7. Negotiating Powers

Was competition law doomed from the start by splitting Germany up into four zones? Which Allies accepted the Potsdam principles? Which pushed back?

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. But how much were the other Allied Powers to blame?

Clay’s rebuke of Draper at a staff meeting in October 1946 gave the trustbusters hope of finally breaking through the sludge of internal resistance.

Less than a year later, there was a big shakeup of OMGUS leadership below Clay.

Understanding what happened requires stepping back to consider the role of the other Allies occupying Germany.

The Red Scares, the Proud Poodles, or Her Majesty’s Monop-apologists? (A Four-Power Who Dunnit)

Clay himself circulated the first proposal for a “Decartelization Law” (covering both monopolies and cartels) at a meeting of the Allied Control Council in August 1945.

So why did it take until February 1947 for a law to be enacted?

Was it because the problem was moot?

Hearing that Germany was divided into four “zones” governed by four different sovereign powers might inspire certain assumptions about the flow of German commerce. In particular, didn’t having separate zones, each increasingly subject to separate rules and governance, mean German industry was already broken up? 

Division of occupied Germany.

Decartelization Branch Chief James S. Martin once explained: not really.

“[A] geographical boundary does not prevent the management from still using what influence it is able to bring to bear on the occupying forces in the territory in which its plan happens to be located… [T]here was no effective Iron Curtain set up across Germany so far as the Germans were concerned. The Germans had quite free transportation and access to one another and to counsel with one another on policies to be followed… [A]llied control was frequently undercut by the fact that the Germans would get together behind the scenes and agree on common tactics to be followed in meeting the policies of the various allied forces.”

This was true even in the Russian zone. Indeed, “American Intelligence used German business men traveling on business to the different plants to report back” facts relating to “methods of operation, the set up, etc. of the Soviet organization.” Although “German managers in the American or British zones were not able to determine whether their plants in some other zones would produce this or that… they could do plenty in terms of keeping together the core and spirit of a unified organization, which at a future time could reform its lines and resume control…”

The Germans were old hands at such coordination. After World War I, they managed to keep “their technology and their organizations alive by establishing factories that would employ their key technical personnel across the border.”

So, the law was not delayed by mootness.

Was it Soviet aggression, then? The outbreak of the Cold War?

No. The Truman Doctrine (March 1947), the Marshall Plan (June 1947), the Soviet withdrawal from the Allied Control Council (March 1948), and the Berlin Airlift (June 1948) all came well after enactment of the law.

Indeed, on the ground, Draper got along quite well with his Soviet counterpart. Later, James Kenneth Galbraith, who visited Berlin to offer his views of economic policy in 1946, recalled that “Clay and such of his staff as the highly intelligent William H. Draper, Jr. were contemptuous” of “fears” of “the menace of the Soviet Union” raised by the foreign policy establishment. “That Russia, recovering from by far the worst devastation of World War II, was physically or even emotionally in a position to begin a new war was dismissed by Clay as fantasy.” As late as March 1947, Clay’s personal letters still reflected hope of reaching agreement with the Soviets on the situation in Germany, even as a Cold War mentality was solidifying back in Washington.¹

Under Clay, the U.S. had initially proposed setting up a commission to carry out decentralization. It would consider cartels and combines on a case-by-case basis and then make recommendations to the leaders of each zone.

In September 1945, the Soviets made a counterproposal: bright light rules. Their draft “defined cartels and excessive concentrations of power,” and “prohibited them outright under specified penalties for violations.” Firms would be deemed “excessive concentrations of power” subject to legal proceedings if they met certain thresholds based on number of employees or annual turnover (later, a prong was added based on the percentage of an industry a firm controlled).

These “mandatory” provisions operated as rebuttable presumptions; companies would be able to challenge the designation. Moreover, the proposal still allowed the four-power Economics Directorate to make specific exemptions, for example if there was a “showing of economic necessity” or “where the size or the practices of a particular combine were harmless.” So, rather than needing four-power unanimity “to undertake any action at all,” four-power unanimity would be required to exempt entities that otherwise met the objective criteria set forth in the law.

Of course, the Soviets were not philosophically aligned with the American antimonopoly tradition. They were just pragmatic. After the Americans unleashed the devastating power of the atomic bomb in Japan in early August 1945 (less than a week after the Potsdam Conference ended) the Soviets were aware they were not bargaining from a position of great strength. As long as the parties could agree to something that would be administrable in practice, the Soviets would go along with decentralization and focus their energy on pushing for reparations.

