomacy in the overall structure of international relations in the interwar years is now well established.5 Rather less well served in the literature is the part played by the diverse range of enterprises and business actors that operated in the period. This chapter focuses, therefore, on political risk in the context of certain key, British business interests in Germany in the 1930s. In the aftermath of the World War I the fragile condition of the world economy imposed severe restraints on many companies including those engaged in international trade; by the 1930s multinational enterprises involved in natural resources and manufacturing were no longer prepared to accept the risks associated with foreign direct investment.6 However, in the 1920s Britain and Germany reestablished much of the structural interdependence that had characterized economic relations between the two countries in the years before 1914. British capital was involved in the development of the Weimar Republic’s economy in several ways. Although the balance of the export trade lay in Germany’s favor, it was the unrivaled range of financial facilities and other services offered by the City of London that kept international trade flowing smoothly. The City’s merchant banks granted short-term loans to German banks and industry while, in general, British financial institutions made long-term loans to German states and municipalities. Industrial capital was also deeply committed to developing the potential of the German market: British multinational firms invested directly in Germany through the operations of their subsidiary companies. At the beginning of the decade, however, the total collapse of Germany’s economic and political systems in the wake of the Great Depression and 2 See the discussion in Gustav Schmidt, The Politics and Economics of Appeasement: British Foreign Policy in the 1930s (Leamington Spa: Berg, 1986), 35. 3 Among the literature see, Berndt Jurgen Wendt, Economic Appeasement: Handel und Finanz in der britischen Deutschland-politik 1933–1939 (Düsseldorf: Bertelsmann Universitätsverlag, 1971); Scott Newton, Profits of Peace: The Political Economy of Anglo-German Appeasement (Oxford: Oxford University Press, 1996). 4 David Kynaston, The City of London (London: Pimlico, 2000), vol. 3, Illusions of Gold 1914–1945, 430–434. 5 See, for example, Patricia Clavin, The Great Depression in Europe, 1929–1939 (London: Macmillan, 2000). 6 Geoffrey Jones, “Multinational trading companies in history and theory,” in The Multinational Traders, ed. G. Jones (London: Routledge, 1998), 10.

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financial crisis did not seem implausible. British capital – tied up in the Weimar Republic in the form of loans and direct investments – would then have been placed in extreme jeopardy. But this is not to say that, by assessing commercial strategy against the criteria of market risk, foreign investors and creditors were presented with an unequivocally right time to withdraw from the German market. Withdrawal would itself have entailed heavy capital losses and, almost as bad, loss of current or future market share to domestic or other foreign competitors. For no one in business doubted that, in such an industrially advanced and heavily populated country as Germany, markets held massive potential for long-term growth. In this context being riskaverse was not without its own problems: disgruntled shareholders or disparaging journalists were quite capable of questioning why opportunities for new business had been missed. It would not be stretching the bounds of credibility, therefore, to suggest that for much of the 1930s business leaders must have faced the question of risk with frequent backward glances to the frightful events of 1929–1931. Fear that the economic system would suffer another, and possibly fatal, blow eclipsed concerns over inchoate and ill defined political risks that might never have developed into anything really threatening. In 1924 the Prudential Assurance Company, the Union Bank of Scotland, and Williams Deacon’s Bank gained complete control of the British Overseas Bank, which had been founded by a number of banks after World War I. Writing from the Scottish bank, one banker mused to a colleague at Williams Deacon’s:

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As to the future it is, of course impossible to speak regarding any institution, so much depends for all of us on the bigger political matters of international importance being faced honestly and dealt with on sound lines by the various nations involved. It looks like being either the start of better things or a pretty complete smash of the credit system.7

Attempts to understand the Weltanschauung of relatively obscure business personalities from the interwar years might seem, especially to historians, to be a process fraught with difficulty: rarely do expressions of personal anxiety feature prominently in the internal communications of any organization. Nevertheless, some experts on the period have become sensitive to the need to explain the mentalities that underlay the process of formulating foreign policy.8 Similarly, it is more likely than not that the effects of the global depression and financial crisis on the collective psyche have been greatly underestimated. Gerald Feldman, for example, has pointed to how enterprises, compromised by their failures, were put on the defensive in dealing 7 Royal Bank of Scotland Group Archives, London (hereafter RBOS), GB1502/WD/349/4, N. Hird (Union Bank of Scotland Ltd.) to H. Bradburn (Head Office, Manchester), 11 December 1931. 8 Wesley K. Wark, “Review Article: Appeasement Revisited,” International History Review XVII, no. 3 (1995): 561.

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Managing Risk in the Third Reich 197

with the new political forces.9 Given that managing political risks in the Nazi era came to involve making moral as well as commercial choices, factors such as the state of mind of the individuals concerned may help to explain patterns of decision making. Although the Weimar Republic collapsed at the beginning of 1933, business circles and government in Britain could at least begin to hope that the worst of the economic and financial storm had been weathered. Above all, it seemed that the fundamental structures of the capitalist system were going to remain intact in most of Europe and the rest of the world. Lionel Fraser, a merchant banker, recalled in his memoirs that the general economic outlook was distinctly more promising and that over the next two years things picked up very well for his firm – Helbert, Wagg & Co. At the same time, Fraser maintained, foreign business on the continent was at a standstill because of the growing menace of Hitler that was monthly becoming more clearly established.10 However, the extent to which it was the rise of the Third Reich which accounts for this inactivity must be questioned for two reasons: firstly, there had not, in any case, been much new business since 1931; secondly, and more importantly, the threat National Socialism posed to the peace of Europe was hardly taken seriously in Britain in 1933. The establishment of a dictatorship in a European state was not, of course, a new political phenomenon. But, before the 1930s, liberal democratic societies had neither the conceptual tools nor historical precedents to draw on in order to understand the significance of a totalitarian dictatorship pathologically sustained by a racist ideology. Most of Britain’s business and political leaders shared the assumption that the stability of Europe would be conditional on a restoration of German economic well-being. The idea of a national awakening was, of course, one of Hitler’s main rhetorical devices.11 Although the trough of the depression had already been reached in 1932, the economy appeared to be recovering under the stimulus provided by the Nazi government.12 In this sense, and whatever the immediate misgivings engendered in Britain by Hitler’s rise to power, improving standards of living would, it was hoped, slowly but surely temper the political extremism of the Nazi movement. Yet, if the risks contingent on the establishment of the Third Reich appeared difficult to quantify, or even hypothetical, the prospects for significant rewards for those enterprises able to benefit from a German economic recovery seemed real enough. Certainly, nowhere had the effects of the Great Depression been more severe than in the Weimar 9 Gerald D. Feldman, “The Economic Origins and Dimensions of European Fascism,” Enterprise in the Period of Fascism in Europe, eds. H. James and J. Tanner, (Aldershot: Ashgate, 2002), 11. 10 W. Lionel Fraser, All to the Good (London: Heinemann, 1963), 109. 11 Alan Bullock, Hitler and Stalin: Parallel Lives (London: BCA/HarperCollins, 1991), 460–461. 12 R.J. Overy, War and Economy in the Third Reich (Oxford: Clarendon Press, 1994), 37.

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Republic. But the course of global economic development laid down in the mature phase of the Industrial Revolution could not be easily diverted: a continuation of productivity growth – underpinned by a highly skilled workforce and advances in industrial technologies – would ensure that Germany remained one of the world’s great manufacturing nations. There was, however, one fundamental deficiency that could not be overcome through domestic means alone: Germany was not well endowed with natural resources. Just as in earlier times, Germany was bound to look to external sources to finance its import trade. The uncertainty and ambivalence inherent in the position held by British bankers in 1933 is revealed in a memorandum written at Williams Deacon’s principal London office:

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In general our feeling is still, as it has always been, that we are very unlikely to make a loss upon our German bank business unless the whole of Germany collapses economically and politically. It is true that political developments in Germany have recently given more grounds for doubt about this … It would be madness for them to deprive themselves of the credit necessary to obtain essential raw materials abroad.13

While the danger of great losses through economic disintegration appeared to recede with Hitler installed as Chancellor this, in turn, gave rise to anxieties over whether private capital would be secure, or a free-market economy possible, under a regime that claimed to be basing its policies on a mix of nationalism and socialism. Some comfort could be drawn in Western societies from the contrasting way in which the Bolshevik Revolution had immediately set out to sweep away the entire Tsarist system. Another answer of a kind was provided by the violent consolidation of the Nazi revolution in the course of 1934. The blood-letting demonstrated in the Röhm purge provided many outside Germany with yet more evidence – if any were needed – that the methods employed by Hitler and his faithful henchmen resembled most readily those of gangsters.14 At the same time, with the supposedly extreme socialist element of the Nazi movement neutralized, there was an expectation that economic life in the Third Reich would continue to function within a capitalist framework – at least in most fundamental respects. Hitler used another ploy to encourage external audiences to believe that nothing too radical would be attempted in economic affairs: continuity was emphasized by appointing internationally respected business figures to hold high office. The misconceived notion that the non-Nazis included in Hitler’s government were influential informed British assessments of the underlying character of the Third Reich and helped, thereby, to shape foreign policy 13 RBOS, GB1502/WD/50/6, memorandum, 29 May 1933. 14 Ian Kershaw, Hitler. 1889–1936: Hubris (London: Penguin Press, 1998), 517. On foreign reactions see, Piers Brendon, The Dark Valley: A Panorama of the 1930s (London: Jonathan Cape, 2000), 243–244.

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from 1933.15 One such appointment, in July 1933, was that of Kurt Schmitt as Minister of Economics. For Schmitt was also head of Allianz – the German insurance giant. Indeed, as more becomes known about such enterprises, the mosaic of contacts betweens official, semi-official and business figures becomes ever more complex. Schmitt’s visit to London in December 1933 to meet business and political leaders was regarded in both Germany and Britain as a great success.16 Of all the personalities who had gained prominence in the Weimar era, no one was more important than Hajlmar Schacht in helping to reassure the outside world that the Third Reich would eschew economic heterodoxy. Reichsbank President in the 1920s, Schacht returned to the post in 1933. His politics were those of a nationalist and a conservative; although he was an ardent supporter of Hitler, he appeared to keep his distance from the Nazi Party. In March 1933 both Hitler and Schacht made public pronouncements that the government would avoid monetary experiments.17 This was, of course, what international creditors and investors wanted to hear: without such financial rectitude Germany’s international commitments would have been unsustainable. The international Standstill Agreement, for example, covered most of the short-term credits granted by banks in Britain and several other countries. Under this agreement, which arose out of the London Conference of 1931, the credits were frozen. International creditors faced an unknown degree of political and economic risk in maintaining their commitments. On the other hand, they could choose to accept clear losses: positions liquidated by means of the market in blocked accounts, such as Register marks, typically involved discounts of some 30 percent.18 In 1932 the Americans and French chose the path of liquidation, though in the former case the move was prompted in large measure by the domestic banking crisis in the United States.19 In what amounts to a classic example of miscalculating political risk in the 1930s, British bankers did not withdraw from the Standstill. On purely commercial grounds the City of London believed that, collectively, its German credits were far sounder than those of their U.S. counterparts. Of course, 15 For the impact of these ideas on Chamberlain’s government see, C.A. MacDonald, “Economic appeasement and the German ‘moderates’ 1937–1939. An introductory essay,” Past and Present, no. 56 (1972). Although styled “introductory”, MacDonald’s essay is still required reading. 16 Gerald D. Feldman, Allianz and the German Insurance Business, 1933–1945 (Cambridge: Cambridge University Press, 2001), 100. 17 David Marsh, The Bundesbank: The Bank that Rules Europe (London: Heinemann, 1992), 110. In 1934, Schacht also replaced Schmitt as Economics Minister and held the office until 1937. 18 Public Record Office, London (PRO hereafter), T 160/927/12750/3, F. Rodd (Bank of England) to J. Pinsent (Treasury), 9 September 1932. 19 K. Burk, Morgan Grenfell 1838–1988: The Biography of a Merchant Bank (Oxford: Oxford University Press, 1989), 146–147.

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200 Neil Forbes

there was a possibility that this distinction would mean little if conditions deteriorated under Hitler’s dictatorship. Yet, British bankers felt able to discount much of this risk precisely because of how they viewed Schacht. The interpretation that Schacht acted as a moderating influence on the Nazi regime, and could be relied upon to safeguard Germany’s obligations to the City, owed much to the Bank of England’s Governor – Montagu Norman. The two bankers enjoyed a long-standing and close relationship that was both personal and professional. They met regularly at the Bank for International Settlements in Basle. This provided a haven, safe from the political pressures of their respective domestic positions, in which to exchange mutually held views on how central banks could foster international stability.20 Indeed, the Bank of England continued to develop a strong inter-institutional relationship with the Reichsbank through, for example, staff exchanges and by honoring Schacht’s sixtieth birthday in 1936. Later that year, the Bank of England was instrumental in arranging for the Reichsbank President to be feted, for facilitating the friendly relations between Germany and the City, at a dinner of the Anglo-German Fellowship.21 Such events attracted considerable publicity. Reporting on a similar dinner in 1937, attended by nearly 500 people, The Times referred to the British members of the Fellowship as “citizens of weight and influence, occupying responsible positions.”22 Public endorsements of Schacht in London were calculated to bolster his position in Berlin. What remains something of a mystery is why such a wildly optimistic view of that position should have been conveyed in private to British bankers. Frank Tiarks, a partner in Schroders and a director of the Bank of England, joined Norman in this task. As Sir Edward Reid, a managing director of Barings Bank, was to recall, “Schroders were more intimately acquainted with Germany than any of the other merchant banks.”23 Tiarks naturally, therefore, became the moving spirit behind the original Standstill Agreement in 1931; he continued to work tirelessly for the rest of the decade to ensure that the agreement was renewed annually. For the two years between December 1935 and November 1937 Tiarks and Norman lost no opportunity to reaffirm their convictions to various private meetings in London: clearing bankers, the Joint Committee of British ShortTerm Creditors, and the Accepting Houses Committee were all told by one or the other that Schacht’s position was secure. This is all the more surprising as it involved consciously rejecting the evidence – the promulgation of 20 School of Oriental and African Studies, University of London, Addis papers, PP MS 14/459, letter from Norman (Campden Hill) to Addis, 14 April 1935. Sir Charles Addis was a friend and former colleague. 21 Bank of England Archives (BoE hereafter), OV34/85, note by Cobbold, 20 March 1936; note, 30 July 1936, on “Reichsbank Personalities.” 22 The Times, “Friendship with Germany,” 3 December 1937. 23 ING Bank NV, London. The Baring Archive (Barings hereafter), Memoirs of Sir Edward Reid, 16.

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the Four Year Plan – that Göring was winning the internal power struggle with the conservatives and confirmation to this effect from Schacht himself.24 As long as Germany did not make Devisen (foreign exchange) available to reduce external debt, any moves significantly to reduce the Standstill credits would have left London bankers facing severe losses. The stance presented by British bankers to the public and to both the British and Reich governments gave a strong impression of a unanimous commitment to maintain the Standstill. However, behind the closed doors of the City’s houses, the debate on the issue became increasingly passionate from late 1936. For not everyone was persuaded by the arguments of Norman and Tiarks. Prominent bankers like Reginald McKenna, chairman of the Midland, became increasingly frustrated with Schacht’s attitude. Similarly, the leading proponent of the case for repayment of capital was Charles Lidbury, chief general manager of the Westminster Bank.25 Indeed, operating on behalf of Westminster’s “Foreign Bank” – the London County and Westminster Bank (Paris) – he had already been quietly converting into Register marks the French franc obligations of the subsidiary’s German debtors. Westminster Bank faced the problem of having to swap sterling into francs for the Paris subsidiary and operate “hedges” on the costs of the swaps undertaken. Working behind the scenes of the Standstill conferences in 1935 and 1936 Lidbury visited the banks concerned (The Deutsche, Reichsbank, Sal Oppenheim, Dresdner and Commerz- und Privat), and converted Fr 66.5 million. Although he intended to make further visits he was absolutely certain that they would be fruitless; he feared that he would be again reminded of what had been done for him in excess of Germany’s Standstill obligations. Lidbury’s plan, therefore, was to mount a secret call operation of Fr 1 million every working day for one month. The risk was that London would end up playing Germany’s game: the London market would know that the bank was selling Register marks in quantity, others would be inspired to call as well and the mark rate would be undermined. But, on balance, Lidbury thought it would be better to reduce the bank’s German risks and minimize the poisonous effect of being a continual seller of forward francs.26 The faith that the City placed in the bona fides of the Reichsbank was crucial to another aspect of the City’s operations. In addition to short-term credits, Britain had extended long and medium-term loans to Germany in the 24 Bodleian Library, University of Oxford (BOD hereafter), Lord Brand papers (collection uncatalogued), Brand Box 191, Tiarks to Brand, 2 December 1935, and Brand Box 193, note of meeting on 4 November 1937; also RBOS, GB1502/WD/50/6, letter from Scott (Manager, Williams Deacon’s Bank, London Office, Birchin Lane) to H. Bradburn (Head Office, Manchester), 7 May 1936, and letter from Scott to M. Thomson (Head Office, Manchester), 5 October 1937. 25 BOD, Brand papers, 192, minutes of Joint Committee meeting, 14 October 1936. 26 RBOS, GB1502/WES/296, secret memorandum by Lidbury, 13 June 1936, entitled, “Project.”

