IBM and the Holocaust

by Edwin Black

  While in Berlin that November 1935, Watson attempted to gain technical information from Dr. Fels, a key Reich Statistical Office expert who had helped organize the 1933 census. Watson learned that despite Fels’ expertise, he had been ousted from his position because he was Jewish. Dehomag delivered a note to Watson’s hotel explaining that Fels was now living as an unemployed refugee with his family in New York, “in quite a bit of misery.” The note added that IBM in America had declined to give him a job. But Watson wanted Fels’ expertise. So immediately upon his return to America Watson arranged a meeting. On February 3, 1936, Fels briefed Watson in his Manhattan office and they spoke of such wide-ranging issues as the German census and the prospects for similar projects elsewhere. As for employment, Watson did assure he would ask around and see if any of the many organizations he was associated with might offer Fels a job.42

  After the Fels briefing, joint exchanges on both sides of the Atlantic between IBM NY and Dehomag sales and technical staff became constant. These exchanges were highly selective, well thought out, and very costly investments in future work. Dozens of Dehomag salesmen, engineers, and managers came to America for training and exchange of expertise. IBM established a special sales training school in Endicott, New York, predominantly attended by German and other European IBMers. Sales training was necessary because despite all the proliferation in punch card systems, representatives encountered continual resistance from government officials on just how the elaborate new technology worked. At Endicott, salesmen learned how to fire the imagination of bureaucrats and convince them that IBM’s technology could provide solutions for any governmental requirement—no matter how unprecedented.43

  Four of IBM NY’s brightest engineers and managers, all of Germanic descent, were eventually transferred from America to the Berlin operation: Walter Scharr in 1936, and Otto Haug, Erich Perschke, and Oskar Hoermann in the following years. One Austrian inventor, Gustav Tauschek, was so prized, he demanded—and was granted—an annual contract guaranteeing him six months with IBM in the United States and six months in his beloved Austria. Tauschek generated dozens of valuable patents. Indeed, anticipating Dehomag’s expansion, IBM NY filed for patents in various European countries to protect the inventions of its German subsidiary.44

  New devices never stopped appearing. Numbered gang punches type 501 for multiple punching. Electrical interpreters type 550 for analysis. Electrical accounting machine type 400 for zone punching. Summary punch type 516 for cumulative information. Dehomag developed its own motor-driven duplicating printing punch type 016 for high-speed processing, and calculating punches type 621 and type 623. Multiplying punches were able to tally the sum of two punched holes on a single card, shortening sort time. High-speed reproducers, alphabetic tabulators, numeric and alphabetic interpreters, horizontal sorters—a parade of metal magicians joined the repertoire.45 Many of these devices were of course dual-purpose. They as routinely helped build Germany’s general commercial, social, and military infrastructure as they helped a heightening tower of Nazi statistical offensives.

  In Germany, some of the devices, such as the IBM Fingerprint Selecting Sorter, were only usable by Nazi security forces.46

  Specialized printing presses for punch cards were finally installed in 1935, allowing Dehomag to print its own punch cards. In a typical eight-hour shift, allowing for pauses to change plates and re-ink, each press could produce 65,000 cards. Within two years, IBM would install fifty-nine such presses in Germany—fifty-two from the only European press source that could manufacture them, and seven from the United States, including several high-speed units five times faster than the European models.47

  In 1936, Dehomag opened its first full-time school for customer training. Courses for beginning card punchers typically required two weeks of intensive study. Additional courses were needed to master the more delicate skills of operating the sorters and tabulators. Each new device required additional training. A Development Laboratory, staffed by ten engineers, was opened. Initial projects included high-speed punches and automatic paper feeders for the new D-11. Ironically, despite all its increased factory space, technical support from America, and extra investment, demand was so high that Dehomag was still two years behind in filling its mounting list of orders.48 It was a never-ending battle to supply systems. And the Reich needed them so urgently.