The Soviet draft was quickly adopted as the template for further discussions. Clay suggested some numerical thresholds that might be satisfactory. Within a few months, three out of the four Allies reached agreement on the law.

Which country balked?

Not the Soviets, although even then they had reason to be frustrated with the process.

Was it France? France was not included in the Potsdam Conference that embraced economic decentralization, and had little interest in facilitating German recovery, and defaulted to obstructionism. Overall, it was by far the Ally that frustrated Clay and Draper the most. (Several years later, for example, Clay complained that the “French Military Government has finally succeeded in that apparently anatomical impossibility of making the tail wag the dog” through its attempts to prevent the British and the U.S. from passing laws in their zones without French input.)

Okay, fine. Here’s a French dog with a tail.

But France seems to have offered little pushback on the decentralization law.²

That leaves England. British government was then in flux. Labour had just won a surprise landslide victory in July 1945. Besides promising strong welfare benefits (e.g. national health and social security systems), their platform included nationalizing major industries.

So it must have been the new socialist-minded leadership who tanked negotiations?

No. Labour leaders in London initially agreed to go along with the official U.S. approach to decentralizing Germany.

British representatives on the ground were a different story. Their equivalent of the Economics Division was led by a knighted industrialist, Sir Percy Mills, and other Conservative holdovers. Although Mills conceded that his new government agreed with the purpose of the law “in principle,” he seemed to take every opportunity to quibble over semantics and add procedural roadblocks.³

At higher levels of the Allied Control Council, the four powers reached an agreement in principle. The law was referred to the Legal Directorate for drafting. According to early DICEA leader Russell Nixon, all four powers accepted that draft. The only task left was “for the Economic Directorate to fill in the blank spaces in the mandatory provision for (a) percentage of the industry, (b) annual turn-over, and (c) number of persons employed.” When it reached them, Mills voted against the law as written.

But he did not act alone.

Throughout the process, General Draper had echoed Mills’ nitpicking and obstructionism. At one point, Draper himself introduced a “compromise draft” that would have replaced the template definition of “excessive concentration of economic power” in a way that would have “transform[ed] the mandatory provisions of the law into mere reporting requirements.”⁴

After officials in Washington received a working party report from the Economics Directorate that “fell far short” of U.S. policy, a transatlantic “conference by teletype” was convened between OMGUS leaders in Berlin and an inter-departmental committee in Washington (with representatives from the State, Treasury, and Justice Departments). That committee emphasized that mandatory provisions were essential. Negotiators would have leeway to determine what numerical thresholds and types of standards would work, but there had to be standards of some sort.

Somehow, the U.S. Economics Division had difficulty understanding the instructions. Over the next few weeks, they kept cabling Washington with more questions. When Washington responded to their concerns about using turn-over as a threshold by offering an alternative mandatory standard, members of the Economics Division falsely announced that Washington had “withdrawn from the mandatory approach.” This set off fresh rounds of cables.

The British voted against the law at the highest level of the Allied Control Council in late November 1945.⁵ Perhaps they would have done that regardless of Draper and his men. But a case can be made that the British were emboldened by them.

Unilateral Gambits

All of this drama happened before Martin took over the Decartelization Branch.

He first learned of the whole situation en route to his new job. On a London stopover, he met with a British Foreign Office representative who cited OMGUS internal dissension as an excuse to backtrack on an agreement in principle with the State Department. Nonetheless, Martin managed to get the British to agree to assembling a list of German combines that were “clear cases” of undesirable economic concentration while the question of thresholds was up in the air. Martin’s team ultimately prepared studies of 69 combines that had principal controlling interests in over two-thirds of German industrial output.⁶

By summer 1946, the British stalled negotiations again. Martin testified that in August, a frustrated General Clay instructed Martin to prepare a unilateral law of the U.S. zone alone, in an effort to pressure the British, and to encourage other Allies to adopt their own unilateral laws.

This was a credible threat. Although the bulk of heavy industry (e.g. iron and steel) was located in the British zone, dozens of large companies were headquartered in the U.S. zone, which had a population of about 20 million Germans.

Draper was not pleased that Martin had dealt with Clay directly, and reprimanded him for such insubordination. But Draper was, temporarily, outmaneuvered— once the U.S. threatened unilateral action, that kickstarted another multilateral round.