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1920s; the total amount, in 1934, stood at more than £60 million – approximately double the amount of capital tied up in the Standstill.27 Indeed, when the Dawes and Young Loans were excluded, the long-term debt held by Britain amounted to some £32 million – not far short of Standstill debt – of which one half comprised bonds issued on the London Stock Exchange.28 As a result of the progressively tighter foreign-exchange controls imposed in the course of 1933 and 1934, and Schacht’s attempts to impose a moratorium on the transfer abroad of interest, a Konversionskasse was created in Germany into which the debts were paid. Foreign debt-holders received scrip, or coupons, as part of their interest quotas. The scrip could then be sold, at a heavy discount, to the Golddiskontbank for foreign exchange.29 Schroders acted as the agent of the Golddiskontbank for the sale of scrip through London.30 Similarly, Sir Edward Reid (Barings), acting on behalf of the Golddiskontbank, bought bonds in Berlin for cancellation. Reid felt that his bank could not go far wrong in carrying out this business, as the Golddiskontbank was 95 percent owned by the Reichsbank.31 For many firms that undertook business with Germany, there was a price to pay for the economic stability and growth that seemed to emerge with the coming of the Third Reich: cooperation to a greater or lesser extent with the leadership’s plans for autarchy and rearmament.32 As historians have pointed out, policies based on discrimination largely determined the structure and nature of the business environment in the Third Reich.33 Discrimination on the basis of race was, of course, carried out to murderous effect from the first days of the Third Reich. Jewish businesses faced boycotts and, thereafter, the confiscation of assets.34 One of the first and most famous families to be so victimized was the German branch of the Rothschild family.35 The response of N. M. Rothschild & Sons, the City finance house, was to cut its losses, accept payment in Register marks, and get out of Germany altogether in 1933.36 27 PRO, T160 534 13460/08, minutes by S.D. Waley and F. Leith-Ross, 23 June 1934. See also, BoE, OV9/100 for memorandum by E.H. Lever (Prudential), 18 March 1937. 28 Barings, 200582, letter from Sir Edward Reid to Dean (Bank of England), 16 August 1934. 29 The Dawes and Young bondholders continued to receive full transfer of interest. See, E.V. Francis, Britain’s Economic Strategy (London: Jonathan Cape, 1939). 30 Barings, 200575, memorandum of meeting of the issuing houses for the London floatations of the loans, 28 July 1933. 31 Barings, 200581, letter from Reid (Berlin) to Millis, 8 May 1934. 32 Overy, War and Economy, 93–118. 33 See, for example, Simon Reich, The Fruits of Fascism: Postwar Prosperity in Historical Perspective (Ithaca: Cornell University Press, 1990), 45. 34 Among the recent literature see, Harold James, The Deutsche Bank and the Nazi Economic War Against the Jews (Cambridge: Cambridge University Press, 2001). 35 Niall Fergusson, The World’s Banker: The History of the House of Rothschild (London: Weidenfeld & Nicolson, 1998), 999. 36 Barings, Memoirs of Sir Edward Reid, 14.

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Ironically, apart from Barings, the merchant bank that had established the closest working relationship with Rothschilds was Schroders. 37 As far as it is possible to determine, Rothschilds remained the only British bank to withdraw from the Standstill. Yet, bankers faced increasingly hostile criticism for their position. By the mid 1930s the sense of financial panic experienced earlier in the decade was giving way to anxiety over the growing international tension. In these circumstances, some commentators argued that British creditors could afford to bring the Standstill to an end.38 The issue became more pronounced as Germany’s international trade fell off; credits that were supposed to be self-liquidating – by financing the international movement of goods – were, instead, used more and more inside the Third Reich as working capital. As Barnard Ellinger, a writer on finance, delicately described the problem on the eve of the Second World War, “Whether London intended the facilities to be so used is open to doubt.”39 The Standstill Agreement remained in place, therefore, until war broke out. In June 1940, with the last of the Allied forces evacuated from Dunkirk, the clearing bankers met to consider the future of the agreement. As Williams Deacon’s noted, the banks could not do very much for the moment, “Still, we shall always keep in the back of our minds that certain German Banks owe us some money although that is not likely to be the hardest thought we shall harbour against the whole crowd of them”.40 Under Hitler’s dictatorship discrimination in industry was practiced, of course, at the level of both the individual firm and the individual sector. The promotion of those sectors of industry deemed crucial to the rearmament effort distorted the distribution of resources within the economy as a whole. Historians are continuing to learn about the effects of this on various enterprises. British multinationals, such as the Anglo-Persian Oil Company, that were involved in supplying Germany with strategically important raw materials, were certainly caught up in the Nazi rearmament drive, albeit in a relatively minor way. Just as vulnerable in this respect were firms that were involved in manufacturing dual-purpose products: the tires that were made by the Dunlop Rubber Company supplied the military as well as the civilian market. Both Anglo-Persian and Dunlop came under considerable pressure to contribute to the development of synthetic materials and to help, thereby, in the task of creating a self-sufficient Germany.41 37 Philip Ziegler, The Sixth Great Power (London: Collins, 1988), 351. The three houses had, since the 1920s, operated as a kind of consortium. 38 For an early example see Paul Einzig, “Germany’s Default,” Banker, 29 (February 1934), 122. 39 Barnard Ellinger, The City: the London Financial Markets (London: P.S. King & Son, 1940), 356. 40 RBOS, GB1502/WD/50/6, note of 7 June 1940. 41 For a fuller analysis of these issues see, Neil Forbes, Doing Business with the Nazis: Britain’s Economic and Financial Relations with Germany 1931–1939 (London: Frank Cass, 2000), 133–161.

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The extent to which British enterprises were prepared to accommodate the Nazi leadership depended, in part, on the local circumstances in which they operated. But, as international tensions mounted in the course of the 1930s, the political risks to multinational business were not necessarily confined to the “host” country – in this case the Third Reich. In general, while the German economy under National Socialism became increasingly regulated and controlled, there was a very marked reluctance in Britain to impose constraints on the foreign operations of British companies. It seems likely that this policy stance applied not just to firms with direct investments in Germany but also to a range of businesses engaged in commercial activity with Germany. For, by far the greatest concern was that as little as possible should be done to impede either Britain’s tentative economic recovery or the working of what was left of the free market in the fractured world of the 1930s. Furthermore, in a democracy shareholders are also voters; the National Government took great care throughout the 1930s not to alienate its core constituency. British firms were left to compete against each other and against foreign competitors in order to protect and if possible enhance market share. The greatest political risks in Western democratic societies to British multinational enterprise lay in the danger that a company’s good name might be tarnished, or even irrevocably damaged. Armament manufacturers were, naturally, most exposed in this respect: Vickers-Armstrong was constantly required to defend itself from accusations that it was traded with fascist dictatorships.42 Such “reputational” risks were not easy to manage as business became global. In mid 1938, Unilever faced accusations in the U.S. that it supported the Nazi Party. As a result, the Jewish community threatened to organize a boycott of Unilever’s products in the U.S. While the threat did not materialize, Unilever’s directors in London were concerned to ensure that the Boston management could provide specific answers to the Jewish Boycott Council of the American Jewish Congress and the Jewish Labour Committee.43 Ineluctably, however, the nature of the risks faced by Britain in doing business with Germany changed fundamentally in the 1930s. In the spectrum of political risks enterprises are called upon to manage, the greatest risk of all is the danger of losing everything in war. By the middle of the decade the course of economic and military developments in the Third Reich seemed to threaten Britain itself. Political and business leaders faced a strategic dilemma – whether British investments and commercial operations in Germany would contribute more to the economic rearming of Britain than to the actual rearmament of the Third Reich. 42 As an example see, Cambridge University Library, Vickers Archive, 58.76, extracts from the AGM, 26 March 1934. 43 Unilever plc, Unilever Historical Archives, London, Minutes of Directors’ Conferences, 30 June 1938.

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In summary, the management by Britain of the political risks in conducting business with the Third Reich involved weighing long-term economic factors that were primarily domestically focused against more immediate concerns over the strategic defense of the nation. Financial and economic reserves and the ability to sustain the deployment of such resources was seen as Britain’s fourth arm of defence, particularly as the threat posed by the Third Reich grew ever greater. For the most part, the risks of not doing business with Nazi Germany appeared to outweigh the risks of carrying on business. As a consequence, however, British investments played a role in facilitating Hitler’s rearmament plans. British business leaders are to be counted among the many who were slow to comprehend the awful significance for Europe and the rest of the world of a dictatorship driven by an ideology based on destruction and annihilation.

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CHAPTER 11

Under Threat of Nazi Occupation: The Fate of Multinationals in the Czech Lands, 1938–1945

❖ Eduard Kub˚u, Jiří Novotn´y and Jiří Šouša The net effect of the German Grossraumwirtschaft was uniformly destructive. Established patterns of ownership were disrupted and local management elites displaced or replaced by German. Richard Overy, “Business in Grossraumwirtschaft,” 173.

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Introduction Before 1989, the term “multinational corporation” was hardly ever used in Czech or Czechoslovak historiography. Since 1990, it has had two senses. (1) The term “multinational corporation” is sometimes used to designate a domestic, in other words, a Czechoslovak company, in which there is capital and management input from more than one of the official nationalities (ethnic groups) living on Czechoslovak territory (mainly Czechs, Slovaks, Germans, Jews and Hungarians).1 In older literature such companies were known as “mixed,” or “utraquist” in the case of Czech-German firms. National differentiation of domestic companies had been the legacy of the economic nationalism of the late nineteenth and early twentieth centuries, which in the Czech Lands had been a consequence of the emancipation of the ethnic Czechs. With the first Czechoslovak Republic this phenomenon 1 See e.g. Vlastislav Lacina, “ Česká eskomptní banka a úvìrní ústav v hospodářství meziváleèné republiky a za okupace 1918–1945” [Böhmische Escompte-Bank in the Economy of the Inter-War Republic and under the Occupation (1918–1945)], in Economic History, no. 22 (1999): 154; Jan Hájek and Vlastislav Lacina, Od úvìrních družstev k bankovním koncernùm [From Lending Co-operatives to Bank Concerns] (Prague, space, 2000), 191–216.

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became less intense and there was deeper economic cooperation between the different nationalities – hence the special terminology. (2) The contemporary modern definition of western type company,2 which we shall be using in this study, has so far been used only in rather isolated cases in Czech historiography. The reason for this usage is that the term “multinational” is not entirely appropriate to Czech conditions, and the number of interwar Czechoslovak entrepreneurial concerns that it could be applied to at all is limited. We need to distinguish between companies and concerns in which there was a foreign capital investment – there was a relatively high number of these, not only large, but also middle- and small-sized – and genuine multinational corporations.3 This latter group not only had a large amount of foreign direct investment, but one or several foreign shareholders had a controlling interest that was sufficient to determine management decisions. In this way a multinational company occupied and developed a place in the international division of labor, using syndicate and later cartel agreements that divided up international markets, limited production and distributed technology and technical equipment, thus developing international affiliates and sometimes links to international financial centers through loans and credits. Only ten such companies of European-wide importance could be found in Czechoslovakia. To the multinational Czechoslovak companies with a major share of foreign capital we should add companies that themselves exported capital and created affiliates abroad. These included the Bat’a and Škoda works. The situation with the Petschek concern is not entirely clear. Otherwise major outflows of capital and the building of foreign affiliates was an entirely unusual and insignificant matter. Economic policy of the new Czechoslovak state attempted on the one hand to weaken the position of traditional Viennese and Reichsdeutsch capital in the Czech Lands through legislative measures such as nostrification, the process of transferring Czech companies’ domiciles back to Czechoslovakia, and land reform, and on the other to exploit political contacts in order to increase capital investment from the allied countries, namely France and Britain. This was aimed at reviving the economy and strengthening political and even military ties. Generally, the policies of all the interwar governments 2 On this occasion the authors recall the lecture given by Professor Alice Teichová in 1995 at the Philosophical Faculty of Charles University entitled “Great multinational companies: legacy of the fin-de-siècle of the capitalism.” Basic literature see Alice Teichová, Maurice Levy-Leboyer and Helga Nussbaum, Multinational Enterprise in Historical Perspective (Cambridge: Cambridge University Press, 1986); Alfred D. Chandler, Jr., Franko Amatori and Takashi Hikino, “Historical and Comparative Contours of Big Business,” in Big Business and the Wealth of Nations, ed. Alfred D. Chandler, Jr., Franko Amatori and Takashi Hikino (Cambridge: Cambridge University Press, 1997). 3 On the disposition of foreign capital in Czech industry see Alice Teichová, Mezinárodní kapitál a Československo v letech 1918–1938 [International Capital and Czechoslovakia 1918–1938] (Prague, 1994).

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208 Eduard Kub˚u, Jiř´ı Novotn´y and Jiř´ı Šouša

of Czechoslovakia developed within the limiting context of what might be called “state economic nationalism,” which attempted to secure a majority stake of Czechoslovak capital in all economically and military-strategically important affairs. This naturally created certain barriers to any more thoroughgoing integration of Czechoslovak concerns into supranational companies. In other words, Czechoslovak companies, even when they might be called multinationals from the point of view of their international cartel and capital links, maintained considerable freedom of decision. This chapter intends to explore the behavior and fate of what in our view were the characteristic and also the most important multinational companies in the Czech Lands in the period 1937–1945.4 Paradoxically, the war influenced the economic development of the Czech Lands even before it began. The menace of Nazi Germany caused a major outflow of foreign capital from the Czech Lands and meant the twilight of some of the existing multinational companies, which often changed both the structure of their capital and much of their management within the space of a few months or even weeks. Most of this chapter therefore concentrates not only on the war, but also on the period immediately before the war. It is based on a sample: two undoubtedly major heavy industrial concerns by the standards of interwar Czechoslovakia (the Škoda Works and the Vítkovice Mining and Smelting Corporation [Vítkovické horní a hutní těž ířstvo]), one bank (The Anglo-Czechoslovak and Prague Credit Bank [Anglo-Československá a Pražská úv˘ırní banka]), one case combining banking and industrial production (Julius Petschek and Co.) and the most famous of Czech multinational corporations, capable of exporting capital and investing abroad – the Bat’a firm. These were all firms with headquarters in Czechoslovakia. They played a determining role in their particular sectors of the Czechoslovak economy, and had major military-strategic importance. After 29 September 1938 (The Munich Agreement that dictated the surrender of large areas of the borderlands to Nazi Germany), and especially after 15 March 1939 (the Nazi occupation of the rest of Czechoslovakia), these firms continued to play an important role in the framework of Hitler’s Third Reich and for that reason attracted the interest of leading German economic and financial circles. The sample cases represented the absolute height of Czechoslovak business in terms of the levels of capital involved.

Akciová společnost, dříve Škodovy závody v Praze (The JointStock Company, formerly the Škoda Works in Prague) The firm was founded in 1859 as the Valdštejn Machine-Tool Shop. In 1899 it was turned into a joint-stock company with capital investment from Baron 4 Since 1990 Czechoslovak literature has not considered this problem, and the older literature sidelines it with sweeping statements about Nazi violence on the one hand and the collaborationist tendencies of Czech management on the other.

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Karel Škoda and Viennese financial houses. Under Austria-Hungary it was the most important arms manufacturer in the monarchy, mainly producing artillery weapons.5 After the establishment of Czechoslovakia, government support secured it an injection of French capital represented by the world famous arms maker, Schneider et Cié in Creusot. Representatives of the French shareholders sat on its statutory boards, holding practically half the seats.6 The French involvement secured the initially faltering company two British loans and one French loan. This provided the basis for a major upswing in the company’s fortunes, allowing it to build plants both in Czechoslovakia and abroad (Poland, Romania, Yugoslavia and Iran, for example).7 Its share capital in 1937 was Krč (Czechoslovak Crowns) 220 million, 46.3 percent of which was held by Schneider. In Czechoslovakia alone it employed as many as 34,000 workers and clerical staff. In the Schneider concern, developments after Munich rapidly undermined the position of the group around Christophe Rochette, which wanted to maintain the position of France in Central Europe. In December 1938 the French company started to divest its Czechoslovak positions. It sold off its share in the Škoda Works to the Czechoslovak state represented by a financial consortium headed by a syndicate of the Czechoslovak Arms Works Brno 5 František Janáček, Největší zbrojovka monarchie. Škodovka v dějinách, dějiny ve Škodovce 1859–1918 [The Greatest Armaments Factory of the Monarchy. The Škoda Works in History and History in the Škoda Works] (Prague: Space, 1990); František Janáček, Čtení o Škodovce [Readings on the Škoda Works] (Plzeň: Space, 1978); Vladimír Karlick´y and collective, Svět okřídleného šípu. Koncern Škoda Plzeň 1918–1945 [The World of the Winged Arrow. The Škoda Pilsen Concern 1918–1945], (Plzeň: Space, 1999). 6 Alice Teichová, Mezinárodní kapitál a Československo, 128–139. 7 Josef Kašpar, Československé burzovní papíry 1937–1938 [Czechoslovak Exchange Securites 1937–1938], vol. XIII, (Prague, 1938), 185; a list of the individual companies is presented in Oldřich Mašata, Historick´y v´yvoj právního základu Škodov´ych závod˚u [Historical Development of the Legal Basis of the Škoda Works] (published by Škoda Works Pilsen Dept. of Organisation in February 1972), 3–17. Of the most important foreign companies belonging to the concern we mention, for example: Auto Škoda AG, Budapest; Libella Separator GmbH, Berlin; Société des Écremeuses Škoda – Libella, SARL, Paris; British Sugar manufacturers Ltd., London; Polskie Zaklady Skody, Spólka akcyjna, Warszawa; Uzinelle metalurgice Ploesti, Sociatate Anonyma, Bucaresti; Skoda India Ltd., Bombay; Jugoškoda AD, Beograd; Société Iranienne Skoda, Teheran; Skodaworks of South Africa, Pty Ltd., Johannesburg; Skoda Brasileira, Companha Industrial e Comercial, SA, Rio de Janeiro; Sociadad Anonima Industrial y Comercial Skoda Platense, Buenos Aires; Afganische Baugesellschaft AG, Kabul; Skoda Malaya Ltd., Singapore; Skoda Egypte Ltd, Cairo; Skoda Iraq, Ltd., Bagdad. Omnipol created its own international network of trading companies for arms export: Omnipol SA, Paris; Omnipol Trading and Shipping Company Limited, London; Overseas Mercantile Co. Inc., New York; Bulgarski Omnipol, TAD Sofia; Omnipol Türk Ltd. Istanbul; Omnipol Trading and Shipping Co. Ltd., Johannesburg; Omnipol Marocain SA, Casablanca, Omnipol Brasileira SA, Rio de Janeiro; Omnipol Handelsmaatschaoij NV, Rotterdam; Omnipol, India Ltd., Bombay a další.

