Of Course, He Wasn’t Against All Change

While “not Communistic,” Kauffman contended, the economic theory advanced by SCAP was “certainly… not that practiced in our country.” By this process of elimination, Kauffman ultimately decided that SCAP’s economic plans were more “socialistic” than anything else. Kauffman informed his corporate clients that SCAP’s experiment would “distribute the wealth of Japan to the workers, farmers and small traders through the medium of taxes, sales of valuable properties at nominal values, financial assistance, regimentation and regulation.”

Kauffman reassured his readers that he was not, of course, against all change. “Everyone at all familiar with Japan,” he wrote, “would agree that conditions under which agricultural lands were held and farmed needed reformation.”1 It was concerning that “[l]arge tracts were in the hands of absentee landlords and farmed by tenant farmers under leases which together with usurious interest rates on loans to farmers kept the tenants in a continual state of abject poverty.” But he lamented that “[o]wners who paid fair market value for agriculture lands are being required to surrender them for a song” to the government for resale to tenants. And that was not the only indignity inflicted upon Japan’s upper classes without due process.

Kauffman likewise couched his discussion of the zaibatsu with a concession: “Of course the family holding companies should have been dissolved and their hold on Japan’s economic life broken.” What he objected to was “the manner in which this is now being done, i.e. by a purge of a large part of the intelligent and experienced businessmen to be followed by a sale of interest in Japan’s most important industrial, mining and financial enterprises at nominal prices to labor unions and cooperatives.” That approach “makes one wonder whether for Japan and the world the remedy may not prove worse than the disease.” Kauffman claimed that the purge had “stripped” Japan of “older men of ability and experience” to such a degree that “Japanese banks are being run by former cashiers and assistant vice presidents.” Surveying the authorities of the Holding Corporation Liquidation Committee—a group of “Japanese puppets controlled by S.C.A.P.” to carry out the dissolution process—Kauffman concluded that all the rulemaking, report-making, investigations, consideration of reorganization plans, and so on amounted to “bureaucracy carried to the nth degree.” Was it any wonder the “Japanese are beginning to question this kind of democracy which is clearly a rule of men, not law”?

Quoting FEC-230, Kauffman underlined a provision stating that zaibatsu holdings might be disposed of “at a fraction of their real value” to match the “ability to pay” of desired purchasers. “Under such a directive,” Kauffman wrote, “an administrative official with a donative turn of mind could give away much of the wealth of Japan.” Some Japanese were asking themselves whether the real motive was to render Japan “economically impotent.” He was disapproved of privileging agricultural cooperatives as purchasers, because they “have been organized either by rich farmers or leftists for the purpose of… taking advantage of the ignorant farmers.”

“[T]he knife of the economic quack,” he warned, would not be confined to zaibatsu. “Businesses in no way connected with the large family holding companies are to be split up if, by the whim of some bureaucrat in Tokyo operating behind a dummy Japanese committee as a front, they constitute an excessive concentration of economic power.”2 Banks would be arbitrarily broken up! Even licenses to American-owned Japanese patents might be renegotiated or opened up on non-discriminatory terms!

“Guinea Pig” Country, “Hog Wild” Workers

Moreover, while concocting these grand schemes, the occupation government “failed to take advantage of the services of experienced businessmen which have been offered.” Washington bureaucrats, former university instructors, recent college grads, and military officers ran the show instead. In particular, the Antitrust and Cartel Division of the Economic and Scientific Section was run by Edward Welsh, “formerly an assistant professor of economics in Ohio State and thereafter connected with” the Office of Price Administration. His Wall Street connections would know what that meant: Welsh was a New Dealer.

And the military officers were letting the New Dealers run amuck. Again, Kauffman was careful to caveat that the military officers may well have impressive knowledge in their own domains, and been otherwise hardworking and sincere. But they had little business experience. The government thus “accepted the advice of mediocre people and listened to the siren song of a lot of crackpots.” These were the same sort of people who “demanded the abolition of the office of Emperor,” “never doubt[ing] for a moment that they knew what was good for the Japanese.”

Turning Japan into a “guinea pig for a group of radical reformers” was, in his estimation, “nothing short of catastrophic.” Breaking up the zaibatsu was merely cover for their “real purpose” of “socializing Japan.” And “[r]eformers of this kind, as we know, have insatiable appetites for power.”

Kauffman held particular disdain for SCAP’s labor proposals, writing that “[a]s Athena in all her beauty came into this world with Zeus’ forehead so The Labor Standard Law sprang full blown from [the Labor Section leader’s] brain.” Although some changes were laudable, it was unrealistic to “thrust” a collection of rights that embodied “at least all the gains which American workers have won through many years of struggle” onto Japanese laborers who were “unequipped by experience either to understand many of them or to know how to use them.”

Indeed, Japanese laborers, he wrote, had already gone “hog wild.”

How wild was that?

“If you have ever seen an American Indian spending his money shortly after oil has been discovered on his property you will have some idea of how the Japanese worker is using the labor law.”

Although typically law abiding and industrious, Kauffman wrote, Japanese “workers are in many respects like children and have to be treated as such.” Their country was, for example, “in desperate need of coal and yet the miners even at time and a half or double time refuse to work overtime because they claim that working overtime is undemocratic.” Millions of workers industrial unions had nearly launched a general strike earlier that year, until MacArthur forbade it,3 and Kauffman was concerned that SCAP’s former labor leader, instead of being chastened, would leverage a new role in the economics department “to do to business what he did to labor.”4

Laws are for Friendship-Haters

Alarmingly for Kauffman, SCAP’s radical economic experiments were already being codified into law. Several bills had been enacted, and others—including a needless Securities and Exchange Act5 and an expansive Anti-trust and Fair Trade Act—seemed to be on the precipice of adoption.

The latter would surpass American laws in various ways, including by banning holding companies, interlocking directorates, and cross-holding of stock by non-financial corporations. Kauffman quoted a local economic magazine, which concluded that there would be “no room under the Act for such giants as the A.T. & T. or U.S. Steel.” He was also concerned that the bill was so broadly targeted at “any corporation” that it might sweep in American firms operating in Japan, despite verbal assurances from SCAP leaders that it would not.6

In light of the risk that the U.S. might never be repaid for all the food and other necessities that were being shipped to Japan, would American taxpayers really stand “paying the freight so that some economic theorists may try an experiment there which we did not want here?” Kauffman also insisted that, geopolitically, “Japan’s real desire to be friends and do our bidding should not lightly be tossed aside,” because they could be “the buffer against Soviet Russia on our Pacific side just as England is in the Atlantic.” Thus, “all Americans whether or not engaged in foreign trade” would benefit from rescuing Japan from SCAP’s radical reformers.

Finally, Kauffman circled back to the direct interests of his clients. So long as the occupation pursued its current course, he could not “see how an industrial enterprise owned in whole or in part by Americans can be successful and profitably carried on” in Japan, nor “any reason why American capital should be attracted to that country.” This was most unfortunate, because it was not inevitable. “Were economic conditions otherwise… Japan would be a most attractive prospect for American industry and a fertile field for American capital.”

What must be done? The government had to end SCAP’s economic experiment, and “replace the theorists… with men of ability and experience who can, if action is taken promptly, still restore Japan’s economy.” That was the only hope to “make Japan self supporting, establish her once again as a country attractive to American industry and capital, insure the success of the occupation, and over and above all give us a far eastern bastion.”

Grapevines, Bat Signals, Telephones and Telegraphs

Did anyone actually read Kauffman’s corporate cri de coeur?

Whether through Kauffman or other leaks, archival records show that corporate America soon expressed keen interest in FEC-230 and competition reform efforts in Japan. Just three days after the memo was issued, the Secretary General of the Far Eastern Commission Nelson T. Johnson wrote to his deputy to ask whether it might be possible to send along a copy of a document called FEC-230 to the International General Electric Company?7 G.E.’s representative had mentioned in a recent phone call that it “would aid [G.E.] in certain negotiations that they were undertaking,” but when Johnson tracked down a copy he saw that FEC-230 was “marked ‘Confidential’ and therefore a restricted document.” Could the deputy double-check whether, perhaps, the document had since been declared unclassified? (The deputy seems to have dashed their hopes; a handwritten note on Johnson’s letter states “It is definitely classified + can’t be released.”).

FEC-230 was not the only thing G.E. was after. Another officer soon sent G.E. “declassified” copies of the proposed Japanese Anti-Trust Law and copies of amendments to that bill that had been approved by the Japanese National Diet.

Rumors of a backlash started to reach SCAP’s allies. Raymond Vernon—one of the leaders of the State-War Mission on Japanese Combines—wrote a letter in mid-September responding to an inquiry from contacts in the State Department: “I understand that the Zaibatsu program for Japan is being reappraised at this time.” Vernon sought to rebut the notion that the program would result in “alienating those sectors of Japan’s political and social structure on whom we shall have to depend most heavily in the future for friendship between Japan and the United States.” Reforms were “not inspired by a desire to punish” but by “the conviction that the excessive concentration of economic power in Japan will effectively prevent, as it has in the past, the development of vigorous democratic institutions.”

But “[i]t would, of course, be the depths of naivete to assume that the zaibatsu program, no matter how effectively executed, will single-handedly bring democracy to Japan. What we are trying to fashion in Japan is a three or four-legged table with the zaibatsu program as one leg; land reform and re-education are among the others. Now, the Department might well make the decision that in the light of all the realities there is not time enough left to complete all of the legs of the table and that we shall have to reconcile ourselves to a nondemocratic Japan. It might conclude that a totalitarian regime is not always aggressive, that such a regime can be kept friendly to the United States, and that we shall have to make the best of a bad situation. Then, the question is, whom shall we throw our weight behind as the future masters of Japan.”

Vernon thought that was a bad bet, so he recommended making “an all-out effort to complete our reform program before leaving Japan” and building “the largest possible vested interest in maintaining these reforms after we leave.” That meant “greatly accelerating the wide dispersal of land and zaibatsu securities” to “create an outside chance for the success of a democratic movement.” And “[i]n any event, we should not subordinate the question of the political and social structure of Japan to the immediate short-run needs of increasing Japanese productivity.”

Under Secretary Draper does not appear to have mentioned the issue in the press conference he gave in Tokyo on September 27, 1947, towards the end of his first trip to Japan. His remarks focused on the proposition that “Japan must promptly begin to stand on her own feet, revive her own economy and pay her own way,” and he responded to questions about the delicate issue of guaranteeing defense for an occupied country whose war-making capabilities the U.S. sought to dismantle. A later news account claims that Draper learned about FEC-230 during that trip to Japan. But given Draper’s formidable network and the fact that Kauffman’s memo came out a week and half before Draper left for Japan, it’s entirely possible that the issue was on the back of his mind during his first meeting with General MacArthur, and that it shaped his itinerary from the outset.

A few weeks later, an executive at International Telephone and Telegraph Corporation mailed a copy of Kauffman’s memo to Major General Frank R. McCoy, Chair of the Far Eastern Commission, remarking that he might find it “of interest.” In late November, a lawyer in SCAP’s Government Section sent a rebuttal memo for McCoy to read. Noting that the purge Kauffman criticized was “more political than economic in origin,” the rebuttal memo focused instead on the programs for dissolving excessive concentrations of economic power, redistributing farmlands, improving labor conditions, and progressive taxation. As context, it briefly recapped the economic and political factors that had prevented the development in Japan “of an independent property-owning middle class, such as has traditionally been the basis for democratic development in the West.” The “extreme concentration of economic power was partly responsible for a similar concentration of political power which prevented these groups from redressing their grievances through peaceful democratic methods,” making them “susceptible to conversion” by extreme militarists.

Simply returning to Japan’s economic status quo would not immediately lead to militarism, but it would lead to “a violent split between strong factions of the extreme right and the extreme left” that would end “at worst” in Communism and “at best” in a “rightist Japan whose political stability would be so uneasy that it could only be maintained by substantial and continuing U.S. intervention.”

The discussion would not be contained within government agencies and corporate America whisper networks for long. Within weeks, Kauffman’s memo—or at least sanitized excerpts thereof—would be made public through a familiar news source.

What happened when news of FEC-230 became public? And how did its recommendations for legislative reform play out?

Stay tuned for the next installment…

Share

Subscribe now

Leave a comment

The Report of the Mission on Japanese Combines was divided into two sections: 1) Analytical and Technical Data, and 2) Recommendations. The first section explained the Mission’s goals, examined the structure of “Zaibatsu Power,” analyzed the zaibatsu’s relationship with financial institutions, catalogued laws that advantaged zaibatsu, and considered potential buyers for zaibatsu assets. It also provided appendices with details about particular firms and industry control associations.

The recommendations were adapted, with some light editorial direction from SCAP, into a formal policy that became commonly known as “FEC-230” after the United States submitted it for consideration by the Far Eastern Commission.1 SCAP’s official statement of transmittal explained that “dissolution of excessive private concentrations of economic power is essential to the democratization of Japanese economic and political life” and was therefore “one of the major objectives of the occupation.” Moreover, it asserted that this “statement of broad policy… incorporates measures which already have been or are being implemented by the appropriate Japanese authorities, at the direction of or with the approval of SCAP,” in accordance with the Basic Directive of the Occupation.

“Policy on Excessive Concentrations of Economic Power in Japan”

FEC-230 declared that the objective of occupation policy would be to “destroy” existing “excessive concentrations of economic power in Japan” and to “prevent the future creation of new concentrations.” Of course, destroying such concentrations would not be simple. “[A]void[ing] the futile gesture of destroying one zaibatsu class only to create another” would require overseeing “drastic change in the nature as well as the identity of the groups controlling Japanese industry and finance.”

But what was an excessive concentration of economic power? “[A]ny private enterprise conducted for profit, or combination of such enterprises, which, by reason its relative size in any line or the cumulative power of its position in many lines, restricts competition or impairs the opportunity for others to engage in business independently, in any important segment of business.” Implicitly recognizing the breadth of this definition, FEC-230 suggested that there should be rebuttable presumptions based on certain bright lines, such as a corporation that has a “very large” asset value or workforce, that has a broad reach “in various unrelated fields,” that controls “substantial financial institutions and/or substantial industrial or commercial ones” or many other corporations, or that produces, sells, or distributes “a large proportion of the total supply of the products of a major industry.”

FEC-230 detailed how to destroy excessive concentrations of economic power:

• Immediately dissolve them “into as many non-related units as possible”—unless their “technological need for large scale operations is such that dissolution would clearly cause a drastic reduction in operating efficiency.”2

• Promote diffuse ownership for any that can be dissolved. Any that “do not lend themselves to competitive operation” should either be purchased by the government or subjected to public utility style regulation over rates and profits.

• Provide “financial and technical aid to preferred types of purchasers” such as small or medium entrepreneurs and investors, and agricultural or consumer cooperatives, unions, and zaibatsu employees—but of course, only upon ensuring they were not acting as fronts for zaibatsu owners. Moreover, no single person or group should be allowed to amass so many divested holdings as to confer the ability to create a new excessive concentration of economic power.

• Eliminate the excessive economic power of the families who control them

• Eliminate the financial roots of their power by divesting their holdings in banks and insurance companies, breaking up large banks,3 severing “alliances between financial and non-financial institutions” by capping ownership percentages4 and banning interlocking directorships with other corporations,5 abolishing financial control associations, and ending “government favoritism towards certain financial institutions,” including by requiring Japan’s postal savings system6 to deposit funds in ordinary banks and instituting a capped deposit insurance system “to diminish the belief that zaibatsu banks are safer than elsewhere.” In addition, FEC-230 would “substantially” increase the “number of independent sources of credit,” including by strengthening local banks and credit cooperatives, while ensuring some minimum level of scale and diversification of loans. Owners of formerly independent banks and insurance companies would be encouraged to seek divestitures to “reconstitute the absorbed institutions.”

• Destroy their “legal support” by repealing control association and licensing laws (except those necessary to protect public health and prevent fraud), introducing an antitrust law,7 and amending patent,8 corporate, tax, and other laws. Moreover, the “petroleum and alcohol monopolies, which were instituted for war purposes, should be terminated as soon as possible,” and the government’s power to create new monopolies should be constrained, and any subsidies should not be controlled by the legislature and subject to private litigation by “aggrieved persons” suffering discriminatory treatment.

• Educate the public about the reforms to foster popular support.

• Implement hiring criteria and anti-corruption measures for federal agencies.

Dissolution would involve divesting securities, ending interlocks between officers and directors across firms, banning certain contractual arrangements between newly-severed units, granting licenses on “non-discriminatory terms to all applicants under [their] patents” and technology, and banning mergers between severed units “except when permission is granted after an affirmative showing of public interest.” Controlling individuals—including “creditors, stockholders, managers,” and so on—would have to divest their holdings, and would be “ejected from all positions of business or governmental responsibility,” and “forbidden from purchasing corporate security holdings or from acquiring positions of business or governmental responsibility at any time during the next ten years.” These restrictions would also apply to certain close associates and relatives by blood and marriage.

Impacted owners and other individuals would be paid for these divestitures. However, FEC-230 emphasized that they would not be entitled to any particular amount of compensation. There would be no strict obligation to sell to the highest bidder (likely to be another zaibatsu). The sales process should take into account the ability of preferred purchasers to pay, while also striving for rapid disposal. Liquidation of divested securities and properties should be completed within about two years.

Measures to help “strengthen and democratize preferred purchasers” included turning Japan’s cooperatives—often heavily influenced by the government—into truly voluntary organizations with democratic election of officers by majority vote and non-discriminatory membership requirements; ideally with minimal fees to facilitate membership by low income individuals. Proceeds “should be divided equally among members or in proportion to the relative volume of business, without allowance, beyond a low fixed dividend, for contribution of capital.” Beyond workers’ cooperatives, there would also be consumer cooperatives. Once democratically transformed, cooperatives “should receive such public financial and technical aid as may be necessary to their expansion.” So should small entrepreneurs, “so that they may compete on more advantageous terms with large scale business.”

There would also be a “tax of not less than 90%” of any amount by which the gross sales price exceeded the market or book value as of August 1945, although payment of that tax would be subordinated to paying other government taxes and compensating non-Zaibatsu equity holders at full value, and even Zaibatsu shareholders would receive a refund to ensure a floor of total compensation worth up to 15% of the August 1945 market or book value of their divested holdings. Likely to deter recapture, there would also be tiered high taxes on resales of divested holdings over the next four years. Moreover, compensation would primarily be paid in 10-year government bonds with modest interest and cash payments would be limited to covering ordinary living expenses. To top it all off, “[b]efore the freeze is terminated, succession by the owner’s heirs” would be accelerated, “with payment of steeply graduated inheritance taxes.”

FEC-230 underscored the importance of fostering public understanding and support for its anti-Zaibatsu program. This might include translating recent English-language literature “about the problems of industrial organization” into Japanese, publishing SCAP’s factual findings about the Zaibatsu in Japanese, encouraging a special Japanese “commission of inquiry, representative of a wide range of interests and opinions, to investigate the facts about the Zaibatsu and make public its recommendations,” and ensuring that Japanese school curricula addressed “the dangers of monopoly and excessive concentration of economic power.” It would be especially important to provide data to and earn the support of “those groups whose economic interests are most acutely promoted by the dissolution of the Zaibatsu: consumers, small and medium-size businessmen, trade unions, and cooperatives.”

Finally, the Japanese government should be “deprive[d]… of its pre-Zaibatsu character,” and measures must be taken to “prevent renewed alliances between the bureaucracy and business interests.” Of course, key steps would include discharging current government employees “believed sympathetic to Zaibatsu interests” as well as screening hires to avoid conflicts of interest. However, given the limited hiring pool, and “the uncertain political complexion of the present Japanese bureaucracy, SCAP should reduce the discretionary policy-making authority of that bureaucracy” as to important issues. In economic matters at least, the Japanese bureaucracy should not be left in a position to usurp the functions of the legislative branch of the government.” To further minimize conflicts, there should be limits on the stock holdings of government officials, and there should be a two-year ban on taking up revolving door positions representing the industries they previously regulated.9 The names of regulators and enforcers should also be made public, so that anti-Zaibatsu groups could “scrutinize their past records and protect publicly against appointments which they consider unsuitable.” The principle of private redress for injury suffered as a result of government action should be recognized in Japanese law.”

All that said—and although FEC-230 declared that “the requirements of the Potsdam Declaration will not have been fulfilled” until these measures had been carried out—the policy document also diplomatically acknowledged that SCAP would have to make “executive decision[s]” about the means and timing by which the Japanese government would carry out this program. FEC-230 also made some concession for protecting the interests of other members of the United Nations, including by providing “adequate, prompt and effective indemnification for property taken from such interests,” so long as that would not limit “effectiveness of these measures.”

Corporate Oversight

It’s unclear how exactly corporate lawyer James Lee Kauffman obtained a leaked copy of FEC-230. But within weeks of setting foot in Japan, he wrote a scathing take-down of the policy. Since the report was a sort of a client advisory—before the war, Kauffman had represented nearly ever major American corporation in Japan, including General Draper’s former employer Dillon, Read & Company—he opened with a professional assessment of whether Japan offered lucrative opportunities for American investors: “[s]o long as present conditions continue in Japan I believe it inadvisable to make any investment in that country in dollars or the equivalent…”

That somewhat clinical tone did not last long. After acknowledging MacArthur’s “military accomplishment” in Japan, Kauffmann asserted that the economic “phase of the occupation has not been successful, much to the delight of several hundred Russians who are attached to the Soviet Embassy in Tokyo and who are wishing and waiting for the economy of Japan to collapse.” The Japanese had lost faith in their currency, and black markets predominated. Inflation more than canceled out wage increases. Uncertainty about the scope of reparations made it difficult for Japanese businessmen to plan for the future. Meanwhile, the Army subsidized hotels, houses with servants, and transportation so generously that SCAP staff lived in comparative luxury—even better than at home. Although the Japanese government technically footed much of the bill for hosting SCAP, American taxpayers were on the hook in the sense that the U.S. might never be repaid for all the food being shipped to Japan.

As context for his take on FEC-230, Kauffman mused that, historically, the victors of war occupied losing countries simply to “restore order and protect and conserve property until a peace treaty is concluded.” Demilitarization meant physical disarmament. But somehow reformers in Japan10 had set their sights on a more ambitious aspiration: “complete reformation of [Japan’s] ideology.”

What else did Kauffman say about the policies laid out in FEC-230? And who, besides his corporate clients, read his report with interest?

Stay tuned for the next installment…

Share

Subscribe now

Leave a comment

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization to parallel democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. In the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course­–or further derailed? It turns out a patent lawyer’s love life might have played a role. German officials had mixed views, while some German academics developed a compatible political philosophy, but outreach to ordinary Germans lagged. Four teams put together cases to break up four dominant combines, but then their leader announced a change of policy. General Clay reunited with Draper as the November 1948 presidential election loomed. In the meantime, Draper had gotten a big promotion and turned his attention eastward—far eastward. By then, a national magazine had already attacked General Douglas MacArthur’s policy of “purging” the Japanese elite from top political and business roles.

Family Business

The word “zaibatsu” is derived from the roots “zai” (wealth) and “batsu” (estate, group, or clique). Zaibatsu were essentially combines with a feudal twist: like conglomerates elsewhere, their subsidiaries dominated multiple industries, but they were controlled by tight-knit families. The oldest Zaibatsu got their start in the late 1800s, just as Japan was transitioning away from feudalism during the Meiji Restoration.1 In an ambitious quest to industrialize, the government built new transportation lines (rail and shipping) and telecommunications systems (telegraph and telephones), mines, munitions works, and 53 consumer industries. To raise money, the government sold off ventures to the private sector. For example, the government offered “coal at cost price” from the former shōgun’s mine exclusively to Mitsui—one of the three leading merchant houses. This yielded “unusually large” profits, which Mitsui used to buy the mine outright from the government. Mitsui also soon appointed a prominent statesman to its board—and then just happened to be designated as the government’s sole agent for minting currency.

Similar government favoritism in disposing of assets undergirded other industries. The Mitsubushi and Yasuda zaibatsu likewise formed and flourished in the Meiji period. Yasuda established itself in banking thanks to the “friendship” of its founder with a finance minister. Yasuda then expanded beyond banking “through foreclosure of mortgages of the assets of independent businesses” that hit hard times—including railway, warehouse, and fiber businesses.