  * * *

  IBM WAS MAKING a fortune. Since the day Hitler came to power, the company had been reaping millions from its German operation. How many millions might never be known because the company buried its profits in bizarre inter-company transactions. But the outward manifestations of IBM’s growth and prosperity and the “admitted profits” it reported were amazing to a nation struggling to recover from the Depression.

  “December 1933 was the largest December in the company’s history,” Watson boasted to stockholders during one early 1934 meeting. He added that January 1934 was also the largest January in the company’s history and February 1934 saw conceded profits of $103,000 above the year before. Watson predicted the trend would continue throughout 1934. These profits were declared despite every attempt to weave revenues into complicated, untaxable inter-company shunts. Net income for 1933—to the extent it was identified given blocked accounts in Germany—was reported as $5.73 million, including income from foreign subsidiaries. Most telling, of $55.4 million in assets, $16.2 million was surplus cash.49

  Net income for the first six months of 1934 was $3.4 million over the $2.9 million posted in 1933, even after adjusting for various inter-company charges. Income increased to $5 million for the first nine months of the year, or $7.18 per share over $6.22 per share the previous year. A dividend of 2 percent was declared in addition to the regular quarterly dividend.50

  Equally impressive to the business press were the numbers for 1935. Watson began the year by predicting IBM’s continued upsurge. “Our trade abroad is improving,” reassured Watson, “as shown by the fact that for the first ten months of 1934 our exports increased about 35 percent over the corresponding period of 1933. One of the main factors contributing to industrial recovery may be found in the constantly increasing cooperation among political, industrial, and financial leaders.” Million-dollar profits continued to rise in 1935. Shares for the year bloated to $9.38.51

  However the funds were classed or categorized, Dehomag alone paid some $4.5 million in dividends to IBM during the early Hitler years.52

  IBM announced it would erect a building at 32nd Street and Fifth Avenue in Manhattan. Then the company purchased $1,000 life insurance policies for all 6,900 of its employees on the job since January 1933 or earlier. While dedicating a new addition to the company’s plant in Endicott just before Christmas 1934, Watson extravagantly announced a Yule gift—a 37 percent minimum wage increase for 7,000 workers. Shortly thereafter, newspapers revealed that Watson had become the highest paid executive in America. They dubbed him the “thousand dollar per day man.” Watson received a bonus of 5 percent of all IBM profits worldwide. So his total salary amounted to $364,432 per year, or nearly as much as the combined salaries of the chairmen of Chrysler and General Motors. With characteristic aplomb, Watson defended his unprecedented compensation. Then IBM bought another Manhattan building site, this one at 57th and Madison.53

  In mid-1935, Congress had passed a new law with an extraordinary impact on IBM: the Social Security Act. Congress had invented a bureaucracy no one was sure could even be implemented. Social Security would require a central file on nearly 30 million Americans.54 Until this point, Hollerith systems had still not attained the technologic ability to create a single central registry. That is why so many repetitive sorts by statistical agencies were undertaken and updated so frequently.

  When the Social Security law was passed, no budget appropriation and no infrastructure were in place because bureaucrats were convinced that “the machinery… to do the job… did not exist.” Nor did the first Social Security officials believe that nearly 30 million Americans
could be quickly punched into a first-time-ever system, and then sorted, assigned a number, and eventually alphabetized. Nor did anyone imagine that such voluminous records could be searchable and retrievable based on name and number.55

  Hollerith machines, as they were understood to exist in America at the time, could do no more than add, subtract, tabulate, and tally punch cards. But Social Security required collation, “the ability to take two sets of records and do a [simultaneous] matching to see whether… they were related to one another,” as government technicians described it.56

  To the amazement of the bureaucrats, IBM was ready. The company was quickly able to unveil a so-called “collator” that could achieve precisely what the government had in mind: compare and cross-reference two sets of records in a single operation. Therefore, it was not necessary for the government to invent its own equipment. IBM would provide the solution.57