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(Československá Zbrojovka Brno) for $9.5 million. The deal included a share for Omnipol, a Škoda subsidiary for arms export. In this way Škoda gained more control over its shares. The departing French also took over Škoda interests in Poland. Through Omnipol, Škoda Works tried to establish a holding company in Switzerland which would formally own some of the shares, but the attempt, which resembled tactics used by other internationally experienced firms (Vítkovice, Bat’a – see below) to protect their property and influence from German expansion, ended in failure.8 Immediately after the occupation on 15 March 1939, Škoda Works was placed under military administration. At a meeting of the board of directors on 26 August 1939 trustee (treuhänder) Dr Wilhelm Voss, managing director of the Reichswerke Hermann Göring Company, was put in executive control of the firm. A complicated operation directed from Berlin to secure legal ownership of Škoda Works and its affiliated production plants followed. As Prime Minister of the German Reich and commissioner for the four-year plan, Marshall Göring entrusted this task to the General Executive Officer of the Reich’s Ministry of the Economy, Hans Kehrl.9 Together with the director of the Dresdner Bank, Karl Rasche, Kehrl then created a special financial group which forcibly acquired an interest in the Czechoslovak Arms Works Brno and through this gained a share in Škoda Works in Plzeň. The minority share held by the Göring group rapidly increased due to a statute passed on 5 August 1940, which allowed the free transfer of shares between Brno the Czechoslovak Arms Works, Škoda Works and Reichswerke Hermann Göring. The latter exploited the opportunity to the hilt, seizing the shares of Omnipol and other owners, and in close collaboration with the H. Kehrl – K. Rasche group gained the decisive voice in Škoda Works, which it used to integrate it into its own concern. From the international politics point of view, however, the Germans had an interest in maintaining the Czech stake in the company.10 The German-managed Škoda Works retained subsidiaries in Romania, Yugoslavia, Persia and Turkey throughout the war, although subsidiaries in India and other allied territories were blocked as enemy property. The departure of French capital meant the transitional running of Škoda Works by an ethnically Czech management controlled by the state. The occupation by the Germans forced the surrender of most of the share capital. Seven Reich Germans including two representatives of the Dresdner Bank, the future minister of the economy of the Protectorate Walter Bertsch, and 8 Karlick´y, Svět okřídleného šípu, 237–239. 9 Alice Teichová, Německá hospodářská politika v česk´ych zemích v letech 1939–1945 [German Economic Policy in the Czech Lands 1939–1945], Ser. Studie z hospodářsk´ych dějin č. 1 [Studies in Economic History no. 1] (Prague, 1998), 42; Karlick´y, et al, Svět okřídleného šípu, 237–239, 251–255, 259–264. 10 Hans Kehrl, Kriegsmanager im Dritten Reich. Sechs Jahre Frieden – Sechs Jahre Krieg – Erinnerungen (Düsseldorf: Space, 1973), 168.

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four Germans from the Czech Lands, sat on the board of directors with ten representatives of Czech minority shareholders. The key executive positions were occupied exclusively by Germans, one of them Albert Göring, Hermanns’ brother. The role of Czech management was clearly secondary, even though the board of directors was formally headed by the Czech Eng. Vilém Hromádko and the managing director was Eng. Adolf Vambersk´y.11

Vítkovické horní a hutní těžířstvo, Moravská Ostrava (The Vítkovice Mining and Smelting Corporation, Moravská Ostrava)

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The Vítkovice Mining and Smelting Corporation was founded in 1828.12 Towards the end of the 1860s, it became a joint business controlled by the Viennese financial groups of the Jewish Rothschild and Guttmann families. The Vítkovice Corporation was among the largest producers of iron and steel in Austria-Hungary and in Czechoslovakia. It also became famous for unique machine-tool products, such as bridge structural parts or armored weapons components.13 Vítkovice had major capital shares in joint-stock companies abroad, for example in Bulgaria, Austria and Poland. Through its holding company, the Continental Company for Trade in Iron, Kern and Co., the Moravia Ostrava firm did business in Belgrade, Zagreb, Nov´y sad, Bucharest, Sofia, Hamburg, London and Tel Aviv. In the 1930s, the total value of the company’s 100 corporation shares [Translator’s note: not to be confused with company stock] was estimated at Kč 1.25 billion. The firm employed approximately 13,000 people. The original 50:50 ratio of the owners of the corporation shares of both families was preserved up until the beginning of the 1930s. Then, on the basis of a moratorium agreement (the “standstill agreement” of 1933), mortgaged 45.5 of the corporation management shares 11 Josef Kašpar, Pražské burzovní papíry 1940–1941 [Prague Exchange Securites 1940–1941] (Prague, 1940), 168. 12 The term Těžířstvo (German: Gewerkschaft) is especifically a Central European form of capitalist enterprise in the mining industry, and has its origin in medieval Bohemian mining law, clarified by Austrian norms of the nineteenth century, for example the commercial code of 1863. Těžířstva were associations of owners of kuks. A Kuks was a security representing one share in the assets of the težířstvo. Its owner was liable for any possible debts of the company to the extent of his entire assets. 13 Jiří Matějček and Josef Vytiska, Vítkovice – železárny a strojírny Klementa Gottwalda [Vítkovice – Klement Gottwald Iron Works and Machine-Tool Works] (Prague, 1978); Jana Machotková, Správa a organizace Vítkovick´ych železáren v období 1918–1945 [Management and Organisation of the Vítkovice Iron Works in 1918–1945], diss. Phil. Fac. Charles University (Prague, 1983); Jan Josif et al., “Dějiny hutnictví železa v Československu” [The History of Iron Smelting in Czechoslovakia] , vol. 2, Od pr˚umyslové revoluce do konce 2. světové války [From the Industrial Revolution to World War II] (Prague, 1986).

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at the N.M. Rothschild and Sons Bank in London for a period of three years. The remaining 4.5 corporation shares remained at the disposition of the Gutmann group. When the moratorium period expired the Gutmanns decided to sell part of their corporation shares to the British Rothschilds. In May of 1937 a Transfer Agreement was made. This allowed the Vienna Rothschilds, who were afraid of Hitler and German expansion, to transfer the Vítkovice corporation shares to the insurance firm Alliance Assurance Company Ltd in London, which was part of the sphere of interest of the British Rothschilds. In exchange for the shares the Guttmanns received British certificates, known as units, in the ratio of one corporation share for 5,000 units. Owners of the units received a dividend, and could intervene decisively in the management of the iron and steel works.14 In February 1939 Eugen Rothschild made an attempt to sell his stake to the Czechoslovak state. The general director of Živnostenská bank, Jaroslav Preiss, assumed the mediation role.15 The situation changed radically after the occupation of the remainder of the Czech Lands by Nazi Germany. Plans to sell the firm to the Czechoslovak state failed. The Vítkovice group was regarded as so important that on 20 March 1939 Herman Göring (as in the case of Škoda Works) empowered the general official in the Reich’s Ministry of the Economy, Hans Kehrl, to acquire a majority interest in the firm and thus take it over. The negotiations for the purchase of Vítkovice, initiated by the British side after the creation of the Protectorate of Bohemia and Moravia, ended in a purchase agreement that would have come into force at the end of October, 1939. After the outbreak of war, however, the British repudiated it and the company was managed by the Reich’s Commissioner for Enemy Property in Berlin. During the war years Vítkovice was drained of funds by credits to firms controlled by Reichswerke Hermann Göring, gifts to Göring himself, and above all transactions related to the activity known as GIBET, in other words, the Gesellschaft für industrielle Beteiligungen m.b.H.16 14 For a detailed description of this transaction see Teichová, Mezinárodní kapitál a Československo, 63; Raul Hilberg, Die Vernichtung der europäischen Juden, durchgesehene u. erweiterte Ausgabe, Bd. 1 (Frankfurt am Main, 1992), 107; Christopher Kopper, Zwischen Marktwirtschaft und Dirigismus. Bankenpolitik im “Dritten Reich” 1933–1939 (Bonn: Bourvier Verlag, 1995), 335. 15 Hilberg, Die Vernichtung der europäischen Juden, 108. 16 Z. Stolařík, “Hospodářská společnost GIBET a její vztahy k VHHT v letech 1941–1945” [The GIBET economic company and its relations to the VHHT in 1941–1945], in Dějiny závod˚u [Works History], vol. 5 (1964): 3–20; see also Ctibor Nečas, Vítkovické železárny v době národní nesvobody v letech 1938–1945 [The Vítkovice Iron Works in the Period of National Captivity 1938–1945] (Ostrava, 1970); Hans Radant, “Podíly německ´ych koncern˚u na podnicích v Československu v letech 1939–1945” [The Shares of German Concerns in Enterprises in Czechoslovakia in 1939–1945], in Pr˚umyslové oblasti [Industrial Regions], vol. 3, (Ostrava, 1971), 154–203; Hans Radant, “Die Witkowitzer Berg- und Eisenhütten-Gewerkschaft als Organisationszentrum der Reichswerke AG

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In 1937, Vítkovice’s general director was Oskar Federer. Czechs and Germans from the Czech Lands predominated among the directors. After the occupation of the Czech Lands and the outbreak of war, changes were reflected in the composition of management. In 1940 a supervisory board nominated by the Reichsprotektor Konstantin von Neurath in Prague took over the firm. State Secretary K.H. Frank was a member of the board, which was dominated by representatives of the Reichswerke Hermann Göring – P. Pleiger, C. Delius, P. Raabe, and P. Rheinländer of the Reichsstelle für Wirtschaftsausbau, while the Dresdner Bank was represented by K. Rasche.17 By their provident and timely maneuver, the Jewish owners had managed to protect the firm from “aryanization,” the firm was administrated as enemy property.

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Bat’a, akciová společnost, Zlín (Bat’a Joint-Stock Company, Zlín) The business was founded as a family firm in Zlín in 1894. With the help of the new progressive methods (Taylorism), it converted to mass production and by the end of World War I it controlled the production of shoes in the Czech Lands. In 1930 the private firm was turned into a joint-stock company, but the majority of the shares remained in family hands. In the interwar period it expanded dramatically into world markets. In 1930–1932 it established a number of affiliate companies with production plants and their own retail networks in Poland, Switzerland, the Netherlands, Sweden, France, Romania, Austria, Egypt and Germany. In the following years it added affiliates in British India, the Dutch East Indies, Malaya, Palestine and the U.S.A. In 1931 Bat’a created another financial center in the form of the holding company Leader AG in St. Moritz, which took over majority shares in all Bat’a’s foreign companies.18 Consequent developments proved this to have been an essential and prudent step. In the early 1930s, Tomáš Bat’a senior (the key figure in the company), in a letter to the Minister of Foreign Affairs Edvard Beneš, expressed the ambitions of the firm in grandiloquent terms: “We are laboring to secure for our state to control the shoe industry throughout the world.”19 After Tomáš Bat’a’s death in an air accident, his brother Jan “Hermann Göring” für die Beherrschung der Eisen- und Stahwirtschaft südosteuropäischer Länder,” Jahrbuch für Wirtschaftsgeschichte, vol. 3 (1973): 17–42; Zájem říšskoněmeck´ych koncern˚u o Československé pr˚umyslové oblasti [The Interest of Reichs German Concerns in the Czechoslovak Industrial Regions]. Conference materials (Opava, 1974). 17 Compass, Industrielles Jahrbuch, Čechoslovakei, Jg. 70 (Prague: Space, 1937), 557, 547, 559, 567; Matějček – Vytiska, Vítkovice – železárny a strojírny Klementa Gottwalda, 219, Hilberg, Die Vernichtung der europäischen Juden, 112. 18 Bohumil Lehár, Dějiny Bat’ova koncernu [The History of the Bat’a Concern] (Prague: Space, 1960), 130–192. 19 Lehár, D˘ejiny Bat’ova koncernu, 147.

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Antonín Bat’a took over the leading role in the company. Towards the end of the Pre-Munich Republic the Bat’a works represented a huge supranational shoe empire, with inroads into associated fields such as leather processing, the rubber industry and textiles among others. This was a massive selffinancing affair that was vertically integrated. Its total number of employees reached ca 65,000, a third of them working abroad. It was a peculiarity of the Bat’a companies that the shares were not publicly traded but were mainly kept in the hands of family members. During the first days prior to Munich, Bat’a prudently transferred part of its share capital from Czechoslovakia to Switzerland – with the assistance of the National Czechoslovak Bank.20 Its activities in the Czech Lands did not, however, diminish after the occupation. Following negotiations with Hermann Göring, relations between the Bat’a concern and the German Reich were set on a regular footing. The firm began to fulfill army orders and secure supplies of raw and semi-finished materials for German firms as well. The head of the company, Jan Antonín Bat’a, obtained permission to leave for the United States, from where he ran his foreign businesses. The protectorate works were controlled by management headed by Dominik Čipera and Hugo Vavrečka. After the outbreak of war Bat’a was forced to leave the United States because of his trading relationships with Germany and he moved to Brazil, where he continued his business activities. Tomáš Bat’a’s widow Marie Bat’ová disagreed with Jan Antonín’s opportunistic willingness to do business in countries with authoritarian regimes as well as democratic states. She actively joined in the resistance, by, for example, giving financial support to the Slovak National Uprising.

Anglo-československá a Pražská úvěrní banka, AS Praha (The Anglo-Czechoslovak and Prague Credit Bank, Inc. Prague) The name of this financial institution was the result of the 1930 fusion between the Prague Credit Bank [Pražská úví˘rní banka] (founded in 1870), the Czech Commercial Bank [Česká komerční banka] (founded in 1920) and the Anglo-Czechoslovak Bank [Anglo-československá banka] (founded in 1922). It was one of the banks with the greatest share of foreign capital in Czechoslovakia, in this case English and French. A significant share in the bank was also held by businessmen of Jewish origin in the Czech Lands. The bank’s activities focused mainly on credit transactions and financing for new firms, primarily in the export industry21 – partly in arms, but mainly in con20 Archives of the Czech National Bank, Fund of the National Czechoslovak Bank, IV. Protocol of extraordinary meeting of the bank board of 4 October 1938, 7. 21 František Vencovsk´y et al., Dějiny bankovnictví v Česk´ych zemích [The History of Banking in the Czech Lands] (Prague, Space, 1999), 311–317.

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sumer goods. It had strong ties with the Czechoslovak state, which gave it both financial and political support. It operated on international capital and money markets through its foreign subsidiaries in London, Sofia, Bucharest, and Belgrade. This was unusual for a Czechoslovak company. In Bulgaria, Romania and Yugoslavia it owned shares in, and gave credits to a range of industrial firms, such as sugar refineries and breweries. The bank reached a high point in 1929/30 with Krč 235 million in share capital, although during the Great Depression this dropped to Kè 120 million.22 In the early 1930s the share of foreign capital in the bank stood at 43 percent, of which 25 percent was British and some U.S. capital and 18 percent French capital. During the Depression, the French pulled out of the bank (1932).23 For the whole period, the Czechoslovak state retained the decisive influence in the bank through the Czechoslovak Arms Concern Brno.24 After Munich the bank had to give up its subsidiaries in the occupied Sudetenland, and these were taken over by the Allgemeine Deutsche CreditAnstalt in Leipzig. Its activities abroad were cut back and Jewish shareholders hastily sold their shares. The outflow of Jewish capital led the bank to set up an agency in New York in December 1938. It officially started business on 15 June 1939. Its fate and its role were unique, since it was operating in New York for the entire period of the war, even after the liquidation of its headquarters in the Protectorate of Bohemia and Moravian. At the beginning of 1942 – due to the intervention of the Czechoslovak Government in exile in London, it acquired a general license on the level of U.S. and British banks. It was involved in the financing of Czechoslovak foreign activities.25 The occupation of the Czech Lands and, above all, the outbreak of war meant a painful reduction of business for a bank oriented towards the export industries and foreign transactions. This led to further changes in the structure of shareholding. The original majority shareholders (i.e. the Czechoslovak State and British shareholders) disposed of their shares. Shares that had been in the ownership of the state, such as most of the British shares, were transferred to private hands. The majority of the British investors pulled out of the bank in time, and the remaining 6 percent of 22 Kašpar, Československé burzovní papíry 1937–1938 (Prague: Space, 1937), 315–317; Kašpar, Československé burzovní papíry 1940–1941 (Prague, Space, 1940), 118–121. 23 The structure of ownership of the shares of the Anglo-Československé a Pražské úvìrní banky k 31. 12. 1937 – see Teichová, Mezinárodní kapitál a Československo, 231. 24 The Československá Zbrojovka Brno was a concern with a direct majority holding by the Czechoslovak state. See Otakar Franěk, Zbraně pro cel´y svět. Zahraniční obchod se zbraněmi. Zbrojovka Brno mezi dvěma světov´ymi válkami [Arms for the Whole World. Foreign Arms Trade. The Zbrojovka Brno between Two World Wars] (Brno: Space, 1970). 25 AČNB, Pražská úvěrní banka, S IX–5/1, New York subsidiary – establishment 1938; S IX-5/5, undated report of the director of the Prague Credit Bank Ferdinand Jičínsk´y [post May 1945].