Zaibatsu dominance became entrenched after the severe economic depression that followed World War I. Zaibatsu likewise benefited from the military buildup that followed the 1930s depression. Unlike monopolies, the zaibatsu aimed not at “high-market occupancy of a few related markets, but oligopolistic positions running the gamut” of the modern economy, representing about 10-20% of market output in each sector. By 1940, for example, Mitsui captured 22% of Japan’s total imports and 10% of its total exports. Using top-holding companies to control subsidiaries in “markets as diverse as banking, coal mining, shipbuilding, electrical equipment, [and] trading,” the same oligopolies came to dominate “market after market after market.”

The zaibatsu developed a cordial “live-and-let-live” relationship with each other, such that Mitsui would not vigorously challenge Mitsubishi in markets of Mitsui’s strength because Mitsui knew it would face Mitsubishi in markets where Mitsubishi was stronger. They controlled hundreds of subsidiaries each. Beyond corporate forms, the controlling families used family councils with their own rules to coordinate control among extended family trees—which, under Mitsui, spanned 11 official families.

Military aggression presented attractive opportunities for dominant Japanese firms. The President of the Oji Paper Company (part of the Mitsui zaibatsu) openly longed for the Japanese government to back corporate adventurism abroad just as the British government had long ago “actively promoted” the British East India Company, adding that “[n]othing is more important than force in achieving [the] ambition” of Japanese trade expansion. Mitsubishi secured its position in shipping through a contract to carry troops to conquer the island of Formosa (now Taiwan) in 1985. And in the 1930s, Nissan—a relatively new combine which was not technically a zaibatsu, because it was founded by a group of military men rather than a family—benefited greatly from Japan’s invasion of China.2 Nissan’s founder and first president, Yoshisuke Aikawa, served as an adviser to the Kwantung Army, and thereby secured lucrative industrial positions in Manchuria—funded half by Japanese insurance companies and half, under duress, by the Manchurian government itself.

Just like in Germany, not all firms were initially eager for imperial warmongering. Three days after Pearl Harbor, Mitsubishi’s president expressed appreciation for international “friends”—i.e. cartel partners—and hopes that any disruption in those old friendships would be temporary. Those brotherly sentiments did not stop them from profiting handsomely in war, however. Indeed, the most lucrative wartime opportunities went to the “Big Four” zaibatsu—Mitsubushi, Mitsui, Sumitomo, and Yasuda—which collectively “doubled their position in the economy” during WWII.

The zaibatsu were not passive—or even particularly reluctant—once the war got going. For example, the Japanese government praised Mitsui’s French affiliate for conducting intelligence activities in France that were “superior even to that of the Japanese embassy” there. Mitsui also picked a Nazi sympathizer to run a cash-only department “for which no records were kept.” Leaders of other zaibatsu and their close family members held wartime advisory roles or served in government ministries. The zaibatsu also supplied officials to lead the wartime “control associations” that most Japanese businesses were required, by law, to join. These associations could “fix prices, allocate production, and require enterprises to consolidate.”

Holding and Folding

In November 1945, at the request of SCAP, the Japanese government submitted a plan to create a Holding Company Liquidation Commission (HCLC), that would oversee the transfer and disposal of the security holdings and other property from the top holding companies of the four largest zaibatsu. Proceeds would go to stockholders, but zaibatsu family members would have to accept their payments in the form of government bonds that would not be redeemable or transferrable for ten years, to prevent resurrection of zaibatsu power. Members of controlling families would also resign their positions in banking and industry, certain appointed officials would also resign, and dominant zaibatsu banks would relinquish control over subsidiary banks.

General MacArthur, who was short-staffed on economic matters, cabled Washington for the administration’s views of the “Yasuda Plan.” Washington raised no objections, so MacArthur approved the plan two days later. SCAP’s directive to the government was careful to caveat, however, that “full freedom of action is retained by the Supreme Commander for the Allied Powers to elaborate or modify the proposed plan at any time and to supervise and review its execution.”

In the same order, SCAP alerted the Japanese government that the Supreme Commander intended to dissolve combines across industries and “eliminate undesirable interlocking directorates and… intercorporate security ownership” to achieve two objectives: 1) permitting “a wider distribution of income and of ownership of the means of production and trade,” and 2) encouraging “the development within Japan of economic ways and institutions of a type that will contribute to the growth of peaceful and democratic forces.” The Japanese government was also required to submit a program to terminate Japanese participation in international cartels, “abrogate all legislative or administrative measures which create, foster or tend to strengthen private monopoly,” and enact laws that would bar monopolies and corporate interlocks.

It took the Japanese government until April 1946 to issue the Imperial Ordinance that actually established the HCLC. Appointments to the commission took another four months. Finally, in September 1946, the HCLC held its first meeting, and announced the first corporations to be designated for dissolution. A SCAP observer attended all meetings, and the commission took no actions without SCAP approval.

The Missionaries Position

Meanwhile, once alert to the shortage of expertise on MacArthur’s staff, Washington offered to send technical experts to Japan for assistance. The resulting State-War Mission on Japanese Combines touched down in January 1946 and stayed into March.

The Mission was headed by the economist Corwin Edwards,3 a Rhodes Scholar who had worked under Thurman Arnold at the Antitrust Division at the Department of Justice (DOJ) and before that at the Federal Trade Commission (FTC). There were seven other members: three attorneys from the Antitrust Division, one legal adviser to the FTC, a law professor who had advised the Federal Power Commission, a special adviser to the Tariff Commission, and Raymond Vernon, an assistant director of the Trade and Exchange Division of the Securities and Exchange Commission (SEC), who had written military affairs guides that touched on the financial structure of Japan.4

Edwards recalled his first impressions upon touching down in Tokyo:

“We’d never seen a war zone; we’d never seen a destroyed city… and the sheer visual impact of these things was startling and disturbing. Because the raids on Tokyo were by firebombing and because the housing of Tokyo—with the exception of a few buildings in the center—was essentially wood and paper, the Japanese residences and small shop areas had in effect been razed to the ground and were ashes. All that was sticking up was an occasional chimney, and many many with steel safes… Because of [the nature of the] destruction, the public utilities of a large city were largely in existence. You could have water, you could have electricity, you had viable road surfaces—sidewalks even—you had bridges except that if they had had steel railings, the steel railings had already been collected… as part of the war effort already. You had no Japanese motor transportation, you had a lot bicycles, and Japanese pulling loads as trailers to bicycles, sometimes two or three bicycles… so there was a great deal of traffic in what was in effect a nonexistent city.”

Although there was little time for sightseeing or mingling, Edwards recalled the courtesy of ordinary Japanese people—and how children clamored for hard candies from SCAP’s K-rations.

The team arrived just as MacArthur’s makeshift dissolution leader left; Vernon recalled learning that MacArthur had “hired a curious character off Wall Street… [who] sort of single-handedly was going to go around breaking up the Japanese trusts; and then after four or five months of this decided he had better get back home to Wall Street.” The man “announced that he had largely succeeded in dissolving the trusts and there were a few cleanup operations to engage in.” Perhaps he was sincere given the general state of devastation in postwar Japan, where “[e]verything seemed busted.”

But the Mission came to different conclusions. Although zaibatsu were impaired by war damage and the end of wartime revenue, they had not lost their relative advantage over the rest of the economy. In “the most heavily bombed areas resulting fires spread the damage widely, making it unlikely that damage was sufficiently concentrated upon large plants to seriously disturb the relative position of the zaibatsu.” Zaibatsu continued to be influential across industries. Edwards also observed that “decisions by government and decisions by [the zaibatsu] meshed” because they had been intertwined so long. And it was not yet clear how taxes on war profits might be implemented or whether they would be sufficient to impact the relative power of the zaibatsu either. Perhaps most importantly, in a country without antitrust or other legal constraints on their power, they were still practically free to use the same tactics through which they had secured and maintained their dominance for decades.

The team also took pains to assess the availability of competent managers who could step in after dissolution who would not be mere “Charlie McCarthys for the zaibatsu.” Edwards and Vernon framed the resulting report with a “guiding philosophy” which Vernon described as “Let’s loosen the society up some. This is the time to do it, when it’s lying flat on its back,” because “[t]he social and psychic and institutional pain involved in doing it will be less now than later when it starts to move.”

Edwards later explained that zaibatsu dissolution was “part of a broad program to encourage wide distribution of income and ownership and forms of economic activity and organization” likely to promote peace. “The purpose is not to reform the Japanese social system in the light of American economic preferences, nor even in the interest of the Japanese people themselves; it is to bring about a psychological and institutional demilitarization.” Edwards—who thought the personnel purges went “too far down the line and thereby got rid of some useful executives”—emphasized that the goal was not punishment. In his view, “[w]hether or not individual Zaibatsu were warmongers is relatively unimportant; what matters is that the Zaibatsu system has provided a setting favorable to military aggression.” How so? The Zaibatsu “discouraged the launching of independent business ventures and thereby retarded the rise of a Japanese middle class,” which in turn meant there was “no economic basis for independence in politics.” Moreover, the “low wages and concentrated profits of the Zaibatsu system have limited the domestic market and intensified the importance of exports, and thus have given incentive to Japanese imperialism.”

But what about the Yasuda Plan? Even apart from certain implementation delays, Edwards deemed it “obviously insufficient to destroy the power of the great Japanese combines” or of “the great families.” A truly effective program would need to reach beyond just the top holding companies to reach lower layers and other control mechanisms. And he was concerned that the great families would be able to “recover full control of their wealth a decade hence,” which they could then turn around and use “to buy their way back into power.”

After the Mission, DOJ attorney James M. Henderson stayed on as head of SCAP’s cartel division. All the other members left. Upon returning to Washington, Vernon jumped over to the State department, where he served as liaison to the Far Eastern Commission (FEC)—the group of allied countries consulting with the United States on policy in postwar Japan. Although the report went to SCAP first, the resulting policy became known by the nomenclature assigned when it was relayed to the international body: FEC-230.

What recommendations did FEC-230 make? And why did Wall Street lawyer James Lee Kauffman find those recommendations so alarming?

Stay tuned for the next installment…

Share

Leave a comment

Subscribe now

Series recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization to parallel democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. In the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course­–or further derailed? It turns out a patent lawyer’s love life might have played a role. German officials had mixed views, while some German academics developed a compatible framework, but outreach to ordinary Germans lagged. Four teams put together cases to break up four dominant combines, but then their leader announced a change of policy. Clay admitted his support, and then reunited with Draper as the November 1948 presidential election loomed. In the meantime, Draper had gotten a big promotion.

Round 1: “250,000 Victims”

In Spring 1946, Newsweek editor Harry Kern—whose pivot into foreign affairs was prompted by the bombing of Pearl Harbor—hired Compton Pakenham as chief of the magazine’s Tokyo bureau. Pakenham had grown up in Japan because his father managed a shipyard there, and was glad to reunited with his prewar friends—including many who had just been purged from political life. Pakenham quickly brought Kerns up to date on elite Japanese sentiment after speaking with a count who was one of the emperor’s closest confidants, the prewar Japanese ambassador to Washington, and the master of ceremonies for the Imperial Household. These men felt they had been judged unfairly and that reforms were alienating the Japanese.2 Pakenham wrote to Kerns in July 1946 that “there is no question but that the occupation here is failing, failing, failing.” Later that year, Newsweek shareholder Harriman—who met with Kern regularly—expressed his concerns about postwar reform efforts. There was a growing drumbeat among certain circles in Washington that Japan must be turned into the muscular lynchpin of an anti-Communist strategy in Asia. Returning Japan to economic self-sufficiency quickly was key to this vision.

So in January 1947 Kern published an article sounding the alarm about the state of Japanese business, based on Pakenham’s dispatches:

In particular, Kern warned that up to 30,000 Japanese businessmen, financiers, and industrialists—who were not only “the most active, efficient, cultured, and cosmopolitan” members of Japanese society, but those “best disposed towards cooperation with the United States”—faced the prospect of removal from their jobs. To make the scope relatable for a home audience, Kern drew an analogy: it would be as if the United States purged “all businessmen who contributed to the war effort and members of the National Association of Manufacturers.” But actually, it was worse. He wrote that the purge also impacted all “relatives to the third degree”—making the real total “250,000 victims”! And they would surely have no economic options but to choose between the black market and the Communist party.

How could this happen? The article was careful not to directly fault the popular General MacArthur. It even breezily swept past the first wave of the “purge”—which had removed militarists from the government—as water under the bridge. No, the problem was that the head of the government section General Courtney Whitney—who had served under MacArthur in the Philippines—had unfair access to the cloistered Supreme Commander, sidelining General Charles Willoughby of the economic and scientific section and General William Marquat of the civilian information and education section. Whitney’s proximity to MacArthur thus revived a “curious feature of prewar Japan Government… [t]he man with direct access to the throne has the best chance of gaining his objectives.”3 And unfortunately, Kern intimated, Whitney in turn had not hired the best advisors. As Pakenham put it, although there were “many theoretical experts in limited phases” in SCAP, they were “immature, untrained for local conditions, blindly unconscious of their tremendous power, and unconcerned over the practical consequences.”

But it was not too late: General MacArthur could “clear” himself “of any blame” and “repair the damages already inflicted on his dignity in the eyes of the Japanese” by welcoming a committee from Congress to investigate “why American capitalist principles are being undermined by American occupation authorities.”4 The article closed with a reminder of broader stakes, quoting an anonymous Japanese businessman: “[w]e know the United States is entitled to impose any punishment it wants and to force us to make any amends it sets. But we can’t understand why, when America could have all Japan working in its own interest, it is now engaged in wrecking the country so as to leave it as an eventual prize to the Russians.”

MacArthur’s Rejoinder

The “purge” in question stemmed from the 1945 basic occupation directive, which stated that all “active exponents of militant nationalism or aggression” must be barred from holding “public office or any other positions of responsibility or influence in public or important private enterprise,” and that active exponents of militant nationalism or aggression who held “key positions of high responsibility… in industry, finance, commerce, or agriculture” had to be removed from such positions. But the purge was not implemented in one fell swoop. Whereas Whitney promptly started purging the military and the government in January 1946—which the Japanese government said resulted in nearly 900 purges across various ministries in less than a year—Willoughby and Marquat argued that the economic side of the purge had to be handled more carefully so as not to delay economic recovery by depriving businesses of their most experienced talent. Whitney agreed to wait, but Willoughby and other generals kept vetoing the draft economic purges prepared by Willoughby’s staff. After half a year elapsed without progress, Whitney resorted to pressuring the Japanese to take on the economic purge. General Willoughby responded by pulling FBI records in an attempt to prove that Whitney’s section had been infiltrated by Communists.

In December 1946, MacArthur shot down the suggestion of Averill Harriman—by then, Secretary of Commerce—that an “economic cabinet” of five prominent American businessmen should be sent to Japan to help solve its economic problems. That same month, Prime Minister Yoshida—who was linked by marriage to a powerful business combine—attempted to prevail upon MacArthur that the Japanese government had to handle the purge its own way or else “the future of democratic and uncommunistic Japan” would be jeopardized. MacArthur shot down Yoshida too.5

After such interactions, the sentiments expressed in Kern’s piece likely did not surprise MacArthur. But he was enraged by the very public attack. MacArthur characterized the piece to a confidante as a “link in the campaign which is being so assiduously pressed in the east to discredit me.” In early February 1947, Newsweek published excerpts from his fiery rejoinder. MacArthur emphasized that a less aggressive purge would “ignore those very causes which led the world into war, and by doing so invite the recurrence of future war.” Denying internal staff divisions (beyond certain “differences of views on detail”), he defended his use of “normal discretion of a field commander in both the details and the timing” of implementing the directive. As for the idea that the purge might tilt Japan towards Communism, MacArthur responded that “it is fantastic that this action should be interpreted or opposed as antagonistic to the American ideal of capitalistic economy.” But even if the purge slowed economic development, there was no other alternative to ensure peace. Newsweek did not give MacArthur the last word; it duly checked back in with its unnamed original sources, who “reported that they still believed that actions by the occupation forces were working to the detriment of American interest and in a manner contrary to what they felt sure the supreme commander intended.”6

The purges continued. In particular, the political purge escalated in advance of the first general elections in April 1947. Ultimately, the economic side of the purge affected a few hundred companies. Even after loopholes were closed, only an estimated 1535 businessmen resigned or were removed—less than one percent of all purges, which were overwhelmingly military and political.

Round 2: “The Terrible-Tempered Mr. Bang of Tokyo”

But the battle with Newsweek had only just begun. In June 1947, Kern traveled to Japan for two weeks. Through Pakenham, he met high profile purgees and came to regard the purge as “the most destructive measure ordered by the Occupation.” He also met with various SCAP officials. General Whitney made the miscalculation of impugning Pakenham in front of Kern, hyperbolically claiming that Pakenham was “praying in front of the Nijubashi [Bridge] to the Emperor” every day. Kerns retorted: “I came here to listen to your point of view, not to hear fairy tales.” He walked out.

At home, Kern secured an introduction to ex-President Herbert Hoover through a retired admiral who was serving as a special editor for Newsweek. Kern aimed “to see a number of people in positions of responsibility and tell them what I have found out.” When they met in person, Hoover expressed support for Kern’s newfound mission to “remedy the tragic mistakes made in regard to Japan” and provided reassurance that others in Washington likewise desired a radical rethink of reform policy—going well beyond the purge, including aid, reparations, “levels of industry,” and other economic problems. Hoover became a confidential source, leaking documents about reparations.

Later that month, the supreme commander’s face was emblazoned on the cover of Newsweek, under the headline, MacArthur: The Crisis is Now.

Once again, Kern avoided direct criticism of the supreme commander, calling him a “unique man with a unique reputation in a unique position” and artfully claiming that all the publicity about the “wonderful job” MacArthur was doing was “unfair to the general himself” and made it difficult for the general to “focus public attention on the difficulty he faces.” Kern elaborated on how the purge was “the most important example of where the occupation has gone wrong.” Of course, he conceded, “[t]here had to be a purge” to root out guilty aggressors. But just as in Germany, the purge process raised a thorny “moral problem”: how to distinguish between “aggression and patriotism.” Unfortunately, the manner in which the purge was implemented had somehow taken on a “curious leftist and anti-capitalist tinge,” in unspecified ways.

Kern posed a rhetorical question: “What happened?” In his estimation, General Whitney happened. Kern did not hold back, describing Whitney as “a red-faced, choleric lawyer with an oratorical manner of speaking and a flair for lecturing those who disagree with him,” basically the “terrible-tempered Mr. Bang of Tokyo.” Lest readers come away with the impression that only Westerners disliked him, Kern added that “[t]he Japanese profess to believe that he had been possessed by a fox.”

And Kern again derided Whitney’s staff, this time with a more explicit partisan slant—without acknowledging Whitney’s own conservative bona fides. “[E]conomists and experts who once gave the New Deal its high flavor,” he wrote, “advise the generals and colonels who are long on strategy and tactics but short on economics.” Although by “their own lights” those advisors were “able, hard-working, and sincere,” the result was a “cumbersome bureaucracy in which theory frequently clashes with reality.” Sadly, “[b]usinessmen and foreign officials” often had to wait months for a reply to their inquiries. And SCAP economists were overly “defeatist” about stabilizing the yen, which others regarded as the most essential priority because that would enable Japan to resume exports. Japan was not in control of Washington as Germany was.

Even More Friends in High Places

Hoover was far from the only powerful new acquaintance Kern made that summer. Kern was also introduced to a fellow New Yorker, an attorney named James Lee Kauffman—who would have been part of Harriman’s proposed business delegation that MacArthur had shot down the previous year. He had not forgotten the slight. Nor had his clients. American businessmen were increasingly antsy to visit Japan—just as they had been allowed back in to Germany. Before the war, Kauffman had served as senior partner in a Japanese law firm for over a decade. The firm had represented essentially every major American corporate interest in Japan, such as General Electric, Ford Motor Company, Otis Elevator, Westinghouse International Company, various banks, and a joint venture between Mobil and Standard Oil.

Kauffman spent three weeks in Japan in August 1947, ostensibly to gather information for his clients to advise them on the general business and investment climate. But in the course of his visit, he somehow obtained a copy of a document that SCAP had marked secret. That discovery turned Kern’s bland-sounding 31-page “Report on Conditions in Japan as of September 6, 1947” into something much bigger.

What was the secret document? And how did it impact the course of the occupation?

Stay tuned for the next installment…

Leave a comment

Subscribe now

Share

Sources: the main sources for the Japan section of this series include Aftermath of War by Howard Schonberger and Antitrust in Japan by Eleanor Hadley.

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization to parallel democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. In the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course­– or further derailed? It turns out a patent lawyer’s love life might have played a role. German officials had mixed views, while some German academics developed a compatible framework, but outreach to ordinary Germans lagged. Four teams put together cases to break up four dominant combines, but then their leader announced a change of policy. Clay admitted his support, and then reunited with Draper as the November 1948 presidential election loomed. Where had Draper been all this time?

“I Had Rather Give You My Right Arm”

It is common wisdom in D.C. that you should at least consider being nice to your underlings, because one day the tables might turn and a former underling could—through merit and/or political connections—become your boss.

General Clay learned the tables were about to turn on him when he received an unexpected call from the Secretary of War, Kenneth Royall in July 1947.

Fortunately for Clay, he had indeed (mostly) treated the underling in question well.

The conversation is reproduced as follows in Clay’s collected papers:

Royall:

I am considering the appointment of Draper [to work under me]. I would like your opinion as to his qualifications for the position and would welcome any other comment you might desire to make.

I realize he is valuable to you but I feel that he can render you invaluable service here at the departmental and interdepartmental level. Furthermore, an inexperienced man here would be disadvantageous.

Clay:

His qualifications are superb and unlimited. His departure from Germany would be almost catastrophic at this time. I have no one repeat no one approaching him in ability and beyond that he is my confidential and close friend. In this job, you do need one.

However, I owe too much to Bill Draper to not let him have the opportunity to decide and with full knowledge that I know his acceptance if made will be where he can best serve. I say this although I had rather give you my right arm.

Royall:

I will discuss matter further with Draper. Give him your views and abide by his decision.

I appreciate your generous and understanding attitude.

I have not mentioned matter to the President but do not anticipate any trouble if Draper should accept.

Clay:

May I offer you my sincere congratulations and best wishes in the difficult task which you are undertaking [as Secretary of the Army]. I can also promise you the best effort of this Command and military government to its successful accomplishment… Will mention Draper matter to no one until I hear further from you.

Royall:

Thank you. It will be a pleasure to work with you. As you know I have unlimited confidence in you and your ability, and will support your administration to the fullest.

Thus, soon after James S. Martin left Germany by resignation, Draper left by promotion.1

Even before learning of his next career move, Draper had already taken steps that would impact the functioning of the Decartelization Branch.

First, OMGUS memos dated March 31, 1947 and June 6, 1947 established procedures that, in Johnston Avery’s view, “paralyzed the program” and “took the authority for deconcentration out of the hands of the Decartelization Branch and placed it in the hands of two review boards, the personnel of which would be drawn from other agencies of OMGUS.” When Avery asked Hawkins about it, the only statement he could “get out of Mr. Hawkins was, ‘That is the way General Draper wants it.’”

Second, according to Avery, Draper had influenced the selection of Martin’s successor. Even though Hawkins had told Avery and other staffers in May that he had handed in his resignation to Draper because the “course of objectives” had been radically changed while Martin was away, somehow, a week after the memo giving review boards deconcentration authority, Draper’s imminent son-in-law Hawkins was appointed the new interim chief instead.

Hawkins was not the only contender; he let slip to Avery that an assistant in the State department had recommended Dr. Corwin Edwards, a prominent economist who had worked at both the FTC and DOJ, and had prepared a comprehensive study on “Economic and Political Aspects of International Cartels” for Senator Kilgore’s Subcommittee on War Mobilization in 1944. However, Hawkins said, Draper and Wilkinson were “pretty sore over State trying to dictate to General Clay,” so Wilkinson wrote a letter to the State Department informing them that the position had been promised to Hawkins instead. And that, apparently, was that. Avery noted a distinct change in Hawkins views as he was brought into “close social contact with the top brass in Military Government.”

