2: The Mandate vs. The Social Network
Recap: Part 1 introduced General William Henry Draper, Junior, an urbane workaholic banker-magician-soldier tasked with handling the “economic side of the occupation” in postwar Germany. We also learned that “economic warfare” investigators concluded that German economy was hyper-concentrated in the hands of about 100 men.
The Mandate That Survived FDR’s Sudden Death
President Franklin D. Roosevelt had warned of the dangers of economic concentration as early as 1938. In an address to Congress, he explained that “the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.”1
This intuition was soon backed up by empirical rigor. During the war, Congress conducted extensive studies of Germany’s economic system. In late 1944, a Senate subcommittee led by Senator Harley Kilgore of West Virginia released a report which concluded that “[t]he monopolies and cartels which are the artery of supply in the Nazi system must be broken up within Germany.”2 This goal, the report declared, was “as fundamental as military occupation and political change.”
FDR’s sudden death in April 1945 shook up some major postwar debates; most notably with respect to whether Germany deserved a “soft” or a “hard” peace. Treasury Secretary Morgenthau, the leading advocate for a hard peace, tendered his resignation in July 1945.3 That significantly changed the balance of power at the Cabinet level; by then both the State and War Departments had rejected the harshest elements of Morgenthau’s proposals.4
But some goals remained consistent. Despite ongoing debates about the “level of industry” Germany would be permitted to pursue, there was general consensus that Germany’s political and economic systems would both have to be reformed to prevent war and to promote democracy.
The Allies had an unprecedented opportunity in this regard. According to a legal advisor for U.S. military government, because Germany had surrendered unconditionally, the Allies had “supreme authority” to govern and reform their respective zones.
President Harry S. Truman continued FDR’s policy of decentralizing Germany’s hyper-concentrated economy. Although dazed to have become Commander in Chief less than three months after being sworn in as Vice-President, Truman was not on autopilot here.5 Having worked as a farmer and a small business owner before becoming a politician, Truman personally embraced economic decentralization both at home and abroad. Although FDR had given Truman little exposure to wartime planning, Truman’s Senate career did equip him with some relevant economic insights. In 1941, he chaired a new investigative committee on war profiteering which held hundreds of hearings. Among other things, the hearings exposed links between the Nazi empire and certain big American businesses that artificially restricted output, causing shortages of critical war materials.
Truman would also have been familiar with State Department reports on Germany that came out in March and July 1945. These reports, prepared mostly by attorneys the State Department had borrowed from the Antitrust Division of the Department of Justice, concluded that Germany’s success in forming international cartels was driven by both domestic cartels and corporate consolidation. The State Department was most concerned with disrupting international cartels, especially ones that hurt American business, but also understood that concentration begat cartelization (it is, of course, much easier for four companies to collude with each other than for forty companies to do so). In June 1945, Assistant Secretary of State William Clayton acknowledged in Senate testimony that it would be “unrealistic” to ban cartels without also breaking up German combines.
All of this is to say, there would have been no surprise that even after FDR’s death, the military government’s marching orders included an economic decentralization mandate. Weeks after Germany’s defeat, the Joint Chiefs of Staff issued a directive (JCS 1067) that, among other things, ordered the military governor to initiate a “survey of combines and pools, mergers, holding companies, and interlocking directorates” to guide “dispersion of the ownership and control of German industry.” The U.S., U.K., and the Soviet Union soon adopted a similar policy in the Potsdam Agreement of August 1945.6 The Agreement declared that “[a]t the earliest practicable date, the German economy shall be decentralized for the purpose of eliminating the present excessive concentration of economic power as exemplified in particular by cartels, syndicates, trusts and other monopolistic arrangements.”
Pretty clear mandate, right?
Of course, this was not the only thing the military government had to worry about. It was also supposed to dissolve the German army, abolish the Gestapo, remove Nazis from positions of power, disarm industries of war, hunt down war criminals, release political prisoners, close and reform the German court system, close and reform the education system, eradicate Nazi propaganda, manage health services, and so on. Even within the economic realm, the military government was expected to tackle a variety of challenges. Under JCS 1067, it was supposed to “constantly maintain” surveys of economic conditions in the U.S. zone, manage price controls and rationing, and coordinate reparations. And it was supposed to delegate work to German agencies “[t]o the maximum extent possible without jeopardizing the successful execution” of such goals.
Nonetheless, economic decentralization was expressly framed as a principle on par with political decentralization.7
So how did Draper build up his Economics Division in light of this mandate?
The Good Old Boys from the Big Old Businesses
Draper was not starting from an entirely blank slate. He inherited a handful of staffers from a predecessor unit headed by a General Motors executive.8
But aside from those holdovers, the nascent Economics Division was Draper’s to shape as he saw fit.
Draper chose to entrust an executive from a subsidiary of (then-monopoly) AT&T to hire men from their network of New York bankers and big business executives. During the summer of 1945, several hundred economics staffers touched down in Germany, and additional field officers fanned out to regional offices. Recruits included the president of Republic Steel, an executive from International Telephone and Telegraph (IT&T), and an attorney from General Motors. Some had previous business dealings with German affiliates of their firms. There does not appear to have been any effort to recruit staff with more diverse business experience.
Not a promising start, from the perspective of economic decentralization.
But let’s give Draper the benefit of the doubt… for a moment.
Perhaps, even though Draper shared living quarters with the deputy military governor for a few months in the summer of 1945, he was kept in the dark about JCS 1067 until it became public. Many staffers would have been hired before the Potsdam Agreement was signed. Maybe he simply didn’t understand the overall mission of military government when he hired them?
