4. The Bottleneck Boy Meets an Immovable Object
Why would anyone take this job? Was the new guy naïve about bureaucratic infighting? Misled by the job description? A glutton for punishment? And how did his first meetings with Draper go?
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.
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.
Many domestic antitrust cases were suspended during the war, at least where the defendant companies were considered important for the war effort.
Although the Bottleneck Boys set out to investigate enemy weaknesses, they inadvertently uncovered bottlenecks at home as well. For example, their “elation at the discovery that practically all of Germany’s fine optical glass came from one factory… was counteracted by the discovery that under the same working arrangements only one such factory of any importance existed in the United States. The pin point for the bombing in Germany could be the blueprint for sabotage in the United States.”
Martin’s boss at the Department of Justice, Attorney General Francis Biddle, later served as one of the judges at the Nuremberg trials.
Concern about German influence abroad was heightened by the discovery in Spring 1945 of documents indicating that Nazis on the brink of defeat had backup plans: they were already, the State Department warned, “developing post-war commercial projects,” “endeavoring to renew and cement friendships in foreign commercial circles,” and “planning for renewals of pre-war cartel agreements.” Moreover, they had a legal strategy: “An appeal to the courts of various countries will be made early in the post-war period through dummies for ‘unlawful’ seizure of industrial plants and other properties taken over by Allied governments at the outbreak of war. In cases where this method fails German repurchase will be attempted through ‘cloaks’ who meet the necessary citizenship requirements. The object in every instance will be to reestablish German control at the earliest possible date. German attempts to continue to share in the control and development of technological change in the immediate post-war period are reflected in the phenomenal increase in German patent registrations in foreign countries during the past two years. These registrations reached an all-time high in 1944. The prohibition against exporting capital from Germany was withdrawn several months ago, and a substantial outflow of capital to foreign countries has followed.”
Martin was expecting to return to Germany to serve as an advisor to the State Department representative in OMGUS. But Major General John Hilldring, Director of the Civil Affairs Division of the War Department, asked the Antitrust Division of the DOJ for a list of names of potential candidates for a new decentralization leader. Hilldring forwarded the list to General Clay, then deputy military governor of OMGUS, who chose Martin.
Personally, Martin found aspects of Morgenthau’s hard peace “too drastic” (as such, his views may have been more in line with the State Department than the Treasury).
Early in the fall of 1945, Draper commissioned an academic economist, Calvin Hoover, to draft a report assessing the appropriate levels of industry that could satisfy reparations commitments within the standard of living targets articulated under the Potsdam Agreement. Hoover concluded that the Potsdam Agreement presented impossible goals, and that instead Germany’s economy must be restored along the lines of its pre-existing economy. Part of the issue seems to have been that whereas Potsdam mandated that that Germany should be permitted an economy “not exceeding the average” standard of living in Europe overall, Hoover interpreted that ceiling as a floor. (Critics later asserted that Draper commissioned this report with the intent to lobby for changing the Potsdam targets, but I haven’t come across any documents proving what Draper did or didn’t intend).
Internal War Department studies indicated that in the western zones, most of Germany’s industrial capacity remained intact.
Additionally, since recovery was the most important objective, Draper believed that “experienced German management” needed to be retained, even if it meant less zealous application of denazification directives
This number was reported in a law review article by an assistant to an Army post mortem investigation. But one New York Times article pegged the number of staffers at 150. I trust the lower figure more. Martin originally proposed a staff of 140, but found himself having to pursue multiple rounds of recruitment during his tenure to compensate for attrition (morale flagged as staffers encountered resistance from the Economics Division). One source estimated that overall, OMGUS had about 10,000 staff. So the Decartelization Branch constituted a single digit percentage of personnel, and likely a small portion of the overall budget.