Did Draper remain involved in OMGUS affairs after his promotion to Undersecretary of the Army? There are certainly hints that he checked in with Clay from time to time—and he advocated in Washington to get Clay the budget he needed. But, with a much bigger job, it seems unlikely he was tracking the day-to-day affairs of the Decartelization Branch. And having already set up procedures and leadership that would reduce the prospect of vigorous enforcement of Law 56, he would not have had much need to do so.

Instead, as an ambitious man of action, he promptly turned his attention to the other major theater of World War II: the Pacific.

Entering the Land of the Rising Pacifism

Japan had surrendered a few months after Germany, an achievement that was hastened by Truman’s decision to drop two atomic bombs on Hiroshima and Nagasaki in early August 1945.

As in Germany, the policy objectives of the U.S. military government in Japan were the product of extensive deliberation back in Washington, D.C. The first, high-level Statement of Policy was drafted by the State, War, Navy Coordinating Committee (SWNCC)—the precursor to the National Security Council—and issued by President Truman in September 1945. It informed the occupation leader that the ultimate objectives of the occupation were to “insure that Japan will not again become a menace to the United States or to the peace and security of the world,” and to establish a “peaceful and responsible government” that hews as closely as possible to “principles of democratic self-government.”2

In addition to disarming and demilitarizing Japan and encouraging individual civil liberties and democratic parties, the Statement declared that “[e]ncouragement shall be given and favor shown to the development of organizations in labor, industry, and agriculture, organized on a democratic basis.” This would involve favoring “forms of economic activity, organization and leadership” that would promote peace and “make it difficult to command or direct economic activity in support of military ends.” Towards that end, it would be the policy of the Supreme Commander to block warmongers from “places of importance in the economic field” and “[t]o favor a program for the dissolution of the large industrial and banking combinations which have exercised control of a great part of Japan’s trade and industry.”

SWNCC followed this with a more detailed directive that was issued by the Joint Chiefs of Staff in November 1945. The “Basic Directive for Post-Surrender Military Government in Japan Proper,” JCS 1380/15, was based heavily on the initial directive for Germany, JCS 1067. However, it was not simply copied-and-pasted. A State Department staffer recalled that the drafting process involved meetings with more than two dozen officers across the three departments that comprised the SWNCC, with levels of intermediate review along the way.3 And the /15 suffix indicated that the final directive had gone through 14 previous drafts.

Under the header “Democratization of Japanese Economic Institutions,” the Basic Directive explained that the U.S. government sought to encourage policies “which permit a wide distribution of income and of ownership of the means of production and trade,” and reiterated aspirations of fostering institutions organized on a democratic basis. The Supreme Commander for the Allied Powers was directed, among other things, to “[r]equire the Japanese to establish a public agency responsible for reorganizing Japanese business” to support the goals of the occupation. The agency would have to “submit, for approval by you, plans for dissolving large Japanese industrial and banking combines or other large concentrations of private business control.” The Supreme Commander would also have to dissolve the Japanese government’s control associations,4 “[a]brogate all legislative or administrative measures which limit free entry of firms into industries to be reorganized where the purpose or effect of such measures is to foster and strengthen private monopoly, and “[t]erminate and prohibit all Japanese participation in private international cartels or other restrictive private international contracts or arrangements.”5

Moreover, the United States had learned some lessons from its experience in Germany. In particular, leaders prioritized avoiding the headaches that came from divided occupation. Thus, in Japan, the United States made sure to control the entire country as much as possible from the outset. The United States physically led the occupation, and after negotiations with the Allies, held the most influence over policy decisions as well.6

The Allies did, eventually, formally weigh in with their own policy recommendations in June 1947. But those, too, kept economic deconcentration as a goal.7

And much had happened in the meantime. Japan had been prodded to adopt a new Constitution that came into force in May 1947. It transformed the Emperor from a monarch into a “symbol of the state,” granted certain human rights (including “minimum standards of wholesome and cultural living”), and famously stripped Japan of military capabilities (albeit with a much-disputed self-defense exception). The Supreme Command of Allied Powers had disassembled the Japanese Army and banned many ex-military officers from positions of power in the new government. Prosecutors had already finished presenting their case in the Tokyo War Crimes Trial, and the defense was nearly done as well.

Economically, SCAP had initiated land reform, introduced new rights to unionize (but then prevented a general strike), required the Japanese government to set up a “Holding Company Liquidation Committee” to breakup Japan’s version of industrial combines, disbanded several combines, banned certain business leaders from holding office, and enacted an anti-monopoly law that, among other things, established a Fair Trade Commission.

In short, Japan was hardly a blank slate when Draper started making travel arrangements.

In Draper’s telling, he prioritized going to Japan “right away” as a matter of good management. He “figured” that the U.S. occupation leader there might otherwise fear second-fiddle treatment, imagining that the leader would think “[h]ere’s this fellow who’s been in Germany and Germany’s going to get a good deal of the favors if he’s going to be the Under Secretary.”

Draper recalled starting his first lunch with the Supreme Commander by asking a simple question that betided servant-leadership: “What can I do to help?”

Draper had never met his interlocutor before, but “had heard fantastic tales about him.”

A man who was reputed to be at least as brilliant, dutiful, and ambitious as Draper, but with far more formidable military experience than Draper and Clay combined.

A man who would be widely lauded by multiple presidents as one of the most “outstanding” military leaders in American history, and by some staffers as the “greatest man who ever lived”—yet who was also once called “The Most Dangerous Man in America.”

However Draper might have hoped to steer policy in Japan, he would have to contend with the reality that the occupation was under control of the one and only General Douglas MacArthur.

How would that go?

Stay tuned for the next installment…

Share

Subscribe now

Leave a comment

Series recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization to parallel democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. In the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course­– or further derailed? It turns out a patent lawyer’s love life might have played a role. German officials had mixed views, while some German academics developed a compatible framework, but outreach to ordinary Germans lagged. Four teams put together cases to break up four dominant combines, but then their leader announced an abrupt change of policy.

Speaking to the Manager

Two days after Bronson’s shocking announcement—in which he not only terminated ready-to-launch cases but also effectively neutered Law 56 and predicted that the branch would be eliminated within the next six months to a year—the staff dashed off an alarmed letter to General Clay on March 13, 1948. The staff explained that Bronson’s new policy—which, they noted, Bronson claimed that Clay and the State Department had both approved—“virtually repeals the decartelization law and contravenes” the 1947 Joint Chiefs of Staff directive. Because Mr. Bronson refused to provide a written memo, the staff compiled a “composite version” of their recollection of the policy “for whatever clarification [Clay] might consider necessary.”

Underscoring the overall import, the staff emphasized that the order “excludes from decartelization action the principal group of monopolistic enterprises which the law says must be eliminated.” Such “drastic” changes, should only properly be made by amending or repealing the law itself. The law made none of the newly-invented carveouts. The text contained no exceptions for vertical integration. Nor did it “draw any distinction between capital goods industries and consumer goods industries.”

In the view of the staff, if anything, capital goods monopolies were “far more frequent and more repugnant to the purposes of the law than are concentrations in consumer goods industries.” To reverse priorities would be “to leave the fundamental concentrations of economics power intact while engaging in little more than harassing attacks on the smaller companies.” That risked making the law both “ineffectual” and “unpopular.”

Finally, giving a “clean bill of health” to uncharged companies was “contrary to all established principles of law and law enforcement,” and using a so-called “rule of reason” instead of “standards in the law offers many obvious dangers.” (Notably, as a later book explained, that did not mean the “rule of reason” as it was applied, based on precedent, by courts in the United States. Instead, it seemed to be shorthand way of saying that the ultimate arbiter of the fate of the combines would be Clay himself, based purely on his own discretion.)

Nineteen staffers signed their names. They no doubt hoped that General Clay would respond as he had on that memorable day two years earlier when he publicly rebuked General Draper and reaffirmed his commitment to official American policy.

On March 22, General Clay held a meeting where he acknowledged that he had authorized a change in policy, as well as dropping the prepared cases.1 At the same time, he hedged a bit, saying “I don’t think that I stopped the study of heavy industries. Mr. Bronson may have misunderstood me. I did give him every reason to believe that I wanted priority given to the consumer goods field.”

Despite that clarification, the meeting did not go well. Apparently, in the course of explaining himself, Clay reiterated Bronson’s favorite canard that antitrust hurts productivity. One of the staffers, naturally, spoke up “to point out that decentralization as such did not mean reduced production and that the Military Government was not committed to guarantee German industries a profitable operation.” As reported by the New York Times, “General Clay interrupted with ‘I did not call this meeting to be lectured on decartelization—the meeting is at an end,’ and walked out of the room.”

The press leak, of course, was not well received by OMGUS officials. One staffer wrote that when the group was reprimanded for the leak, he objected that “[u]ntil the law was repealed by another law, not by some interpretation or policy statement of [Bronson or Clay], we could only be guided by the law.”

It turned out that there had been several internal discussions leading up to Bronson’s announcement between Clay, Wilkson, Hawkins, and Bronson. Lawrence Wilkinson, Director of the Economics division, was a diving force in persuading Clay to make the changes­—and also used his position on the internal review board for deconcentration proceedings to squash the case against the Henschel locomotive combine on the farcical ground “that it would force the Germans to compete among themselves.”

Floored

Less than two weeks after the staff wrote to Clay, Representative George Sadowski of Michigan—in the course of a House debate about the Marshall Plan—submitted for the record “a memorandum signed by 19 courageous men and women” who “felt so strongly about the outrage committed against the good job they were trying to do” that they signed their names—while noting that Bronson’s orders “were entirely oral,” and no high ranking officers “had nerve enough to put such orders in writing.” Sadowski was evidently aware of the history of the Decartelization Branch; he lamented that “[f]rom the very beginning there has been opposition, in high places in our military government in Germany; to anything which would hurt German monopoly.” Thus, this turn of events could not be pinned on the recent “break-down of relations with the Russians.”

Sadowski rattled off the names and brisk biographies of high ranking Nazis who nonetheless were allowed to retain important roles in industry. For example, even a high-ranking Nazi held guilty of war crimes by a German denazification court was “returned to work by Allied authorities to coordinate Siemens operations.” Thus, Sadowski argued, “[t]he ordinary German can very well say to us today: You came here talking of democracy. You leave us in the hands of the same Ruhr magnates and militarists who led us to dictatorship and ruin. Why don’t you give us the democracy you talk about?”2

Yet Congressional attention, at least from a representative of the minority party, seemed to have little impact.

Then-deputy military governor General George Hays, upon receiving a copy of the Congressional record, forwarded it to Phillips Hawkins with a note: “Please have read by each of 19 ‘courageous’ nonconformists. Mr. Sadowski may consider them courageous, but I consider them disloyal employees who should be treated accordingly.” The personnel office put a note on each signer’s file prohibiting promotions, transfers, or other changes of status without clearance from a higher authority. One staffer was fired. Ultimately, seven lawyers and economists resigned.

Congressional attention might have prompted OMGUS to greenlight a case against Bosch in March 1948. Yet thanks to the elaborate procedures imposed by Bronson and others, the case went slowly, with Bosch submitting its own plan in July 1948. That same month Bronson approved an agreement that would enable Bosch to export its products to a number of countries. Even by September 1948, the Decartelization Commission still had not “formally met to take action on the reply or as to a next step” because the British had been too busy to focus on the issue.

The Branch also had meetings with representatives from Siemens & Halske through the summer of 1948 “to decide whether or not a self-imposed plan for its deconcentration was practicable.” The Branch ultimately sent Siemens back to the drawing board to submit another plan in September 1948. That month, the Branch boasted of being almost done with preliminary work on Metallgessellschaft and Degussa, and making progress investigating a monopoly on matches.

Remaining staffers also duly investigated consumer goods.

How did that go? In late May 1948, Bronson submitted a staff memo for the Economic Advisor to pass on Clay that recommended taking action against Deutsche Linoleumwerke, which had a 100% monopoly on linoleum, although production was depressed to a fraction of prewar levels due to a shortage of raw materials. A later account explained that the memo highlighted a policy problem broadly applicable to consumer goods markets: “namely, the existence of a monopoly position due in part to war damage to competitors and shortage of raw materials.” The outlined three potential policy responses: 1) promptly seeking final deconcentration orders, 2) instituting proceedings but delaying action “until there was enough production to warrant such action,” or 3) “shelving entirely any deconcentration proceedings until the economy of Germany was better established.”

Bronson recommended pursuing immediate action to terminate the monopoly.

But the Economics Division did not relay the memo to Clay. Instead, Deputy Economic Advisor Hawkins made a penciled notation indicating that the matter would be held for discussion until Mr. Bronson came to Berlin—and that Hawkins and Wilkinson contemplated writing an opposition to accompany the memo. Finally, Mr. Hawkins wrote another penciled notation indicating that the matter would simply not be submitted to Clay at all.

Thus, no cases were instituted against consumer goods companies.

Bronson’s personal notes reveal that General Clay was no longer afraid of blowback from bad press, because previous leaks amounted to “screams [that] had come and gone” with few real consequences. Far from being chastened, in May 1948, General Clay approved an Economics Division policy authorizing national industry associations that would control entire industries, members and nonmembers alike, with mandatory exchange of production data. All associations would be overseen by a central Economic Administration. In other words: rather than dispersing industry, Clay pushed a form of central planning.

Counting the Next Administration’s Chickens

In late October 1948, Leland Spencer, the Chief of the Commerce and Industry Group, received a letter from a former army civilian employee named Kenneth L. Myers, which stated the author’s “expectation that policy and procedure in this matter is headed for a thorough review under the next administration.” “Consequently,” he added, it is our hope that precipitous action will not be taken until there has been an opportunity for such a review.” Spencer forwarded this letter to Major General Adcock with the note: “[i]nfo on the fact that decartelization may be reviewed & with a lot of support from American industry.”

Clay, too, had a pen pal back home. In March 1948, Clay sent a cable venting that the Decartelization Branch’s press leaks were “another outburst of disloyalty from the same old crowd who want their views accepted.”

Clay claimed that “they were planning break-ups without reason except to make small units.” In October 1948, Clay received a cryptic cable from the same interlocutor:

“On the decartilization [sic] matter we discussed on the plane, we understand you will discuss with General Robertson and will advise his reaction. Present indicated date 15 November.”

Who was this mystery correspondent?

William H. Draper, Junior.

Draper? Draper!

The very same.3

Where had Draper been since leaving Germany in the summer of 1947? What role did he have in 1948 that enabled him to send “secret priority” classified messages to Clay?

And how would the presidential election of November 1948—which OMGUS counted on New York Governor Thomas Dewey winning—work out for OMGUS?

Stay tuned for the next installment…

Share

Subscribe now

Leave a comment

Primary Sources

Below are newly-scanned primary sources relevant to today’s installment:

• Clay to Draper, March 14, 1948 cable: https://archive.org/details/clay-to-draper-march-1948

• Draper to Clay, Oct. 25, 1948: https://archive.org/details/draper-clay-plane-discussion (an exciting find that I haven’t seen referenced in other accounts)

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive—however, to minimize spoilers, I’ll wait to post some of them until later in the series. I’ll also provide a list of some excellent secondary sources.

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization to parallel democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. In the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course­– or further derailed? It turns out a patent lawyer’s love life might have played a role. German officials had mixed views, while some German academics developed a compatible framework, but outreach to ordinary Germans lagged. Four teams put together cases to break up four dominant combines.

“Deliberately Moderate” Deconcentration

The Decartelization Branch teams began circulating their “determinations and directives,” with break-up recommendations, in early Fall 1947. These were not final orders. Instead, they were more like complaints filed by the U.S. Federal Trade Commission: the beginning of an adjudication process. Under the procedures OMGUS adopted to carry out Law 56, each target combine would have three months to submit its own compliance plan, but would also have an opportunity to appeal the action. Just developing implementing regulations took many months, because of difficult coordination with the British side. Moreover, the Decartelization Branch would not be the only reviewer. In June 1947, the Bipartite Decartelization Commission (BIDEC, a joint U.S. and British agency) established two German agencies as part of a larger process to build up new German institutions of democratic governance, and gave them certain authorities under Law 56 as well, creating some “delay and confusion” about how those authorities intersected with the ongoing work of the Decartelization Branch.

Nonetheless, the teams continued to work on Bosch, Henschel, VKF and GHH.

Bosch

The team investigating Bosch documented its world-wide monopoly positions in fuel injection equipment and magneto fields, its extensive patent portfolio and international cartel connections, as well as its alleged industrial espionage before and during WWII. Bosch’s empire was built through acquisitions—especially its acquisition of competitor Ernst Eisemann and Company in 1925. Accordingly, the Decartelization Branch staff recommended reversing that acquisition, and also divestiture of certain foreign companies in which Bosch had an interest. In addition, staff recommended making Bosch inventions available to purchasers of divested units on a royalty-free basis, and to all other applicants at reasonable royalty rates. The former measure would extend to patent rights acquired within the next five years, while the latter would be limited to inventions existing as of the date of a judgment. The staff regarded these measures as the “minimum conditions upon which the competition in Germany, which Bosch had destroyed, could be restored.”

Although Phillips Hawkins had written favorably about the decartelization program, as a former patent lawyer, he was apparently uneasy with the scope of the licensing provision. He supported requiring royalty-free licenses on existing inventions, but thought that Bosch should be compensated with a reasonable royalty for inventions conceived after the date of the decree.

Johnston Avery, who had previously served in the Antitrust Division of the DOJ, wrote Hawkins about this issue in February 1948. Avery’s view was that divested units should “have free access to Bosch inventions until such time as they are able to build up their own research departments.” He noted that this did not go as far as an old U.S. antitrust case against DuPont regarding gunpowder, which required DuPont to establish new competitors with plants in a variety of states and also equip them with “ample capital, man them with experts and officials equal to its own, and supply them initially with business.” DuPont shareholders received stock in the new competitors, with certain restrictions on voting power. Moreover, in 1945, the Supreme Court had affirmed an injunction requiring licensing at reasonable royalties for existing and future patents. And the DOJ was seeking a royalty-free license remedy in another case.

Hawkins apparently expressed concern that licensing future inventions would remove the incentive for Bosch to do research. Avery responded “[t]hat has not proved to be the case in the automobile industry in the United States,” which had voluntarily participated for 33 years in a patent pool with royalty-free licenses to not only hundreds of existing patents but also future patents for the duration of the agreement. An executive at the Automobile Manufacturers Association testified before the Temporary National Economic Committee that there was general agreement in the industry that this arrangement “tended to throw the automobile industry open to broad competition with rewards going to the companies that made the best product, sold at the lowest price, but with an opportunity to every company to make a car based on the best that the art know about at the time­.” Yet this did not unduly standardize automobile manufacture; “[i]n every factory there was a fight on constantly to make changes, to make their car just a little bit better.” Moreover, even though Ford Motor Company was not a member of the trade association, it nonetheless chose to maintain patents purely on a defensive basis, offering licenses on a royalty-free basis. Its policy was to assist inventors “in getting into production and then purchasing products in which the inventions had been incorporated.”

Avery noted that even an economics professor at the University of Chicago—known for publishing a policy pamphlet in 1934 on “A Positive Program for Laissez Faire” that “gave much comfort and ammunition to the critics of the New Deal”—wrote a journal article on “Postwar Economic Policy” which argued that “fundamental and minimal” features of a global postwar order must include widespread adoption of “effective antimonopoly policies, involving systematic industrial deconcentration, dissolution of giant corporations and cartels, and effective prohibition of private monopolistic restraints of enterprises and trade.”

More importantly, in 1946 President Truman had approved the Executive Committee on Economic Foreign Policy’s recommendations that the Germans establish a patent office, while reserving to the Allies the authority to take actions including “dedication to the public by termination” of patents, if necessary to “further any program for the “disestablishment of combines, cartels or other prohibited arrangements.”

After considerable back and forth, a determination for Bosch was ready in spring 1948.

Henschel

The Henschel Determination and Directive discussed the history of the combine (best known for making Tiger tanks) and its various business lines, noting in particular its 70-80% market share in locomotive facilities and 90-95% share in bus manufacturing.

Recommended deconcentration measures included selling off at least two of the three main plants, and selling or terminating stock ties with sixteen other entities in Germany, as well as all enterprises outside of Germany.1 Notably, the main plants already operated independently of one another, with few common components.

The Henschel Determination and Directive also summarized the extensive holdings of members of the Henschel family, concluding “that the Henschel Family power… has been, through financial participation by one or more members of the Henschel Family, exercised over approximately 50 German enterprises,” giving them “power and influence… such that even minor participation in another enterprise gives a status to the Henschel view not accorded to the views of large but less influential participants.”

Moreover, beyond the family itself, a dozen Henschel company directors also served as directors in over two dozen “key industrial enterprises.” This collectively gave the family the power “toward the elimination or control of competition, to be presented in almost compelling terms to a controlling segment of German industrial and financial institutions at any given time.” Thus, members of the Henschel family would themselves be subject to directives requiring dissolution of certain family-controlled holding companies, and “disposal of their participations in such industrial and commercial enterprises as may be capable of acting as competitors, suppliers or customers of H&S” upon “severance” of the combine.

In late September 1947, Hawkins was promoted to Deputy Director of the Economics Division, and Bronson in turn was promoted to Chief of the Decartelization Branch. In civilian life, Bronson had been a lawyer for DuPont. But he had worked under the previous Decartelization Branch Chief, James S. Martin, without any major conflict. His main challenge would likely be recent “drastic personnel cuts.”

In December 1947, Bronson—perhaps self-conscious that no actions had been initiated in the ten months since Law 56 was adopted—wrote a memo about the status of the decartelization program, explaining that “[i]t has been decided both by the Acting Director and the Economics Division of OMGUS and by members of BIDEC that it would be inadvisable to issue any decentralization action or Cease and Desist Orders against improper trade practices until after the Regulations have been promulgated.” The reasoning, he wrote, was that issuance of the Regulations could be delayed, or that the Regulations might be changed in some way that would impact the form of a Determination and Directives, and a “subject enterprise” might “either follow the procedure of the old regulations or claim that it had a right to follow the original procedure which is quite different from the procedure set up in the amended Regulations.”2 In any event, he also emphasized that two cases were “substantially ready” and were “in the hands of the British… for concurrence.” Finalizing regulations would thus unleash “considerable decartelization activity in a far more apparent manner than has existed in the past.” (He also noted that various orders to target cartel practices were also “substantially ready.”)

However, in the same memo, Bronson caveated this plan of action. “[P]ostponement of the implementation of deconcentration orders” would be necessary, in certain instances, to avoid “even a brief interruption of production.” And in practice, he instituted an additional layer of review over staff objections, appointing a special committee to separately inspect Henschel properties to evaluate deconcentration. Of course, as Avery pointed out, Law 56 provided for review only in the form of appeal—not any kind of pre-filing collateral review by agencies that were not charged with enforcing the law. Avery observed that “no such review is imposed on other agencies.” This extra review would mean “[a] man can be put on trial for his life merely by indictment by the Office of Chief Counsel, but we can’t put an enterprise on trial for the divestiture of some property without prior clearance from three Divisions and the British. This might, he noted drily, give Germans the perverse idea “that the American conception of values places property over life.”

Moreover, the concern that apparently prompted the review­—that splitting Henschel into three plants would hurt production—was directly contrary to the premises of antitrust law. “Somebody has reversed the horse and cart on us,” Avery wrote; “[w]e are the ones that should be screaming about releasing productive capacity” through divestiture. He reminded Bronson that the U.S. suffered shortages during WWII because of “monopolistic conditions” impacting “aluminum, opticals, machine tools, the Phillips screws, certain building materials, ignition equipment, paint, [and] shoes.” By contrast, there was a “fantastic scale of production reached by the competitive enterprises such as the automobile industry, the clothing industry, the watch making industry and the heavy machine industry.” Urgent action was needed in Germany because the “greatest intrenchment of the monopolistic positions comes in times of scarcity,” making that “the best time for a competitor to get a foothold in the industry.” In any event, there was no reason to postpone filing actions; although the U.S. paused trials for antitrust cases during WWII, staff continued to file cases there.

