5. The Inside Game and the Outside Game
No saboteur is an island
Perhaps you’ve heard of the CIA’s “Simple Sabotage Field Manual” – a guide for weaponizing bureaucracy that came out in 1944. That encapsulated the spirit of the “inside game” thwarting trustbusters. But that was not the only threat, as outside forces were also trickling into Germany…
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…
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.
Ironically, according to Martin, it was the Economic Division’s scheme for directing American raw materials to German plants via U.S.-backed lending facilities that resulted in “waste” in the form of hundreds of tons of raw material diversions to black markets.
According to Wilson, Draper “agreed with my general conclusions, but I don’t believe that he ever specifically agreed to the general line of reasoning.”
The Economics Division wanted to maximize exports, so that Germany could fund its own recovery without further spending from American taxpayers. (In practice, their framework involved using the U.S. backed lending facilities of the Reconstruction Finance Corporation to attract private investment to buy raw materials from the U.S.). But according to Martin, the predicted savings did not materialize. The “export program lagged behind estimates, requiring more and more dollars in food and raw materials from the United States.” In Martin’s view, Draper’s plan delayed recovery in the rest of Europe, ultimately making the Marshall Plan more expensive. In any event, whether or not the export scheme was sound is somewhat beside the point with respect to decentralization policy.
Some of them were already sympathetic ears when it came to decentralization. For example, during the war, Forrestal had interceded to delay a U.S. antitrust action against Britain’s largest supplier of military explosives and high octane aviation fuel, which was accused of colluding with DuPont.
Interestingly, it appears Hoover did not unilaterally oppose decentralization policy. Just a few months later, in a letter to the Secretary of War, he recommended establishing “a few absolute prohibitions such as monopolies” in Japan, arguing that “development of de-monopolized private enterprise is the only hope of increasing the standards of living in Japan.”
Laird Bell was a Chicago lawyer who had served on the Foreign Bondholders Protective Council in 1933 “to safeguard the interests of American holders of German bonds.” One of the early decentralization leaders, Russell Nixon, described Bell as being of “the Liberty League stripe”– a reference to a group of businessmen that opposed New Deal policies in the 1930s. Consistent with that impression, Bell’s publications expressed misgivings about the administrative state constructed by the New Dealers, and public control over education (“That government should be the sole support of education, or even its major support, is a prospect to alarm those who believe in private enterprise.”).
“At its founding in 1945, the United States Council of the International Chamber of Commerce (as it was called until 1981) was intended to represent the specific interests of US-based multinationals striving to expand their international trade and investments.” A member of the executive committee explained that the vision included “concern[ing] ourselves with the reconstruction of Germany, [and] the problems of Japan…”
Kugelfischer was the only independent ball bearing manufacturer but at some point the Economics Division sacrificed most of its equipment as reparations, giving its competitor VKF a total monopoly. (It’s entirely possible that Draper’s retention of the GM executive was totally above-board. This document does make me wonder what other letters of introduction for consultants might exist in the general files of the Economics Division…)