  Washington awarded IBM an on-going contract so substantial it permanently boosted IBM into a corporate class of its own. Watson’s people boasted that Social Security was “the biggest accounting operation of all-time.” Actually, it was the second biggest. The dress rehearsal had already taken place in Germany in 1933. It will never be known whether the collator was invented in Germany or the United States, or as a collaborative effort of IBM’s cross-Atlantic development programs. But shortly after it appeared in the United States, the collator also appeared in Dehomag’s inventory. Dehomag was so impressed with the talented machine, the subsidiary deployed dozens of them, and planned to produce or import 50,000 more.58

  From the moment Washington anointed IBM with the Social Security contract, the company’s income catapulted six-fold within several years. Social Security and a diverse parade of lucrative contracts from the Department of Labor to the War Department created a veritable federal partnership with IBM.59 The company became quasi-governmental. Large-scale research and development into punch card registration, identification, and storage and retrieval systems were now funded by the U.S. government as well as Nazi Germany. IBM’s technology jumped. As a result of massive American taxpayer-funded research, more people-managing punch card capabilities than ever before would be available to the Hitler regime.

  * * *

  WATSON’S STRUGGLE to retain profit in Nazi Germany was all consuming. Reich regulations were constantly tightening the rules for business in cash-starved Germany. Austerity measures required ever-increasing domination of industry. Moreover, Heidinger never paused in his battle to reap his portion of the Dehomag money. Watson could handle Reich regulations. But Heidinger was something else.

  Barely a day passed without numerous position papers, contract drafts, legal opinions, and explanatory memos wafting between IBM offices in Geneva, Paris, Berlin, and New York trying to maintain an edge in Watson’s profit war with Heidinger. Every time one fire seemed doused, new flames erupted.

  For example, IBM was faced with a Dehomag profit of RM 1.2 million at the end of 1934. Watson didn’t want to pay the taxes in either Germany or the United States. To both take the profit, yet make it disappear, European auditors in late February 1935 concluded that “the new Dehomag will simply have to show a deficit as of December 31, 1934, after payment of the RM 1.2 mil lion 1934 dividends. The deficit will be made up within the first few months of 1935.” That dividend of course would be classed a “royalty,” making it appear as an expense. However, at about the same time, even the royalty loophole dried up. IBM accountants reported to IBM that “royalty payment to New York is no longer possible.” Confronted with a technical deficit for the first quarter of 1935 and unable to transfer profit, Dehomag petitioned the Berlin authorities for temporary tax relief, claiming “a hardship.”60

  The problem was that Heidinger earnestly wanted a profit shown so he could qualify for a bonus. Without a formal profit showing, Heidinger’s 10 per cent bonus would never materialize. Before the merger, Heidinger was accustomed to receiving a monthly bonus of RM 10,000. Under the new arrangement, IBM reaped huge earnings as royalties or other “fees,” but his income suddenly disappeared. Until the profits could again be declared, Heidinger demanded a monthly “loan” of RM 5,000 just to make living expenses.61

  Only Watson could authorize it. He did agree, but kept Heidinger on a short leash. The loans would extend only until August 1935, at which time “the whole position will be reviewed again.”62

  Upon learning of his temporary morsel, Heidinger, on March 3, 1935, shot off a saccharine thank you to IBM NY Vice President Otto Braitmayer. “It was indeed a great pleasure for me to receive… your kind letter of February 21 by which you allow me to receive from the Dehomag during the first eight months of this year a monthly advance of RM 5,000—instead of dividends which will be declared later on…. thank you very much for your kind thinking of me on occasion of my 60th birthday… which brings me nearly into your class of age.”63

  But then an additional Reich regulation hit, this one completely undercutting windfall profits. New rules prohibited distributed profits in the form of dividends above 8 percent of a company’s original investment. Since Dehomag’s soaring profits were now vastly in excess of IBM’s original capitalization, the dividend cap applied. As it became increasingly difficult for IBM NY to extract monies from Germany, profits still remained undeclared. It seemed that no matter what was done, Dehomag’s growing business made money but profit was never declared.64