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shares they still owned were managed by the Germans as enemy property. The subsidiaries of the Anglo-Czechoslovak and Prague Credit Bank in the Balkans were taken over by German financial institutions, headed by the Reichswerke Hermann Göring. Despite interest from the Allgemeine Deutsche Credit-Anstalt, the Deutsche Bank, the Dresdner Bank and the Commerzbank, the Germans ultimately did not assume direct control of the bank. The loss of its positions of the market meant that it became a significantly less attractive proposition. After 1940/41 the Anglo-Pragobanka was merely surviving, and it was dissolved in 1943 on the basis of a decision by the Ministry of the Economy in Prague headed by the Reich’s German Walter Bertsch.26

The Empires of the Petschek Families The Branch of the Heirs of Isidor and Julius Petschek (Prague) In Czechoslovakia the main elements of the Prague Petschek family27 conglomerate were coal companies (acquired in 1917) and a banking house established in 1920.28 The Petschek’s also had major properties in Germany. The following is a list of its most important firms. Concern of Julius and Isidor Petscheks (main place of business – Prague):

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• • • • • •

Petschek et Co., Bankhaus Prag Anhaltische Kohlenwerke AG, Halle Werschen-Weißenfelder Braunkohlen AG, Halle Norböhmische Kohlenwerke AG, Brüx Brüxer Kohlen-Bergbau Gesellschaft Aussiger Montangesellschaft mbH, Aussig.29

The links between the management of the Prague Petschek assets in Czechoslovakia and Germany are rather unclear. From the handbooks of the period it is not obvious whether the links were purely personal or institutional as well. In their industrial business the Petscheks used not only their 26 Václav Král, Otázky hospodářského a sociálního v´yvoje v česk´ych zemích 1939 – 1945 [Questions of Economic and Social evelopment in the Czech Lands 1939 – 1945], vol. II, (Prague, 1958), 342–370. 27 Otto Petschek, Paul Petschek, Friedrich Petschek – sons of Isidor Petschek, Walter Petschek – son of Julius Petschek. 28 For the origins of the Petscheky family see Joseph Pick, “The Economy,” in The Jews of Czechoslovakia. Historical Studies and Surveys, vol. I, (New York, 1968), 374–375. 29 Hilberg, Die Vernichtung der europäischer Juden, 120; AČNB, ŽB, S VIII/g-64, Bankovní d˚um Petschek a spol. v Praze z 18. 1. 1923; Compass. Finanzielles Jahrbuch 1938, Personenverzeichniss (Vienna, 1938), 953.

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Under the Threat of Nazi Occupation 217

own private banking house but also the services of the Böhmische EscopteBank und Creditanstalt and Böhmische Union-Bank in Prague. Through share ownership and the provision of credits their interests also extended into the food, paper, textile, glass and porcelain industries. The family had a range of smaller holdings in various companies abroad, in the U.S.A., Canada, Austria, Poland, the Netherlands, Yugoslavia and even in Tanganyka, in mining and metallurgy, oil, paper, glass, textile plants and electrical engineering.30 The internationally experienced Petscheks were very well aware of trends in Central Europe and the threat that Hitler’s Germany posed to them. The “aryanisation” of the Petschek mines in Germany had been entrusted by Göring to Friedrich Flick, head of the Friedrich Flicks Mittelstahl-Werke company. His negotiating role was difficult, however, since the Prague Petscheks had formally set up a British company, to which they transferred the shares of their German affairs. The British company was controlled by another Petschek company – this time American – called the United Continental Corporation, New York. The Germans were faced with the danger that the property would pass into foreign hands. In this situation the Petscheks expressed their willingness to cease business in Germany and sell their mines, but only for foreign currency. When Göring personally intervened, the Reichswirtschafts-ministerium in Berlin released the necessary foreign capital. On the basis of an agreement of 21 May 1938 the Petschek mines were transferred to a German consortium, which consisted of the Friedrich Flicks Mittelstahl-Werke, IG Farben and Winterschall AG Shares with a nominal value of RM 24 million were sold for RM 11.7 million ($4.75 million).31 In 1938 they initiated negotiations with the management of the Živnostenská Bank and offered to sell the bank their North Bohemian mines and later the banking house as well. The Živnostenská Bank actually bought this conglomerate in 1938, at a price of Kè 300 million. It transferred the individual mines to its subsidiary company the Czech Trading Company, inc. (Česká obchodní společnost, AS, Prague). This deal was followed by further negotiations between the partners in November 1938 leading the sale of part of the credits and deposits of the Petchek and Co. Banking House to the Živnostenská Bank. The family had thus managed to sell the greater part of its assets in Czechoslovakia and sent the capital released abroad. What had seemed an advantageous deal at first did not actually benefit the Živnostenská Bank, since after the occupation German authorities cast doubt on 30 Jiří Novotn´y – Jiří Šouša, “Soukromé bankovní domy v česk´ych zemích meziválečné doby. Nástin problematiky” [Private Banking Houses in the Czech Lands of the Inter-War Period. A Sketch of the Subject]. Acta Universitatis Carolinae, ser. Philosophica et Historica, Studia historica XLVII (2000): 170; Karel Kratochvíl, Bankéři [Bankers] (Prague, 1962), 140, 220–221, 294–295, 324. AČNB, ŽB, S VIII/g-64, Bankovní d˚um Petschek a spol., Prague. 31 Hilberg, Die Vernichtung der europäischen Juden, 120–122.

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the sale and the former property of the Petschek family was “aryanized” anyway.32 The heirs of Julius Petschek had been developing their plans to sell their enterprises in Central Europe for a long time. These began after the establishment of Nazi power in Germany. Evidence of this is the fact that for years the family had not invested in the technical modernization of the mines that formed the core of their business. According to an expert report drawn up in the autumn of 1938 by the statistical department of the Deutsche Reichsbank, the company’s enterprises on German territory alone, which were estimated to have a value of RM 200–250 million, required a modernization outlay of RM 50 million, i.e. almost five times more than its selling price in the same year. In reality, the difference between the selling price and the modernization costs was not, of course, so great, since the selling prince was obviously artificially low.33 The neglect of modernization of the Petschek enterprises in Germany was not the result of a lack of investment resources, but of their strategic plan. It is also evident in the family enterprises in Czechoslovakia, and in this context it must be noted that part of the concern was a private banking house generally regarded as prosperous.34 These circumstances support the theory that the divestment of the Central European enterprises was an integral part of the family’s business strategy.

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Branch of the Heirs of Ignaz Petschek (Aussig a. E. – Ústí nad Labem) The property of the Ústí Petscheks35 consisted of the I. Petschek firm, wholesale trade in coal in Ústí nad Labem and also the trading company I. Petschek in Vienna, which also dealt in coal. The basis of the empire of the Ústí Petscheks was a large conglomerate of mining businesses in Germany, Czechoslovakia and Poland as listed below. • • • •

Concern of Ignaz Petschek (main place of business – Aussig): J. Petschek (Kohlengrosshandel), Aussig a.E. – Ústí nad Labem J. Petschek, AG, Vienna Öhringen Berbau, AG, Gleiwitz – Öhringen

32 AČNB, ŽB, S VIII/d-9, Česká obchodní společnost AS, Prague, Coal transaction in 1938. Purchase of brown coal property from the Petschek firm. See AČNB, ŽB, S VIII/g-64, The Petschek and Co. Bank in Prague from 7 November, 10 December 1938 and 7 January 1939. 33 Bundesarchiv Berlin (hereafter simply BA), fond Deutsche Reichsbank, sign. R 2501/982, Stand der Verhandlungen mit den Petschek Gruppen vom 16. 2. 1938. 34 Private banking houses in Czechoslovakia did not publish their economic results. For more detail see František Vencovsk´y et al, Dějiny bankovnictví v česk´ych zemích, 364. 35 Franz Petschek, Wilhelm Petschek, Karl Petschek – sons of Ignaz Petschek.

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• Preussengrube, AG, Mechtal bei Beuthen, Ober-Schlesien • Niederlausitzer Kohlenwerke, AG • Eintracht Braunkohlenwerke und Brikettfabriken, AG, Welzow. NiederLausitz • Hubertus Braunkohle, AG • “Ilse” Bergbau, AG Grube Ilse, Nider-Lausitz • Braunkohlenwerke Borna, AG, Borna, Rez. Leipzig • Duxer Kohlengesellschaft auf Aktien, Teplitz-Schönau – Teplice-Šenov • Britannia Kohlenwerke, AG, Königswerth bei Falkenau – Kynžvart u Sokolova • Vereinigte Britannia Kohlenwerke, AG, Seestadt – Ervìnice • Theresia Teifbau – Gewerkschaft, Brüx – Most • Zaklady Hohenlohego – Hohenlohe-Werke, Wilanowiecz.36 The negotiator chosen by Göring for the liquidation of the property of the Ústí branch of the Petschek family was, once again, Friedrich Flick. The Ústí cousins of the Prague Petscheks employed the same kind of strategy for the protection of their company, i.e. transfer of ownership of the property abroad, but in their case the situation had already deteriorated enough for the strategy to be unsuccessful. On 19 January 1938 the spokesman of the Ústí Petschek group, Karl Petschek, in a conversation with the state secretary at the Reichswirtschaftsministerium Posse declared: “Sie wollen Krieg meine Herren, ich bin bereit.”37 Conflict with the Nazi administration and attempts of the Petscheks to prevent the “aryanisation” of their property by claiming that they were Czechoslovak and not German citizens, did not achieve the expected results. In the first phase of the struggle over the Petschek property the Nazi administration placed it under forced management and in the second phase used alleged tax arrears as an instrument to gain full control of it. Unpaid taxes were alleged to total more than the overall value of the company. The empire of the Ústí Petscheks was confiscated both on the territory of the so-called Old Reich and in the Sudetenland.38 In comparison, the apparently hasty retreat of the Prague Petscheks, who sold off their property at an artificially low price as early as the spring and summer of 1938, before the development of the forced “aryanisation,” turned out to have been a wise move. It allowed the preservation of a considerable amount of the property and its transfer to the free world. The resistance of 36 Hilberg, Die Vernichtung der europäischen Juden, 120; Compass. Finanzielles Jahrbuch 1938, Personenverzeichniss (Vienna, 1938), 953; Josef Peters, Statistická příručka Československého hornictví pro rok 1932 (Prague: Space, 1931), 73, 84–85, 121, 129, 303; AČNB, ŽB, S VIII/g-64/3. 37 Hilberg, Die Vernichtung der europäischen Juden, 124; Kratochvíl, Bankéři, 324. 38 Hilberg, Die Vernichtung der europäischen Juden, 122–127; Harold James, Die Deutsche Bank und die “Arisierung” (Munich, 2001), 100; Harald Wixforth, Auftakt zur Ostexpansion. Die Dresdner Bank und die Umgestaltung des Bankwesens im Sudetenland 1938/39 (Dresden: Space, 2001), 40.

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the Ústí Petscheks, who insisted on their property rights and refused “voluntary” “aryanisation” right up to the last moment, only resulted in the loss of their empire as a whole, without any “aryanisation” compensation at all. Despite the view of total failure common in academic literature, the “fighting tactics” chosen by the heirs of the Ignác Petschek deserve to be seen in a slightly different light. The audit report from the prestigious Deutsche Revisions- und Treuhand Gesellschaft, AG in Berlin on the state of the company on 31 December 1938, drawn up at the request of the commission administrator, Erich von Reisenauer, came to the conclusion that all the firms had been deliberately highly overburdened with debt. The deficit had reached a sum of almost RM 5 million through the gradual drawing of mobile funds into the accounts of family members, and by non-settlement of debts. Family accounts:

Personal account Ignaz Petschek Capital account Franz Petschek Personal account Franz Petschek Capital account Wilhem Petschek Personal account Wilhelm Petschek Personal account Josefa Petschek Joint account Unsettled debts

RM 133,474 RM 600,000 RM 334,069 RM 600,000 RM 817,995 RM 332,324 RM 2,817,862 RM 2,178,39539

Although it appears that the mobile funds saved in this way40 represented only 2–3 percent of the overall stake of the Ignaz Petschek concern in Germany, the actual loss was not 100 percent. It gave the family the chance to found and finance enterprises in new locations.

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Conclusion The only one of the aforementioned Czech big business figures who managed to save his business empire was Jan Antonín Bat’a, although the firm was still divided into two autonomously functioning parts – one in the sphere of German influence and one outside it. The price of holding on to the firm, which was never confiscated, was high. It meant the subordination of production to the war needs of Nazi Germany and the establishment of a certain consensus with its leaders, all of which later exposed Bat’a to accusations of collaboration from both the Czechoslovak resistance and the Allies. 39 BA Berlin, Deutsche Revisions- und Treuhandgesellschaft, AG Berlin, R 8135/4213, Bericht Nr. 12.273, S. 36. 40 From the fact that the audit report regarded the sums in the capital and personal accounts of individual members of the family as lost, it can be deduced that these mobile funds had been successfully lodged in accounts in the “free world”. The technique of transfer is not entirely clear from the audit.

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Bat’a’s only concern was to survive the war in the form of a genuinely multinational company without there being a change in its majority shareholder. A second category is made up of the firms, which had been the subject of plans for transference to the Nazi sphere of influence or liquidation even before the outbreak of war during the period of diplomatic struggle over the fate of Czechoslovakia on the international political scene. These were firms of European-wide importance, as was reflected by the very speed of their take-over after Munich and the occupation of the rest of the country. The Nazi authorities appointed representatives of the leading German companies as trustees, whose policy towards Czech management and owners was uncompromising. Their activities were directed to ensuring major transfer of property rights to the new German owners. Essentially compulsory sales were made at artificially low prices. At the most important Czechoslovak arms company, Škoda Works, the process of change in ownership relations and related changes in management was initiated as early as the autumn of 1938, when French capital pulled out of the company. Škoda Works was integrated into German concerns and in practice ceased to be an independent business entity in which Czech capital and management had a decisive influence. It also ceased to be a multinational corporation. Czech management fell into a position of minimal influence. Their real influence was almost negligible, and exercised only in middle technical-administrative and commercial levels of management. They were entirely eliminated from strategic decision making. They were maneuvered into the role of passive, essentially unwilling collaborators.41 Shortly before the war the Jewish Rothschild and Petschek families (Julius’s and Isidor’s heirs) chose the tactic of rapid withdrawal in an attempt to save the major part of their property by transferring it to the economies of the Western allies. The Prague Petscheks chose the path of speedy total withdrawal and the liquidation of the company, at the cost of significant losses. The Rothschilds used their wide international family network and the manipulation of trade in securities on the British capital market. They changed their property (the Vítkovice Mining and Smelting Corporation), originally declared to be “Czechoslovak” into British property. For this reason the company was not confiscated but treated as “enemy property.” Formally the Vítkovice company remained a multinational firm, but de facto its fate and role in the Nazi economy differed little from that of the multinational companies mentioned above that were “legally” transferred into 41 Characteristic examples of Czech managers with this kind of minor influence included the top representatives of the Živnostenská Bank, the chief director Jan Dvořá˘cek or President of the Board of Trustees Vojtìch Mastn´y, who sat on the boards of trustees both of Škodovka in Pilsen, the Zbrojovka in Brno and others. For the character of their activities see Vojtích ˘Mastn´y, Vzpomínky diplomata [Memoirs of a Diplomat], ed. Eduard Kub˚ u, Petr Luňák and Otto Novák (Prague: Space, 1997), 184–191.

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German hands. The strong resistance put up by the Ústí Petscheks ended in complete failure. The Anglo-Czechoslovak and Prague Credit Bank met the fate of a multinational whose assets consist of a series of horizontally articulated concern enterprises; it was broken up by the Nazis using the tactic of gradual takeover. All that remained in the end was the “shell” of the former multinational company, and this was closed in the middle of the war. The wartime fates of the largest Czech firms as a whole meant the end of Czechoslovak large-scale enterprise on a multinational basis. The dramatic changes in the character of the Czechoslovak economy after 1945 – primarily nationalization of all key concerns – made their revival impossible.

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CHAPTER 12

Industrial Capitalism and Political Constraints: the Bureaucratization of Economic Life during the Fascist Regime

❖ Luciano Segreto

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The basic assumptions underlying the great mass of evidence, reports and monographs which were collected and published [after the economic crisis of the 1930s, author’s note] was that competition has to be revived against monopolizing forces and that the activities of oligopolies, monopolies and cartel have to be curbed by enforcing existing and/or promulgating new legislation. … However, the illusion of the protagonists of a free market economy about the return to a state that had existed in the nineteenth century was at the time, and is even more today, anachronistic. Alice Teichova, Multinationals in Perspective, 370.