Martin and his team aimed to put together a basket of inter-related laws with a specific priority in mind:

“The management groups who wormed their way into the top industrial and financial positions in the Nazi industrial economy must not be permitted again to take the reins and maneuver German economic development. They built power through chains of holding companies, interlocking directorates, trade associations vested with power to allocate scarce materials; through licensing laws, fiscal controls, and cartel agreements. And unless something positive is done to reorganize those instruments of power, there is no ground whatever for hoping that the men who abused this power in the past will refrain from abusing it [again].”

This was not some kind of punishment. It was “one of the keys to [Germany’s] recovery.” The same men who had dominated Germany’s economy “should not be put back in a position to control, to stand astride the channels of commerce, to turn the economic system off and on at will,” perhaps endangering recovery. Ousting them would relieve the “stagnation” of the “completely wooden and non-flexible German economic system.” After all, monopolies and restrictive trade practices “do not have a history of increasing production or releasing productive energy.”

Martin drew a distinction between these aims and more routine U.S. antitrust actions– as well as with “fallacious” caricatures floated by the Economics Division:

“[T]his was never a plan to break up German industry. It was not a plan to prevent a healthy economic recovery in Germany. It was not a plan to reduce the size of industrial plants or to require that industrial production should be undertaken only in small, scattered or isolated industrial units. It was a plan to prevent small cliques of corporate managers from assuming control over too large a proportion of Germany’s economic life.”⁷

They drafted proposals to tackle each key mechanism through which this “management clique” exerted control.⁸ Martin was “not merely thinking of particular types of [bad] persons, but the kind of organizations through which they function– the peculiar relationships of the big banks and industries.” Because economic democracy goes hand in hand with political democracy, OMGUS needed to tackle “both extremes of centralized management and control, whether government management and planning or private monopoly planning.”⁹ Germany’s combines weren’t merely the equivalent of American companies such as Du Pont. The largest were like “a whole series of Du Pont organizations, all of them managed from the top as a corporate undertaking by a group of financiers and what you might call ‘Economic Planners.’”

Even though the draft law adopted principles approved by the President’s Executive Committee on Economic Foreign Policy and was approved by General Clay, the Economics Division managed to delay adoption. Meanwhile, Draper leveraged his contacts to personally lobby William Clayton, the Under Secretary of State, for a weak “nonmandatory” law that would make enforcement discretionary. In September 1946, just a few weeks before Clay’s public rebuke, Draper called Martin to tell him that the State Department position had shifted. Draper followed up with an artfully worded memo where he portrayed himself as a neutral observer of official discussions:

“Clayton had expressed disagreement with the mandatory test of ten thousand employees on the basis that no test of size alone necessarily represented a harmful concentration of economic power. The resulting discussion among State Department officials indicated considerable differences in points of view toward the proposed decartelization law. I had merely reported the status of the quadripartite negotiations and purposely took little or no part in the discussion…”¹⁰

He also attached an internal State Department memo reflecting the nuanced views of Clayton’s staff. (Draper emphasized that Clayton had not seen or approved their recommendations). That memo readily acknowledges that an employment threshold would be “arbitrary” and “blunt” but suggests that exceptions might be allowed “where it can be demonstrated that technological efficiency would be seriously impaired by breaking up the firms into smaller corporate units,” and that the arbitrary thresholds would only be applied for an “initial” program. “[F]uture policing of Germany industry for excessive concentration could be accomplished on the basis of much more flexible and refined standards.” Martin testified that “[n]one of us were happy about retreating to a rather arbitrary standard of employment,” but “that was the only one the British would agree to include at all.”¹¹

According to Martin, Clay had remarked in private that “he was not certain that someone from the Economics Division had not done a certain amount of selling of the non-mandatory position in Washington.” Clay’s October rebuke was partly a reaction to Draper’s staunch rejection of the mandatory approach.

The State Department, perhaps waiting for the mid-term elections, slow-walked its response to Draper’s lobbying. Rather than directly address the mandatory standard, Clayton directed OMGUS to negotiate a joint law with the British in anticipation of the two zones merging. Although unable to secure an immediate reversal of policy, the Economics Division was no doubt happy to settle for more delay. And, of course, they knew they could count on the British to oppose a mandatory law.

