IBM and the Holocaust (24 page)

In Germany, some of the devices, such as the IBM Fingerprint Selecting Sorter, were only usable by Nazi security forces.
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Specialized printing presses for punch cards were finally installed in 1935, allowing Dehomag to print its own punch cards. In a typical eight-hour shift, allowing for pauses to change plates and re-ink, each press could produce 65,000 cards. Within two years, IBM would install fifty-nine such presses in Germany—fifty-two from the only European press source that could manufacture them, and seven from the United States, including several high-speed units five times faster than the European models.
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In 1936, Dehomag opened its first full-time school for customer training. Courses for beginning card punchers typically required two weeks of intensive study. Additional courses were needed to master the more delicate skills of operating the sorters and tabulators. Each new device required additional training. A Development Laboratory, staffed by ten engineers, was opened. Initial projects included high-speed punches and automatic paper feeders for the new D-11. Ironically, despite all its increased factory space, technical support from America, and extra investment, demand was so high that Dehomag was still two years behind in filling its mounting list of orders.
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It was a never-ending battle to supply systems. And the Reich needed them so urgently.

IBM WAS MAKING
a fortune. Since the day Hitler came to power, the company had been reaping millions from its German operation. How many millions might never be known because the company buried its profits in bizarre inter-company transactions. But the outward manifestations of IBM's growth and prosperity and the "admitted profits" it reported were amazing to a nation struggling to recover from the Depression.

"December 1933 was the largest December in the company's history," Watson boasted to stockholders during one early 1934 meeting. He added that January 1934 was also the largest January in the company's history and February 1934 saw conceded profits of $103,000 above the year before. Watson predicted the trend would continue throughout 1934. These profits were declared despite every attempt to weave revenues into complicated, untaxable inter-company shunts. Net income for 1933—to the extent it was identified given blocked accounts in Germany—was reported as $5.73 million, including income from foreign subsidiaries. Most telling, of $55.4 million in assets, $16.2 million was surplus cash.
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Net income for the first six months of 1934 was $3.4 million over the $2.9 million posted in 1933, even after adjusting for various inter-company charges. Income increased to $5 million for the first nine months of the year, or $7.18 per share over $6.22 per share the previous year. A dividend of 2 percent was declared in addition to the regular quarterly dividend.
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Equally impressive to the business press were the numbers for 1935. Watson began the year by predicting IBM's continued upsurge. "Our trade abroad is improving," reassured Watson, "as shown by the fact that for the first ten months of 1934 our exports increased about 35 percent over the corresponding period of 1933. One of the main factors contributing to industrial recovery may be found in the constantly increasing cooperation among political, industrial, and financial leaders." Million-dollar profits continued to rise in 1935. Shares for the year bloated to $9.38.
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However the funds were classed or categorized, Dehomag alone paid some $4.5 million in dividends to IBM during the early Hitler years.
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IBM announced it would erect a building at 32nd Street and Fifth Avenue in Manhattan. Then the company purchased $1,000 life insurance policies for all 6,900 of its employees on the job since January 1933 or earlier. While dedicating a new addition to the company's plant in Endicott just before Christmas 1934, Watson extravagantly announced a Yule gift—a 37 percent minimum wage increase for 7,000 workers. Shortly thereafter, newspapers revealed that Watson had become the highest paid executive in America. They dubbed him the "thousand dollar per day man." Watson received a bonus of 5 percent of all IBM profits worldwide. So his total salary amounted to $364,432 per year, or nearly as much as the combined salaries of the chairmen of Chrysler and General Motors. With characteristic aplomb, Watson defended his unprecedented compensation. Then IBM bought another Manhattan building site, this one at 57th and Madison.
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In mid-1935, Congress had passed a new law with an extraordinary impact on IBM: the Social Security Act. Congress had invented a bureaucracy no one was sure could even be implemented. Social Security would require a central file on nearly 30 million Americans.
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Until this point, Hollerith systems had still not attained the technologic ability to create a single central registry. That is why so many repetitive sorts by statistical agencies were undertaken and updated so frequently.