One of the main tasks of the European Cooperation Administration (ECA) mission in Rome after World War II was to study the ways to reduce or, better put, to eliminate the restrictive business practices in Europe. U.S. policy strictly linked democracy with economic liberalism, while associating cartels and antidemocratic policies with the Nazi – Fascist regimes. For the United States there was a clear identification between the international activities of the cartels and the economic effects of an aggressive foreign policy. In 1944 Roosevelt affirmed that cartels were utilized by the Nazis as government instruments to “achieve political ends.” The defeat of the Nazi army should be followed by the elimination of these weapons for economic warfare.1 These 1 W. Asbeek Brusse and R.T. Griffiths, “The Management of Markets: Business Governments and Cartels in Post-War Europe,” in Business and European Integration since 1800. Regional, National and International Perspecitives, ed. by Ulf Olsson, (Göteborg: Göteborg University Press, 1997).

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opinions greatly differed from those prevailing in the 1920s, when cartels were considered useful for keeping the peace and reducing international political rivalries.2 U.S. criticisms were not only concentrated on Nazi Germany. This “disease” affected all of Western Europe. During the Marshall Plan an increasing part of the activities of the ECA missions in Europe was to convince its European partners that new antitrust laws were in their best interest. Economic growth stimulated an increase in productivity. Greater unitary productivity would yield greater returns on labor and capital. But this could not coexist with the rebirth of cartels, whose main aim was to limit production to artificially sustain profits.3 The instruments used by the United States to convince its European partners varied considerably from a softer approach, which considered it very difficult to implement the U.S. antitrust model in Europe, to a more radical, if not severe approach, linking the use of U.S. dollars and/or counterfunds to the realization of antirestrictive policy.4 This attitude had quite negative results and most of the European countries did not pass new antitrust laws under U.S. pressure during the 1950s. The Italian case did not differ from the other European countries. Cartels were part of Italian industrial history. U.S. analysis of the Italian economic structure stressed, well before the beginning of the campaign against restrictive economic practices, the importance of its role in shaping the industrial sectors in particular. The best examples were considered the SNIA Viscosa Company, one of the four members of the European synthetic fibers cartel together with Courtaulds, Comptoir des Textiles Artificielles e Vereignite Glenzstoff Fabrik, and the chemical firm Montecatini, member of the international fertilizers cartel. But Italy also possessed another very specific element, which played a relevant role in this context. The large presence of the state as an entrepreneur through the State Holding IRI (Istituto per la Ricostruzione Industriale) was considered a decisive factor in influencing, 2 Delisle Burns wrote that “governments … which may be incited to rivalry by rival traders may be incited to alliance by the traders of different nations who have joint interest.” See C. Delisle Burns, Syllabus of a course of twelve lectures on the history of international relations and the League of Nations, 2nd ed. (London, League of Nations Union, 1928). 3 ECA was concerned with restrictive business practices because it was “convinced that wide prevalence of such practices in Western Europe is a major obstacle to lower unit costs, increased productivity, rising standard of living, and to increasingly effective competition of Western Europe in international trade. We must therefore regard these practices as barriers to the attainment of ERP objectives” (NARA, RG 469, Records of U.S. foreign assistance, Office of special representative in Europe (OSR/E), Office of the general counsel (OGC), Subject Files, 1948–1953, folder: Restrictive business practice (RBP), Instruction A-252, 5 June 1950. 4 NARA, RG 469, OSR/E, OGC, Subject Files 1948–1953, Folder RBP, agenda for executive group, Draft working paper: production and business practice improvement program, 25.20.2950; Instruction A-252.

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Industrial Capitalism and Political Contraints 225

especially in heavy industry, the development of restrictive business practices.5 All the U.S. analysis of restrictive business practices in Italy pointed out that the origins of this attitude was to be found in the Fascist regime and especially in its economic culture, whose aim was considered to be the control of the economy rather than its development. This chapter will try to examine that opinion, focusing on the economic and political reasons of that policy. The Italian economy was deeply affected by the crisis of 1929, which was considered – in the words of the Confederation of Italian Industrialists (Confindustria) – “a system crisis,” that ought to be confronted as such, “through a radical, although gradual, revision of the economic organism.” Unemployment rose by 21.5 percent between 1929 and 1932; the total hours worked diminished in comparison with 1929 by 5.84 percent in 1930, by 16.49 percent in 1931, by 28.64 percent in 1932 and by 24.84 percent in 1932.6 Wages decreased proportionally, given that they were calculated on an hourly basis. Many workers tried to “invent” new types of activities, both going back to agriculture or creating new jobs as ambulant food sellers, as shown by the increase of people working in the small retailing sector from 1.1 to 1.6 million.7 The crisis of the world market led to new forms of competition, with unintended negative consequences at times. In Italy, as in other countries, firms were free to form cartels and other forms of collusion to reduce competition among them. The cartels formed in that period were just sale organizations.8 In many cases the competition and the jealousy between potential participants in those agreements was so strong and deep that it was very difficult to get an agreement signed and/or respected. This situation was particularly common in such sectors as the metallurgical and the textile, both deeply affected by the general economic crisis, the former because of the universal banking crisis, the latter because of the fall of demand, both in Italy and abroad.9 The intervention of the State became a necessity and assumed 5 IRI controlled about 26 per cent of productive capacity of the mechanical industry, 45 percent of iron and steel and 80 percent of the shipbuilding industry (E. Cianci, Nascita dello stato imprenditore (Milan: Mursia, 1977)). A list of the international cartels were Italian firms were represented has been supplied by B. Curli, “L’Italia, la Società delle Nazioni e la discussione sugli accordi internazionali, 1927-31,” Rivista di storia economica, 7, no. 1, 1990, 45–46. 6 “Confederazione Fascista dell’Industria Italiana,” L’economia italiana nell’ultimo decennio (Rome: Confederazione Fascista dell’Industria, 1939). 7 G. Gualerni, Storia dell’Italia industriale. Dall’Unità alla Seconda Repubblica (Milan, Vita e Pensiero, 1994), 113. 8 F. Guarneri, Battaglie economiche fra le due guerre, vol. I, (Milan, Garzanti, 1953), 274. 9 V. Castronovo, Storia economica d’Italia. Dall’Ottocento ai giorni nostri (Turin, Einaudi, 1995), 281–282.

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226 Luciano Segreto

different forms. The eclipses of the universal banks in 1931/32 opened the door to the transformation of the State into entrepreneur, giving a management unity to several industrial sectors such as steel, shipbuilding and the heavy mechanical industry.10 But the birth of IRI was not enough to guarantee the necessary uniformity of behavior of these economic actors. The state also intervened through the law to force the reluctant partners of agreements and cartels to respect their commitments. At the beginning of the 1930s the Italian Parliament passed a law by which all firms interested in the existing agreement were obliged to take part in it. At the same time the statutes of the cartels were legally recognized. Thus the directions of the cartels had enforcing power to oblige the single firms to respect the plant development program. On the commercial side they could impose a common policy on purchases coordination, as well as on sales in domestic and foreign markets to keep the distribution and marketing organization more efficient. The Italian government realized quickly that the powers given to the cartels transformed them into a monopoly of sorts, leaving the state powerless to control them and to prevent or to repress abuses against society or single firm member of the cartel. The Fascist regime, as noted by Ernesto Rossi in the 1950s, was very careful with the language used by the government: “in politics words are often more important than facts.”11 In the Italian economic and social conditions of the beginnings of 1930s the word cartel gave a very negative impression of the institution it wanted to define. While in the previous decade cartels could be considered, among other things, as a useful instrument to modernize, rationalize and standardize firms,12 in a period of economic crisis the industrialist forming a cartel was considered a “parasite” and his creation an instrument of consumer domination.13 These are the reasons why decree 31.12.1931 n. 1670, approved by Parliament in 1932 by law 16.6.1932, n. 834, is about the “regulations regarding the establishment and operations of Consortia among firms engaged in the same type of productive activity.” The word consortia – the direct translation of the Italian “consorzio” – substituted the word cartel, but it meant to define a group of companies engaged in the same type of business or economic activity, all of whom were 10 11 12 13

Cianci, Nascita dello Stato imprenditore. E. Rossi, I padroni del vapore (Bari: Laterza, 1955), 157. V. Dagnino, I cartelli industriali nazionali e internazionali (Turin, F.lli Bocca, 1928). Rossi, I padroni, 157–158. Rossi added that in the semi-official Dizionario di politica (dictionary of politics), edited in 1941 by the Fascist National Party, it was stressed that it was a big mistake to give the same meaning to the words cartel and consortia, because “cartels are the expression of the spirit of the capitalism, they are instruments through whom the entrepreneurs try to get the biggest gains, and they excercise an antisocial action. While the obligatory consortia must inspire their action to public interest or, to be more precise, they must subordinate the interests of the firms who are members of the consortia to the general interest of the national economy,” ibid., 160.

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Industrial Capitalism and Political Contraints 227

bound by a written agreement regulating competition among them and other matters, such as price policy and level of production, in other words, a cartel. The law provided that obligatory consortia could be established whenever a request was submitted to the government by parties representing at least 70 percent of the firms controlling 70 percent of the output of a given sector or, in absence of the required number of firms, by those firms controlling 85 percent of the output. The government was also entitled under this law to establish obligatory consortia in those sectors where over 50 percent of the output was accounted for by State owned enterprises. The powers of the state were very wide, because it had the right under this law to intervene in the management of consortia and to dissolve them whenever they were found to be pursuing ends contrary to the public interest. An important role was also played by the Confindustria, which was actually delegated by the government to supervise the creation of new agreements. Its chairman, speaking at the annual assembly of Italian industrialist, affirmed that consortia existed “not to establish monopolies, nor to crystallize defined positions, nor to avoid technical progress, but only to prevent serious damages arising from excessive competition.”14 The real main task of the industrialists’ organization was but to reduce the possibilities for the Corporazioni (the Corporations, the Fascist institutional body, created in 1926 and reformed a first time in 1930 and then again in 1934, where all the economic categories and sector were represented) to intervene and gain a complete control over the productive apparatus. Confindustria’s worries were those of the Italian industrialists, who feared that the law of obligatory consortia could give more powers to the state to intervene in their business strategy and especially in their plants. The strategy of the association of Italian industrialists was thus to prevent the definition of a regulatory entity of the consortia law. As long as there was only a law the problem was just a matter of form, while with the definitive approval of a formal regulation the question would have been about the level of bureaucratization – which was in any case very high – and the freedom of the private industrialists to maintain a certain level of autonomy in their relationship with the state. The situation was complicated – or simplified, according to the different points of view – by the fact that many of the chairmen of the single Corporazione were also the chairmen of the cartels they were supposed to control. Thus the intervention of the Corporazioni was always just formal and limited to a mere descriptive analysis of the activities of the cartels.15 The pressures of the industrialists through their national or sector associations achieved another victory in 1937, when a new law was approved. 14 Confederazione generale fascista dell’industria italiana, Assemblea generale, 30 giugno 1933 (Rome: Confederazione Fascista dell’Industria, 1933). 15 Gualerni, Storia dell’industria, 119.

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The provisions of the law of 1932 were extended under law 961, dated 22 April 1937, to include “voluntary” consortia. This new law provided that voluntary cartels could be established for the purpose of regulating production or sales of firms engaged in similar or related activities. Apparently the law was a clear example of greater bureaucratization of the economic life and an instrument of the state to closely control the firms. Consortia established under this law were required to submit a report of their activities including a list of prices, volume of sales, and output in relation to capacity, annually to the Ministry of Corporations. This would allow the ministry to evaluate to what extent a consortium was achieving its objectives. The Ministry of Corporations was empowered to obtain at any time from the consortium or from its individual members all the technical or economic data regulating the activities of an individual firm in its relations with the consortium. The Ministry of Corporations would also examine the activities of consortia as these may affect national interests, or require that consortia modify their policies. The complex institutional building created by the two laws had a weak point: neither the law of 1932 nor that of 1937 defined which practices were considered contrary to national interests, nor was any serious attempt made to establish a special administrative body under the Ministry of Corporations to investigate consortia activities. State control of consortia existed only in theory, and the Consortia Board established under the Ministry of Corporations confined its activities to the collection and filing of consortia agreements and declarations submitted periodically by consortia on the subject of prices, production quotas, etc. The Consortia Board never verified the statements made in such declarations.16 In the memoirs of one of the most important fascist technocrats, Felice Guarneri, the real influence of those decisions is exemplified. Guarneri affirmed that nobody in the Ministry of Corporations looked at the huge amount of information received from the consortia. At a certain point the ministry feared that the Consortia Board could be flooded by these documents. So when the bill was approved by parliament, the ministry decided to exclude the voluntary consortia whose activities did not affect production or national markets from those obligations.17 The only information provided by the board was that in 1937 there were in Italy 279 industrial consortia (or cartels): 46 in the metallurgical sector, 36 in the food industry, 34 in the chemical, 11 in the textile industries, etc. without any details about their internal rules, their quota and prices policies.18 The role of the state as coordinator and supreme judge of any economic behavior was thus formally exhalted. As stated in The Economist in 1935, greater state involvement in the economic activity 16 “Ministero per la Costituente, Sotto Commissione Economica,” Industria (Rome: Camera dei Deputati, 1947), 228–229. 17 Guarneri, Battaglie economiche, vol. I, 286–287. 18 G. Scagnetti, Gli enti di privilegio nell’economia italiana (Padua: Cedam, 1942), 247.

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meant that only weak economic actors, such as small companies, would lose from greater bureaucracy.19 Despite these self-evident limits the Italian government gave much importance to the laws on the consortia. The new Civil Code, which became operative under law 262 of 16 March, 1942, incorporated a special section under title X for the “regulation of Competition and of Consortia.” The most important articles were the following:

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1. any agreement limiting competition must be in writing and cannot be valid for a period exceeding five years, while contracts for the co-ordination of production and trade were limited to a period of ten years; 2. companies granting a legal monopoly over services must observe equal treatment in negotiating with persons requiring such services; 3. practices not in accordance with the principle of professional business ethics or designed to harm the reputation of a competitor constitute unfair competition; 4. contracts limiting production and trade which were entered into between entrepreneurs engaged in the same type of economic activity must specify the quotas assigned to each member or the criteria to be used in determining such quotas; 5. in absence of any agreement to the contrary, a contract limiting production and trade can not be altered without the consent of all the members. Different types of economic culture inspired the text. The predominant was, of course, that of regarding competition as a danger, while the opposite, the agreement to limit competition, was welcomed as an instrument of guarantee for all the economic actors. Competition, wrote Guarneri, must be stopped or limited because it may become destructive. The regulation was thus considered a form of rationalization of the economy, the best way to allocate resources, in relationship with the real capabilities of the domestic and international markets to absorb production.20 It is interesting to note that the same ideas, using different words, can be found in the text of the Encyclic Quadragesimo Anno published by Pope Pious XI in 1931, when he discussed the degeneration of capitalism and the principle of free competition as the economic aspects that needed to be urgently corrected.21 In more economic terms, an economist wrote in 1932 that the ill functioning of the 19 Presenting the new organisation based on the Corporations it wrote that “till now the new corporatist State means only the formation of a new and expensive bureaucracy, from which those industrialist who can spend what they want can obtain what they want, and can adopt the worse forms of monopolies against the small producers, who in this process are crashed” (The Economist, 27 July 1935). 20 Guarneri, Battaglie economiche, vol. I, 273. 21 F. Vito, “La Quadragesimo Anno e i problemi dell’economia moderna,” Rivista internazionale di scienze sociali e discipline ausiliarie (1931), 335.

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economic equilibrium was caused by such factors as “competition, the individualistic spirit and the excess of machinism.”22 This last word, meaning the use of too many machines in the industrial apparatus, was dependant on the old economic crisis theory that stressed the role of overproduction. The struggle against it could not be engaged by using the consortia and certainly not reconsidering the methods used by the luddite movement, but by making specific interventions into the industrial plants. As a result, the bureaucratization of the industrial life in the 1930s also knew better forms and instruments. The economic crisis of 1929 was analyzed by one of the most important Italian economists as a “structural and organic crisis of the liberal economy…but not a crisis of capitalism.”23 But in 1933, the year IRI was founded, the Duce affirmed that “the capitalist mode of production has been overcome and with it also the theory of economic liberalism which explained it and apologized for it.”24 On the one hand the speech by Mussolini opened the doors to the formalization of an economic theory of the Italian “third way” between capitalism and communism; on the other hand offered an official framework to the laws approved in 1932 and 1933, giving enormous power to the state and its bureaucracy to control industrial development. The new intervention on Italian industry passed through laws no. 824 of 16 June 1932 and no. 141 of 12 January 1933. Those laws granted the government the power to authorize the establishment of new industrial plants as well as the enlargement of existing ones. The industrial sectors more affected by the law were the textile and metallurgical ones. The laws were quite severe in their definitions, but as in the other case, such as the consortia, there was always a clear gap between the text of the law and the economic reality of the country. The firm that wanted to enlarge or to establish new plants ought to present the demand to the Inspectorate of its Corporation. But the huge workload those institutions normally had forced the government to ask the Confindustria to make the first analysis of the demands. Then the National Association of the Industrialists transmitted its opinion to the Ministry of Corporations, which asked the corporation to which the firm belonged to express its opinion. The representatives of the workers limited their comments to questions related to trade union activities. The decisive opinion was that of the representatives of the industrialists in the corporation. The time necessary for a firm to receive the final decision regarding its demand was about three to four months: an excellent result by today’s standards, a problem for that period, when the changes in the economic cycle 22 F. Carli, Le crisi economiche e l’ordinamento corporativo della produzione, (Rome: Tipografia del Senato, 1932), 10. 23 G. Arias, “Il significato storico della crisi economica,” Gerarchia, vol. 2, (1931), 482. 24 B. Mussolini, “Discorso al Consiglio nazionale delle Corporazioni,” Rivista di Politica Economica, 23 (1933), 1238.

