IBM and the Holocaust (25 page)

IBM agreed to give Heidinger a bonus on losses, but struggled to phrase the arrangement since German taxing authorities would never believe genuine losses could create a bonus. Finally, to assuage Heidinger, the company agreed to declare a phantom dividend first, pay Heidinger a 10 percent bonus on that amount, and then recast those same numbers as losses to avoid tax.
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But what should be done with the blocked funds? In July 1935, during a Dehomag board meeting Watson attended in Berlin, he directed that "the money should rather remain invested in the firm and be credited to the license account [royalties], as direct remittances are not possible." Heidinger was offered extra incentives, such as insurance and a generous pension.
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The feisty German agreed, but that only postponed the next round of financial fisticuffs.

Meanwhile, to realize blocked profits, Watson channeled money into tangible assets. He expanded Dehomag's Lichterfelde factory, retrofitted an old underutilized pre-merger facility in Sindelfingen outside Stuttgart, and installed additional card printing presses. The race was on to build those presses and expand factories, because shortly, the Reich would decree that German companies could no longer pay for any imports from America. The new rules prohibited such imports, by either cash or credit. Hence intra-company accounts could no longer be manipulated to create losses. Dehomag could no longer mask as a legitimate expense its own machinery shipped from one IBM company address to another. The German subsidiary would have to become completely self-sufficient.
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Rottke bragged to the Dehomag board chairman in New York that he had beat the new regulations because "I have still imported as much merchandise as ever possible" from IBM NY before the new regulations took effect.
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Stockpiling IBM supplies, machines, spare parts, fabricating equipment, and punch cards meant that Dehomag received a decisive manufacturing impetus without the need to remit any money to New York. That only strengthened Dehomag's balance sheet, and made it a more powerful component of IBM.

But now surplus cash escalated in Germany beyond even Dehomag's needs. Watson needed to invest in German assets that would retain their value. They could be sold later. Eventually, IBM commissioned its outside auditors—Price Waterhouse—to join IBM managers in making investment recommendations. An extensive written report was submitted. Stocks of other German companies were considered too volatile. Timberlands were debated, but deemed unlikely to be approved by the Reich as a precious natural resource. Buying an independent paper factory was rejected since paper was now highly regulated by the Reich.
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"Rental property might be acquired, preferably in Berlin," an IBM European manager suggested to Watson in a letter. The decision was Watson's. He chose apartment buildings. These could be turned over to local rental agents for leasing, thereby generating income as well.
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Berlin was filled with some very discounted real estate at the time.

IBM began buying apartment buildings. The properties purchased were not prime locations, but reliable sources of rental income. One building was at Schutzenstrasse 15/17. A second was at Markgrafenstrasse 25. Attorney Konrad Matzdorf, whose office was near one of the addresses, managed the sites, and according to one IBM assessment, "accumulated a substantial amount of money for the rentals."
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As IBM plowed its Reichsmarks into hard assets, it already anticipated a wider European presence. In 1935, Watson shifted the company's European headquarters from Paris to a city with a better banking environment, Geneva, Switzerland. A Price Waterhouse report later confirmed that while dividends and profits destined for the United States were indeed blocked in Germany, "the regulations quoted above do not apply to transfers to Denmark, Belgium, Holland, Switzerland and Italy, since these countries have made special arrangements with Germany in connection with the transfer of interest and dividend payments."
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As it happened, IBM maintained operations in Denmark, Belgium, Holland, Italy, and now Switzerland.

Although the arrangement to pay Heidinger bonuses on losses originated in 1935, the small print of any agreement with the Dehomag founder consumed months of wrangling. During that time, IBM was astonished to learn that Heidinger had never quite filed all the many merger papers from 1934, thus preserving some or all of his original corporate compensation rights. More than that, the language in some of the merger documents Heidinger drew up was so convoluted, no IBM translator could understand it. At the end of 1935, an IBM manager confessed to New York, "the translation is still very confusing and actually it is hard to tell exactly what it means. Also you will be interested to know that both Mr. Rottke and Mr. Zimmerman of the German company are unable to determine the exact meaning of the German original."
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Pure and simple, Heidinger would not finalize the merger papers until his bonus was rectified. The matter had been dragging on since late 1933. IBM was operating companies that arguably did not quite legally exist for lack of the proper paperwork.

Once and for all, IBM wanted to straighten out its contractual messes with Heidinger. Both sides, in spring 1936, agreed to new bonus language. Heidinger visited New York in early 1936 to attend the Hundred Percent Club, the international IBM celebration of those executives meeting or exceeding their annual sales quota. Dehomag was always the number one foreign revenue producer. While Heidinger was in New York, there was plenty of face-to-face time for him and Watson to work out the smallest details of the final agreement governing the merger and bonus. A special letter was crafted by a Berlin attorney confirming that the contract was just a private undertaking between two stockholders with Dehomag, not with Watson in his capacity as chairman of IBM. This continued the fiction that Dehomag was not under foreign influence.
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So little trust remained that each side secured its own attorney. IBM Vice President Braitmayer sent a letter to a European manager in Geneva, and in a postscript asserted, "You will understand that I wish to avoid any unnecessary legal expenses, yet it is essential that IBM interests be fully protected and that you avoid any such complications as were involved in the 1934 contract drawn by Mr. Heidinger." Braitmayer added, "I am depending upon you to use some tact and judgment in handling this situation. And I hope you will understand that this letter is [only] for the perusal of yourself."
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Finally, on June 10, 1936, with numerous translations, multiple translated copies, attorneys in abundance, and signatures inked everywhere, an extensive array of eight document sets was executed, thus finalizing the Dehomag merger of 1933 and securing Heidinger's bonuses. To further bolster the image of German ownership, IBM ultimately arranged so-called "loans" for directors Hermann Rottke and Karl Hummel so they could purchase nominal shares of Dehomag. The loans were collateralized by the shares themselves and neither individual enjoyed "the right to sell or transfer to any third parties" any of their shares. No money changed hands. In consequence, it appeared to Reich authorities that three Germans owned Dehomag, even if in fact it was controlled 100 percent by IBM NY.
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As Watson reviewed a passel of final signed, notarized, sealed, and registered documents, America's most powerful businessman undoubtedly hoped that the war for profits in Germany was over. Heidinger might now be pacified. Watson was wrong.