When the Social Security law was passed, no budget appropriation and no infrastructure were in place because bureaucrats were convinced that "the machinery . . . to do the job . . . did not exist." Nor did the first Social Security officials believe that nearly 30 million Americans could be quickly punched into a first-time-ever system, and then sorted, assigned a number, and eventually alphabetized. Nor did anyone imagine that such voluminous records could be searchable and retrievable based on name and number.
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Hollerith machines, as they were understood to exist in America at the time, could do no more than add, subtract, tabulate, and tally punch cards. But Social Security required
collation,
"the ability to take two sets of records and do a [simultaneous] matching to see whether . . . they were related to one another," as government technicians described it.
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To the amazement of the bureaucrats, IBM was ready. The company was quickly able to unveil a so-called "collator" that could achieve precisely what the government had in mind: compare and cross-reference two sets of records in a single operation. Therefore, it was not necessary for the government to invent its own equipment. IBM would provide the solution.
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Washington awarded IBM an on-going contract so substantial it permanently boosted IBM into a corporate class of its own. Watson's people boasted that Social Security was "the biggest accounting operation of all-time." Actually, it was the second biggest. The dress rehearsal had already taken place in Germany in 1933. It will never be known whether the collator was invented in Germany or the United States, or as a collaborative effort of IBM's cross-Atlantic development programs. But shortly after it appeared in the United States, the collator also appeared in Dehomag's inventory. Dehomag was so impressed with the talented machine, the subsidiary deployed dozens of them, and planned to produce or import 50,000 more.
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From the moment Washington anointed IBM with the Social Security contract, the company's income catapulted six-fold within several years. Social Security and a diverse parade of lucrative contracts from the Department of Labor to the War Department created a veritable federal partnership with IBM.
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The company became quasi-governmental. Large-scale research and development into punch card registration, identification, and storage and retrieval systems were now funded by the U.S. government as well as Nazi Germany. IBM's technology jumped. As a result of massive American taxpayer-funded research, more people-managing punch card capabilities than ever before would be available to the Hitler regime.

WATSON'S STRUGGLE
to retain profit in Nazi Germany was all consuming. Reich regulations were constantly tightening the rules for business in cash-starved Germany. Austerity measures required ever-increasing domination of industry. Moreover, Heidinger never paused in his battle to reap his portion of the Dehomag money. Watson could handle Reich regulations. But Heidinger was something else.

Barely a day passed without numerous position papers, contract drafts, legal opinions, and explanatory memos wafting between IBM offices in Geneva, Paris, Berlin, and New York trying to maintain an edge in Watson's profit war with Heidinger. Every time one fire seemed doused, new flames erupted.

For example, IBM was faced with a Dehomag profit of RM 1.2 million at the end of 1934. Watson didn't want to pay the taxes in either Germany or the United States. To both take the profit, yet make it disappear, European auditors in late February 1935 concluded that "the new Dehomag will simply have to show a deficit as of December 31, 1934, after payment of the RM 1.2 mil lion 1934 dividends. The deficit will be made up within the first few months of 1935." That dividend of course would be classed a "royalty," making it appear as an expense. However, at about the same time, even the royalty loophole dried up. IBM accountants reported to IBM that "royalty payment to New York is no longer possible." Confronted with a technical deficit for the first quarter of 1935 and unable to transfer profit, Dehomag petitioned the Berlin authorities for temporary tax relief, claiming "a hardship."
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The problem was that Heidinger earnestly wanted a profit shown so he could qualify for a bonus. Without a formal profit showing, Heidinger's 10 per cent bonus would never materialize. Before the merger, Heidinger was accustomed to receiving a monthly bonus of RM 10,000. Under the new arrangement, IBM reaped huge earnings as royalties or other "fees," but his income suddenly disappeared. Until the profits could again be declared, Heidinger demanded a monthly "loan" of RM 5,000 just to make living expenses.
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Only Watson could authorize it. He did agree, but kept Heidinger on a short leash. The loans would extend only until August 1935, at which time "the whole position will be reviewed again."
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Upon learning of his temporary morsel, Heidinger, on March 3, 1935, shot off a saccharine thank you to IBM NY Vice President Otto Braitmayer. "It was indeed a great pleasure for me to receive . . . your kind letter of February 21 by which you allow me to receive from the Dehomag during the first eight months of this year a monthly advance of RM 5,000—instead of dividends which will be declared later on. . . . thank you very much for your kind thinking of me on occasion of my 60th birthday . . . which brings me nearly into your class of age."
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But then an additional Reich regulation hit, this one completely undercutting windfall profits. New rules prohibited distributed profits in the form of dividends above 8 percent of a company's original investment. Since Dehomag's soaring profits were now vastly in excess of IBM's original capitalization, the dividend cap applied. As it became increasingly difficult for IBM NY to extract monies from Germany, profits still remained undeclared. It seemed that no matter what was done, Dehomag's growing business made money but profit was never declared.
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An IBM comptroller's analysis conceded that by fiddling with losses, "It is obvious that Mr. Heidinger would draw about 40 percent of the total dividends which could be declared." At the same time, the analysis added, IBM would only be able to receive 60 percent of what it was expecting.
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Finally, Heidinger caught on that IBM losses were just as valuable as profits. If he couldn't get a bonus on profit—he demanded it on the losses. Ironically, IBM managers were unable to deny the logic. "Mr. Heidinger is justified to a certain extent," conceded one internal memorandum, "in asking that the losses in the other divisions be taken into consideration . . . because . . . the surplus is reduced."
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