Perhaps Draper thought that economic decentralization was someone else’s job? After all, the military government’s org chart was still in flux. Whatever divisions emerged would divvy up the laundry list of the occupation’s action items. The finance group had already assigned some guys to dissect cartel relationships and track down fleeing Nazi assets. Perhaps Draper expected that while they handled such details, he and his men could ponder bigger picture questions about the economy.
Draper later testified that although he had misgivings that “deconcentration” (breaking up combines) could interfere with German recovery if “carried out to an excessive degree,” “in the early stages this was just one of a great many problems.” It wasn’t something he recalled discussing within military government those first few months.
Yet, there are reasons to doubt that Draper’s recruitment strategy was entirely innocent.
For one thing, his Division never seems to have changed its hiring formula, even well after former staff of the military government singled out Draper and his men for scrutiny in Senate hearings in the fall of 1945.
Then there’s Draper’s own background. Throughout the time he was serving in Germany, he was technically on leave from a New York investment bank. And, as we’ll see, it wasn’t just any investment bank—but one with a very specific connection to pre-war Germany.
Stay tuned for the next installment.
Primary Sources
Today’s newsletter links to one newly scanned primary source: testimony by legal counsel discussing the U.S. military government’s views about the (quite expansive) scope of its authority to reform Germany.
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. Draper’s testimony) until later in the series. I’ll also provide a list of some excellent secondary sources.
Bonus Trivia
A reader tracked down a possible family tree for Draper from a genealogical site.
Lingering Questions (Can You Help?)
This is an ongoing project, with some threads I have not been able to pursue.
If you happen to live near 1) the National Archives in College Park, Maryland or 2) the Truman Library in Missouri, there are even more ways you could be helpful to unravel what went down. Just let me know in the comments if you’d like to help!
Expanding on this theme in a domestic context, FDR’s 1944 State of the Union address set forth an economic bill of rights that included “[t]he right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad.”
According to one historian, the State Department concluded that overall the subcommittee’s structural recommendations, such as “breaking up monopolies and cartels,” were “not markedly at variance with the views of the [State] Department.” But it dryly took issue with other, “rather extreme” suggestions, such as punishing 10,000 “imperialist-minded” industrialists and completely dismantling Germany’s metallurgical and chemical industries.
Under the Morgenthau Plan, Germany’s arms industry would be completely destroyed, and the country’s major industrial area (the Ruhr valley) would be governed by the United Nations. The rest of Germany would be “convert[ed]… into a country primarily agricultural and pastoral in character.” When newspapers reported false rumors that Morgenthau planned to resign, See Morgenthau’s diary entries about the encounter (starting on 4th page of pdf). Truman had previously expressed support for a hard peace, so this may have come down to Truman personally viewing Morgenthau as a “block head.”
Proponents of a “soft” peace wanted to revive and harness Germany’s great industrial capacity as a hub for European trade (later, they touted the additional benefit of bulking up militarily against the Soviets). The State Department went through several leadership changes as postwar policy was being developed. One Secretary of State resigned for health reasons in late 1944; then his successor transitioned to becoming the first U.S. Ambassador to the United Nations in June 1945. My impression is that as of the summer of 1945, the State Department generally sought to strike a more moderate balance between destroying Germany’s war-making capacity and reviving industry enough to serve basic humanitarian goals.
Even as he evinced a desire to honor FDR’s memory, Truman did not shy away from making big changes where he saw fit. Just two months after FDR’s death, Truman had already replaced four Cabinet members. See Associated Press, “Four New Cabinet Members Take Oaths of Office Today,” Evening Star (June 30, 1945), ISSN 2331-9968. Besides jettisoning Morgenthau, Truman replaced Secretary of Labor Frances Perkins, the first female Cabinet member, with a male federal judge. This, too, may have had downstream effects on U.S. policy in Germany—a retired attorney who was also pursuing a research project at the National Archives told me that the U.S. military government intentionally delayed repealing Nazi era labor laws that required a lower wage scale for women. That and other aspects of labor policy in Germany might well have gone differently if Perkins had served in the Cabinet longer.
General Draper provided on-site assistance to the U.S. delegation at Potsdam, although he did not attend the negotiations himself.
For example, JCS 1067 stated that: “The administration of affairs in Germany shall be directed towards the decentralization of the political and administrative structure and the development of local responsibility. To this end you will encourage autonomy in regional, local and municipal agencies of German administration. The German economic structure shall also be decentralized.” (There was a limited exception for public utilities, consistent with the American antitrust tradition. “The Control Council may, however, to the minimum extent required for the fulfillment of purposes set forth herein, permit centralized administration or establish central control of (a) essential national public services such as railroads, communications and power, (b) finance and foreign affairs, and (c) production and distribution of essential commodities.”) Section 3(c).
Although not essential to understanding our story, these initial staffers came bearing a grudge from several dramatic backstories. The lineage of U.S. military government in Germany can be traced back to the German Country Unit (GCU), a joint U.K.-based British-American entity structured to parallel German government ministries, which put together plans for controlling various Reich ministries. That entity was dissolved about a year and a half into its existence in part due to a controversial handbook it had drafted to help the military plan for occupation. For whatever reason, the group was not informed of either the State Department’s extensive postwar planning or the emerging debate over Treasury Secretary Morgenthau’s proposal for a “hard” peace. GCU staff assumed the military’s job would be to simply reconstruct Germany as quickly as possible. Upon learning of the handbook, which apparently did not acknowledge the importance of removing Nazi industrialists from power, FDR ordered all copies destroyed. Some staffers who were not fired transitioned to a new U.S. only unit, the U.S. Group Control Council for Germany. Then that unit got in trouble. Somehow, a General Motors executive named Graeme Howard had been appointed head of the unit even though he had published a book that opposed U.S. entry into the war and applauded the Nazi economic system. When that inconvenient fact threatened to become a public scandal, out went Howard, and in came Draper. Draper later testified that he was unaware of Howard’s book.