GERMAN JEWRY
did not understand how, but the Reich seemed to be all-knowing as it identified and encircled them, and then systematically wrung the dignity from their lives. Indeed, it was clear to the world that somehow the Reich always knew the names even if no one quite understood how it knew the names.

Confiscation and Aryanization escalated throughout 1936, as did physical brutality. On September 8, 1936, a
New York Times
report headlined "Reich Seizing 25% of Fortune of Jews" reported: "The order served on Jews by local tax authorities demands that they deposit within eight days 'security' equal to the Reich escape tax . . . one-fourth their total assets. Jews on whom the order was served were frank in stating that sudden withdrawal of 25 percent of their capital meant ruin to their business and nothing was left except to shut down."
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On September 17, 1936, a
New York Times
report headlined "Nazi Penalties Heavier" reported: "The
Sturmer,
Julius Streicher's anti-Semitic weekly, announces that the Reich Justice Ministry has instructed public prosecutors to demand more severe punishment for Jewish race defilers—Jews convicted of having had relations with German women. The
Sturmer,
which regularly prints a list of Jews sentenced during the week throughout Germany, has long complained that German courts are too lenient."
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The day before, the
New York Times
was one of many publications that printed Streicher's explicit remarks to newspapermen. The article, sub-headlined "The Way to Solve Problem Is to Exterminate Them," reported: "The Nuremberg high-priest of anti-Semitism . . . announced that in the last analysis, extermination is the only real solution to the Jewish problem. Mr. Streicher made it clear in his address that he was not discussing the question in regard to Germany alone . . . but of a world problem. He declared there were some who believed the Jewish question could be solved 'without blood,' but . . . they were seriously mistaken. . . . if a final solution was to be reached 'one must go to the bloody path.' Such measures would be justified, Mr. Streicher declared, 'because the Jews always attained their ends through wholesale murder and have been responsible for wars and massacres. To secure the safety of the whole world, they must be exterminated,' he said."
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The world could not help but know the dismal result of Nazism. What they did not read, they saw. Refugees were everywhere.

Trains screeched into Paris, Prague, Warsaw, Brussels, Geneva, and Madrid. Ships lowered their gangplanks at Boston, New York, Mexico City, London, and Johannesburg. On every arrival, refugees were an unmistakable sight. Emerging as a family group, wearing their finest, towing suitcases and footlockers filled with clothes and memories, they stepped with hard-summoned pride and irrepressible confusion into the dim of displacement. Many were professors toting books bundled with cord. Some were doctors and lawyers lugging well-worn briefcases. A number were merchants stowing precious leather ledger books. Not all of them were Jewish. Some didn't even believe they were Jewish. Many were intellectuals or dissidents of various religions. Children were told stories about sudden vacations. Parents wondered what the night would bring. Not all had papers. Some carried smuggled gold and jewels to re-establish themselves. But most had little to defray their existence. The machinery of confiscation had sent them out virtually penniless or with their dwindled assets trapped in a hostile Reich.

An amalgam of disorganized rescue and relief was underway. The League of Nations, Jewish organizations, Zionist bodies, church groups, governmental committees, labor unions, and ad-hoc municipal agencies struggled to find housing, jobs, and moment-to-moment succor for the refugees. But all of the several dozen helping drew upon money and resources that fundamentally did not exist at a time when all nations were suffering from the weight of their own domestic depression. The world's brittle ability to assist was cracking. By late 1935, more than 125,000 had escaped Germany. In Holland, more than 5,000 had arrived. Czechoslovakia also extended asylum to more than 5,000. Poland absorbed 30,000. France had received 30,000 refugees but transferred 20,000 to other countries. Nearly 37,000 had escaped to the United States, Palestine, and Latin America.
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So global was the crisis that the League of Nations appointed James G. McDonald a special High Commissioner for German Refugees. McDonald's compelling report on the mounting catastrophe, issued as he resigned in frustration, declared, "Perhaps at no time in history have conditions been less favorable to the settlement of such a difficult international problem." The gates were closing. Zionist leader Chaim Weizmann declared the world was divided between places where Jews could not stay, and places where Jews could not go.
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It was against a backdrop of human misery everywhere that Watson proved that he was a special friend of the Nazi Reich. More than just his investments in Germany, and his strategic socializing with German diplomats and industrialists, Germany felt Watson was an ally in the Nazi battle for economic recovery and conquest. Watson never spoke a word of criticism against his customer Nazi Germany. But more than that, he worked to breach the gorge of isolation surrounding the Reich. One of his main venues was the International Chamber of Commerce and its U.S. affiliate, the United States Chamber of Commerce.