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needed – especially in the case of a quick enlargement of the plants – an even faster decision-making process. But the productivity of the institution charged with the demands was sometimes very high: the average of forms examined was 50 per day, but there were exceptional days when 120–140 demands were examined. This situation, very strange compared to the normal behavior of the Italian bureaucracy, can be attributed to the intervention of the offices of Confindustria, which were involved in the preparation and first examination of the requests. But in other cases, when a big industrial group presented the request, the minister himself gave his approval through an ad hoc decree. Sometimes formal approval arrived when the new plant or the new section of an old plant had already been completed. For the big industrial groups there were other opportunities. The easy manner in which they could obtain the permission to enlarge their plants did not necessarily mean that they would actually have to build a new plant. Thus the law was also a powerful instrument not only to maintain the equilibrium between the production capabilities of the firms and the capabilities of the market to absorb their products, but also to create a barrier to potential competitors. In fact, when the firm obtained the permission to build a new plant or to enlarge an old one, it was not forced by law to do so. Thus the strategy often followed by the big industrial groups was that of obtaining a series of permits just to prevent the competitors from asking for new plants or the enlargement of existing ones. Even a cursory analysis of the real use of the law shows that in general the enlargement requests were more frequent than those for new plants, but if among the new plants one does not include just the plants belonging to new firms, then the new plants, at least between 1933 and 1941, were always more numerous than the enlargements.25 The bureaucratization of the Italian economy did not affect only the big industries. The small and medium size industries were part of the same phenomenon, but in different ways. In today’s Italy these sectors of the industrial apparatus are considered the more dynamic and efficient. Its importance is generally accepted if not exhalted by economists, both Italian and others.26 Their importance during the Fascist period cannot be neglected either. In 1937 the firms with less than ten employees constituted 84.5 per25 F. Gualerni, La politica industriale fascista (Milan: Vita e Pensiero, 1976). 26 Following the 1991 Census, 26.1 percent of the total employees work in firms 1 to 9 workers, another 15.3 percent in firms 10 to 19 workers, 16.3 percent in firms 20 to 49 workers: i.e. 57.8 percent in firms with less than 50 employees; another 10 percent in firms with less than 100 workers. At the beginning of 1990s the employees firms with less than 250 workers were 71.4 percent of the total in Italy, Germany 37.5, France 47.0, the U.K. 44.5, the U.S.A. 36.6, while in Spain 67.8 and in Japan 74.1 percent (S. Brusco and S. Paba, Per una storia deindistretti industriali italiani dal secondo dopoguerra agli anni novanta, in Storia del capitalismo italiano dal dopoguerra a oggi, ed. Fabrizio Barca (Rome, Donzelli, 1997), 268 and 270).

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232 Luciano Segreto

cent of the total number of firms, but their employees were only 13.9 percent of the total number of people employed. Considering a larger universe (firms with less than fifty or one hundred workers) the percentages change in this way: firms with less than fifty workers were 95.4 percent and those with less than one hundred employees constituted 97.7 percent; the ratio of workers grows to 29 percent and to 40.1 percent respectively.27 These statistics confirm the high level of concentration of the Italian industry during the Fascist regime and the coherent strategy of the government to favor the process of industrial concentration,28 but also the dynamism of a large sector of the Italian economy which only recently has received its due attention by economic and business historians.29 When the first Fascist government came to power there was already an institutional instrument through which small firms could transmit their needs to the political world. In 1919 a Royal decree formed the Comitato Consultivo per le Piccole Industrie (the Consultative Committee for Small Industries). Based on local committees and with a centralized body, its function was essentially to supply suggestions and practical instructions about the more convenient goods to be produced, methods and ways of production.30 By 1925, the government had accelerated the centralization of the decisions concerning small industries by creating through the Royal decree of 8 October 1925 the Ente nazionale per le Piccole Industrie (ENAPI), the National Agency for Small Industries. The Board of the ENAPI was largely formed by representatives of ministries, with a small representation of industrialists and artisans. The main aim of the institution was to promote and develop the economic activity and the technical assistance for the small industries and the handcraft industries. Its activities also included, in a very generic way, the diffusion of the specialized credit for the firms included in the protected category and defined by the law as small industry.31 They decided to eliminate the Italian Institute for the Products of the Small Industries and the National Institute for Credit to Small Industries and Handcrafts, which had existed since 1926, but whose performance was so negative, that the government decided to transform them into a special section of ENAPI. Two large banks, the Banco di Sicilia and the Banco di Napoli, were authorized to take part financially in that section, while the Istituto Nazionale delle 27 ISTAT, Censimento Industriale e Commerciale 1937–1940, Prima Serie, vol. I, Part II (Rome, ISTAT, 1940). 28 A. Cecco and A. D’Andrea, “Piccola e media impresa nella crisi del fascismo,” in Studi storici, XVII (1976), 96. 29 A. Colli, “Piccole imprese e ‘piccole industrie’ in Italia sino al 1945,” Storia d’Italia, Annali 15,L’industria, ed. Franco Amatori, Duccio Bigazzi, Renato Giannetti and Luciano Segreto (Turin, Einaudi, 1999), 757ff.; F. Amatori and A. Colli, Imprese e industria in Italia dall’Unità a oggi (Venice, Marsilio, 1999). 30 Ministero dell’Economia Nazionale, Le piccole industrie. Provvedimenti-NotizieStudi (Rome, Ministero dell’Economia Nazionale, 1925). 31 ENAPI, L’azione per le piccole industrie nel 1928 (Rome, ENAPI, 1928).

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Assicurazioni, the national Institute of Insurance, the state insurance company, and the Banca Nazionale del Lavoro, a semi-official state bank, could intervene to finance consortia between small industries.32 The ENAPI role in supplying credits to the small industries became rapidly one of the most important. The loans awarded between 1928 and 1940 were on average Lire 10 million a year (from about 8 million in 1928 to 11 million in 1937–1940) and the number of firms obtaining these credits grew from 1,210 to more than 6,100, but every year about 20 to 25 percent more firms requested credit than those who actually received a loan.33 In any case these figures represented no more than 1–2 percent of the total of existing small firms in the late 1920s and the 1930s, in other words those with less than ten workers, and even an inferior percentage if one includes firms with less than twenty-five or fifty workers. On the other hand, however, it must be added that without the intervention of ENAPI the problems connected with the credit supply would have been worse than they were at the outbreak of World War II. Before the universal banking crisis in the early 1930s, the structure of the Italian banking system was not prepared to assist small firms in their requests of both short and long-term capital. After the approval of the new banking system law in 1936 the situation changed for the credits to the small industries as well, but only in 1940. In that year an agreement was signed between the ENAPI and the representatives of the national, provincial, and savings banks, which permitted many small firms to have access to the credit system. The decisive role was now played by the provincial banks that were in more direct contact with the firms asking for finance.34 Thus, if granting credit was one of the main tasks of ENAPI, its philosophy was rather to consider the small industries as the best representatives of Italian style (especially in the handcraft sector) and not as an active partner of the industrial structure of the country. This explains why this institution formed a special office for giving suggestions in the fine arts and the decorative arts.35 But by doing so, the government sometimes achieved the opposite of its aim. The paradox was that the creativity of the small entrepreneurs, when coordinated or directed from a central bureaucratic institution, was damaged and not encouraged. But the firms knew very well that if they wanted protection and credits from ENAPI they had to follow its suggestions. A classic Catch 22 situation. A similar approach was taken in order to improve the export of the small industries. From the end of the 1920s, ENAPI organized exhibitions and fairs to promote Italian products, but its powers to choose the firms and 32 ENAPI, L’azione, 7–8; Archives of the Confindustria (Rome), Balella papers, B. 12, file Olivetti. 33 ENAPI, Relazione sull’attività svolta nel 1928 (Rome, ENAPI, 1928); the same official source has been used for the following years until 1940. 34 Archives of the Banca d’Italia (Rome), Fondo Ispettorato Risparmio e Credito, pratiche, b. 95. 35 Confederazione Fascista degli Industriali, Annuario 1937 (Rome, Confederazione Fascista degli Industriali, 1937), 510–515.

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234 Luciano Segreto

sectors to be invited were absolute.36 And the situation became more difficult in the late 1930s after the League of Nations punished Italy with economic sanctions. Exporting was even more important, because it was necessary to acquire foreign currency to import raw materials. Once again the small industries were sacrificed in favor of the larger ones, who could manage to obtain scarce raw materials through Confindustria. The small industries only obtained the inclusion of an article in the agreement between the Confindustria and the Fascist Confederation of Traders saying that the importers of raw stuffs had to sell them to their clients among the small industries at a fair price and on the basis of the quota accorded to them. Confindustria, the representative of the industrialists, and especially of the big industries, had defined the quota.37 The small ones had to wait until the big ones were satiated enough before they could begin to eat. The fascist regime clearly preferred big businesses and did all it could to favor its development. Confindustria played an important role in defining concrete industrial policies and especially the interpretation of the laws regarding consortia, enlargements and/or constructions of plants, as well the distribution of raw materials. Big business was more suitable to permit Fascist Italy to achieve its aims. The rhetoric of the Fascist regime was centered on the construction of an economic, political and military power capable of dialogue (or of confrontation) with the other powers in the international system. Only with a large production of steel, heavy industrial goods, chemical products etc. could that aim be realistic. On the other hand, the problem of social and political consent forced the regime to consider the necessity to develop a specific policy for small firms. The ideology of the regime needed to give a bureaucratic and centralized structure every instrument to govern Italian society, both from the social and from the economic side. But in doing so the results were not always the best ones, because the ideology of the bureaucratization was a terrible constraint for a sector of the economy that was by definition allergic to constrictions and rigid controls. The concrete application of those policies was in reality a perverse mixture of bureaucratic, but only formal controls, interaction between top level employees of the economic ministries and representatives of private big industries without any clear definition of responsibilities and limits of intervention in both directions. The final result was a mentality of personal favors and incorrect behavior by the officials and the high bureaucrats (such as general directors of the ministries) and of request for protection by the industrialists, both large and small ones. Against this mentality the chance of winning was much smaller than the Americans had in the late 1940s and 1950s to convince the Italian government to eliminate restrictive business practices. At any rate, Italy finally approved the antitrust law in 1990, but the fight against that mentality is still going on today. 36 Archives of the Confidustria, Ballela Papers, b. 88, Attività ENAPI 1940. 37 “Agevolazioni per la piccola industria”, L’Organizzazione, 29 July 1937.

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Notes on Contributors

❖ Martin Dean is an applied research scholar at the Center for Advanced Holocaust Studies of the United States Holocaust Memorial Museum in Washington, DC. In 1997 he was awarded the Pearl Resnick Research Fellowship. He was previously senior historian with the Metropolitan Police War Crimes Unit in London and has been involved in the preparation of, and given, evidence in, several Nazi war crimes cases in Australia, Britain, and Germany. His publications include Collaboration in the Holocaust. Crimes of the Local Police in Belorussia and Ukraine, 1941–44 (1999).

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Wilfried Feldenkirchen was born in 1947 in Cologne. His studies were in English language, literature, and economics. He holds the chair of Economic, Social and Business History at the University of ErlangenNuremberg and has published extensively in economic and social history. Gerald D. Feldman was born in 1937 in New York, U.S.A. He teaches history at the University of California in Berkeley. In 2002–3 he was a Humbolt Fellow in Berlin. Among his many books are the recently published Allianz and the German Insurance Business, 1933–1945, “The Deutsche Bank from World War to World Economic Crisis 1914–1933 in The Deutsche Bank 1870–1995 (1995) and The Great Disorder (1993). He is the winner of numerous academic honors and is currently working on a history of Austrian banks during the Nazi period. Neil Forbes is Senior Lecturer in history in the School of International Studies and Law at Coventry University. He teaches nineteenth and twentieth century British and European history and has a special research interest in the international and economic relations of the interwar period. His Doing Business with the Nazis: Britain’s Economic and Financial Relations with Germany 1931–1939 was published in 2000.

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236 Notes on Contributors

Per H. Hansen was born in 1957. He is Professor of Business History at Copenhagen Business School. He has published books and articles on financial history and on the Danish economy during the German occupation. Peter Hayes was born in 1946 and is Professor of History and German, and Theodore Zev Weiss Professor of Holocaust Studies at Northwestern University, Illinois. He is currently preparing From Cooperation to Complicity: Degussa in the Third Reich and Profits and Persecution: German Big Business and the Holocaust. His numerous publications include Industry and Ideology: IG Farben in the Nazi Era (1987). Lars Heide was born in 1950. He is an Associate Professor of Business History at Copenhagen Business School. His field of interest is nineteenth and twentieth century European and North American business history with special reference to the development of information technology.

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Kurt Jacobsen was born in 1954. He is an Associate professor of Business History at Copenhagen Business School and has published widely on Danish business and political history. He is the head of the Centre for Business History. His special interest lies within the history of telecommunications. Christopher Kobrak holds MBA and Ph.D. degrees from Columbia University. He is a Certified Public Accountant with ten years of practical business experience, most of which in the pharmaceutical industry with Sterling Drug Inc., where he held numerous positions including Treasury Director Europe and Africa; Vice President, Sterling Winthrop Japan; and Vice President of Finance, Strategic Resources – Ethical Medicines. Since 1991, he has taught finance in Paris at ESCP-EAP, European School of Management. He is the author of National Cultures and International Competition: The Experience of Schering AG, 1851–1950. Christopher Kopper was born in 1962 in Bergisch Gladbach, Germany. Between 1991 and 2000, he was lecturer at the University of Göttingen and professor for German studies at the University of Minnesota, Minneapolis. He is currently teaching history at the University of Pittsburgh. He is a specialist in banking policy and the author of Zwischen Marktwirtschaft und Dirigismus (1995). Eduard Kub˚u was born in 1951. He is Associate Professor at the Faculty of Arts and Philosophy, Charles University and Assistant Director of the Institute of Economic and Social History. He has published extensively on the modern economic and political history of central Europe, economic nationalism, Czechoslovakian foreign policy, and the history of the Holocaust including “Die Verwaltung von konfisziertem und sequestriertem

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Industrial Capitalism and Political Contraints 237

Vermögen – eine spezifische Kategorie des “Arisierungs-Profits”: Die Kreditanstalt der Deutschen und ihre Abteilung “F”, Geld und Kapital with his fellow authors in Chapter 11. (2001). Jiř´ı Novotn´y is born in 1941. He holds a Ph.D. and is the leading archivist of the Czech National Bank. He is the author of numerous works on modern Czech banking history, general business history, and aryanization, including several studies with his co-authors in Chapter 11. Luciano Segreto is the Chairman of the History department of the University of Florence. His main teaching and research interests are economic history and the history of economic relations. He has published numerous books and articles in Italian and English on Italian and European economic and business history issues including Marte e Mercurio. Industria bellica e sviluppo economico in Italia 1861–1940. He serves on the boards of Enterprise and Society, Studi Storici, and Passato e Presente. Jiř´ı Šouša is born in 1952. He is Associate Professor in the Faculty of Arts and Philosophy, Department of Auxiliary Historical Sciences and Archival Studies, Charles University. He is the author of many studies of modern Czech banking history, agrarian history, the history of management, and aryanization.

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Mira Wilkins is Professor of Economics and Business History at Florida International University. She is an authority on the history of foreign investments and on multinational companies and she has published widely in the field. Her latest book is The History of Foreign Investment in the United States, 1914–1945 (forthcoming 2004). Jana Wüstenhagen was born in 1968. She studied history, Spanish literature and linguistics in Halle, Germany and Barcelona, Spain. She is a lecturer in the department of history at the Martin-Luther University, HalleWittenberg. Her publications include books and articles on European integration, East German foreign policy, the two German states during the Cold War, and the strategies of German pharmaceutical companies in Latin America.

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Zenoff, D., and J. Zwick. International Financial Management, Englewood Cliff, N.J., 1969. Ziegler, P. The Sixth Great Power. London: Collins, 1988. Zuccotti, S. Under his Very Windows. The Vatican and the Holocaust in Italy. New Haven and London: Yale University Press, 2002.