Avery managed to get Bronson to back down from requiring an evaluation of whether separating plants could be done “with the expectancy of a reasonable return on the investments” for the owners—a standard nowhere in the law. Avery also refused Bronson’s invitation to chair the committee, which included another U.S. member who had expressed antipathy towards the law, asserting that “decartelization should go home and come back in ten years. But he was not able to stop the extra review.

VKF

In February 1948, Bronson received a determination and directive for VKF. Notably, the DOJ had alerted Bronson that it had pending U.S. litigation against SKF, the Swedish company that owned VKF, and two DOJ staffers who had visited Germany earlier that month on other matters also perused VKF’s corporate records. As with Henschel, Branch staff documented VKF’s history and market dominance, as well as cross-ownership of shares and interlocking directorates with other firms. They recommended that VKF sever all ties with “each and every plant and other facility, wherever located, which is suitable for the purchase and sale of anti-friction bearings.”

GHH

A determination and directive for massive steel and machinery combine GHH—which encompassed 300 companies—was submitted to Bronson in the early spring of 1948. This determination was regarded as “incomplete,” but nonetheless reflected “extensive investigation.” The bigger challenge would be coordination with the British, given GHH’s significant operations in the Ruhr Valley.

In any event, multiple cases were ready for Bronson to greenlight by Spring 1948.3 Even a historian who was skeptical of trustbusting characterized the deconcentration teams’ recommendations as “deliberately moderate.” In sum, Bosch would be split by reversing its acquisition of a competitor. Henschel would be split into two equal companies. GHH would be split the same way the British handled their zone.4 And VKF’s deconcentration would mitigate the Industry Branch’s embarrassing decision to grant it a near-total monopoly by decommissioning its largest competitor.

A Special Announcement

Then, in March 1948, Bronson called a staff meeting. Far from launching any of the ready cases, he declared a new decartelization policy: all capital goods and heavy industries enterprises would be exempt, as would vertical integration. Staff would instead target consumer goods—under a “rule of reason” standard. And enterprises with no pending actions were to be granted an affirmative “clean bill of health.”

This shocked staffers. Had Bronson gone rogue? Did he think General Clay was so busy with other Military Government priorities that he would not notice this betrayal? Some of them must have recalled the infamous meeting in 1946 where Clay yelled at Draper in front of everyone. Bronson’s new policy was more brazen than what Draper did. And tellingly, Bronson did not put the new policy in writing.

So staffers got together and escalated their concerns to General Clay.

Would that lead to another fateful meeting?

Stay tuned for the next installment…

Subscribe now

Share

Leave a comment

Primary Sources

Below are newly-scanned primary sources relevant to today’s installment:

• The VKF Determination and Directive; Henschel Determination and Directive

• Memo from Francis Laurent to Bronson, Oct. 18, 1947 (re OMGUS failure to engage in systematic enforcement efforts relating to cartels).

• Memo from Johnston Avery to Richardson Bronson re: Basic Principles of Competitive System, Dec. 2, 1947 (re premises of antitrust and divestiture remedies to unleash productive capacity, and objects to committee to re-investigate Henschel case); Memo from Avery to Bronson, Jan. 5, 1948 (opposing requirement that committee determine whether owners will obtain reasonable return on investments); Memo from Avery to Bronson, Jan. 10, 1948 (re Bronson ordering Avery to attend the committee meeting); Memo from Avery to Hawkins, Feb. 24, 1948 (re Bosch Patent Question)

• Charles Dilley Testimony, Dec. 17, 1948.

• Memo from Richardson Bronson to Brigadier Oxborrow of Bipartite Control Office, Dec. 21, 1948 (trading company might be a “front” controlled by Bosch).

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive—however, to minimize spoilers, I’ll wait to post some until later in the series. I’ll also list some excellent secondary sources.

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization to parallel democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. In the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course­– or further derailed? It turns out a patent lawyer’s love life might have played a role. German officials had mixed views, while some German academics developed a compatible framework, but outreach to ordinary Germans lagged.

Target Practice

In June– four months after Law No. 56 was enacted– Phillips Hawkins “was in a terrific hurry” to take action.” As he explained a few months later in an interim report directed to the Secretary of War, “[t]here are at least 69 combines in Germany today which appear to possess characteristics of illegal concentrations within the meaning of the law,” and still “others which will have to be examined.” Of course, some of those were based in the zones of other Allies. Nonetheless, “[i]n the United States Zone alone, there were [over two dozen] such combines having their headquarters or principal place of business in that Zone.”

Due to resource constraints, however, the Decartelization Branch had to focus on just a handful of initial “targets.” Hawkins’ aim was to pursue “a sufficient number of dissolution actions and trade practice cases against the most vicious violators so as to set a pattern and establish precedents which can be followed in a consistent manner by future German courts.” He also hoped “[t]o enlighten the German consuming public concerning the mass advantages of the free enterprise system to such a degree that future public sentiment in a democratic state will demand continuation of the fight against monopolistic practices.”

Hawkins tasked four Decartelization Branch teams with putting together cases against German combines. Each deconcentration team was staffed with four professionals and a secretary.

They dove in to their assignments with alacrity. Done well, these initial cases could demonstrate the viability of restructuring the German economy, quell the carping of the Economics Branch, and built trust with the German public. Besides conducting an in-depth study of each business, the teams had to come up with plans outlining specific business units and plants that should be divested.

Combines were chosen for targeting based on dominance in their industries– as well as the strength of their Nazi ties. Early on, the group considered targeting a German subsidiary of International Telephone and Telegraph (ITT). As early as 1939, “the German electrical equipment industry was concentrated into a few major corporations linked in an international cartel and by stock ownership in two major U.S. corporations”– International General Electric and ITT. Post-war interrogation of a financier revealed that ITT made “cash payments to S.S. leader Heinrich Himmler” in order to protect its investment in a German firm that made “fighter aircraft used against the United States.” ITT’s subsidiary was dropped from consideration, however, due to pressure from U.S. intelligence agencies.1

“The names… [of the combines chosen were not] released to the Germans,” Hawkins informed a superior, “as it is not desirable that the other companies gain a false feeling of immunity from the Law.”

The initial targets were:

1. Henschel and Sohn, a locomotive and armaments firm that made Tiger tanks for the Nazis. By the end of the war, this combine “possesse[d] the most extensive locomotive facilities on the continent of Europe, constituting between 70 and 80 percent of all Germany’s [locomotive] facilities” and “from 90 to 95 per cent of all Germany’s trolley bus manufacturing capacity.”

   

2. Robert Bosch Company, an automotive fuel injection equipment trust. The trust’s fuel injection products accounted for 50 – 80% of Germany’s production of 13 different classes of commodities, and there was evidence that the company “was an important unit in the economic warfare conducted by Germany prior to and during the war.”

3. Siemens & Halske, an electrical engineering combine. During the war, Siemens had contractually pushed an American firm not to grant a British aircraft-equipment firm a patent license that would enable the British Air Ministry to expand production of aircraft carburetors. Siemens also had a “gentleman’s agreement” with General Electric to maintain certain “minimum selling prices and conditions.”

4. Metallgesellschaft A.G., a metals combine. Former Decartelization chief James S. Martin had investigated the company while trailing troops after the war,2 and found that it had “figured quietly, but very substantially, in practically every industrial field that fell between the iron and steel industry and the chemical industry, especially in nonferrous metals and alloying materials,” with perhaps its highest German market share clocking in at 40% of Germany’s copper smelting and refining. One subsidiary had even “secured a monopoly of all raw materials from mines in Spanish Morocco,” and “[o]ther subsidiaries controlled the largest deposits of phosphate rocks in the United States.” Board members were so interlocked that “three industrial firms… and three of the big Berlin banks… as well as the Nazi ministries of the Four-Year Plan for rearmament, had supplied the over-all direction of the affairs of Metallgesellschaft.”3

Hawkins gave each team ten weeks. Three out of four reports met that deadline. Economist Charles Dilley recalled that “[t]he Siemens & Halske team was extremely plagued by personnel difficulties,” some “[p]eople didn’t get [to Germany] from the States [in time]; other people left the Branch.”4 Work on Metallgesellschaft also ran into delays after the first report. So somewhere along the way the teams picked up two other combines:

5. Gutehoffnungshütte (Good Hope or GHH), a steel and machinery combine. GHH was an “aggregation of approximately 300 companies” with a varied product line including “locomotives, Diesel engines, automobiles, farm machinery, stoves, wire goods and cables, rivets castings and forgings.” What GHH lacked in market shares, it made up for with the political connections: “with Nazi connections of their management and the [controlling] Haniel family members, the Good Hope companies had very little to worry about.”

5. Vereinigte Kugellagerfabriken AG (VKF), a “dominant manufacturer of anti-friction bearings” that was an almost wholly-owned subsidiary of Swedish company SKF.5 Such bearings were used in “[a]ircraft, trucks, automobiles, trains, military equipment, machine tools,” and so on down to “household appliances,” making them a “world necessity in this modern industrial economy.” “[M]ore than 50 per cent of the bearings produced by SKF throughout the world were made in Germany.” VKF had a history of predatory pricing both in Germany and abroad. Moreover, the U.S. Department of Justice had filed a complaint against SKF’s U.S. subsidiary for having an arrangement where the American subsidiary exported bearings to SKF overseas markets, which “enabled SKF to divert its Swedish output to Germany” while limiting bearings in the U.S. market. Addressing this combine would remedy the Industry Branch’s embarrassing decision to grant VKF a monopoly by decommissioning the plant of its largest independent competitor, Kugelfischer.

After further refinement by supervisors, the teams deemed four cases ready to launch by spring 1948.

In the meantime, there had been more personnel changes at OMGUS. In September 1947, Hawkins was promoted to Deputy Director of the Economics Division. In that capacity, Hawkins published an article in the OMGUS biweekly Information Bulletin touting the benefits of Law 56: “[t]o the millions of German workers the law will mean more and better jobs,” by promoting competition, and “[e]very housewife will benefit by lower prices.”

Hawkins appointed Richardson Bronson to replace him as head of the Decartelization Branch. Bronson, a former lawyer for DuPont without any previous training in antitrust, had worked directly for former Decartelization Branch chief Martin on overseeing a large combine that OMGUS had seized. Bronson had also served as best man at Hawkin’s wedding to Draper’s daughter. And the new deputy chief Johnston Avery, a longtime staffer in the Decartelization Branch, was an experienced DOJ antitrust lawyer who had investigated German cartels with James S. Martin before transferring to OMGUS.

How did these personnel changes impact the deconcentration program as it geared up for its first deconcentration procedures? What did the team’s Determination and Directive reports look like? And how did they propose to break up the combines?

Stay tuned for the next installment…

Share

Subscribe now

Primary Sources

Below is a newly-scanned primary source relevant to today’s installment:

• July 1947 correspondence where Wilkinson affirms Clay’s policy of excluding certain firms from export-import financing until they had undergone “proper reorganization and decartelization."

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive—however, to minimize spoilers, I’ll wait to post some of them until later in the series. I’ll also provide a list of some excellent secondary sources.

Leave a comment

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization to parallel democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. In the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course­– or further derailed? It turns out a patent lawyer’s love life might have played a role. German officials had mixed views, while some academics developed compatible views.

“People Were Talking Socialization”

Germans did not hesitate to express their preferences, even in defeat. Just a week after the Nazis surrendered, German trade unions demanded that all coal mines be socialized. In September 1945, a trade union federation in the Soviet Zone formally proposed that heavy industry be socialized. The following year, the Social Democratic Party advocated socializing all property confiscated by the Allies­– other than small and medium businesses­– as a step toward a democratically planned economy. By socialization, SDP meant self-governing organizations with labor serving on boards, rather than state ownership. SDP believed that dissolution would only be a temporary fix, because capital would simply reconstitute into new big business combinations.2

The Americans had been apprehensive about collectivism even before World War II began. In 1938, after FDR urged Congress to address concentrated private economic power, Solicitor General Robert H. Jackson gave a speech contending that economic concentration paved the “road to socialism.”

After the war, OMGUS leadership observed German sentiment with concern. General Clay told staffers in October 1946 that he believed Germany “must have small ventures, or we will find our ventures will be affected by influence of Communists, and the influence of the British Labor Party [which increasingly favored nationalization of heavy industries] in the British Zone.” Rising tensions with the Soviet Union­– which encouraged collectivism in its Zone even as it seized certain German property for itself as reparations­– heightened American concerns.3

There were some German leaders who publicly echoed American views favoring decentralized free enterprise. For example, in August 1946, Konrad Adenauer, gave a speech to the Christian-Democratic Party (CDU)’s Congress warning that “[t]he concentration of economic power in the hands of a few, whether private or public, is a danger to the political freedom of the individual as well as of the people as a whole.” Yet he also advocated a “mixed-economy,” where, for example, private capital might have a minority stake in a mining operation, while the majority of shares would be split between workers and local government.

When Herman Abs, Deputy Chair of the German Reconstruction Loan Corporation, was asked a few years later whether the German public generally “favored socialization or whether they favor individual initiative,” Abs hedged that “[i]t depends very much on how it is stated and presented to the public. If there should be a plebescite, I should say today that rather the majority is inclined to socialization. But if all facts could be stated properly and carefully it might be different.” Even though the CDU was “in principle not in favor of socialization,” he predicted that a vote on the topic might “split the party.”

In October 1946, the French-occupied state of Hesse voted in favor of a new constitution that banned “the abuse of economic freedom, in particular [if used] to accumulate monopoly power”– and required all “property that harbors the risk of such abuse” to be “transfer[red] into common property.” Further, it specified a wide range of basic industries­ including coal, iron, steel, potash, and transportation­­ that would be subject to common or public ownership. The CDU and the liberal Free-Democratic Party challenged this charter in court. Meanwhile, General Clay “insisted on a separate referendum” to stop (or at least forestall) that outcome. When that referendum passed, Clay “decided to withhold approval of the Landtag’s implementing legislation” at the Allied Control Council. Outraged SDP leadership analogized these actions to the Nazi Party’s anti-democratic coups against the Weimar Republic.

As this dispute played out, two more states, both in the British Zone, enacted socialization laws. Although there were detractors who preferred capitalistic private property rights, they were outvoted. In any event, the British ultimately fell in line with OMGUS, by agreeing to punt the question of socialization until the Germans had their own fully sovereign federal government.4 The United States later made Marshall Aid to West Germany conditional on deferring socialization.

OMGUS Outreach: A “Dale Carnegie in Reverse”?

One economist–who was not part of Draper’s clique, but instead worked within the Decartelization Branch–was particularly outspoken in favor of outreach efforts to the German public. Originally from Kansas, Charles Dilley had worked as a school superintendent before earning a master’s degree in economics and teaching economics at a military academy.

Dilley was hired to lead the Consumer Goods Section in April 1946, and within a year was promoted to serve as an assistant chief of the Decartelization Branch. Dilley supported Law 56 and largely embraced official decartelization and deconcentration policies in general–although he had spirited debates with lawyers who came from the antitrust division about how to implement those policies without impairing technological or engineering efficiencies.

In September 1947, Dilley wrote to then-chief of the Decartelization Branch, Phillips Hawkins, noting that he been “rather active in this field [of outreach to Germans] for the past year and a half” and was “keenly interested in it.”

Ordinary Germans were susceptible to collectivism, Dilley feared, because they had not been educated about any alternative. “Everywhere I went around here at first, particularly among Germans, people were talking socialization,” and that was naturally concerning, in his view, because the “Socialist” Nazis had rearmed Germany. “Every argument that can be used to justify holding-company empires,” Dilley wrote, “can be turned to justify the socialistic programs. If business organizes itself into a nest of private collectivisms, it will have little argument against establishment of an overriding public collectivism.” Dilley linked the mission of “establish[ing] a democratic, peace-keeping Germany” with promoting a “capitalistic Germany with as large a healthy middle-class as possible.”

But Dilley was not sure OMGUS had settled on a consistent philosophy to communicate. If OMGUS “conceive[s] of [its] program as an honest, straight-forward, antitrust, antimonopoly program,” Dilley believed “we may fairly expect honest and sincere German decartelizers to get behind it.” Germans would not accept a program they view as “punishment.” Other parts of OMGUS—the “War Crimes people, Denazification people, Demilitarization people, Reparations people, etc.”—would “deal out the punishment for Germans.” The Decartelization Branch “should honestly stress that we have no intent or desire to atomize (pulverize) German industry: that our purpose here is not to permit the rest of the nations of the world the benefits of large-scale production, but to punish Germany by denying those benefits to her, thus crippling the German economy and making the international markets café for American big business interests.” Dilley was optimistic that OMGUS could “defend (and sell to the German people) a deconcentration program on antitrust, fair opportunity, free enterprise, fair trade grounds, if it actually has these ends as its honest aim.” Dilley contended that, instead, “[t]oo often we have talked as if we were determined to atomize German industry.” Accordingly, he thought OMGUS had accomplished “a Dale Carnegie in reverse,” putting into practice the techniques of “How to Lose Friends and Alienate People.”

Yet in later testimony, Dilley could name only one person in the Decartelization Unit he personally witnessed taking an extreme position about “deconcentrat[ing] everything” such as “set[ting] the railroads up as little individual competing railroad lines.” This lieutenant colonel was eventually relieved of duty by Hawkins, but perhaps because the encounter happened soon after Dilley joined OMGUS in April 1946, it made a “lasting impression” on him. Dilley admitted that he could not recall Martin or Hawkins or other OMGUS leaders advocating any “ruthless action, pulverizing or atomizing.” Moreover, Dilley spent some time with fellow economists in the Economics Department, who were prone to fomenting caricatures and mischaracterizations about the Decartelization Branch, both within OMGUS and in communications with outsiders.5 In any event, Dilley viewed Law 56 itself as “moderate” and “sensible.”

Ordinary Germans were not completely in the dark about OMGUS’s plans to promote free enterprise. For example, an August 1948 German news article reported that OMGUS would be taking action against groups including the “scrap-iron dealers, the shoe-manufacturers, the truck manufacturers and the producers of mining equipment, that had intentionally or not” thwarted post-war free enterprise through price-fixing, which could be penalized by a fine and even imprisonment. Another article noted that “[t]he principle of an open competition is to be maintained at all events, and the Military Government will severely interfere against every attempt to evade these regulations.”

But apart from such dispatches, OMGUS fell short in communicating the overall goals and philosophy behind its planned economic reforms. This was likely due in part to a shrinking budget, as a Republican-controlled Congress sought to slash costs. Even when the Marshall Plan gained steam, that did not translate into more funding for outreach.6

If Not Talk, Then Action?

Winning over Germans without a comprehensive messaging program would be challenging­– but perhaps not impossible. If the Decartelization Branch could take legal action to demonstrate how economic decentralization worked in practice, that would deliver concrete results that could persuade the German public (and quell internal critics).

There was even low-hanging fruit that would take minimal resources to implement: OMGUS could start by simply eliminating Nazi-era occupational licensure requirements. Many Germans still could not open up a new business, such as a watch repair store, without first navigating a crooked licensure process controlled by local cartels and monopolies, which were often Nazi-affiliated. The Decartelization Branch received “hundreds of complaints from independent German businessmen that although their plants were ready to operate, they had been refused the necessary license.” Nixing these restraints would give ordinary Germans the experience of free enterprise.

Moreover, despite personnel cuts, the Decartelization Branch still had sufficient resources for Hawkins to organize four teams to launch investigations into various major combines in June 1947. According to Dilley, Hawkins “was in a terrific hurry,” giving the teams an initial deadline of about 10 weeks. Each team was tasked with putting together not merely an extensive study of their assigned combine, but also a “deconcentration plan outlining specific subsidiaries and plants to be divested and then a draft directive to the company to give effect to that deconcentration plan.” Dilley had expressed concern that Germans could “no more conceive of Siemens & Halske [an electrical engineering combine] as an evil doer than can the average American conceive of General Motors as an evil doer. They consider such corporations one of the sources of Germany’s strength and greatness.” This initiative would tackle not only Siemens & Halske, but also three other combines.

So, how did the Decartelization Branch fare in taking action?

Stay tuned for the next installment…

Share Balancecraft

Subscribe now

Primary Sources

Below are newly-scanned primary sources relevant to today’s installment:

• Letter from Charles Dilley to Ferguson Committee member A.T. Kearney re: "Transmittal of Memoranda Dealing With Winning German Support for the Decartelization Program," Dec. 13, 1948, https://archive.org/details/dilley-German-support

• Letter from economist Charles Dilley to Chief Phillips Hawkins re: "Mr. Avery's Proposals for the Deconcentration of the Henschel Combine," Sept. 18, 1947, https://archive.org/details/dilley-henschel

• Letter from Johnston Avery to Charles Dilley debating “technological efficiency” as a metric for deconcentrating German combines, Sept. 19, 1947, https://archive.org/details/avery-dilley-efficiency

• Letter from Charles Dilley to Johnson Avery re: Clarification of Policy Statement, Sept. 22, 1947, https://archive.org/details/dilley-avery-efficiency

• Letter from lawyer Creighton Coleman to economist Charles Dilley, with response typed on the same letter, https://archive.org/details/dilley-coleman-debate

• Memo from Charles Dilley to Phillips Hawkins, “Explaining Decartelization to the Germans,” Sept. 10, 1947, https://archive.org/details/dilley-educate-Germans

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive—however, to minimize spoilers, I’ll wait to post some of them until later in the series. I’ll also provide a list of some excellent secondary sources.

Leave a comment

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization to parallel democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. In the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course­– or further derailed? It turns out a patent lawyer’s love life might have played a role. German officials had mixed views on the Allies plans.

A “Conscious Task of Public Economy Policy”

The city’s eponymous university, founded in 1427, is one of the oldest in Germany. During the Nazi era, the University of Freiburg lived up to its name by harboring scholars who questioned the Third Reich’s approach to political economy, and instead developed a new vision for a free market system.

In 1933, an attorney named Franz Böhm published “Competition and Monopolistic Struggle”—the foundational text of what came to be known as “ordoliberalism.” Böhm’s views were informed by his firsthand experience with enforcement of Germany’s weak cartel regulations at the Imperial Ministry for Economics. Breaking from neoclassical economics’ fixation on equilibrium models, Böhm sought to explain how monopolies and cartels undermined the rule of law and the liberal constitutional order of the Weimar Republic. Böhm came to regard competitive markets, where no player could abuse market power over another, as guarantors of peace and the rule of law.

In 1936, Böhm and several other scholars published an “Ordo Manifesto.” The ordoliberals elevated competition to a fundamental constitutional principle for governing both state and private actors. Böhm was clear-eyed about the tradeoffs involved: “[i]f we want freedom, we have no option but to sacrifice some advantage which we could obtain only by employing concentrated power.” In other words, potential benefits of centralization, such as efficiency, could not offset harms to individual economic freedom. And the state had to play an active role to create the conditions for such freedom. As ordoliberal economist Alfred Müller-Armack declared a decade later: “the free market is not automatic… we must today regard the organization of competition as a conscious task of public economic policy.”

The ordoliberals scrutinized all forms of corporate economic power, ranging from cartels to monopolies to patents and other restraints on trade. For example, a co-author of the manifesto, Walter Eucken, advocated not only for monitoring cartels, but also subjecting mergers and acquisitions to approval by a special commission, which would have the power to either impose conditions or prohibit the transaction.1 In reports commissioned by the Allies, Eucken also recommended breaking up Germany’s big banks.

Located in the southwest corner of Germany close to the borders of Switzerland and France, near the Black Forest, Freiburg was a natural fit for those who wanted to distance themselves from the Nazi regime, both physically and philosophically. Nonetheless, the university’s scholars did not carry on unscathed. Eucken, who began his career as a conservative, nationalist thinker, was eventually interrogated by the Nazis thanks to his growing “reputation as an outspoken critic of Hitler’s dictatorial regime and its authoritarian and totalitarian ideology.” Other academics fled the country. The city itself also suffered the scars of war; most of the old, medieval center was destroyed by Allied bombing.2

Some who fled took refuge in French, British, and American institutions, and influenced economic warfare investigations and policymaking in their host countries. For example, Franz Neumann, a Jewish scholar who fled to New York City in 1933, coined the term “totalitarian monopoly capitalism” to explain the organization of the Third Reich and its drive to “total war.”3 In addition to developing new theories, such expats conducted empirical studies to debunk arguments that cartels stabilized the economy.4

After the war ended, some expats rebuilt connections at home. One key example was Heinrich Kronstein. Although Kronstein did not label himself as part of the Freiburg School, he was close with Böhm. After the war ended, Kronstein co-authored the policy reports that originally guided OMGUS and next spent the latter part of 1945 heading the German Agencies Section of the Economics Branch of OMGUS, where he focused on unravelling legal problems relating to foreign-held corporations. He then split his time between teaching at Georgetown Law School and the University of Frankfurt, which enabled him to keep close ties with contacts working on drafting German competition laws and in academia. Thus, he “necessarily saw the problems of American antitrust law in the light of German experience and the problems of German antitrust law in light of American experience.” Kronstein believed that law must be “wertgebunden” (value-bound) to effectively protect freedom, and that one of the principle aims of the legal system should be preventing private individuals and organizations from acquiring power that threatens the stability of the system.