In late October 1946, Senator Kilgore’s War Investigating Committee dispatched its counsel to investigate obstructionism in Germany. The report found that “[o]utwardly, most policies remained exactly as they had been from the start of the occupation; but the principal opponents of reform policies began quietly to propose moves that went in the contrary direction, as if they were confident that changes were coming.”

Were they?

Stay tuned for the next installment…

Primary Sources

Two 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.

• 1949 letter from Martin to DOJ Antitrust Division listing combines headquartered in U.S. zone, with notes on cartel links, board members, percent control of industry, etc.

To minimize spoilers, some secondary sources and scanned documents will be posted later.

1. Clay wrote: “Progress here in Moscow is slow and uncertain. However, patience is required.” Influential members of the foreign policy establishment who were alarmed by communist rebellions in Greece and Turkey as well as aggressive Soviet efforts to spread communism, had by then begun agitating for the partition of Germany and Cold War.

2. France’s reasoning may well have been along the lines of “Heads, Germany’s economy suffers from this law; tails, the economy improves but war-mongering power is broken.”

3. According to Martin, the British were also eager to “promote and use certain of the men who had been most actively connected with the building of the old pre-war Cartel System”–men such as Hermann Abs and Ernst Helmuth and “Vits, the Rayon King” who were “the original financial supporters that enabled Hitler to get into power in the first place.”  

4. Draper was not the only U.S. representative who undermined the official U.S. position. Early on, Major Petroff, a General Motors attorney, “reported that he had negotiated a compromise draft with the Russians. The compromise draft turned out to be a short version of the original law proposed by the United Stated representation in the Control Council which, at best, merely provided for administrative machinery. There were no prohibitions…” 

5. Draper also persuaded the Soviets that the U.S. position was not firm, leading the Soviet representative on the Economics Directorate to vote against the law at one point. See Nixon Testimony at 1572 (Draper and his allies “indicated: 'We didn't really mean it when we referred to our support for the mandatory law...' In addition they created confusion. There were incorrect minutes written... these same forces attempted to get Washington to relax the policy by expressing excessive defeatism, telling them it was impossible to get a tough law and trying to get them to give permission for a weaker position."); Id. at 1542 (“When asked how he explained the apparent change in the Soviet position, since they had been the first to propose a mandatory law, [Draper] replied smilingly that he probably had had something to do with that, too. When, subsequently, we asked a Soviet representative why the Russians no longer took an aggressive position in the Economic Directorate on the issue of a mandatory as opposed to a discretionary law, he replied that if we wanted that kind of law we could count on their support [if] we showed them that we meant business.”).

6. The list was based on factors including “the percentage-wise position in industry, on gross assets valuation, on the number of employees, and on the past history of the firm in terms of its activities in connection with cartels and monopolistic practices, its support of Nazi political activities, and other types of earmarks.”

7. More specifically, Martin testified that his written proposal to Clay included “laws to limit the use of holding companies, interlocking directorates and officerships, intercorporate stockholding, issuance of securities in bearer form, and inter-company arrangements for the common control over finance and sales.” According to Martin, “General Clay read the memorandum, discussed and then initialled it with the notation: ‘Approved in principle.’” 

8. Martin also specifically noted that in the Ruhr valley (U.K. zone), “certain members of the old German management clique have been allowed to get into a position where they can decide there that coal and steel are going to go.” Regarding companies that had plants in the American zone but headquarters in Russia’s zone, Martin thought it would still be “desirable to deconcentrate, because, in addition to all other reasons, you do not want a management under Russian control to still have, at least legally, some right to say how this company is going to manage itself in the American zone… [I]t is much like the move we made to call on a firm to cancel its cartel agreements. It was fairly obvious they were not living by them, but it was important to clean up the legal relationship so that the pipeline couldn’t be managed separately from the former Combine.” What about legal title? “A corporation under our jurisdiction is simply under orders. Its control over its assets is suspended. The Military is in there as a Trustee. It is up to them to work out a program for ultimate disposition of the ownership of those properties.”

9. “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.”

10. Draper’s memo is silent as to whether he might have engaged in any one-on-one discussions before the meeting he observed.

11. Martin thought that “by far the best measure of size that would make it easier… would be the measure of size based on the percentage of industrial control.” “[I]n dealing with people who basically do not want to come to that kind of an agreement, they do tend to push the thing into a rather unworkable shape.”