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Index

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❖ A Accepting Houses Committee 200 Agrippinia corporation 60 Albert, Dr Heinrich 31 Allgefeuer 53 Allgemeine Deutsche Credit-Anstalt 215 Allgemeinen Feuerassekranz AG. See Allgefeuer Alliance Assurance Company Ltd 212 alliances. See German-Italian Axis Allianz Insurance Company 42 battle for Phönix Insurance 46, 47, 49 insurers’ wartime collaboration 52, 55, 57, 58 Allianz Life 49 Allied Chemical 29 alphanumerical punch card machines 165, 169 Dehomag’s project delayed 161 Alzheimer, Alois 42, 44 insurers’ wartime collaboration 51–61 America. See United States American IG Chemical Corporation 26, 28, 29 American Jewish Congress 204 Anglo-Czechoslovak and Prague Credit Bank 208, 214–16, 222 agency in New York 215 German occupation repercussions 215–16 significant Jewish shareholding 214, 215 subsidiaries taken over by Germans 216 Anglo-Persian Oil Company 203 Anglo-Pragobanka. See AngloCzechoslovak and Prague Credit Bank

anti-Semitism “Association for Defense against AntiSemitism” 114 in carbon black industry 76 in industrial relations 17 in insurance business 43–44 measures against Jewish economic life 105–8, 202 negative effect on German business 16 response by MNEs 37 antitrust laws, proposed by ECA 224, 234 appeasement of Nazi regime, British business accused 195 Arbeitsgruppe Argentinien 98 Argentina confiscation of German property 96–98 massive economic problems 97 moves against German subsidiaries 96 Schering Argentina 81–102 trade with Germany 83–84 armaments production 209–11 Nazi use of punch card technology 164 Aryanization 24, 30n companies protected by Jewish owners 213 implications for Jewish business owners 103, 104, 106–7, 115–18, 120 in insurance 50, 60 Petschek interests 217, 218, 219 Ärztlich-Technischen Industrie AG Prag 142 assets of MNEs, blocked in Germany 27, 30

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250 Index

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protection of German assets abroad 91 transfer of industrial assets abroad 85 Assicuranzioni Generali. See Generali Association for the Coverage of Large Risks 54–55, 60 Auer. See Auergesellschaft Auergesellschaft (also known as Degea) 66, 73 August Wegelin AG 64, 66–68, 73 Auschwitz, forced labour for carbon black factory 70 Austria Anschluss 48–49 Germanizing Austrian insurers 51 insurance business 45–51 autarchy clash with global approach of MNEs 35, 38 Dehomag under the Nazi regime 157–62 Nazi regime 8, 16, 30 premium on technological progress 36 authoritarianism attractive to German businesses 6–9, 12–13 redefined in twentieth century 9 See also dictatorship “Axis Replacement Program” 82 B Baerwind, Ernst 63 alliance with tire manufacturers 69, 76 coping with Eckell’s demands 71–72, 74 Banca Nazionale del Lavoro 233 Banco di Napoli 232 Banco di Sicilia 232 Bank of England 200 Bank for International Settlements 11, 200 banking City of London business with Germany 195, 201 uncertainties about German economy 198–99 Baroncini, Gino 43 Barrell, Emil 33–34 Bat’a 207, 208, 213–14 army orders for Third Reich 214 international expansion 213–14 share capital to Switzerland 213, 214 Bat’a, Jan Antonín 214

accused of collaboration 220–21 Bat’a, Tomás senior 213 Bat’aová, Marie 214 Bayerische Stickstoffwerke 73 Behn, Sosthenes 29 Berghütte Ost 134 BERI. See Business Environment Risk Intelligence Berlimed SRL, renamed Schering Argentina SRL 99 Berliner, Wilhelm 45, 46, 47, 50 Bertsch, Walter 210, 216 bicycle parts business, owners’ emigration/deportation 118–19 Black, Edwin, IBM and the Holocaust 149–50, 171–72 Borner, Wilhelm 98 Brest-Litovsk, Treaty 127 British financial interests, threatened by Nazi policies 194 British insurance, German and Italian aspirations 54, 58 British Overseas Bank 196 British Short-Term Creditors 200 British-Dutch multinational enterprise 25, 28–29 Brugger, G. 96 Bull company 158, 168 Bull punch card machines 168, 169, 171 bureaucratization, Italy’s economic life 228, 230–32, 234 Busemann, Ernst 63, 76, 77 concerns over CK3 66, 67 financial requirements of partnership 70 pressures of the Nazi regime 76, 77 purchase of August Wegelin AG 64 business environment, apparent stability of Third Reich 202 Business Environment Risk Intelligence (BERI) 5 business history x, 3–21 business leaders, decision making, judgement and risk 194–205 business risk. See political risk C camouflage of business activities. See cloaking capital at risk in Germany 194 “Capital Flight Tax” (Reichsfluchtsteuer) 105, 114, 116, 117, 118, 120

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Index 251 capital markets, Nazi control 17–18 capital transfer abroad by Jewish businesses 103–21 case studies of attempts 111–19 from Czech lands 208 strategies used 108–10 carbon black alternative raw materials and sources 64 CK3 from napthalene 65, 66–67, 68 CK4 from anthracene residues 70, 74 German indecision over choice of process 67–68 proposals for a third CK3/4 plant 74 Reich demands for increased output 74–75 cartels 8 contrasting opinions 223, 224, 226 formed following crisis of 1929 225–26 in Italian economic structure 224–25 See also consortia Chamber of Industry and Commerce, and Jewish businessmen 104, 112, 113, 120 Cheape, Charles 35 Chemical and Pharmaceutical Enterprises Ltd. (Chepha) 90 Chemnyco 28, 34 CHEPHA. See Chemical and Pharmaceutical Enterprises Ltd. China GNTC cable link 176 GNTC concession 179, 180 Japan-Shanghai cable 180 relations with Japan impacting on GNTC 184 Ciba (Basle) 90 CK3. See carbon black from napthalene CK4. See carbon black from anthracene residues cloaking 27, 29, 36 Munich Re and Generali in Poland 58–59 of Munich Re operations 42 Schering’s operations 88–96, 92, 93, 94 Swiss cloaking of German insurers 60 clothing manufacturers, capital transfer through British branch 115–18 coal industry Prague Petschek family 216 Ústí Petschek empire 218–20

Cologne Re 42, 55 Commercial Union Assurance Company Ltd. 58 communications products, Siemens in Czechoslovakia 141–43 competition limitation, Italian economic policy 229 Comptoir des Textiles Artificielles 224 concentration camps, forced labour 70 Confindustria, and consortia 227–28, 230, 231, 234 consortia powers of the state 227 provision for “voluntary” consortia 228 redefinition of cartels 226 state control and coordination 228–29 See also cartels Consultative Committee for Small Industries 232 Continental-Krupp, carbon black project 67, 68, 69, 76 Corn Products Refining Company 30 Corporazioni 227 country risk. See political risk Courtaulds 224 Creditanstalt 46, 47, 48, 49, 50 crisis of 1929 225 Croatia, insurance 58 currency control blocking of accounts 103, 106 German restrictions on Jews 103–21 Nazi occupation 208 transfer restrictions and levy 105–6 Czech Trading Company 217 Czechoslovak Arms Concern Brno 215 Czechoslovak Arms Works Brno 209–10 Czechoslovakia menace of Nazi Germany 208 multinationals in a Czech context 206–22 state economic nationalism 208 D D11 tabulator 158, 170 alphabetic version delayed 161, 170 DAF. See Nazi Labor Front debt, British long-term loans to Germany 201–2 Degea AG (also known as Auergesellschaft), subsidiary of Degussa 66, 73

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252 Index Degussa 1936 agreement with rubber firms 68–69 and carbon black 62–77 construction of factory for CK4 70–71 enmeshed in criminality of Nazi regime 62, 70–77 progressive loss of control 76–77 Dehomag 32–33, 37 accused of disloyalty to Germany 169–70 collapse and recovery 154–57 conduct during World War II 172–73 developing tabulator resembling IBM 165 in enemy company custodianship 168 and government punch card industry 168–71 growth due to German rearmament 159 increasing turnover in World War II 167–68 relations with the Third Reich 149–73 rising employment 157t stressing company’s “Germanness” 158 strong customer base 152 technical progress 156, 161 turnover 156, 156t under custodian control in World War I 153 and Wanderer-Werke 170–71 World War II demand for punch cards 162 Denmark German invasion 189 GNTC cable link 176 Deutsch-Amerikanische PetroleumGesellschaft (DAPG) 32 Deutsche Gold- und SilberScheideanstalt vormals Roessler AG. See Degussa Deutsche Hollerith Maschinen Gesellschaft m.b.H. See Dehomag Devisenstellen, Nazi currency offices 104, 109, 111–13, 119, 120 dictatorship British business dealing with Third Reich 194–205 definition and distinguishing features 9, 24, 36 Dehomag under the Nazi regime

157–62 government intervention and political risk 10 and multinational enterprise 22–38, 149–73 See also authoritarianism DINIE, administering Schering Argentina 97–100 Dirección Nacional de Industrias del Estado. See DINIE Dnjeprostroj power plant 132 domestic political risk. See political risk Dortmund carbon black plant 68–73, 75 doubts about further expansion 76 new factory development 70–71 dumping by Germany, concerns in United States 34 Dunlop Rubber Company 203 Dutch multinational enterprise 36 Dutch-British multinational enterprise 25, 28–29 DVP. See German Peoples’ Party E Eastern Europe, Siemens electrical engineering 122–45 ECA antitrust laws 224, 234 elimination of restrictive business practice 223 Eckell, Johannes appointed to Raw Materials office 63, 67, 68 concern to commission Dortmund factory 71, 72 pressure for increased production 73, 74, 75 economic growth productivity 224 U.S. proposals for postwar recovery 224 economic relations, British/German interdependence 195 economic risk, faced by international creditors 199 The Economist, risk evaluation 5 economy, interaction with politics 81–82 electrical engineering German exports 124 Siemens in Eastern Europe 122–45 Elektrotechna AG (Prague) 141–43 emigration, coercion of Jews 107

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employment, Nazi drive for full employment 157 ENAPI 232, 233 Enskilada 90 Ente nazionale per le Piccole Industrie. See ENAPI Ernergibau Ost 134 Erste Allgemeine Unfall 43, 51–52, 58 European Cooperation Administration. See ECA F Farben, IG. See IG Farben Fascists, enmeshing insurance companies 59–61 Federer, Oskar 213 Feldman, Gerald 27 Finck, Wilhelm von 42 Flick, Friedrich 217, 219 Flight tax 105, 114, 116, 117, 118, 120 “Florjanka” Company 59 La Foncière 44 Ford, Edsel 26 Ford Motor Company 25, 26, 37n substituting domestic parts for imports 30–33 technology transfer 35 foreign assets, blocked in Germany 27, 30 foreign currency, German restrictions on Jews 103–21 foreign direct investment 10, 11 foreign exchange concerns over German dumping 34 Germany’s “New Plan” 83 post World War I changes 11 restrictions 17–18, 27–35, 37–38 restrictions on profits of MNEs 28–29 Schering’s success with bureaucracy 85–87, 91 special status for insurers 42, 52 transfer of interest 202 Foreign Investments and Invention Company Ltd. See Forinvent Forinvent. 90, 91, 93, 94 France insurance industry 56–58 multinational enterprise 36 Fraser, Lionel 197 Friedrich Flicks Mittelstahl-Werke 217 Frigessi de Rattalma, Arnoldo 44, 45n, 46, 48, 51 insurers’ wartime collaboration 52–61

response to the Anschluss 49 G GAF. See General Aniline and Film General Aniline and Film (GAF) 28, 29 General Motors 25, 35 Generali 42, 43–44 battle for Phönix 45–51 insurers’ wartime collaboration 51–61 Generali-Port-Polonia Insurance Company 59 Gentilli, Camillo 49, 51 German Mining and Furnace Construction Company 134 German multinational enterprise 24–29, 34–38 German Peoples’ Party (DVP), coalition with Social Democrats 15 German-Italian Axis “Axis Replacement Program” 82 relationship of insurers 41–61 German-Italian Insurance Committee 57 German-Russian economic agreement, “Special business 1935” 130–31 Germany business home country risk 6–9, 10–13 post-war recovery 18 electrical industry 123–24, 126 foreign trade 123, 124 blockade of exports to Poland 137 exports 124–26 with USSR 130, 130t, 133t National Socialism. See Nazi regime Nazi regime. See Nazi regime Germany (West), postwar economic recovery 97 Gesellschaft für elektrische Apparate 142 Gesellschaft für industrielle Beteiligungen m.b.H. 212 Gestapo reports on Jewish businessmen 104 GIBET 212 global. See also international global telecommunications foreign relations issues 179–80 GNTC’s operations broken apart 189 government interest and intervention 192 Japan’s link 177 national security issues 179, 186, 189, 190

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254 Index globalization, absence of consensus 19, 20 GM. See General Motors GNTC accusations of espionage 186, 189 on both sides of blockade of Russia 181–82 concession from Soviet Russia 182, 183, 187 end of operations in Japan 189 Japanese and Russian host countries compared 177–78, 190–93 “Lex GNTC” exceptional status in Russia 183 Nagasaki cable link 176–78, 179, 180, 189 negotiations with Japan and China 184–85 origins and early expansion 176–77 political neutrality 175, 179, 193 preserving business with USSR and Japan 174–93 replacement of Danish employees by Russian 186–87 Shanghai office under Japanese offensive 188–89 tensions over Japanese concessions 179–81 Trans-Siberian link 177, 181–82, 186, 191 Göring, Albert 211 Göring, Hermann 16, 63, 74, 170 and Bat’a 214 Hermann-Göring-Werke 74 and Petschek interests 217, 219 and Skoda Works 210 and Vítkovice group 212 winning internal power struggle 201 See also Reichswerke AG Hermann Göring Görz, Hermann 128 government intervention. See state intervention Great Depression 195–96 anticipation of German recovery 197–98 Great Northern Telegraph Company. See GNTC Greece, insurance 56, 58 Guarneri, Felice 228 Guenther Wagner 99 Guttmann (Vienna) 211, 212

H Haase, Alfred 52 Haavara-Transfer agreement 109 Hahn & Kolb 111 Hartenstein, Hans 89, 94 Heidinger, Willy demand for dividends 159 dual allegiances 172, 173–74 improving position with IBM 153, 161 manager of Dehomag 149, 150, 151–52, 158 regaining control of Dehomag 168 strengths and flaws 155–56 Helbert, Wagg & Co. 197 Helvetia 60 Hermann-Göring-Werke 74 See also Reichswerke AG Hermann Göring Hess, Hans 46 Hilgard, Eduard 46, 57 history. See business history Hitler, Adolf appointed Chancellor 15 appointing businessmen to high office 198–99 relations with the unions 15 Hoffman-La Roche 25, 33 on both sides in war 34 Hollerith, Herman 151 Holocaust, accusations of IBM and Dehomag complicity 171–72 Hromádko, Vilém 211 I IBM 24, 29, 33 assigning autonomy to host nationals 155 on both sides in war 36–37 conduct during World War II 172–73 German relations maintained 167 IBM 405 tabulator 165 leasing contracts 167–68 relations with the Third Reich 149–73 restructuring 32 technology transfer 35 technology used by Third Reich 172 Ideuka (tire manufacturers) 68 IG Chemie 29 IG Farben 16, 24, 25–26 in Argentina 84 cloaking link with U.S. 36

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Index 255 concerns over foreign exchange 28, 29, 34 link with Petschek mines 217 process for carbon black 67, 71, 72 restructuring 32 technology transfer 35 Ilgner, Max 25 import substitution policy 16 industries, small and medium-sized 231, 232, 233, 234 Consultative Committee 232 National Agency 232 industry-specific risk 5 Institute of Insurance (Italian) 233 insurers insuring facilities in internment camps 59, 60 multinational, within German-Italian Axis 41–61 international. See also global International Business Machines Corporation. See IBM international firms. See multinational enterprise International Harvester 28 international regulatory bodies, politically unpopular 18, 19 International Telegraph Convention 187 International Telephone & Telegraph 25, 29 Internationale Unfall- und Schadensversicherung Gesellschaft 44 internationalism, and nationalism, recurring economic issues 18–21 Interunfall 52–53, 58 investment inward MNEs 22–38 Nazi control over capital markets 17–18 outward MNEs 22–30, 35–38 over investment in German industry 14 See also foreign direct investment; foreign investment inward multinational enterprise 22–38 IRI (Istituto per la Ricostruzione Industriale) 224–25, 226, 230 iron and steel production 211–13 Istituto Nazionale delle Assicurazioni 55, 232–33 Istituto per la Ricostruzione Industriale. See IRI Italian-German Axis. See German-

Italian Axis Italy banking system 233 and crisis of 1929 225–26, 230 exports 232–34 Fascist regime insurance companies 59–61 preferring big business 234 restrictive business practices 225 Ministry of Corporations 230 Consortia Board 228 Parliament, cartels/consortia legislation 226–27, 229 the “third way” economic theory 230 Trieste becoming Italian 45 ITT. See International Telephone & Telegraph J Japan dependence on GNTC telecommunications 176–78 expansionism and changes for GNTC 179–81, 188, 190 “Fundamentals of National Policy” 188 GNTC’s attempt to preserve position 174–93 negotiating terms with GNTC 180 offensive against GNTC 188–89 relations with China impacting on GNTC 184 Jewish Boycott Council 204 Jewish Labour Committee 204 Jews accounts blocked 103, 106, 118 Argentina and Judenpolitik 84 boycotts 202 coerced emigration 107 confiscation of assets 60, 107, 113, 202, 219–20 currency restrictions 103–21 Degussa’s Jewish employees 76 denaturalization 107, 113, 114 Haavara-Transfer Agreement 109 “illegal” actions by businessmen 104–5 in insurance 42–43, 47, 50 progression of persecution 119–20 “Punitive Tax” on Jewish property 106, 120 registration of all property 117 transferring capital 103–21