Another German academic who returned home after the war was Walter Hallstein, who had chaired the Institute for Comparative Law at the University of Frankfurt until he was captured and held as a prisoner of war at a military camp in Mississippi from 1944 to 1945. While there, he worked with the University of Chicago to establish a camp university where he taught, among other subjects, American antitrust law. In the summer of 1945, he enrolled in a re-education program arranged by the U.S. Department of War, which gave him the opportunity to network with other returning Germans.5 Three years later, he went back to the U.S. through an exchange program between Georgetown University and the University of Frankfurt, where he impressed Kronstein as “the best qualified man to build bridges to German universities.”

The ordoliberals were not entirely alone in their efforts to rethink Germany’s political economy. Other groups, including certain socialists, communists, trade unionists, proto-Keynesian economists and the French Popular Front, had developed antipathy towards cartels by the 1930s because of the Great Depression.6 By the mid-1940s, ordoliberal views were becoming mainstream.7

Böhm and other ordoliberals started drafting the new German government’s anti-cartel law in 1947.8 Yet, even with the support of Ludwig Erhard, the first Director of Economic Administration in the fused American/British zones of occupation, the ordoliberals did not achieve political influence commensurate with their intellectual influence. Indeed, “none of Erhard’s advisers received a relevant position [in German government] when the restructuring of the German industry finally began.”

A “Lack of American Literature”

Outside of academia, a group of proactive German attorneys formed a committee to figure out “how to apply the guiding principles, developed in USA, to the base of the economical and judicial development in Germany.” But, as one wrote to FTC Commissioner Garland Ferguson in 1949, they were “handicapped by the nearly entire lack of American literature,” equipped only with a few old law review articles, and would appreciate receiving more resources for education and discussion. This meant that were they missing out not only on precedents and historical material; they were also missing out on contemporaneous events in American antitrust, such as the 1948 divestiture of unlawfully acquired theater chains and the break-up of the Paramount system. Such cases elaborated on the rationale for such structural remedies, including “depriv[ing] the defendant of the gains from his wrongful conduct” and “undo[ing] what could have been prevented had the defendants not outdistanced the government in their unlawful project.”

Another German attorney drafted a preamble to a commentary on Law 56, which found that the Americans’ legislation was aligned with the German philosophical principle that “freedom does not mean unrestraint but willing obligation” and even with certain existing legal principles, although “[t]he want of a legislation and jurisdiction which secure the free action of every tradesman cannot be refused” (likely meaning, denied). This attorney concluded:

“Thus, the Law No. 56 of Military Government proves itself to be not—as it is often looked upon—a handcuff by the victors but a base for the development of a German legislation and jurisdiction on this line of administration of justice, so authoritative for our future political and economic life. It is the task of our jurisdiction to rank the regulations of this law into our law concerning competition and to develop it according to the German conditions. We cannot and will not resign from taking ideas from the America jurisdiction. Therefore this work, too will occupy itself thoroughly with the state and the development of this American jurisdiction.”

Quite New to the Ordinary German Mind?

That even practicing attorneys had difficulty accessing information about American antitrust law raises questions about OMGUS’s approach to public outreach. Was this just an isolated oversight in an otherwise coherent program? Were ordinary Germans even aware of America’s plans to introduce economic democracy hand in hand with political democracy? If so, what did they think?

Stay tuned for the next installment…

Share

Subscribe now

Primary Sources

Below are newly-scanned primary sources relevant to today’s installment:

• 1949 Letter from German patent lawyer Werner Cohausz to FTC Commissioner Garland Ferguson about lacking resources on American antitrust

• The draft preamble to a commentary on Law 56 referenced in the letter.

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive— however, to minimize spoilers, I’ll wait to post some of them until later in the series. I’ll also provide a list of some excellent secondary sources.

Leave a comment

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization in parallel with democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. But in the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course­– or further derailed? It turns out a patent lawyer’s love life might have played a role.

Quite New to the German Mind?

Unlike the U.S., Germany had never adopted antitrust laws to counterbalance its rapid industrialization and the few restrictions it placed on cartel practices in the 1920s were rarely enforced. So economic decentralization, at least on the scale the Americans envisioned, would indeed have been “new to the German mind.”

Yet why propose this gatekeeping criteria—continuity with previous organizing principles of German society—just for this particular policy area? After all, the Allies were not exactly hesitant to enact other reforms to ensure a country that had already waged two world wars in half a century would not launch a third. The Allies had already resolved that Germany could not be permitted to simply revert to pre-Nazi laws and institutions, and ensured that “every amendment of [Germany’s new Constitution] and adoption of new laws” would be conditioned on their approval. Whatever would have been best in principle, in practice the opinions of German officials took on greater importance over time as budget cuts drove OMGUS to adopt a policy of “mak[ing] the Germans decartelize themselves.”

So what did German officials think? Some members of the old German establishment had learned nothing. James S. Martin recalled that when the exiled German ex-chancellor Heinrich Brüning gave a lecture in America in 1940, Brüning expressed a belated realization that there was a historical template for the forces that pushed him out of leadership: Thucydides’s classic history of the Pelopennisian War. Brüning had come to regret governing by emergency decrees that overrode the Reichstag and weakened the “equal protection of the law” and he acknowledged that “voluntary” agreements among business interests were futile in stemming “large-scale economic forces.” But Martin found that Brüning’s hindsight was still less than 20/20:1

“Even in the retelling, however, it seemed to me that Dr. Brüning again showed some of his former blindness. The main point in Thucydide’s history was the discovery of the large part that economic forces play in bringing nations into conflict. Yet, even when pressed by questions, Dr. Brüning showed no particular concern over the role of the large German industrial corporations. He related the entire story of Franz von Papen’s intrigues… without once alluding to von Papen’s conferences with the bankers and the Rhineland industrialists who agreed to back Hitler and who put up the funds. It was, throughout, a story of politics without economics: a story of a man who had felt that no harm could come from the temporary dictatorship so long as the laws and the courts protected civil rights, who showed no feeling for the ways in which great economic power and unlimited funds could get around an inconvenient legalism.”

The Economics Division, for its part, had managed to befriend any number of like-minded industrialists and economists. One such contact was Gustav Stolper, an Austrian economist2 who had served in the German Reichstag in 1930 before fleeing the Nazis. In early 1947, Stolper shepherded ex-President Herbert Hoover on a tour of Germany that was originally supposed to focus on food supplies, but somehow yielded a set of sweeping economic recommendations that happened to dovetail with the convictions of the Economics Division. Stolper later wrote that “the Americans in charge of antitrust in Germany seem to have acted under the illusion that the Germans themselves had never recognized the problem or done anything about it.” He disparaged the “young American lawyers in whose minds German history is a blank.”

In reality, the original proposals for dispersing economic concentration in Germany were drawn up not by “young American lawyers,” but by a subcommittee of the State Department’s Executive Committee on Economic Foreign Policy. Led by Dean Acheson, members included staffers from Thurman Arnold’s Antitrust Division, including Joseph Borkin, Sigmund Timberg, Corwin Edwards, and a German-Jewish lawyer named Heinrich Kronstein3 who worked as a judge and in private practice in Germany before emigrating in 1935 to the United States, where he became a law professor and served in the Antitrust Division.4 Kronstein testified before Congress:

“After the cartels were once established it could be quickly seen that the big industrialists inside the compulsory cartel had a more or less absolute leadership. Very often if not in most cases, the suspicion arose that the compulsory cartels were only made on the request of the big fellows because of the refusal of one or another of the small industrialists to join.”

The subcommittee issued two reports, in March and July 1945, which guided OMGUS.5 One stated: “the powerful domestic German cartels—and through them the big German combines—were the dominant factors in international cartels… Through them German firms were able to exercise monopoly control over large sectors of non-German industry—restricting output, controlling prices and technology.” Far from treating German history as a “blank,” as Stolper claimed, the report expressly repudiated Germany’s previous ineffective cartel laws.

The Economics Division also had connections with elements of the emerging German government. In May 1947—while decartelization chief James S. Martin was back in the USA on the verge of tendering his resignation—the Germans somehow happened to decide that decartelization work would be housed solely within their Ministry of Economics, rather than having any presence within their Ministry of Justice.6

The frustration of some German officials who were upset with their ongoing lack of sovereignty was succinctly reflected in a document that labeled a list of firms impacted by American deconcentration plans as “German economy outside of German influence.” Several German officials were later interviewed about their experiences with OMGUS. Dr. Otto Schniewind, Chairman of the Committee for West Germany’s Reconstruction Loan Corporation, was skeptical of the American view that hyper-consolidation was a bad policy choice that helped bring Hitler to power. He argued that the “concentration of manpower widely unknown in your country… [put Germany] in the position of facing the necessity of concentration of economic power, concentration of economic power aimed to use the human force of those millions of people concentrated in small areas in order not to split the power and to make a better and bigger use of it than could be done without such concentration.…[S]uch a high concentrated population as we had before 1939 and especially after 1945 has not enough room to establish free individual competition. Not everybody could do in that imagined competitive market what he liked. The highest effect could be reached only if this concentrated manpower could be used in concentrated economic forces.”

When asked about Law 56 specifically, Schniewind acknowledged that “there have been abuses of economic power in Germany,” but maintained that “the splitting up and deconcentration as foreseen in Law 56 is not in every direction useful for German economic conditions.” He did not view industry concentration as something readily useable by Hitler to foster a war economy, but rather emphasized that the individual “leaders of the industry were willing to go together with Hitler.” He supported deconcentration of Farben, but viewed the coal, iron, and steel industries as efficient.

Another official, Hermann Abs, Deputy Chair of the RLC also offered his opinions about Germany’s economy and prospects for reform. Abs was not exactly an impartial observer, having served on the board of Deutsche Bank—and its Farben oversight committee—during the Third Reich.7 However, Abs was cleared of wrongdoing after serving as a witness in the Nuremberg trials. Regarding the causes of Germany’s economic concentration, Abs explained that “the destruction of liquid funds through the period of inflation 1921-23 and during the crisis in 1931 led more than anything else to bring about larger units in Germany.” He pointed to United Steelworks, Farben, and big commercial banks like Deutsche Bank as examples. Abs similarly attributed the formation of cartels to inflation, but acknowledged that some industries did not become concentrated after the inflationary period of the 1920s. The textile industry, for example, retained a “sufficient amount of variety.” Meanwhile, “[i]n the cement industry the largest unit produces about 20% of the total” capacity, and cement cartels remained regional with some businesses that stayed independent; Nazi “efforts to bring about unified cartels for all Germany were not successful [due to] the opposition of the various companies who didn’t want to be just dependent manufacturers depending on one strong cartel.”

Abs thought that in the postwar economy where “any products can be sold either in the market for reconstruction, if it can be financed, or in the world market, one can very easily do away with cartels.” But he was “afraid that the time when a slump or a crisis should come up again the people will get together and try to find out how to defen[d] a certain industry against the effects of such a crisis.” Although he believed some cartels benefit “smaller and weaker manufacturers” and benefited consumers, he acknowledged that “in many instances” cartels were “abused by the larger, stronger manufacturers.” He agreed on banning cartels whose purpose was to “just to keep prices up” or eliminate international competition. Overall, “we should have a more competitive and freer economy and then watch carefully whether there are still either cartel organizations or some price agreements, etc. that should be examined.”

Abs also expressed concerns about how a transition to deconcentration would work. “[I]f one wants to aim at a certain policy of deconcentration, to put up separate units, there must be either a safeguard that each individual [coal mine] unit has a chance of working with a profit or without a loss, or someone is going to give some support, as this aim can only be reached after a certain period of years…”

A third German official was more amenable to official American policy. Ludwig Erhard’s background was in consumer market research but in 1944, he wrote a memo which caught the attention of U.S. authorities by predicting how losing the war might impact Germany’s finances. In March 1948, Erhard was elected Director of the Department of Economics by the Bizonal Economic Council.

The most pressing topic on Erhard’s mind was currency reform. Acting with American encouragement, in June 1948 Erhard introduced a new currency in West Germany: the Deutsche Mark. Then he took another leap without the blessing of the Allies by lifting price controls on many consumer goods in tandem with the currency reform. These actions were ultimately viewed as a success; the black market soon subsided and industrial production skyrocket from 50% of 1936 levels in June 1948 to nearly 80% by the end of the year. (However, the transition was not entirely smooth: a swift bout of inflation led to a general strike by the trade unions in November 1948.)

Erhard said that he was “absolutely positive towards the purpose of decartelization laws insofar as they hinder cartels and cartel-like trade practices,” but had a nuanced take on Germany’s cartels that varied by industry: “We have had cartels which had a good effect in the sense of establishing a sound market order. We had others which only sought to insure their market position.” What role did these groups play in the Nazi regime? Erhard thought that the existing cartels “formed the first point Hitler could grab to enforce and foster his plans. He took the cartels and organized them to the management links, committees, etc., to more closely and straighter organized bodies than he had before in those economic consumer goods cartels.” Erhard did not favor having cartels going forward, “because I regard cartels and the like practices as a medium for excluding a fair competitive market.”

As for deconcentration, Erhard distinguished between a “an economic firm which had developed itself in technical and economic steady development in a natural organic process” and a “group of concentrations founded purely out of reasons of economic power”—such as industrialist Hugo Stinnes’s coal and trading empire, which already boasted sixty subsidiaries by 1914. As examples of the former category, he named Bosch and Siemens, which in his view “had natural reasons [for growth] because of development of other technical processes of [the] enterprise. For instance, [television] developments or radio developments, or cinema developments, those matters have primarily not the intention of collecting economic power just to grow bigger and bigger, but the development was more natural.” By contrast, the association of steelworks “was a concentration of economic power by combining separate units just for the purpose of combining.” More generally, “[c]oncerns in the heavy industries had an absolutely different character from the concerns in the processing industries.”

Overall, “[b]etween the American and German opinions on decartelization and deconcentration,” he believed “there is no fundamental difference.” Yet Erhard also left the door open to the possibility that “research in effects and kind of decartelization laws in Germany may lead us to review of perhaps this or that paragraph of the law without altering the main and fundamental purpose.”

An Academic Revolution

What about academia? Most interwar German scholars and practitioners favored cartels– and influenced government commissions, courts, trade associations, and the Cartel Office accordingly. However, around the time Hitler took power, a small group of scholars far from Berlin, in the southwestern-most corner of Germany, started to lay the groundwork for a new school of economic thought. Some were fired or arrested because they were unwilling to cooperate with the Nazis. Some fled. After Hitler was defeated, the French Zone encompassed their university.

Who were these scholars? What did they believe? And what role did they—and Erhard—play in reforming Germany?

Stay tuned for the next installment…

Share

Primary Sources

Several newly-scanned primary sources are relevant to today’s installment:

• May 19, 1947 meeting summary (English translation) from German Laender Special Committee on Decartelization. Records decision to situate decartelization within Ministry of Economics, not the Ministry of Justice.

• Testimony of German officials about decartelization (interviews conducted between Dec. 21, 1948 and Jan. 6, 1949).

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive— however, to minimize spoilers, I’ll wait to post some of them until later in the series. I’ll also provide a list of some excellent secondary sources.

Leave a comment

Subscribe now

Uptown Girl

Your first guess might be that Phillip Hawkins fell in love with some beautiful fräulein– perhaps the daughter of some prominent German industrialist– and that prompted a change of heart towards his duties.

After all, until 1947, there were few signs that Hawkins was not aligned with official American policy. Yes, he had been a patent lawyer for a chemical and munitions manufacturer before the war. But James Stewart Martin had found Hawkins to be a hardworking and loyal deputy. When Hawkins stepped up to serve as acting Chief of the Decartelization Branch while Martin went back to America for several months in late Spring 1947, longtime staffers who hailed from the Department of Justice were encouraged that Hawkins implemented their suggestions for making constructive organizational changes to the Decartelization Branch.

Martin’s resignation also put a degree of pressure on OMGUS. The New York Times reported his allegations that “the expressed wishes of the American people are being over-ridden by special interest groups who have their own idea of how Germany ought to be treated.”

Later that year, Hawkins would even publish an article in the OMGUS Weekly Information Bulletin extolling the virtues of the new Military Government Law No. 56. The ardent imagery would have made a serviceable alt-caption for anti-monopoly political cartoons from the Standard Oil era. Hawkins wrote, for example, that the law was designed to:

“[B]reak the strangle hold which cartels, combines, syndicates, trusts, and other excessive concentrations of economic power inflicted on the German people. It endeavors, once and for all, to smash these octopuses which obstruct the upward surge of a healthy economy for all and enchain the very right to existence of the individual.”

Indeed, Hawkins framed Law No. 56 as a charter of economic liberty: The “small businessman” would soon be able to “establish an enterprise anywhere he chooses, to produce or sell whatever he wishes, to sell to whomever he desires, to charge less to the consumer if he sees fit, free from the dictates of the economic giants. It will not be permitted for him to be driven to the wall, discriminated against, dictated to, and forced out of business completely by the ruthless practices common to cartels, combines, syndicates, and the like.”

Hawkins contrasted this vision with Soviet-controlled trusts that were “driving the independent German businessman out of business… at a time when Germany has need for all the independent initiative, energy, and talent that she can muster.”

Yet despite championing vigorous enforcement of the new law, Hawkins acquiesced to the adoption of implementing procedures that would make effective enforcement difficult in practice. The Economics Division ensured that Law 56 provided expansive procedural protections for firms. Even if ordered to disperse, firms would have an opportunity to file objections and submit their own plans for implementing breakups.

The Chief of the Enforcement Section of the Decartelization Branch, Johnston Avery, later called the resulting procedure, which accumulated more and more steps and reviewers over time, “a masterpiece of confusion.” 

Another key problem was that “virtually all decartelization work” was put “in the hands of the Germans,” rather than the Decartelization Branch. According to The New York Times:

“In each of the eight states in the two zones is a German commission and a United States or British counterpart. The German commission writes the directive for breaking up a particular cartel, which then goes to a German bi-zonal commission in Frankfort on the Main for review. The German agency passes it on to a bipartite military government commission, also in Frankfort, for coordination with other affected agencies.”

Ultimately, the final procedures “took the authority for deconcentration out of the hands of the Decartelization Branch and placed it in the hands of two review boards [staffed by] other agencies of OMGUS.” Every member of Avery’s staff (five lawyers and three investigators) complained to him that it would be “impossible ever to break up a German monopoly under that procedure.”

One staffer wrote an outline on “The Ineffectiveness of Law 56,” which among many concerns noted that “[f]inal say lies in a board which most likely will consist of business men prejudiced against decartelization.”

Indeed, one staffer calculated that “if the German enterprise took advantage of every step provided, it would take more than two years before we reached the point of ordering a dissolution, if, indeed, we ever reached that point.” If a German combine exploited every extension and appeal allowed by the process, the earliest final decision could not be reached until after the next U.S. election for President—which the Economics Division (confidently, but wrongly) assumed would flip to a Republican. With multiple layers of review before the equivalent of a complaint could be filed, the procedural rights exceeded those granted to corporate defendants in the U.S.

When Avery pushed back against the impracticality of the procedures, the most he “could get out of Mr. Hawkins was, ‘that is the way General Draper wants it.’”

Why did Hawkins react that way?

Perhaps because he was about to marry a woman named Dorothy Wagner.

Hawkins likely met her in Germany, and they wed in Berlin, but she was American.

Like Hawkins, she had already been married once before, to a navy lieutenant who was killed near the Normandy Coast the day after D-Day.

So Dorothy’s maiden name was not Wagner.

It was, instead, Draper.

Thus, William H. Draper, Junior became Hawkins’ father-in-law on July 15, 1947.

Another Man Develops a Plan

Meanwhile, American foreign policy was changing. Although a cost-cutting mentality had begun taking hold, especially after the midterm elections, some American businessmen and politicians started to think there might be value in making longer term public investments in Europe.

In June 1947, Secretary of State, General George C. Marshall gave a speech proposing the fundamental elements of what would eventually become the Marshall Plan to fund the reconstruction of Europe. Political winds soon shifted towards boosting German production, combatting shortages, and rebuilding Germany as a bulwark against the Soviets.

But this emerging elite consensus favored changes beyond increasing investment. By August 1947, Secretary of Commerce Averell Harriman—then one of the wealthiest men in the country, as heir to a railroad baron’s fortune and the founder of a Wall Street investment bank with ties to Nazi industrial magnate Fritz Thyssen– was urging Truman that “[t]here must be an end to denazification at an early date to release these people, many of them the best brains in the country, to go back to their productive activities.” By that fall, at the request of the State Department, OMGUS started pressuring local German governments to adopt more lenient classifications for Nazi offense, and expedite clearances.

Similarly, Harriman agitated for termination of decartelization, echoing the findings of other business delegations that passed through the Economics Division, that the decartelization program constituted “impractical pulverization.” At some point that summer or fall, the Decartelization Branch suffered personnel cuts.

Nonetheless, on paper, decentralization policy remained consistent. When a revised version of the Joint Chiefs of Staff order was issued in July 1947, many sections were substantially changed, primarily to reflect the defeat of Morgenthau’s hard peace. But the decentralization provisions emerged from this process unscathed. Perhaps this simply reflected an acknowledgment that an express change would conflict with the views of both the State Department and President Truman, but given General Clay’s demonstrated ability to influence the Secretary of State, it seems unlikely the provisions would have escaped any significant changes or new caveats if Clay were strongly opposed to the policy. Instead, JCS 1779 still directed OMGUS to promote “dispersion of ownership and control of German industry.”1

And President Truman’s stance remained clear. He advocated the same principles for international trade generally in a March 1947 speech, declaring that the “pattern of international trade that is most conducive to freedom of enterprise is one in which the major decisions are made, not by governments, but by private buyers and sellers, under conditions of active competition, and with proper safeguards against the establishment of monopolies and cartels.” Then in October, Truman’s DOJ filed an antitrust lawsuit against several investment banks– including Draper’s former employer Dillon, Read & Co.

Hawkins may have found himself caught between Draper– who was back in America, but now close family, and Clay, Hawkins’ ultimate boss in Germany. Hawkins was promoted to Deputy Director of the Economics Division in September 1947. In October, perhaps in response to critical press scrutiny, Hawkins announced that the German government had been directed to “sell at once eight coal distributing companies in an effort to remove them from the giant Ruhr mining cartels,” with an aim “to divorce the distributing companies from the mines.”

What About The Germans?

Hawkins’ article– published in November 1947– was certainly more aligned with Clay’s views– or at least Clay’s media sensibilities– than Draper’s. In the article, Hawkins not only embraced official policy, but expressed a degree of optimism about its feasibility. He argued that decentralization was not a “new” idea: “Germans have been fighting monopolies for generations– under the Kaiser; under the Weimar Republic; in short, ever since industry became the backbone of the German economy. However, the forces which the large-scale monopolies could muster were too strong and too unscrupulous.” But fortunately, “the German and US governmental authorities [were now] united in a common desire to see that the law succeeds.”

This subtly pushed back on a favorite line of attack by the Economic Division– echoed by the anonymous “top business executives” whose May 1947 press release argued for delaying decartelization, which represented “economic principles quite new to the German mind.”

But did they have a point?

What did the Germans think about all this, anyway?

And did it matter who Hawkins chose as his best man for the wedding?

Stay tuned for the next installment…

Share

Subscribe now

Primary Sources

Because archive.org was (yikes!) hacked, this post does not link to any newly-scanned primary sources (yet).