  An IBM comptroller’s analysis conceded that by fiddling with losses, “It is obvious that Mr. Heidinger would draw about 40 percent of the total dividends which could be declared.” At the same time, the analysis added, IBM would only be able to receive 60 percent of what it was expecting.65

  Finally, Heidinger caught on that IBM losses were just as valuable as profits. If he couldn’t get a bonus on profit—he demanded it on the losses. Ironically, IBM managers were unable to deny the logic. “Mr. Heidinger is justified to a certain extent,” conceded one internal memorandum, “in asking that the losses in the other divisions be taken into consideration… because… the surplus is reduced.”66

  IBM agreed to give Heidinger a bonus on losses, but struggled to phrase the arrangement since German taxing authorities would never believe genuine losses could create a bonus. Finally, to assuage Heidinger, the company agreed to declare a phantom dividend first, pay Heidinger a 10 percent bonus on that amount, and then recast those same numbers as losses to avoid tax.67

  But what should be done with the blocked funds? In July 1935, during a Dehomag board meeting Watson attended in Berlin, he directed that “the money should rather remain invested in the firm and be credited to the license account [royalties], as direct remittances are not possible.” Heidinger was offered extra incentives, such as insurance and a generous pension.68 The feisty German agreed, but that only postponed the next round of financial fisticuffs.

  Meanwhile, to realize blocked profits, Watson channeled money into tangible assets. He expanded Dehomag’s Lichterfelde factory, retrofitted an old underutilized pre-merger facility in Sindelfingen outside Stuttgart, and installed additional card printing presses. The race was on to build those presses and expand factories, because shortly, the Reich would decree that German companies could no longer pay for any imports from America. The new rules prohibited such imports, by either cash or credit. Hence intra-company accounts could no longer be manipulated to create losses. Dehomag could no longer mask as a legitimate expense its own machinery shipped from one IBM company address to another. The German subsidiary would have to become completely self-sufficient.69

  Rottke bragged to the Dehomag board chairman in New York that he had beat the new regulations because “I have still imported as much merchandise as ever possible” from IBM NY before the new regulations took effect.70 Stockpiling IBM supplies, machines, spare parts, fabricating equipment, and punch cards meant that Dehomag received a decisive manufacturing impetus without the need to remit any money to New York. That only strengthened Dehomag’s balance sheet, and made i
t a more powerful component of IBM.

  But now surplus cash escalated in Germany beyond even Dehomag’s needs. Watson needed to invest in German assets that would retain their value. They could be sold later. Eventually, IBM commissioned its outside auditors—Price Waterhouse—to join IBM managers in making investment recommendations. An extensive written report was submitted. Stocks of other German companies were considered too volatile. Timberlands were debated, but deemed unlikely to be approved by the Reich as a precious natural resource. Buying an independent paper factory was rejected since paper was now highly regulated by the Reich.71

  “Rental property might be acquired, preferably in Berlin,” an IBM European manager suggested to Watson in a letter. The decision was Watson’s. He chose apartment buildings. These could be turned over to local rental agents for leasing, thereby generating income as well.72 Berlin was filled with some very discounted real estate at the time.

  IBM began buying apartment buildings. The properties purchased were not prime locations, but reliable sources of rental income. One building was at Schutzenstrasse 15/17. A second was at Markgrafenstrasse 25. Attorney Konrad Matzdorf, whose office was near one of the addresses, managed the sites, and according to one IBM assessment, “accumulated a substantial amount of money for the rentals.”73

  As IBM plowed its Reichsmarks into hard assets, it already anticipated a wider European presence. In 1935, Watson shifted the company’s European headquarters from Paris to a city with a better banking environment, Geneva, Switzerland. A Price Waterhouse report later confirmed that while dividends and profits destined for the United States were indeed blocked in Germany, “the regulations quoted above do not apply to transfers to Denmark, Belgium, Holland, Switzerland and Italy, since these countries have made special arrangements with Germany in connection with the transfer of interest and dividend payments.”74 As it happened, IBM maintained operations in Denmark, Belgium, Holland, Italy, and now Switzerland.