8. Elections have consequences
How did the midterm election of 1946 impact the balance of power in Germany? Why was a final report stamped “DRAFT”? And which leaders left the following summer?
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…
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.
They also sought to mitigate the risk of another New Deal style president winning long term governance powers ever again. The Republican Congress approved the 22nd amendment in March 1947. Although Harry S. Truman would have been grandfathered in, he decided not to run for a third term after the amendment was ratified by the states in 1951.
The Senate Sub-Committee to Investigate the National Defense Program released a report on November 22, 1946 which expressed concern that “business representatives of American firms are seeking their companies’ interest rather than their country’s interest in positions of economic power in Military Government,” given that “individuals with Wall Street connections and philosophy would not naturally be inclined to advocate forcibly and effectively a program of decartelizations.” But the conclusion was equivocal. News of the report started leaking to the press on December 3, 1946.
Felix Bair Jr., Occupation Study Balked by Kilgore, The New York Times (Nov. 26, 1946), https://timesmachine.nytimes.com/timesmachine/1946/11/26/issue.html
Somehow, even before the U.S. started to negotiate patent matters on a quadripartite basis, “French and British representatives… [became] aware of disagreements within Military Government on the advisability of the policy itself.” The policy was prepared by an executive committee including the U.S. Patent Commissioner, based on testimony from experts in “industry, patent law, and international relations.” Among other things, all patents would have to be licensable to anyone at a reasonable royalty for the life of the patent on a nondiscriminatory basis, there would be strict disclosure requirements, and Allied authorities could dedicate patents “to the public by termination” if that would further any program “concerning the disestablishment of combines, cartels or other prohibited arrangements.”
The standards were drastically pared back. Martin testified: “In the end, when the British were trying to reach, with us, a compromise, they rejected anything based on percentage or on the gross asset valuations and insisted that the only standard they might be willing to entertain was based on the gross number of employees employed. They held further that this standard should only set a prima facie case for deconcentration; and in the end a case of abuse would have to be made out even against the firm that had more than 10,000 employees.” The U.S. version of the law, however, did make the law mandatory if the corporation existed entirely within the U.S. zone.
“At least”?!? In many respects, the war was the trial. Why should German firms have greater due process rights than American firms?
What about the other suite of laws, on interlocking directorates and so forth? At some point, General Clay decided “that all of these laws should be referred to the Land German Governments to try to persuade them to pass legislation through their legislative assemblies to require registration of securities, etc.” But this strategy did not work. Martin testified: “[W]e weren’t given a sufficient staff to spend sufficient time in Germany to see that the Germans did it.”
The Economics Division did not strenuously oppose cartel restrictions the way it opposed dismantling monopolies.
The law also provided that if such enterprises were located entirely in the US zone, it would be dissolved unless OMGUS affirmatively exempted the enterprise. This provision was essentially illusory, since “most firms which exceed the 10,000-employee standard probably have at least a sales agency outside the U.S. zone.” Public utilities and enterprises taken over by military government were exempted from the law.
State Department staff dissatisfied with the law included members of the Inter-Departmental Committee on Cartels such as “Robert F. Terrill, who was in charge of the Commodities Division under Clair Wilcox; Isaiah Frank and Ray Vernon (Vernon having gone with Corwin Edwards to Japan to study the Japanese Combine Problem).”
Martin testified: “The Attorney General told me after the cabinet meeting that the members… had seen no reason for changing the government’s policy on decartelization” President Truman advocated the same principles for international trade generally in a speech in March 1947, proclaiming 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.”