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive— however, to minimize spoilers, I’ll wait to post some of them until later in the series. I’ll also provide a list of some excellent secondary sources...

Leave a comment

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization in parallel with democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations towards a law. But how much did the midterm elections of 1946 impact the success of the program?

Midterm Tremors

Draper’s play for time worked. Less than a month after Clay rebuked him at a staff meeting, a shockwave swept through domestic politics: Republicans gained over fifty seats in the House and nearly a dozen in the Senate, winning full control of Congress for the first time since 1928.

President Truman’s inability to get Congress to extend wartime price controls was a major factor behind this defeat. Voters were outraged by skyrocketing inflation that followed the expiration of the Emergency Price Control Act in late June 1946. Rapid erosion of purchasing power led to a “volume of labor strikes in 1946 [that] was about three times as high as its previous peak during the Great Depression.”

Upon winning, the Republicans eagerly slashed funds to help farmers, enacted the anti-union Taft-Hartley Act over Truman’s veto, and generally attempted to repeal New Deal priorities while forestalling progress on civil rights.1

Back in Germany, Clay predicted that the change of power would lead to greater Congressional scrutiny over appropriations, necessitating personnel cuts. Clay was “continually pressing” Martin to get a law done, because “every day that passes the chances of our getting anything done under it are going way down.”

The victory emboldened the Economics Division and its allies in Washington. The trustbusters had been counting on continued Congressional oversight to keep the Economics Division in check. Although the Senate did come out with another report on war profiteering and internal obstacles to implementing decartelization shortly after the election, Republicans were able to tone down the final version.2 Meanwhile, Clay and members of the State Department insisted that further investigations would undermine OMGUS and inflame Communist propaganda. It also appeared that Republicans might reroute scrutiny to focus on the high costs of the occupation.3

So ongoing investigations screeched to a halt.

Recently appointed Secretary of Commerce Averell Harriman, heir to a railroad fortune, wasted no time in sending Phillip D. Reed, Chairman of the Board of General Electric, as a special envoy to a conference in Berlin in early December 1946. At that meeting, among other things, an OMGUS patent lawyer felt free to engage in a tirade against the patent policy for Germany that had been approved by President Truman a few months before the election.4 General Draper told Martin that “until Mr. Reed had a chance to return to Washington to see if there was a disposition to re-examine the policy, [Martin] should be very cautious about actually trying to follow the policy which President Truman had signed.” The same attitude increasingly applied to decartelization overall. The Economics Division was confident Truman would be toppled in the next election.

In December 1946, Clayton finally gave Draper his coveted written State Department authorization to negotiate a “nonmandatory” law. So that’s what OMGUS and the British agreed upon.5

One Decartelization Branch staffer called the law “a betrayal of the French and Russians” that put the U.S. “in the preposterous position of having made concessions to the British on a bizonal basis which they led other allies in resisting on a quadripartite basis.”

Moreover, heightened thresholds meant the law would apply to fewer firms than contemplated at the beginning of the negotiation process. And the list of target firms that had been exhaustively negotiated by the four powers (and already chopped down by the British) was struck entirely.

Why?

The day before the final draft bizonal law was due to be turned in to Clay, Draper “suddenly asked for assurance that the case against each of the listed firms was at least as completely documented as an indictment in the United States for violation of the Antitrust laws.”6 According to Martin, Draper contended that commencing reorganization proceedings would be “tantamount to convicting the firms of a crime.” Rather than delay the law even further, Martin dropped the list.7

Martin sadly concluded that Law 56, in its final form as enacted on February 12, 1947, “was nothing more than an authorization to a joint United States-British commission to examine firms.” ­­Washington’s original policies “had been whittled away and watered down and rendered quite innocuous” even before the law was adopted. The only bright spot was that the section on restrictive trade practices that Martin drafted stayed largely intact.8

Still, the law threatened to generate some meaningful deconcentration action: combines with more than 10,000 employees would be “examined as prima facie constituting economic concentrations of economic power” and other firms could be targeted if they exceeded certain market shares.9 The law also included criminal penalties for combines­– after a transitional grace period.

So the trustbusters got to work building cases to satisfy those thresholds. They focused on a handful of firms that “seemed beyond all question to represent excessive representations of economic power.” The firms were chosen “not necessarily because they were the biggest enterprises, but because the type of problem they presented would be the clearest test we could devise within the meaning of the various phrases that finally appeared in the Decartelization Law.” Anticipating resistance, they focused on thoroughly documenting the evidence for initiating actions under the new law.

In March 1947, Martin circulated their reporting within and outside of OMGUS. He cannily stamped it as a “draft” to avoid subjecting the report to the Economic Division’s antagonistic review process that would mangle any “final” report.

The preface explained the economic democracy imperative dictated by the Potsdam Agreements and other official U.S. policy instruments, and tied it to the responsibilities of the Decartelization Branch:

(1)  “to disperse the ownership and control of those German industrial or business concentrations which represent excessive concentrations of economic power, and to prevent their future reconsolidation; and

(2) to eliminate German participation in cartels and prevent such participation in the future.”

This was, he wrote, “a logical extension” of the half-century tradition of the Sherman Act, which “stood as a positive expression of the will of American people to preserve freedom and equality of economic opportunity.”

Resignations

In April 1947, Martin returned to the United States for a few months to arrange meetings with the State Department about the condition of the Decartelization Program. He recalled being subjected to “a terrific barrage of criticism… of what they considered to be largely an incompetent job of drafting a law to express the Deconcentration and Decartelization policy.”10

The sweeping Republican victory explains why the War Department was able to prevail upon President Truman to dispatch Herbert Hoover to study postwar Germany. That in turn set the stage for the War Department to invite a delegation of “top business executives” to visit and issue their own press release in May 1947, which served to amplify the views of the Economics Division. Their top recommendation was to delay decartelization, which represented “economic principles quite new to the German mind,” because “too strict adherence to the law in its administration will serious retard” the recovery so urgently needed by “a starving people.”

After getting word of this influence campaign, Martin met with the Attorney General and State Department officials to urge for an official clarifying statement. A memo Martin prepared was considered at a Cabinet meeting. The Cabinet members opted not to change official policy. In July 1947, the Joint Chiefs of Staff issued an updated directive to General Clay, with the approval of President Truman and the State Department. Although substantial policy changes were made in other sections of the directive, it reaffirmed the official US position on decartelization. President Truman and the State Department approved this directive. The new directive continued to promote “dispersion of ownership and control of German industry.”11

Martin’s efforts in Washington seemed to have paid off, in terms of official support. But he was troubled that “no directive ever went to the Military Government criticizing the past lagging” or pointedly ordering compliance.

So in early July 1947, before the directive was even signed, Martin resigned.

He hoped this act would “underlin[e] the fact that responsibility from then on was entirely that of the Economics Division. I wanted them to put in a man who was their man; and then they would have full responsibility.”

Martin’s deputy, a patent lawyer named Phillips Hawkins, stepped up to take his place in the interim. Martin had found him to be a good worker, and the trustbusters who remained were pleased that Hawkins quickly made some constructive organizational changes based on their input.

Not long after Martin resigned, the trustbusters learned that another key OMGUS leader would be departing that summer as well: Draper.

Would the trustbusters’ work get back on course– or further derailed by these changes?

And how would developments in Hawkins’ personal life soon became surprisingly relevant to the fate of the trustbusters?

Stay tuned for the next installment…

Leave a comment

Share

Primary Sources

Several newly-scanned primary sources are relevant to today’s installment:

• Draper’s September 1946 memo to Martin regarding State Department discussions about the deconcentration threshold.

• A 1949 letter from Martin to DOJ Antitrust Division listing combines headquartered in U.S. zone, with notes on cartel affiliations, board members, percent control of industry, etc. Also notes that Martin originally sought 140 staff.

• Law 56, U.S. zone (both English and German translation)

• Excerpts from the Decartelization Branch’s report on German Economic Decentralization (March 1, 1947).

• A June 1947 outline on “The Ineffectiveness of Law 56”

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive— however, to minimize spoilers, I’ll wait to post some of them until later in the series. I’ll also provide a list of some excellent secondary sources.

Subscribe now

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization in parallel with democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. But how much were the other Allied Powers to blame?

Clay’s rebuke of Draper at a staff meeting in October 1946 gave the trustbusters hope of finally breaking through the sludge of internal resistance.

Less than a year later, there was a big shakeup of OMGUS leadership below Clay.

Understanding what happened requires stepping back to consider the role of the other Allies occupying Germany.

The Red Scares, the Proud Poodles, or Her Majesty’s Monop-apologists? (A Four-Power Who Dunnit)

Clay himself circulated the first proposal for a “Decartelization Law” (covering both monopolies and cartels) at a meeting of the Allied Control Council in August 1945.

So why did it take until February 1947 for a law to be enacted?

Was it because the problem was moot?

Hearing that Germany was divided into four “zones” governed by four different sovereign powers might inspire certain assumptions about the flow of German commerce. In particular, didn’t having separate zones, each increasingly subject to separate rules and governance, mean German industry was already broken up? 

Decartelization Branch Chief James S. Martin once explained: not really.

“[A] geographical boundary does not prevent the management from still using what influence it is able to bring to bear on the occupying forces in the territory in which its plan happens to be located… [T]here was no effective Iron Curtain set up across Germany so far as the Germans were concerned. The Germans had quite free transportation and access to one another and to counsel with one another on policies to be followed… [A]llied control was frequently undercut by the fact that the Germans would get together behind the scenes and agree on common tactics to be followed in meeting the policies of the various allied forces.”

This was true even in the Russian zone. Indeed, “American Intelligence used German business men traveling on business to the different plants to report back” facts relating to “methods of operation, the set up, etc. of the Soviet organization.” Although “German managers in the American or British zones were not able to determine whether their plants in some other zones would produce this or that… they could do plenty in terms of keeping together the core and spirit of a unified organization, which at a future time could reform its lines and resume control…”

The Germans were old hands at such coordination. After World War I, they managed to keep “their technology and their organizations alive by establishing factories that would employ their key technical personnel across the border.”

So, the law was not delayed by mootness.

Was it Soviet aggression, then? The outbreak of the Cold War?

No. The Truman Doctrine (March 1947), the Marshall Plan (June 1947), the Soviet withdrawal from the Allied Control Council (March 1948), and the Berlin Airlift (June 1948) all came well after enactment of the law.

Indeed, on the ground, Draper got along quite well with his Soviet counterpart. Later, James Kenneth Galbraith, who visited Berlin to offer his views of economic policy in 1946, recalled that “Clay and such of his staff as the highly intelligent William H. Draper, Jr. were contemptuous” of “fears” of “the menace of the Soviet Union” raised by the foreign policy establishment. “That Russia, recovering from by far the worst devastation of World War II, was physically or even emotionally in a position to begin a new war was dismissed by Clay as fantasy.” As late as March 1947, Clay’s personal letters still reflected hope of reaching agreement with the Soviets on the situation in Germany, even as a Cold War mentality was solidifying back in Washington.1

Under Clay, the U.S. had initially proposed setting up a commission to carry out decentralization. It would consider cartels and combines on a case-by-case basis and then make recommendations to the leaders of each zone.

In September 1945, the Soviets made a counterproposal: bright light rules. Their draft “defined cartels and excessive concentrations of power,” and “prohibited them outright under specified penalties for violations.” Firms would be deemed “excessive concentrations of power” subject to legal proceedings if they met certain thresholds based on number of employees or annual turnover (later, a prong was added based on the percentage of an industry a firm controlled).

These “mandatory” provisions operated as rebuttable presumptions; companies would be able to challenge the designation. Moreover, the proposal still allowed the four-power Economics Directorate to make specific exemptions, for example if there was a “showing of economic necessity” or “where the size or the practices of a particular combine were harmless.” So, rather than needing four-power unanimity “to undertake any action at all,” four-power unanimity would be required to exempt entities that otherwise met the objective criteria set forth in the law.

Of course, the Soviets were not philosophically aligned with the American antimonopoly tradition. They were just pragmatic. After the Americans unleashed the devastating power of the atomic bomb in Japan in early August 1945 (less than a week after the Potsdam Conference ended) the Soviets were aware they were not bargaining from a position of great strength. As long as the parties could agree to something that would be administrable in practice, the Soviets would go along with decentralization and focus their energy on pushing for reparations.

The Soviet draft was quickly adopted as the template for further discussions. Clay suggested some numerical thresholds that might be satisfactory. Within a few months, three out of the four Allies reached agreement on the law.

Which country balked?

Not the Soviets, although even then they had reason to be frustrated with the process.

Was it France? France was not included in the Potsdam Conference that embraced economic decentralization, and had little interest in facilitating German recovery, and defaulted to obstructionism. Overall, it was by far the Ally that frustrated Clay and Draper the most. (Several years later, for example, Clay complained that the “French Military Government has finally succeeded in that apparently anatomical impossibility of making the tail wag the dog” through its attempts to prevent the British and the U.S. from passing laws in their zones without French input.)

But France seems to have offered little pushback on the decentralization law.2

That leaves England. British government was then in flux. Labour had just won a surprise landslide victory in July 1945. Besides promising strong welfare benefits (e.g. national health and social security systems), their platform included nationalizing major industries.

So it must have been the new socialist-minded leadership who tanked negotiations?

No. Labour leaders in London initially agreed to go along with the official U.S. approach to decentralizing Germany.

British representatives on the ground were a different story. Their equivalent of the Economics Division was led by a knighted industrialist, Sir Percy Mills, and other Conservative holdovers. Although Mills conceded that his new government agreed with the purpose of the law “in principle,” he seemed to take every opportunity to quibble over semantics and add procedural roadblocks.3

At higher levels of the Allied Control Council, the four powers reached an agreement in principle. The law was referred to the Legal Directorate for drafting. According to early DICEA leader Russell Nixon, all four powers accepted that draft. The only task left was “for the Economic Directorate to fill in the blank spaces in the mandatory provision for (a) percentage of the industry, (b) annual turn-over, and (c) number of persons employed.” When it reached them, Mills voted against the law as written.

But he did not act alone.

Throughout the process, General Draper had echoed Mills’ nitpicking and obstructionism. At one point, Draper himself introduced a “compromise draft” that would have replaced the template definition of “excessive concentration of economic power” in a way that would have “transform[ed] the mandatory provisions of the law into mere reporting requirements.”4

After officials in Washington received a working party report from the Economics Directorate that “fell far short” of U.S. policy, a transatlantic “conference by teletype” was convened between OMGUS leaders in Berlin and an inter-departmental committee in Washington (with representatives from the State, Treasury, and Justice Departments). That committee emphasized that mandatory provisions were essential. Negotiators would have leeway to determine what numerical thresholds and types of standards would work, but there had to be standards of some sort.

Somehow, the U.S. Economics Division had difficulty understanding the instructions. Over the next few weeks, they kept cabling Washington with more questions. When Washington responded to their concerns about using turn-over as a threshold by offering an alternative mandatory standard, members of the Economics Division falsely announced that Washington had “withdrawn from the mandatory approach.” This set off fresh rounds of cables.

The British voted against the law at the highest level of the Allied Control Council in late November 1945.5 Perhaps they would have done that regardless of Draper and his men. But a case can be made that the British were emboldened by them.

Unilateral Gambits

All of this drama happened before Martin took over the Decartelization Branch.

He first learned of the whole situation en route to his new job. On a London stopover, he met with a British Foreign Office representative who cited OMGUS internal dissension as an excuse to backtrack on an agreement in principle with the State Department. Nonetheless, Martin managed to get the British to agree to assembling a list of German combines that were “clear cases” of undesirable economic concentration while the question of thresholds was up in the air. Martin’s team ultimately prepared studies of 69 combines that had principal controlling interests in over two-thirds of German industrial output.6

By summer 1946, the British stalled negotiations again. Martin testified that in August, a frustrated General Clay instructed Martin to prepare a unilateral law of the U.S. zone alone, in an effort to pressure the British, and to encourage other Allies to adopt their own unilateral laws.

This was a credible threat. Although the bulk of heavy industry (e.g. iron and steel) was located in the British zone, dozens of large companies were headquartered in the U.S. zone, which had a population of about 20 million Germans.

Draper was not pleased that Martin had dealt with Clay directly, and reprimanded him for such insubordination. But Draper was, temporarily, outmaneuvered— once the U.S. threatened unilateral action, that kickstarted another multilateral round.

Martin and his team aimed to put together a basket of inter-related laws with a specific priority in mind:

“The management groups who wormed their way into the top industrial and financial positions in the Nazi industrial economy must not be permitted again to take the reins and maneuver German economic development. They built power through chains of holding companies, interlocking directorates, trade associations vested with power to allocate scarce materials; through licensing laws, fiscal controls, and cartel agreements. And unless something positive is done to reorganize those instruments of power, there is no ground whatever for hoping that the men who abused this power in the past will refrain from abusing it [again].”

This was not some kind of punishment. It was “one of the keys to [Germany’s] recovery.” The same men who had dominated Germany’s economy “should not be put back in a position to control, to stand astride the channels of commerce, to turn the economic system off and on at will,” perhaps endangering recovery. Ousting them would relieve the “stagnation” of the “completely wooden and non-flexible German economic system.” After all, monopolies and restrictive trade practices “do not have a history of increasing production or releasing productive energy.”

Martin drew a distinction between these aims and more routine U.S. antitrust actions– as well as with “fallacious” caricatures floated by the Economics Division:

“[T]his was never a plan to break up German industry. It was not a plan to prevent a healthy economic recovery in Germany. It was not a plan to reduce the size of industrial plants or to require that industrial production should be undertaken only in small, scattered or isolated industrial units. It was a plan to prevent small cliques of corporate managers from assuming control over too large a proportion of Germany’s economic life.”7

They drafted proposals to tackle each key mechanism through which this “management clique” exerted control.8 Martin was “not merely thinking of particular types of [bad] persons, but the kind of organizations through which they function– the peculiar relationships of the big banks and industries.” Because economic democracy goes hand in hand with political democracy, OMGUS needed to tackle “both extremes of centralized management and control, whether government management and planning or private monopoly planning.”9 Germany’s combines weren’t merely the equivalent of American companies such as Du Pont. The largest were like “a whole series of Du Pont organizations, all of them managed from the top as a corporate undertaking by a group of financiers and what you might call ‘Economic Planners.’”

Even though the draft law adopted principles approved by the President’s Executive Committee on Economic Foreign Policy and was approved by General Clay, the Economics Division managed to delay adoption. Meanwhile, Draper leveraged his contacts to personally lobby William Clayton, the Under Secretary of State, for a weak “nonmandatory” law that would make enforcement discretionary. In September 1946, just a few weeks before Clay’s public rebuke, Draper called Martin to tell him that the State Department position had shifted. Draper followed up with an artfully worded memo where he portrayed himself as a neutral observer of official discussions:

“Clayton had expressed disagreement with the mandatory test of ten thousand employees on the basis that no test of size alone necessarily represented a harmful concentration of economic power. The resulting discussion among State Department officials indicated considerable differences in points of view toward the proposed decartelization law. I had merely reported the status of the quadripartite negotiations and purposely took little or no part in the discussion…”10

He also attached an internal State Department memo reflecting the nuanced views of Clayton’s staff. (Draper emphasized that Clayton had not seen or approved their recommendations). That memo readily acknowledges that an employment threshold would be “arbitrary” and “blunt” but suggests that exceptions might be allowed “where it can be demonstrated that technological efficiency would be seriously impaired by breaking up the firms into smaller corporate units,” and that the arbitrary thresholds would only be applied for an “initial” program. “[F]uture policing of Germany industry for excessive concentration could be accomplished on the basis of much more flexible and refined standards.” Martin testified that “[n]one of us were happy about retreating to a rather arbitrary standard of employment,” but “that was the only one the British would agree to include at all.”11

According to Martin, Clay had remarked in private that “he was not certain that someone from the Economics Division had not done a certain amount of selling of the non-mandatory position in Washington.” Clay’s October rebuke was partly a reaction to Draper’s staunch rejection of the mandatory approach.

The State Department, perhaps waiting for the mid-term elections, slow-walked its response to Draper’s lobbying. Rather than directly address the mandatory standard, Clayton directed OMGUS to negotiate a joint law with the British in anticipation of the two zones merging. Although unable to secure an immediate reversal of policy, the Economics Division was no doubt happy to settle for more delay. And, of course, they knew they could count on the British to oppose a mandatory law.

In late October 1946, Senator Kilgore’s War Investigating Committee dispatched its counsel to investigate obstructionism in Germany. The report found that “[o]utwardly, most policies remained exactly as they had been from the start of the occupation; but the principal opponents of reform policies began quietly to propose moves that went in the contrary direction, as if they were confident that changes were coming.”

Were they?

Stay tuned for the next installment…

Subscribe now

Share

Primary Sources

Two newly-scanned primary sources are relevant to today’s installment:

• Draper’s September 1946 memo to Martin regarding State Department discussions about the deconcentration threshold.

• 1949 letter from Martin to DOJ Antitrust Division listing combines headquartered in U.S. zone, with notes on cartel links, board members, percent control of industry, etc.

To minimize spoilers, some secondary sources and scanned documents will be posted later.

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power, so U.S. postwar policy prioritized economic decentralization. After early leaders resigned, an investigator relaunched these efforts. But several forces threatened to sabotage progress.

The Other Bottleneck Breaker

In 1944, Eisenhower had a problem. Front lines were moving slowly because the few undamaged ports controlled by the Allies had gotten snarled up. One had “literally a hundred ships lying offshore,” but was “unloading maybe two or three a day.” Luckily, he had already borrowed an accomplished engineer from Washington. Once dispatched to Normandy, Lucius Clay quickly diagnosed the problem. Shielding the port commander from micromanagement for just 72 hours dissolved the traffic jam. Hopping from port to port, Clay’s nimble troubleshooting quintupled shipping volumes in just three weeks. Clay made a name for himself, but got yanked back to Washington to serve James F. Byrnes in the Office of War Mobilization, “because he could make decisions rapidly and be arbitrary about them.”

A precocious talent descended from a long line of politicians, Clay lied about his age to enter West Point early. Clay earned good marks for everything but conduct and discipline. Then in the Army Corps of Engineers, he overcame feedback about lacking “tact, judgment, and common sense.”1 During the Great Depression, Clay worked with Harry Hopkins to set up the Works Progress Administration, built support within the Corps for New Deal activities, and literally built a New Deal dam. Clay hoped to lead troops in WWII, but had to settle for becoming the Army’s youngest brigadier general (at age 43) as the nation’s procurement czar.

Will the Real Military Governor Please Stand Up?

In March 1945, victory in sight, Secretary of War Henry Stimson told FDR they should send a “most effective organizer” to handle the “chaotic” situation in Germany. FDR preferred civilian leadership, or making a general-level role for a civilian such as judge Robert Patterson. But Stimson noted Patterson’s “integrity and experience” were needed elsewhere to resolve production problems without scandal. The man to assist Ike “should be a man like General Clay with his ability.” FDR said “laughingly” that “[y]ou will break Jimmie Byrnes’ heart, he is so dependent on him.” After FDR died, Assistant Secretary of War John J. McCloy argued “strongly” for Clay as a pragmatic short-term move (the military did not want long-term responsibility). With both military and civil service experience, Clay was a “consensus choice.” Clay initially planned to serve only until an expected transition to civilian leadership in June 1946. Although Ike was Military Governor, Deputy Clay handled most day-to-day decisions. Then Ike left to become Army Chief of Staff in fall 1945. His nominal successor, General Joseph McNarney,2 delegated everything other than “military command problems” to Clay. After fraught maneuvering, Clay officially took over in 1947.

What did Clay think of his marching orders? In late 1945, Clay wrote that overall, “JCS 1067 as modified by Potsdam has proved workable… I don’t know how we could have effectively set up our military government without JCS 1067.” One reason he found it “workable” was McCloy’s clever drafting. The order sounded harsh to please Treasury, but included caveats favoring the War Department. A key exception let OMGUS take action to “prevent starvation or such disease and unrest as would endanger” the occupation. McCloy encouraged Clay to use this “escape hatch” liberally. Meanwhile, Clay also exerted influence in Washington. Truman had appointed Clay’s former boss Byrnes as Secretary of State. In 1946, Clay persuaded Byrnes to give a major address adopting “all of Clay’s policy recommendations, sometimes verbatim,” paving the way for elections, a new constitution, and Germany’s admission to the United Nations.