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256 Index K Kalscheuren carbon black plant 65, 66, 67, 73–74, 75 Kehrl, Hans 210, 212 Kirov, Sergei, assassination impacting on GNTC 185 Kisskalt, Wilhelm 42, 46, 51 Klöpfer, Harry 65, 66 Korea, GNTC cable link 176 Kovno power plant 131 Krakow-Plaszow forced labour camp 59 Krassin, Leonid 127–28 Kristallnacht 105, 106, 107 Krupp, Continental-Krupp carbon black project 67, 68, 69 Kura River dam 131

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L Laboratorio Químico Biológico SA 96, 99 Labowsky & Co. 118 Labowsky, Walter 119 Latin America, U.S. “Axis Replacement Program” 82 Leader AG 213 League of Nations 11, 234 Lee, Ivy 26 Leeuw, Sally de 119 Lenin, Vladimir Ilyich Ulyanov 182 Leseleuc 58 Lidbury, Charles 201 Lloyd’s of London 53–54 Löb, Fritz 67, 71 London Conference, 1931 199 M machine tool products 211 machinism, and overproduction 230 McKenna, Reginald 201 manpower allocation, Nazi use of IBM technology 164 Marchesano, Enrico 44, 53, 54 market assessment, carbon black industry 62–77 Marshall Plan 224 Mattfeld, Gustav 42, 46 Merck Chemische Fabrik 99, 101 Meuschel, Walter 42, 49 Milch, Erich 163 MNEs. See multinational enterprises Moffett, George Monroe 30 Moldavia-Generali 52

Montecatini 224 Morgenthau, Henry 34n Morpurgo, Edgardo 43, 47, 49, 50 Moscow subway 132 MTT (Manchuoko telegraph company) 187 multinational enterprises assets blocked in Germany 27, 30 bargaining power 38 on both sides in war 32, 34, 36–37 British firms supplying Germany 203–5 concern over power 19 Czech firms under Nazi threat 206–22 defined 22–23 and dictatorship 23–24, 37 electrical engineering 122–45 foreign employees in host nation 191 foreign exchange restrictions 27–35, 37–38 foreign firms in Germany 25–26, 28–32, 35–38 foreign firms in host nation 150 German acquisition of territory 22, 36 insurers 41–61 manipulation within Germany 38 in Nazi Germany 171–73 pharmaceuticals in Argentina 81–102 political boundary changes 23 political entanglement 25–26 recurring economic issues 20 relations between HQ and subsidiary 149–73 restructuring 32, 36 staff loyalty and alinement 37 substituting domestic output for imports 30–32, 33 and technology transfer 34–38, 150 telecommunications 174–93 Münchener LebensversicherungsAnsalt A.G. 44 Munich agreement and Czech companies 208, 209, 215 impact on SEAG 143 Munich Re 27, 41–42 battle for Phönix Insurance 45–51 insurers’ wartime collaboration 51–61 Munich Reinsurance Company. See Munich Re Murnane, George 29 Mussolini, Benito 43–44, 55, 59, 230

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Index 257 N Nagasaki link for Shanghai/Vladivostok cable 177–78, 179, 180, 184–85, 189 Nagasaki/Shanghai cable 184 National Agency for Small Industries (ENAPI) 232 National Cash Register 37n National Czechoslovak Bank 214 National Fascist Federation of Insurance Companies 57 National Socialism in Germany. See Nazi regime National Socialist Workers’ Party (NSDAP) 82 Auslandsorganisation 91, 92–93, 94 using punch cards for records 159 nationalism, anti-foreign sentiments in Germany 30 nationalization, insurance industry opposition 56 Nazi Labor Front (DAF) 17 Nazi regime balancing exports and domestic demand 125–26 business concerns and reactions 15–18, 76 currency offices 104, 109, 111–13, 119, 120 economic policies 16–18, 30 effect on companies and multinationals 100–102 enmeshing insurance companies 59–61 expansionist policy 70 Four Year Plan 201 import controls 157 industrial relations 15, 17 intervention in carbon black industry 62–77 measures against Jewish economic life 105–8, 119–20 MNEs in Germany 25–26, 28–32, 35–38 politics of “Lebensraum” 16 progression of persecution of Jews 119–21 protection of assets abroad 91 punch cards for information management 162–67 Raw Materials office 67, 71, 72 Reich Export Office “black list” 119 Reichsstelle für Chemie 91

Schering’s cloaking strategy 91 support for Degussa 65 trade with Argentina 83–84 Netherlands, multinational enterprise 25, 28–29, 37 Neurath, Konstantin von 213 neutrality. See political neutrality Nordstern 55 Norman, Montagu 195, 200, 201 North British & Mercantile Insurance Company 53 Norton Company, overcoming foreign exchange problems 35 Norway, GNTC cable link 176 nostrification (Czech measure) 207 NSDAP. See National Socialist Workers’ Party O Omnipol 210 Opel 25, 31 OSSW. See Siemens Schuckertwerke Austria Österreichische Vericherungs-AG (ÖVAG) 27–28, 48 Ostgesellschaften 134n 135 outward multinaltional enterprise 22–30, 35–38 ÖVAG. See Österreichische Vericherungs-AG over capacity of German industry 14 P Pace Insurance Company 52 paintbrush factory owners, thwarted capital transfer 113–14 Paolini, A. 57 paper mill owners, capital transfer through subsidiary 114–15 Passow, Kurt 165, 168, 169–70 “Patria” Insurance Company 59 Perón, Juan Domingo 97, 99 Perón, María Eva 98 Perry, Sir Percival 26, 31 Petschek and Co. Banking House 217 Petschek family empires 207, 208, 216–20, 221 Prague Petschek family 216–18, 221 neglect of modernization 218 property aryianized 218 Ústí Petscheks 218–20, 222 Petschek, Ignaz 30n 218–20 aryanization of property 219

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258 Index company confiscated 219–20 Petschek, Isidor, heirs of 216–18 Petschek, Julius 29, 30n heirs of 216–18 Petschek, Karl 219 Petschek mines aryanization 217 transferred to German consortium 217 pharmaceutical companies 81–102 Phönix Elementar 45, 46, 48 Phönix Insurance Company battle for the company 45–51 name change to Wiener Allianz 50 Phönix Life 45, 46, 47, 48 Piast 44, 59 Pius XI, Pope, Encyclic Quadragesimo Anno 229 Pjatakoff agreements 130 pogrom on Kristallnacht 105, 107 Poland insurance 58 post World War I independence 136 Siemens’ development 135–39 Polish Cable Works Warsaw 137t, 137–38 Polish Siemens AG 138 political accommodation Degussa/Auer expansion at Kalscheuren 67 Degussa’s guiding principle 63, 64 Schering’s dealings with Nazi regulators 85–86 political neutrality, GNTC’s key principle 175, 179, 193 political risk British business interests in Germany 194–205 in carbon black industry 62–77 emergence of concept 3–5, 10 evaluation criteria 5–6 historical perspective 3–21 home country risk 5, 81, 101 host country risk 5, 81, 101 losing everything in war 204 multinational companies 23, 24, 81–82, 101 offset by “cloaking” 27, 29 Siemens’ Russian business 134t See also economic risk; reputational risk Polnische Siemenswerke Aktiengesellschaft 136

Powers punch card machines 168 Preiss, Jaroslav 212 “principle-agent” problems 23–24, 36 La Protectrice Accidents 44 La Protectrice Vie 44 Prudential Assurance Company 196 punch card business evolution and development 151 expansion of applications 159–60 German-controlled industry established 168, 169 important to German rearmament 159 a tool in World War I 152 punch card technology essential to Nazi regime 162–67 progress from numerical to alphanumerical 160–62, 165 trials for a national register in Germany 165–67 “Punitive Tax” on Jewish Property 106, 120 Q Químca Schering SA. See Schering Argentina R Radiotechna AG 142 Rappallo treaties (Germany and USSR) 129 RAS (Riunione Adriatica di Sicurta). See Riunione Adriatica Rasche, Karl 210, 213 rearmament of Nazi regime 203 British business accused 195 Reich Group Insurance 57 Reichsbank 200, 201 Reichswerke AG Hermann Göring 16, 17, 52 and Skoda Works 210 and Vítkovice group 212, 213 See also Hermann-Göring-Werke Reid, Edward 200 Reininghaus, Eberhard von 47, 50, 54, 55 reputational risk 204 restrictive business practice, in Italy 223, 224, 225, 234 risk. See economic risk; industryspecific risk; political risk; reputational risk Risque Politique, risk evaluation 5

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Riunione Adriatica 42–45 battle for Phönix Insurance 45–51 insurers’ wartime collaboration 51–61 Riunione Adriatica di Sicurta (RAS). See Riunione Adriatica Rochette, Christophe 209 Rohrer, Herbert 84–85, 87, 89 Roosevelt, Franklin Delano 223 Rothschild, Eugen 212 Rothschild family 6n 221 Rothschild, N.M. & Sons 202, 203, 212 Rothschild (Vienna) 211 Rottke, Hermann 159 royalties, precipitating Dehomag insolvency 154 rubber companies, agreement with Degussa 68–69 Russia dependant on GNTC 176–78 See also USSR Russwerke Dortmund 68, 69, 73 doubts about further expansion 76 new factory development 70–71 Reich-guaranteed loan 72–73 using forced labour 70 S S&W. See Siemens & Halske Sapac 34 SBU. See Siemens-Bauunion Schacht, Hjalmar 48, 65, 83, 199–200, 201 Schering AG cloaking 94 foreign currency earnings 93 foreign subsidiaries’ profits 89 new plants in Latin America 84–85 strategy under Nazi regime 37n 100 Schering Argentina in the 1930s 83–88 administered by DINIE 97–100 Argentine government control 94–96, 100 auctioned 99 investment and development 88 political risk 100–102 production problems 84 takeover as enemy property 96–97 Schering Corporation, New Jersey 90 Schloessmann, Rudolf 46 Schlosser, Hermann 64, 65, 66, 74 alliance with rubber consortium 69, 76

background 63 Schmitt, Kurt 42, 49, 51–61 Minister of Economics 199 Schmitt-Polex, Hans 50 Schneider et Cié (Creusot) 209 Schnitzler, George von 25, 26 Schønebeck, Alfred 174, 182, 183, 193 Schroder 28, 203 Schuschnigg, Kurt 47 Schweizerische Bankverein 90 screw manufacturing business, failure to transfer capital 111–13 SEAG. See Siemens ElektrizitätsAktiengesellschaft Krakau SEBH. See Society for European Business History Securitas-Prague 52 Selck, Erwin 25 Shannon hydroelectric power plant 132 shoe production 213–14 Siemens adapting to prevailing situations 144–45 in Eastern Europe 122–45 growth due to German rearmament 159 state control in USSR 126–27 up to outbreak of World War II 122–26 Siemens & Halske (S&W) 122, 128 Czechoslovakian business 139, 141, 142 Polish business 135–39 Polish Cable Works agreements 137–38 rebuilding Russian business 128–33 “Technical Office East” (TB Ost) 128, 131t, 132t 133–34, 135 Siemens Argentina 96 Siemens Elektrizitäts-Aktiengesellschaft Krakau (SEAG) 138 annual profit of SEAG Prague 140t favorable development 140–41 orders and sales 143t Siemens Schuckertwerke Austria (OSSW) 139–40 Czechoslovakian sales 141 Siemens Schuckertwerke Berlin (SSW) 122, 130 Czechoslovakian business 139–44 reconstruction in Ukraine 134 Siemens Ukraine GmbH Kiev 135 Siemens-Bauunion (SBU) 139

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260 Index decline in orders 133–34 Moscow subway 132 USSR heavy industry 133 Siemens-Kabelgemeinschaft 137 Siemens-Schuckert AG state control in USSR 126–27 in USSR 126–35 Sinclair Oil 28 SKF 25, 33 Škoda, Karel 208–9 Škoda Works 207, 208–11, 221 foreign subsidiaries 210 under German administration 210–11 SNIA Viscosa 224 Social Democrats, coalition with German Peoples’ Party 15 Society for European Business History (SEBH) ix Soviet Union. See USSR Speer, Albert 163–66, 169, 170 SSW. See Siemens Schuckertwerke Städtische 48 Stalin, Joseph 192 Standard Oil of New Jersey 29, 32, 37 Standstill Agreement 199, 200, 203 state intervention as entrepreneur 224–25, 226 in Italian industry 230–32 steel industry 16 Studiengesellschaft für privatrechtliche Auslandsinteressen e.V. 98, 99, 100, 101 Sudetenland annexation, impact on SEAG 143 Sulfina, Michaele 43–44, 49, 61 Suvich, Fulvio de 44, 53 Sweden GNTC cable link 176 multinational enterprise 25, 33 Swiss holding company, cloaking Shering’s subsidiaries 88–96 Swiss Reinsurance Company 42, 54, 55, 60 Switzerland insurance business 42, 60 multinational enterprise 25, 33 T Tabulating Machine Company 151, 153, 155 Taiwan, Japanese cable link 179 tariffs, protective 8 taxation, MNE avoidance techniques 27

TB Ost. See Siemens & Halsk, “Technical Office East” Technische Industrie AG (TIAG) 142 technology transfer 34–38, 150 telecommunications American Commercial Pacific Cable Company 178 Eastern and Associated Companies 178 GNTC’s business with USSR and Japan 174–93 GNTC’s operations broken apart 189 MTT (Japanese telegraph company) 187 Pacific Joint Purse Agreement 178, 184 USSR and Japan’s aim of state management 190 Telegraphen-Bauanstalt von Siemens & Halske 122 Thieme, Carl von 42 Third Reich. See Nazi regime TIAG. See Technische Industrie AG Tiarks, Frank 200, 201 tire manufacturers agreement with Degussa 68–69 Ideuka consortium 68 outmaneuvered by Reich 75 requirement for carbon black 64–77 Todt, Fritz 163 Todt Organization 134 Tolle, Heinrich 153 trademarks and patents (German), Argentina’s confiscation 98–99, 100 Trans-Siberian cable link 177, 181–82 transnational firms. See multinational enterprise Transpharm AG 94 Trieste insurance business 42 becoming Italian 45 U Ukraine, Siemens orders for reconstruction 134 Unilever 25, 28, 204 Union Bank of Scotland 196 Union Reinsurance Company 42 Union of Soviet Socialist Republics. See USSR United Continental Corporation, New York 217 United Kingdom multinational

European Business, Dictatorship, and Political Risk, 1920-1945, Berghahn Books, Incorporated, 2004. ProQuest Ebook Central,

Copyright © 2004. Berghahn Books, Incorporated. All rights reserved.

Index 261 enterprise 28 United Kingdom-Netherlands multinational enterprise 25, 28–29 United States interpretation of Italian economic culture 224–25 multinational enterprise 24–26, 28–33, 35–38 post World War II European policy 223 production of carbon black 64 U.S.-German Treaty of Friendship, Commerce and Navigation (1923) 38 Ussing, Alf 183 USSR German-Russian economic agreement 130–31 GNTC’s attempt to preserve its position 174–93 GNTC’s diplomacy after Revolution 181–82 GNTC’s strained relations with Soviet Union 185–87 Gosplan (Supreme Soviet planning commission) 174, 183, 193 government take over of Siemens 127 industrialization 174 isolationism and actions against GNTC 190 NKVD surveillance of GNTC 185, 186 relations between GNTC and Soviet Russia 182–83 reopening telegraph links 182 Russian “socialization” of Siemens’ facilities 127 Siemens consulting office 131–32 Siemens’ development 126–35 See also Russia V Valdštein Machine-Tool Shop 208 Vambersk´y, Adolf 211 Vereignite Glenzstoff Fabrik 224 Versailles, Treaty 123, 124 Vickers-Armstrong 204 Vienna Guttmann 211, 212 insurance business 43 Rothschild 211 Vítovice Mining and Smelting Corporation 208, 211–13, 221–22

managed by Commissioner for Enemy Property 212 protected from aryanization 213 Voigt, Hermann 168 Volksgemeinschaft 17 Volkswagen 17, 73 Volpi di Misurata, Count 43–44, 51, 52 Voss, Wilhelm 210 W Wanderer-Werke AG under contract to German army 169 up against existing patents 169 Warsaw Insurance Co. 59 Watson, Thomas John, Sr 151, 155, 172 problem of Dehomag’s royalty payments 154–55 returning a German decoration 36–37, 168 Wegelin. See August Wegelin AG Weimar Republic British capital investments 195–96, 197 German business 12–15 industrial relations 13–15 Weydenhammer, Rudolf 52 Wiener Allianz 50, 51 See also Phönix Insurance Company Wilcke, Gerhard 89, 94 William Deacon’s Bank 196, 203 Williams, Robert Neil 151 Winterschall AG 217 Wirtschaftsgruppe Chemische Industrie 85, 86, 87 World War I aftermath and impact 10–12 implications for Dehomag 152 watershed in business affairs 10–12 World War II demand for Dehomag’s punch cards 162 international telegraph system broken apart 189 moves towards postwar recovery 223–34 Y Yugoslavia, insurance 56, 58 Z Zakovsky, Leonid 186 Zemo-Avtshaly hydroelectric plant 131 Živnostenská Bank 217 Zurich, insurance business 42

European Business, Dictatorship, and Political Risk, 1920-1945, Berghahn Books, Incorporated, 2004. ProQuest Ebook Central,

Copyright © 2004. Berghahn Books, Incorporated. All rights reserved. European Business, Dictatorship, and Political Risk, 1920-1945, Berghahn Books, Incorporated, 2004. ProQuest Ebook Central,