Maybe Clay Just “Never Understood” Decentralization?

But what did Clay think of decentralization? Pondering the plight of the trustbusters, law professor Daniel Crane recently suggested that perhaps Clay “never understood” that “democratizing Germany” was the “long-run policy” aim of decentralization.3

This might have been true at first. Clay had been insulated from Cabinet-level jockeying, and received JCS 1067 only upon boarding the plane for Germany. Clay’s annotated copy of the Potsdam Agreement just bears action-oriented scribbles: “draw up our proposals,” “figure quantities,” and “figure amounts.” Next to a reparations directive: “Lets get busy.” Next to “Allied controls shall be imposed upon the German economy but only to the extent necessary” for various goals: “What is extent?” Next to abolishing discriminatory Nazi laws, Clay wrote: “Legal Is this done?”4

And what about Article 12: decentralization?

“Our cartel proposal.” A bit glib! Clay’s remarks at a staff conference in August 1945 also do not evince deeper understanding. In one speech, Clay summarized OMGUS aims as de-Nazification and de-militarization. In another, Clay announced an “endeavor is to live in a goldfish bowl.” Neither speech mentioned decentralization.

Dawning Awareness

Yet despite an initially blinkered view, Clay had already taken a major concrete step. In June 1945, Clay proposed taking over Farben “until Allied Control Authority determines the disposition to be made of these plants, with the view to the final and complete dissolution.” This would “convince the doubters that we mean business with respect to the large cartelized German combinations.” Then Ike ordered “dispersion of the ownership and control” of plants and equipment not otherwise destroyed.

Perhaps Clay thought of Farben in terms of war capacity, and let tensions with early decentralization leaders distract him from the bigger picture. But it’s unlikely Clay stayed ignorant for long. The Allies began drafting a competition law soon after Potsdam. At first, they seemed poised to adopt bright line thresholds to initiate proceedings against Germany’s hyper-concentrated firms. This “mandatory” approach would use readily measurable metrics, such as number of employees or revenue. The State Department authorized Clay to “accept as a final resort such a provision relative to the percentage of an industry which could be concentrated in a single corporation.” Clay sought help to avoid a “decartelization law without teeth”: “We have little hope that a law without mandatory provisions would be really effective as each separate case would require quadripartite agreement.” In any event, there is little doubt Clay understood the mission by October 1946– when Clay rebuked Draper.

That Time Pythias Wrote Damon a Stern Memo

Clay did not surround himself with “yes men.” He preferred smart, driven men with strong opinions. Men like Draper. As Clay worked round the clock, Draper kept pace. Years later, Clay told Draper he “made possible anything I may have accomplished” in Germany. Draper responded: “Damon will never forget Pythias”–referring to a Greek legend about friends willing to die for each other. But they did not always agree.

While Draper had far more facetime, Martin managed to build good rapport with Clay as well due to a loophole in the org chart. Besides serving as Decartelization Chief (under Draper), Martin also served as Farben “Control Officer.”5 For that special project, he reported directly to Clay. That let him advocate for his team.

Clay was as nonplussed by Draper’s rogue propaganda to visiting news editors and other wildcat actions as he had been by leaks about inadequate de-Nazification. So he issued a memo reprimanding Draper. Decentralization was not a fair scapegoat since it “had not progressed sufficiently… to have any real effect on the German economy.” He was “certain that the revival of democracy in Germany is dependent on our ability to develop an economy which is not controlled by a handful of banks and holding companies.” Clay then cannily held a live “gripe session” where he solicited dissenting opinions as an opportunity to chew out Draper in front of the staff. Clay was “personally… in sympathy with decartelization based on size until we have destroyed the conditions which did exist in Germany” and “absolutely convinced” the “choice in Germany” was “between free enterprise of […] small business and socialism.” Draper protested that “Germany in the accredited world markets, which it is going to have to enter, has got to have the opportunity to have efficient industrial organization; and where that requires sizable industry or plants, that should be permitted.” Clay reminded Draper of his duty as an officer to follow official U.S. policy. Documents about this incident made their way to the Senate, as well as The New York Times.

The Tail That Wagged

There were limits to how much Clay was willing to rock the goldfish bowl. Despite Martin’s requests, Clay declined to give his team Division status. But Clay had stood up for them in no uncertain terms to make Draper’s men fall in line. Draper even said he had his “tail between [his] legs.” So things were about to get way better, right?

Stay tuned for the next installment to learn more…

Subscribe now

Primary Sources

Featured newly-scanned primary sources: 1) Excerpts of Clay’s Potsdam annotations; 2) Clay’s Aug. 1945 OMGUS staff speech; 3) Clay’s less rousing “goldfish bowl” speech on recordkeeping; 4) Clay’s Oct. 1945 memo on expected transition to civilian control; 5 Clay’s memo rebuking Draper.

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization in parallel with democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation” in Germany. After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. But forces both inside and outside military government sought to thwart progress.

No Saboteur Is an Island

Draper and his men were (probably) unaware of the Simple Sabotage Field Manual issued by the CIA’s precursor in 1944. But they certainly mastered the spirit.

Unlike undercover saboteurs, however, they made no effort to hide their true opinions. According to James S. Martin, the Economics Division not only hampered progress in meetings, but even proactively wrote position papers that mischaracterized the policies of the Decartelization Branch, without allowing them to provide any input.

Staff from the Industry Branch and other parts of the Economics Division “condemn[ed] the Trading with the Enemy Act, which prevented unrestricted dealings between American and German businessmen; [and] the denazification program, which they said was denying German industry the services of the ‘best management.’” They also inveighed against a Truman-endorsed plan for opening up patent pool licensing across German industry on the grounds that it would “discourage new inventions and the disclosure of new technology”—even though the U.S. was already successfully applying that type of policy to open up the software industry and other technologies back home (ironically, paving the way for the very types of investment opportunities that further enriched Draper’s descendants).

Their actions reflected their disdain of decentralization. Just as James Martin feared, sister branches implemented policies in ways that worsened concentration. The Industry Branch often decommissioned independently owned plants as reparations; once blindly creating a total monopoly on ball bearings. When political blowback from Washington forced military government to dissolve a Nazi stockpiling organization, the Industry Branch turned over its semiprecious metals and alloys to the Metallgesellschaft combine, on the theory that turning them over to anyone else “might lead to competition, which would be inflationary.”

Critical inputs, such as coal or other raw materials, were often preferentially allocated to combines. US government-backed lending facilities focused on “well-established” firms, regardless of their cartel participation, and blackballed independent plants. As late as 1947, the Decartelization Branch was “still finding glass factories and other light industry establishments which were all set to produce for export, but which were still shut down for lack of coal.”

Draper’s most vocal supporter on staff may have been Colonel Lawrence Wilkinson, who was hired as Director of the Industry Branch in the spring of 1946. Wilkinson was a banker involved with underwriting loans to Germany before the war. He had no formal training in law or economics, but was not shy about making confident proclamations on these subjects. Like Draper, in later testimony Wilkinson claimed to support official U.S. policy– even stating that decentralization “is one of the most useful means of controlling German war potential” while framing his concerns as about the “blanket application of the U.S. anti-trust policy in Germany.” But Wilkinson also acknowledged that he frequently expressed more vehement opinions to his colleagues in military government. Wilkinson believed antitrust policy was a luxury appropriate only for rich countries like the U.S. that could “afford to waste raw materials and manpower and plant capacity.” However, in poor economies, like Germany’s, he believed centralization was inevitable.1 Thus “blanket” antitrust efforts “would not only be futile but would also retard German recovery.”

The trustbusters, of course, pushed back against such proclamations. They understood that the antitrust tradition in part aimed at expanding output, because monopolies have incentives to restrict output. Martin viewed his job as trying to prevent the re-emergence of private central planning:

“We were not interfering with production. We simply wanted to make the operation of the separate plants legally independent, so that the old management would not be able later to pull everything together on the old basis by a simple stroke of a pen. The ‘concentration of power’ we were talking about was a form of over-all economic planning, carried on privately, out of sight, by the kind of men who made up the ‘Himmler Circle.’ We were not talking about the way even ‘mass production’ is supposed to be carried on in the United States.”

But Draper repeatedly promoted Wilkinson,2 and the Economics Division proceeded as if its mission were to resurrect German industry as-is. They sought to win over powerful German industrialists to get everything back up and running as quickly and “efficiently” as possible.3 They also focused on paving the way for the re-entry of American firms into the German market.

Martin’s trustbusters coped with the hostile work environment by focusing on their work. By June 1946 he had hired “some forty lawyers, economists, investigators and secretaries” and he continued to periodically recruit, ultimately more than doubling that count. They prepared exhaustive reports mapping out Germany’s combines and cartels, with proposals dividing up control and ownership of industrial plants. By doing so, they aimed to force more concrete discussions about how to apply official decartelization policy, to stop getting bogged down in theoretical and speculative objections from the Economics Division.

Skip-Level Meetings

However, the Economics Division was not just inwardly focused. Draper and his men knew they needed support back home in order to rebuild Germany’s economy more than the Potsdam Agreement allowed.

Draper himself kept in regular contact with Washington. As you may remember from the first post in this series, General George Marshall (later renowned for the “Marshall Plan” to rebuild Europe) had personally recruited Draper to resume active duty before the war after being impressed with his service in the Army Reserves. Draper was also close with other high level wartime leaders. James Forrestal, who served as Undersecretary of the Navy and later Secretary of Defense, had been president of Draper’s investment bank, and recruited Draper for a wartime procurement job. Draper also became close with the former Assistant Secretary of War, John McCloy (a white shoe Wall Street lawyer). When Russell Nixon, one of the early decentralization leaders, was asked in a Senate hearing about Draper’s business conflicts as a banker, he testified: “I am very careful about the things I say about General Draper.” Draper leveraged his network to arrange meetings to build support for his view of German recovery.4

Draper and his men also looked to cultivate other potential allies. They began showing selected visitors around Germany.

Cameo by Ex-President Herbert Hoover

One such visitor was ex-President Herbert Hoover. It wasn’t a casual drop-by.

In early 1947, the War Department convinced President Truman to send Hoover to Germany to study food supplies. It seems unlikely that F.D.R. would have acquiesced to such a suggestion, but Truman was facing austerity-minded Republicans in Congress, who wanted to ramp down war spending quickly. Although not a popular president, Hoover was still respected, at least in some elite quarters, for his logistical acumen in convening relief missions in Europe after World War I. Hopefully, Hoover could help persuade Congress to authorize food relief after a difficult winter.

Somehow, Hoover’s report, issued in March 1947, went far beyond a modest study of food supplies. He made sweeping recommendations about the German economy overall. They mirrored the convictions of the Economics Division. Hoover concluded that “[w]e have an admirable staff in Military Government of Germany under Generals Clay and Draper, but their administration is constantly frustrated in building up the needed exports to pay for food and minimum raw material imports.” Accordingly, he endorsed ignoring the “level of industry” restrictions imposed by the Potsdam Agreement. The Economics Division had also equipped Hoover with the assistance of an Austrian economist, Gustav Stolper, who adamantly opposed decartelization. According to Martin, Hoover initially expressed some interest in antitrust during his visit,5 but his final report reflected the favored caveats of the Economics Division: “While de-Nazification and de-cartelization are necessary and important certain phases of them limit recovery. They are so involved as not to warrant description here.”

Hoover was not the first person outside government the Economics Division sought to persuade.

Missionary Work and Inspection Rites

Draper’s first deputy director served only a few months in Germany.6 He resigned in December 1945 to do “missionary work” by giving talks to commerce clubs back home. He urged American businesses to re-engage with Germany, and urged increasing the “levels of industry” permitted by the Potsdam Agreement. His talks likely did not get into the details of decentralization policy.

But the Economics Division did not miss the opportunity to frame that issue, too, once it started hosting visitors.

For much of the first year of the occupation, civilian travel to Germany was tightly restricted. But the chorus of American businessmen clamoring to visit– ostensibly just to check on the physical condition of their property– kept growing louder. So in early 1946, they were allowed back in.

Somehow, their visits kept morphing from simple inspections to re-establishing old ties with German counterparts and striking new business deals­­– sometimes, with the military government itself.

According to Martin, the Economics Division was guided not by any consistent process but by “a great deal of improvisation that followed the formula ‘Here’s good old Henry! What can we do for Henry and what can Henry do for us[?]’” So plants were reopened based not on what products were most important for German or European economic recovery, or the best use of scarce materials, but which firms cultivated personal ties with OMGUS.

And, of course, “Henry” was often “Heinrich.” Men in the Economics Division hired their German business ties as consultants, and facilitated travel exemptions. For example, they vouched for an executive who had prior business dealings with Draper’s bank, managed a French collaborationist bank, and led the German side of a banking syndicate across German-occupied Europe—and who had been a contributing member of the S.S. (The Finance Division, which had co-equal status with the Economics Division, was eventually able to curtail this consulting relationship).

Hoping to stem the increasingly unseemly tide, and to prevent holding companies sneaking in on behalf of Nazi-affiliated interests, the State Department declared a moratorium on foreign investments in March 1946. Eventually it became clear that was still not sufficient, so the U.S. Attorney General implemented tighter travel restrictions in May 1947.

It Takes a Village of Multinationals

Draper may not have aided any particular U.S. businesses in Germany. But it’s hard to imagine Draper not having a hand in cleverly arranging for “delegations” of prominent Americans to visit Germany. He certainly maximized the opportunity to put on a show. Conveniently, the Economics Division played a starring role in the itineraries of American visitors. One dinner in June 1946 featured the Chair of the Board of General Electric—who was also head of a newly formed U.S. trade association for multinational corporations—along with chairs of the National Association of Manufacturers and the National Foreign Trade Council, and leaders from several major banks.7

Each time, visitors would hear extensive presentations from Draper’s men over the course a multi-day tour. Draper would restrict presentations by the Decartelization Branch to five minutes at the very end of the schedule. And he would preface their turn with remarks downplaying decartelization as “certain changes that might happen in the future” but that were currently moot because the war had put cartels “out of action.” Wilkinson once told a visiting delegation of twelve American news editors that although “important,” policies such as decentralization and denazification were “disruptive” to economic reconstruction. He invoked a favorite analogy:

“[W]e were often faced with a situation where we pulled on the hand of a man lying on the floor and wondered why he didn’t get to his feet in spite of the fact that we had one foot on his neck.”

After Hoover’s visit, the War Department sent over a dozen business executives on their own factfinding junket. After taking the Economics Division’s tour, they issued a press release in May 1947 expressing “unanimous agreement” with Hoover’s conclusions. They urged rapid resolution of denazification procedures. And they specifically cautioned against “too strict adherence” to a new antitrust law, which they said would “seriously retard” essential rapid “recovery of the economic life of a starving people.” Enforcement should “be postponed, or at least substantially modified” until Germany recovered.

Where was the adultier adult?

But hold on a minute– Draper was never the highest-ranking official within OMGUS.

By now, you may be wondering about Draper’s boss: the military governor. Did he oppose U.S. antimonopoly policy– or did he just not understand it? Was he corrupt? Oblivious? A pushover?

Stay tuned for the next installment to learn more…

Leave a comment

Share

Primary Sources

Several newly-scanned primary sources are relevant to today’s installment:

• Lawrence Wilkinson’s testimony from an internal Army investigation. (There are some light spoilers but they won’t make much sense at this point, especially without the exhibits. Pages 9-10 feature the quotes most relevant to this installment.)

• The press release issued by the businessmen who toured Germany after Hoover.

• A letter of introduction from Draper to Wilkinson regarding a retired General Motors executive who was retained to make a “Kugelfisher [sic] bearing study.”8

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive— however, to minimize spoilers, I’ll wait to post some of them until later in the series. I’ll also provide a list of some excellent secondary sources.

Subscribe now

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization in parallel with democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation” in Germany. After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in to relaunch their work from a clean slate. How did that go?

Like a Detective Story

“The history of the use of the I.G. Farben trust by the Nazis,” FDR once marveled to the Secretary of State, “reads like a detective story.”1

When James Stewart Martin first set foot in Frankfurt in early 1946 to lead the antimonopoly work of the newly reorganized “Decartelization Branch,” he was no stranger to the many detective stories that abounded in Germany’s tightly interlocked economy.

A few months after the U.S. entered the war, Martin was plucked from his role as general counsel and treasurer of a liberal arts college to serve as a Special Assistant to the Attorney General. He focused on setting up an Economic Warfare Section within the Department of Justice that would conduct investigations to aid both the Air Force and a newly created cabinet-level agency, the Board of Economic Warfare. With help from the Antitrust Division, Martin built up a team of nearly 60 staffers.2 In addition to learning about specific industrial plants and chains of production in Germany and Japan, the unit aimed “to test the possibilities of viewing the enemy through the chinks and loopholes of international business arrangements.”

Because they pinpointed weak links in production chains, the group became known as the “Bottleneck Boys.” Rather than deploy theoretical models, they amassed granular knowledge of how particular German companies and industries actually operated. “While other agencies hired economists and technicians to lay out large studies of the German industrial economy, our men interviewed men from DuPont, Standard Oil, International Telephone and Telegraph, Anaconda Copper, General Motors, General Electric, and investment bankers and other businessmen who had been to Germany on what turned out to be ‘bottleneck’ deals.” American engineers and technicians often had inside knowledge of—and sometimes even blueprints for— enemy plants.3

As the war drew to a close, Martin was asked to lead a small team from the Department of Justice to aid the Financial Branch of General Eisenhower’s headquarters in Europe (SHAEF). As others pursued war crimes,4 they tracked down the “masterminds” behind Germany’s economic system. “Sitting on the management boards of six large banks and seventy huge industrial combines and holding companies, fewer than one hundred men controlled over two thirds of Germany’s industrial system.”

Such men typically claimed to be victims of circumstance, denying any intention to provoke war. Martin’s team was nonetheless determined to find as many as possible. “Whatever their story might be, we had to know how such men came to have power and what forces determined the use they made of it.”

General Eisenhower also arranged for the team to trail Allied occupation troops securing Germany in order to investigate the flight of capital assets from Germany.5 They found “cans of microfilm buried in gardens, hidden in barns, suitcases, clothes closets,” and endless boxes of documents in company headquarters. But at times they found themselves at odds with occupying forces. When a commander wanted to convert a castle into a club for SHAEF officers, the team had to let the mining trust reclaim boxes of files stashed there because they were stretched too thin by other big moving jobs from their investigations. Attorney General Francis Biddle mentioned these challenges to new President Truman, who asked Senator Kilgore to look into the matter. The team received approval to recruit 250 more investigators to ramp up their efforts over the summer of 1945. Among many other targets, Martin’s team investigated the international steel cartel— which, as it happened, centered around the very steel combine that had been put together by the investment bank where Draper worked.

But Martin did not cross paths with Draper that summer.

Instead, Martin returned to the United States in September 1945 to consult with the State Department on occupation policies on cartels and patents—and therefore missed much of the drama that had begun to brew within OMGUS. In December 1945, he was asked to step in to lead decentralization efforts in Germany.6 Martin was told he would be leading a division called DICEA. But on a layover in Iceland en route to his new job, he encountered acquaintances who informed him that this division had been “abolished.” In its place there would be a new “Decartelization Branch” that, along with several other divisions, “had been swallowed up by the very large Economics Division, headed by Brigadier General William H. Draper, Jr.” Moreover, he learned of Senator Kilgore’s recent allegations in the press that certain military government officials were looking forward to resuming commercial relationships with German companies.

“A Government of Laws, Not Men”

Perhaps Martin was a bit dismayed by the dawning realization that his role would not match the job description. But this was not his first rodeo with bureaucratic infighting or skeptical bosses. He’d even had a previous run-in with OMGUS lawyer Charles Fahy— the same lawyer who at one point was supposed to exercise “general supervision” over DICEA (presumably, to prevent more embarrassing press leaks about lackluster de-Nazification efforts) when it was led by Morgenthau’s men.

As Martin later recounted in The Atlantic, in 1941 the DOJ stumbled upon a torrential leak of the sailing plans for American ships. The leakers were not traitors or spies. They were large American insurance companies that sought to hedge risk by purchasing reinsurance from the Zurich Group in Switzerland—which, as it turned out, had a reinsurance treaty with a reinsurance pool in Munich, Germany. Before every voyage, American insurers would radio ahead details including the name of the ship, “the sailing date, the cargo carried, the destination, and the value of the insured property.”

When the DOJ failed to persuade the companies to fix the problem, Martin’s Bottleneck Boys stepped in. They learned that the scope of the problem went far beyond ships. The insurance companies were also leaking blueprints for industrial plants, “especially those large new plants built for war production.”

Martin proposed sending a letter in the name of the Attorney General telling the companies point-blank that their information transmission violated the Espionage Act. But first they needed the permission of the Solicitor General— Charles Fahy. Unfortunately, “Mr. Fahy would not take this responsibility without consulting the other interested departments of the government.” Those departments dithered in vain for a way to allow the insurance business to carry on as usual. Fahy wanted a bureaucratic process involving an “interdepartmental committee of qualified economists and experts to sit in consultation with members of the insurance industry” that “could pass upon specific items of information, deciding in each case whether the release of the information would substantially harm the war effort or give help to the enemy.”

Martin pressed for drawing bright lines:

“We stuck to our guns and insisted that the simplest thing to do was to tell the insurance companies that this particular practice had to stop. Let the people in the business, who were already familiar with conditions in their industry, figure out how they could adjust themselves to the new circumstances. We felt that government, wherever possible, should operate through laws, not by setting up more and more administrative tribunals to command or forbid particular acts. We pointed out that the Lloyd’s group had solved a similar problem by sending over from England a resident representative with power of attorney to make commitments on behalf of the British companies without sending information out of the United States.”

It took months of infighting, but Martin finally got the letter sent, a year and a half after the DOJ first looked into the issue.

Martin also had experience overcoming a skeptical (but fair-minded) boss. When Martin jumpstarted the Bottleneck Boys, Attorney General Francis Biddle was already tired of hearing trustbuster Thurman Arnold’s “constant baying” about international collusion. Moreover, Biddle had already succumbed to political pressure to accept a consent decree that halted an investigation into dealings between an American chemical firm and Germany’s chemical trust, I.G. Farben. But after Martin’s team built a convincing evidentiary record demonstrating how cartels suppressed production and created fragile chokepoints at home, Biddle came around— and even testified before the Senate about the need to “break the power of the German monopolistic firms.”

Meet the New Boss (Decidedly Not the Same as the Old Boss)

Martin went into his first meetings with his new boss ready to distance himself from the blunt edges of his predecessors.7 He disavowed tunnel vision and offered to be a team player: of course economic decentralization should be considered holistically, as part of “the whole economic program.”

Draper dismissed this olive branch out of hand. His urgent focus was on developing a “Level of Industry” plan and conducting associated four-power negotiations over allowable amount and types of industrial production.8 Decentralization was, at best, a premature distraction. According to Martin, in Draper’s view:

“[T]he war, the bombing, the division of Germany into zones, and the fact of the occupation itself, meant that the cartels as such no longer existed and the combines were ‘flat on their backs.’ There was no need to take action in these first years of the occupation beyond enacting a law to declare certain practices illegal in the future. The current economic program should be one of economic recovery. Until the German economy was in a ‘reasonable’ state of operation, it would be unnecessary, and in fact harmful, to undertake ‘drastic’ reforms. Therefore a program to eliminate ‘excessive concentration’ was not to be an important part of the immediate plan.”9

Martin pointed out the pitfalls of ignoring decentralization. Implementing a reparations program necessarily meant making choices that impacted concentration: would OMGUS sacrifice plants from giant combines, or plants from independent competitors? Other decisions would have similar impacts. Coal and other raw materials were scarce. How would rationing them work? Who would get what when? This “power to allocate was the power to withhold.” It would impact the ratio of “heavy” industries to “light” industries, shaping Germany’s ability to revive its war-making capacity. Making more generous allocations to big combines would increase their power. And so on.

Draper’s attitude was that any incidental imbalances could be remedied after the fact. If independents were snuffed out, and revived industries got overconcentrated, the team could rebalance by breaking off plants from the big combines later. There was no need to “discriminate” ex ante.10

Martin’s first meetings his peer leaders within the Economics Division did not go any better. “All findings of the wartime investigations were rejected as though we had learned nothing.” Rufus Wysor, the former president of an American steel company, contended “with some heat” that the trustbusters at the Department of Justice “were merely trying to use Germany as a testing ground for bringing anti-trust cases.” That statement was far-fetched enough that it did not “carry much weight with other people in Military Government,” but it illustrated “the strength of opposition to the philosophy behind the official policy.” The men clearly “felt that the German industrial leaders were practically no different from the American industrial leaders; and that, therefore, any dealing with them in an unfriendly way was practically a reflection on American business and American industry.” They were concerned that anything done in Germany would be wielded as “precedents for modifying or increasing the degree of enforcement of anti-trust laws in the United States.” Rather than explaining particular proposals, Martin found himself defending decentralization from scratch, on the fly, in five minute snatches, without the aid of the voluminous Congressional records sitting in Washington.

Despite the icy reception, Martin got to work. He hired dozens of people, building up a peak staff of 94 lawyers and investigators.11 Some had deep antitrust experience. Martin also had a few connections to call on in Washington in times of need. There was reason to hope that ongoing Senate scrutiny of OMGUS and fear of bad press would give him some leeway to do his job properly.

But recruiting staff took time, and it couldn’t be done remotely. So Martin spent much of early 1946 traveling back to the United States.

While Martin was away, outside actors increasingly started to find their way in to Germany. 

Who were they? What did they want? And how did that impact Martin’s mission?

Stay tuned for the next installment to find out.

Share

Leave a comment

Primary Sources

Today’s newsletter links to one newly scanned primary source: a letter from James Stewart Martin summarizing his government service before joining OMGUS.

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive— however, to minimize spoilers, I’ll wait to post some of them (e.g. more of Martin’s writings) until later in the series. I’ll also provide a list of some excellent secondary sources.

Subscribe now

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization in parallel with democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation” in Germany. Why?

A Haven for Cultured Hotshots

When Draper touched down in Germany in 1945, he had served full-time in various military roles for five years. But he was still, technically, on leave from a New York investment bank.

And it wasn’t just any bank. Draper had spent the early years of his career gaining experience at more traditional New York banks. When he joined Dillon, Read, & Company in 1926, it was an ambitious move to a Roaring Twenties haven for cultured hotshots.

Named partner Clarence Dillon was a famously cool-headed “Wizard of Wall Street” who vaulted a once “obscure” firm into the Wall Street elite— “ranked by many as second to the powerful house of Morgan,” according to the New York Times. Soon after becoming chair of the bank, Dillon coordinated a series of contentious transactions that merged six domestic steel companies into one. The bank typically retained tight control over management of companies in its portfolio by reserving all voting stock for itself, selling only nonvoting stock to the public. In 1921, Dillon raised $100 million “in a single forenoon” to save Goodyear Tire and Rubber Company from bankruptcy. In 1925, he outbid both J.P. Morgan and General Motors to buy the Dodge Brothers car company. He made headlines for closing the transaction by signing the “largest single check ever drawn in a commercial deal.” A few years later Dillon merged Dodge into Chrysler, making Chrysler one of the Big Three automakers.

An already frothy market was turbocharged after 1926, when the Supreme Court gutted the ability of federal enforcers to unwind harmful mergers.1 Predictably, that unleashed a tidal waves of thousands of mergers over the next few years. It would have been a very exciting time to be a dealmaker.

Yet after a decade and a half of accumulating adrenaline, acclaim, and untold wealth, one day Clarence Dillon just… stopped. In 1929, he made a mysteriously abrupt exit from the markets and laid off sales staff not long before the financial crash. Over the next few decades, he toured Europe, bought a vineyard, and dabbled in some board service and consulting, but never returned to his namesake firm.

Things did not turn out so well for the firm’s clients.2 Some lost everything—especially those who had purchased bonds for industries in a certain European country heavily marketed by the firm. Namely: Germany.

The German Connection

While Dillon was building his domestic empire, he had also chased foreign opportunities in Japan, Latin America, and Europe. In the 1920s, the bank underwrote (in today’s dollars) over $1 billion in German industrial bonds, and quarterbacked the merger of seven competitors to form the largest steel combine in Germany—which became the ringleader of an international cartel.

The New York Times reported that “American bankers” would hold seats on the board, although the combine would remain “under German control.” And who would chair that board? A German industrial magnate named Fritz Thyssen. Even back then, Thyssen was already pretty enamored of a political propagandist with an odd mustache.

Dillon, Read, and Company was not shy about boosting investor confidence in Germany’s bright future, despite lingering reparations owed after WWI. The bank co-sponsored an academic economist to write a book touting German recovery. A later edition explains that the “German rationalization movement” aimed to “make the general production process of the whole nation cheaper, more efficient, and better coordinated” through three main strategies: 1) standardization of products and materials, 2) scientific management, and:

3) “the endeavor to secure a better organization of whole industries [through] the elimination of duplication of plants, cross freights, and sales efforts, and in general by securing better cooperation. This aspect of the movement clearly encourages, if it does not require, the formation of cartels, combines, and outright mergers.”

Evaluating this system, the author proclaimed that it “requires no defense, and no hymn of praise; its achievements speak for themselves. To it is due a very substantial part of the great increase in the general efficiency of the German production machine as a whole in recent years… [I]t has already been of great benefit to industry and commerce, and may be expected to bring even greater gains in the future.”3

What About Draper?

After the crash of 1929, William Henry Draper, Jr. faced a long, hard grind to keep his young family afloat through the Great Depression.4 Draper stayed put for over a decade until General Marshall recruited him back to active military status.

What was Draper working on during that time?

A civil society group later alleged that “when the United Stated investigation teams went through the files of [steel combine United Steelworks] in 1945, they found friendly letters written in the 1930’s by Draper to the top management” of the combine.

But Draper testified that he was never a director of a German company, and it’s not clear whether his involvement went much beyond writing a few letters checking in on an investment. It’s also not clear to what extent his day-to-day work involved mergers and acquisitions versus, say, arranging lines of credit, selling domestic bonds, or other tasks less directly relevant to forming a worldview about the merits of centralizing or decentralizing an economy.

And perhaps in fairness we should leave some room for the possibility that whatever views Draper once had might have changed over time. Even Fritz Thyssen, the steel magnate who was once Hitler’s largest donor, completely broke ranks with the Nazi Party after Kristallnacht in 1938. Draper served his country honorably during WWII and like the rest of the world would have learned more and more about Nazi atrocities as troops liberated the concentration camps. Draper claimed that he even politely tried to decline a role in military government because he knew that his “past connection with Wall Street would undoubtedly be criticized,” but superiors “still insisted” that he go.

Was he similarly reluctant about shaping the structure of military government once he was there?

The Org Chart from Hell

The unit that eventually focused on “decartelization” work (an umbrella term staffers used to describe not only the dissolution of cartels, but also “deconcentration” of combines) began its turbulent journey months before the structure of the Office of Military Government, United States (“OMGUS”) crystallized.

Early team members sat within a fledgling Finance Division staffed by the U.S. Treasury Department. In addition to investigating cartels and combines, they also pursued the interrelated task of tracking down where and how Nazis were attempting to hide assets outside of Germany. The group was called the “Division of Investigation of Cartels and External Assets” (“DICEA”) with the expectation that this important work would be represented at the top levels of OMGUS.

But it never actually became a division.

Why?

Some credible explanations have nothing to do with Draper.

For one thing, the first leader of DICEA experienced his appointment as a demotion. Colonel Bernard Bernstein, a former Treasury attorney, had led the group that seeded the eventual Finance Division. Although the deputy military governor liked Bernstein well enough, Bernstein may not have been the right fit for leading that division.5

So others were brought in for that role, and Bernstein was reassigned to lead the newly separate investigative team. The deputy military governor justified the reorganization this way:

Until now, the Finance Division has been responsible not only for financial institutions, currency and public finance, but also for investigating German external assets. Under the reparations and disarmament programs, these investigations have taken on added importance. They are also closely related to the program from outlawing cartels and decentralizing German industry. For these reasons, we decided to set up a new division under the general supervision of Mr. [Charles] Fahy [of the Legal Division] to devote itself to investigating the existence and scope of cartels and other concentrations of economic power, and the existence and location of German external assets.”

He took pains to emphasize that the reorganization had “no relation to ‘soft peace’ or ‘hard peace.’”

It was true that strong differences of opinion were generally tolerated within the staff. But press leaks were not. Finance staffers had increasingly felt that their efforts to “denazify” German financial institutions were being thwarted by the foot-dragging of other divisions. Although Finance boasted “removal of 25,000 Nazis from the banking and finance system in Germany,” some purged Nazis easily pivoted into high level positions in other industries. After an internal memo failed to spur changes, word got out to major U.S. newspapers. Scathing stories reported that officials displayed a “lackadaisical attitude” and a “general tendency” to “ignore, evade, or circumvent” denazification policy.6

The military government apparently retaliated by ousting DICEA from its original headquarters to “the workshop of plumbers and other German civilian employees.” Without Morgenthau, the Treasury Department held less sway in Germany. Unsurprisingly, Bernstein ultimately resigned.

In October 1945, final decisions were made about the structure of OMGUS. All leaders were “invited to indicate” their staffing needs and “the responsibilities [they] felt [they] should have.” So Bernstein’s deputy, Russell Nixon, proposed that DICEA become “one of the nine divisions in military government.”

And at this point, Draper allegedly played a role. Nixon later testified that Draper and a few peers promptly summoned him to a meeting where “pressure was put on [Nixon] to withdraw [the] claim to that kind of jurisdiction.” Nixon refused to back down, but his proposal was rejected. So he resigned too.

Leaderless, the group was reorganized again in December 1945. The work of tracing external assets returned to the Finance Division, and all “decartelization” work was diverted to a new “branch” within Draper’s Economics Division. Perhaps the deputy military governor simply viewed economics as a logical overall category. Perhaps he thought Draper’s impressive managerial skills could wrangle useful work product out of the group while fending off more press leaks.7

Whatever the motive, the result essentially inverted the structure of U.S. domestic enforcement: it was as if economists got to run the Federal Trade Commission.

Which would matter more: structure, or personnel?

Some in Washington chalked up the drama around DICEA to personality conflicts. So an experienced investigator was recruited as a peacekeeper of sorts. Under him, the new “Decartelization Branch” could be relaunched from a clean slate, with a healthy recruiting budget to bring in fresh blood.

So how did the new guy’s first meeting with General Draper go?

Stay tuned for the next installment.

Share

Leave a comment

Subscribe now

The Mandate That Survived FDR’s Sudden Death

President Franklin D. Roosevelt had warned of the dangers of economic concentration as early as 1938. In an address to Congress, he explained that “the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.”1

This intuition was soon backed up by empirical rigor. During the war, Congress conducted extensive studies of Germany’s economic system. In late 1944, a Senate subcommittee led by Senator Harley Kilgore of West Virginia released a report which concluded that “[t]he monopolies and cartels which are the artery of supply in the Nazi system must be broken up within Germany.”2 This goal, the report declared, was “as fundamental as military occupation and political change.”

FDR’s sudden death in April 1945 shook up some major postwar debates; most notably with respect to whether Germany deserved a “soft” or a “hard” peace. Treasury Secretary Morgenthau, the leading advocate for a hard peace, tendered his resignation in July 1945.3 That significantly changed the balance of power at the Cabinet level; by then both the State and War Departments had rejected the harshest elements of Morgenthau’s proposals.4

But some goals remained consistent. Despite ongoing debates about the “level of industry” Germany would be permitted to pursue, there was general consensus that Germany’s political and economic systems would both have to be reformed to prevent war and to promote democracy.

The Allies had an unprecedented opportunity in this regard. According to a legal advisor for U.S. military government, because Germany had surrendered unconditionally, the Allies had “supreme authority” to govern and reform their respective zones.

President Harry S. Truman continued FDR’s policy of decentralizing Germany’s hyper-concentrated economy. Although dazed to have become Commander in Chief less than three months after being sworn in as Vice-President, Truman was not on autopilot here.5 Having worked as a farmer and a small business owner before becoming a politician, Truman personally embraced economic decentralization both at home and abroad. Although FDR had given Truman little exposure to wartime planning, Truman’s Senate career did equip him with some relevant economic insights. In 1941, he chaired a new investigative committee on war profiteering which held hundreds of hearings. Among other things, the hearings exposed links between the Nazi empire and certain big American businesses that artificially restricted output, causing shortages of critical war materials.

Truman would also have been familiar with State Department reports on Germany that came out in March and July 1945. These reports, prepared mostly by attorneys the State Department had borrowed from the Antitrust Division of the Department of Justice, concluded that Germany’s success in forming international cartels was driven by both domestic cartels and corporate consolidation. The State Department was most concerned with disrupting international cartels, especially ones that hurt American business, but also understood that concentration begat cartelization (it is, of course, much easier for four companies to collude with each other than for forty companies to do so). In June 1945, Assistant Secretary of State William Clayton acknowledged in Senate testimony that it would be “unrealistic” to ban cartels without also breaking up German combines.

All of this is to say, there would have been no surprise that even after FDR’s death, the military government’s marching orders included an economic decentralization mandate. Weeks after Germany’s defeat, the Joint Chiefs of Staff issued a directive (JCS 1067) that, among other things, ordered the military governor to initiate a “survey of combines and pools, mergers, holding companies, and interlocking directorates” to guide “dispersion of the ownership and control of German industry.” The U.S., U.K., and the Soviet Union soon adopted a similar policy in the Potsdam Agreement of August 1945.6 The Agreement declared that “[a]t the earliest practicable date, the German economy shall be decentralized for the purpose of eliminating the present excessive concentration of economic power as exemplified in particular by cartels, syndicates, trusts and other monopolistic arrangements.”

Pretty clear mandate, right?

Of course, this was not the only thing the military government had to worry about. It was also supposed to dissolve the German army, abolish the Gestapo, remove Nazis from positions of power, disarm industries of war, hunt down war criminals, release political prisoners, close and reform the German court system, close and reform the education system, eradicate Nazi propaganda, manage health services, and so on. Even within the economic realm, the military government was expected to tackle a variety of challenges. Under JCS 1067, it was supposed to “constantly maintain” surveys of economic conditions in the U.S. zone, manage price controls and rationing, and coordinate reparations. And it was supposed to delegate work to German agencies “[t]o the maximum extent possible without jeopardizing the successful execution” of such goals.

Nonetheless, economic decentralization was expressly framed as a principle on par with political decentralization.7

So how did Draper build up his Economics Division in light of this mandate?

The Good Old Boys from the Big Old Businesses

Draper was not starting from an entirely blank slate. He inherited a handful of staffers from a predecessor unit headed by a General Motors executive.8

But aside from those holdovers, the nascent Economics Division was Draper’s to shape as he saw fit.

Draper chose to entrust an executive from a subsidiary of (then-monopoly) AT&T to hire men from their network of New York bankers and big business executives. During the summer of 1945, several hundred economics staffers touched down in Germany, and additional field officers fanned out to regional offices. Recruits included the president of Republic Steel, an executive from International Telephone and Telegraph (IT&T), and an attorney from General Motors. Some had previous business dealings with German affiliates of their firms. There does not appear to have been any effort to recruit staff with more diverse business experience.

Not a promising start, from the perspective of economic decentralization.

But let’s give Draper the benefit of the doubt… for a moment.

Perhaps, even though Draper shared living quarters with the deputy military governor for a few months in the summer of 1945, he was kept in the dark about JCS 1067 until it became public. Many staffers would have been hired before the Potsdam Agreement was signed. Maybe he simply didn’t understand the overall mission of military government when he hired them?

Perhaps Draper thought that economic decentralization was someone else’s job? After all, the military government’s org chart was still in flux. Whatever divisions emerged would divvy up the laundry list of the occupation’s action items. The finance group had already assigned some guys to dissect cartel relationships and track down fleeing Nazi assets. Perhaps Draper expected that while they handled such details, he and his men could ponder bigger picture questions about the economy.  

Draper later testified that although he had misgivings that “deconcentration” (breaking up combines) could interfere with German recovery if “carried out to an excessive degree,” “in the early stages this was just one of a great many problems.” It wasn’t something he recalled discussing within military government those first few months.

Yet, there are reasons to doubt that Draper’s recruitment strategy was entirely innocent.

For one thing, his Division never seems to have changed its hiring formula, even well after former staff of the military government singled out Draper and his men for scrutiny in Senate hearings in the fall of 1945.

Then there’s Draper’s own background. Throughout the time he was serving in Germany, he was technically on leave from a New York investment bank. And, as we’ll see, it wasn’t just any investment bank—but one with a very specific connection to pre-war Germany.

Stay tuned for the next installment.

Subscribe now

Primary Sources

Today’s newsletter links to one newly scanned primary source: testimony by legal counsel discussing the U.S. military government’s views about the (quite expansive) scope of its authority to reform Germany.

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive— however, to minimize spoilers, I’ll wait to post some of them (e.g. Draper’s testimony) until later in the series. I’ll also provide a list of some excellent secondary sources.

Bonus Trivia

A reader tracked down a possible family tree for Draper from a genealogical site.

Lingering Questions (Can You Help?)

This is an ongoing project, with some threads I have not been able to pursue.

If you happen to live near 1) the National Archives in College Park, Maryland or 2) the Truman Library in Missouri, there are even more ways you could be helpful to unravel what went down. Just let me know in the comments if you’d like to help!

Subscribe now

1. An Urbane Workaholic Banker-Magician-Soldier

Today, at least on the West Coast, General William Henry Draper, Junior may be best known for founding Silicon Valley’s first venture capital firm Draper, Gaither & Anderson in 1959.1 His son Bill was a widely respected early investor in Skype, OpenTable, and other top-tier startups. His grandson Tim, perhaps the most eccentric member of the dynasty,2 dubbed the family patriarch the “Grandpa of the VC Industry.”3

Less remembered now is the ür-Draper’s role in shaping the course of history in postwar Germany and Japan. Draper had dipped his toes into geopolitical affairs even before graduating from New York University with both a bachelor’s and a master’s in economics. He chaired a delegation of thirty college students aboard Henry Ford’s Peace Expedition to Europe during the first World War; a quixotic escapade that nonetheless hints at Draper’s formidable networking skills and ambitions. Another interesting signal of Draper’s social sensibilities was his membership in the American Society of Magicians; he “earned part of his college tuition by giving card-trick demonstrations.” Yet despite such capacity for flair, one later profile described him as “soft spoken.” A picture emerges of a man inclined to move through the world through strategic influence— and, perhaps, a bit of misdirection.

After college, Draper served in the Army. Then he led a Reserve division even as he climbed the ranks at a series of investment banks. Although he always had a strong work ethic, Draper doubled down on working night and day during the Great Depression. In September 1929 Draper had “invested his entire bonus in a German-based maker of automatic coffee brewers,” which “soured to zero” in the stock market crash. Draper’s work ethic ultimately earned him a reputation as a “demon for detail and administrative efficiency.”

2. Cometh the Man, Cometh the Hour

In 1940, while Draper was serving as Chief of Staff of a Reserve Division, General George C. Marshall (later of “Marshall Plan” fame) invited him to resume active duty. At first, Draper’s tasks were administrative. He helped write the Selective Service Act and coordinated the mechanics of the draft. But Draper was also a man of action; after Pearl Harbor, he spent a year leading a regiment in the Pacific Theatre. Then an old boss, James Forrestal— an investment bank president turned Secretary of the Navy— poached Draper to develop a common purchasing policy for the Army and the Navy.

Draper’s role in the US military occupation started prior to Germany’s surrender in May 1945. Hot off his promotion to brigadier general at the beginning of the year, Draper was tapped to lead the “economic side of the occupation” by his former procurement boss, General Lucius Clay. Clay was preparing to serve as Deputy Military Governor under General Eisenhower.

3. Behold, the Economic Structure of the Death Star

Congress and various wartime agencies had investigated the structure of Germany’s economy and its “economic warfare” strategies for years by the time Draper touched down in Germany in the summer of 1945.

By then, Germany’s banks, industries, and government had become tightly woven together into a war-mongering singularity that exerted a formidable gravitational pull throughout German society. This did not happen overnight. The path to hyper-concentration pre-dated, and arguably greased the way for, Hitler’s rise to power.

Germany had never adopted an anti-monopoly law like the U.S. Sherman Act to counterbalance its rapid industrialization. However German civil society might have caught up in peacetime, World War I inaugurated a small burst of industrial consolidation thanks to the German military’s procurement policies. After that war, large firms leveraged compensation they received for war-torn properties to buy up smaller businesses that were being ravaged by inflation.

Nor did Germany prohibit cartels. So German industries easily revived international cartel links that were temporarily disrupted by World War I. In 1923, the Weimar government did pass a law restricting certain cartel practices to placate a shrinking middle class— but it was rarely enforced. There were major mergers in that era as well, often between former cartel members.

Soon after Hitler became Chancellor, the Nazi Party hosted a group of industrial leaders to extort political donations that helped Hitler consolidate power even though he did not have an absolute majority in parliament. Fritz Thyssen, the head of the steel combine, personally convened his peers. Because only a few leaders needed to be rounded up in consolidated industries, twisting arms was a quick task.4

In 1933, the Nazi Economics Ministry urged combines to acquire smaller competitors and forced companies to join cartels.5 Many industries such as chemicals, electricity, and artillery became dominated by a handful of large companies. Combines were further entrenched by special tax concessions and subsidies. German combines were not all dragged along reluctantly into following Nazi orders. They often made proactive proposals to abet foreign conquest, and developed business plans in anticipation of absorbing captured foreign competitors into their industrial empires. Several even collaborated with the Nazi regime in perpetrating the Holocaust.

Some members of Congress explicitly attributed Germany’s belligerence to its economic structure. In October 1944, West Virginia Senator Harley Kilgore, chair of a Senate subcommittee on war mobilization, declared in a press conference that:

“The basis for lasting peace is fundamentally an economic one. Germany, under the Nazi set-up, built up a great series of industrial monopolies in steel, rubber, coal and other materials. The monopolies soon got control of Germany, brought Hitler to power and forced virtually the whole world into war.”

Economic warfare investigators found that fewer than 100 men controlled over two-thirds of Germany’s industrial system by sitting on the boards of Germany’s Big Six Banks and 70 industrial combines and holding companies. Germany also dominated a variety of industries internationally through cartel agreements.6

Of course, the “economic side of the occupation” consisted of more than reconsidering economic structure. As Draper recalled in a later interview, the immediate problem facing German industry was that coalmines had been flooded. Without coal production, factories were at a standstill.7 So ramping that production back up to some minimum level was a high priority.8

Yet the situation was not so dire that there was only time to address immediate problems. As Draper himself acknowledged, “[t]he crops that year were quite good, and there was also considerable food we found that the Wehrmacht had stored, which we took over. So there was no immediate danger of starvation that particular fall [of 1945] or even that winter [of 1946].” Food security did become a bigger problem in subsequent years, but during the critical period when the military government took power in Germany, it did not dwarf all other considerations.

In other words, there was time to start tackling the economic roots of the Nazi regime.

So… what happened?

Stay tuned for the next installment.

Leave a comment

Subscribe now

Primary Sources

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post scans of primary sources to Internet Archive— however, to minimize spoilers, I’ll wait to post some of them (e.g. Draper’s testimony) until later in the series. I’ll also provide a list of some excellent secondary sources.

Lingering Questions

This is an ongoing project, with some threads I have not been able to pursue. Want to help? Here are a few lingering questions:

• What would Draper’s NYU economics curriculum have looked like in the 1910s? (What would he have learned about concepts such as monopolies and efficiency?)

• How might Draper’s experience with wartime procurement have influenced his views about economic (de)centralization? (And what corporate ties might he have developed in that role?)

• What was Draper’s family background? One genealogy site identifies his parents as “Mary Emma (née Carey) and William Henry Draper,” but I have not found detailed information about them. (I recall that another internet source made a reference to the textile industry, but I have not seen confirmation or details on that point.)

Social Media

More ways to follow updates:

Bluesky: Balancecraft

Vichy twitter: BalanceCrafting

Leave a comment

Share Balancecraft