Hell's Cartel

by Diarmuid Jeffreys

  The break came only in 1923, when Matthias Pier, one of Carl Bosch’s scientists at Oppau, devised a commercially viable process for synthesizing methanol from coal, relying on high-pressure hydrogenation equipment similar to that which BASF had used to make synthetic nitrates. A valuable chemical in its own right, methanol could also be used as a crude fuel for motor vehicles. But more important was that the process pointed to a way in which Friedrich Bergius’s discovery could be made to work on an industrial scale. Bosch, vividly aware of the great potential of synthetic fuel technology, quickly acquired Bergius’s patents and his company’s assets for around RM 10 million.*

  The IG, with its vast capital, technological expertise, and extensive holding in the coalfields of the Ruhr, was now well placed for getting into the oil game. Indeed, that prospect had been one of the principal reasons behind Bosch’s determination to bring the combine into being in the first place. He knew that the project would require resources far beyond anything that BASF could command on its own and that only the IG’s critical mass could provide the necessary economies of scale. Of course, anything involving such a massive degree of investment carried great risks and would demand enormous effort on the part of all the scientists and engineers involved. But if they were successful the payoff would be huge.

  Bosch’s gamble led to one of the IG’s first commercial decisions: to invest hundreds of millions of marks in the assembly of a new plant at Leuna.† The aim was to eventually manufacture a hundred thousand tons of synthetic oil a year, which would sell for around twenty pfennigs per liter in Germany—a highly competitive price at a time when natural oil sold for between twenty-three and twenty-five pfennigs per liter, and one that could ensure IG’s profitability for years to come. But that was only the beginning. Bosch also had ambitions of exploiting the process worldwide, of forging partnerships that would take the combine’s technology into new markets and help to reestablish its domination of the global chemical industry. As corporate initiatives go, the synthetic fuel program was about as big, bold, and ambitious as it was possible to be. The combine’s very future was riding on it.

  The gamble was not universally popular. Though Bosch had a great deal of authority as IG’s new boss, he was still only primus inter pares; he had no automatic fiat to push things through without consultation and had to listen patiently to the grumbling of several senior colleagues about the potential risks. He mollified them by pointing to the American government’s predictions about an impending oil crisis; even if the forecasts were only half right, he argued, the price of oil was going to shoot up and a synthetic alternative would eventually pay great dividends. But Bosch knew that not everyone at the IG was convinced.

  There were potential external opponents to placate, too. From the start Bosch had realized that by embarking on a program of fuel production IG Farben ran the risk of coming into conflict with the traditional oil industry. Previously the oil barons and the chemists had been able to keep out of one another’s way, their products, technology, and markets being separate and distinct. That was clearly going to change and Bosch knew that unless he came to some sort of accommodation with the oil industry—especially with one or more of the half dozen companies that controlled it—the combine was going to find itself in a competitive minefield. On the other hand, if a deal could be achieved—perhaps by selling some of those oil firms a license to use the IG’s new fuel technology—the funds could help defray some of the heavy costs of Leuna. So in 1925, while his plan was still in its embryonic stages, Bosch had cautiously made contact with the largest of them, Standard Oil of New Jersey—or Esso, as it was more colloquially known—by sending a group of executives under Wilhelm Gaus, Oppau’s production head, on a goodwill visit to Standard’s refineries around New York. Gaus was under strict instructions to drop hints throughout the trip about the acquisition of the Bergius patents and the IG’s plans to develop them. If Gaus could also find an opportunity to invite Standard’s managers back to Germany on a reciprocal visit, then so much the better. Either way, he had to make sure the Americans took the bait.

  Standard’s bosses duly obliged. The company was very interested in any process that allowed it to better refine leftover heavy oils and tars into premium liquid fuel products, and it already knew from conducting its own research that hydrogenation and the Bergius process might offer a way. But it was the prospect of extracting crude oil equivalents from coal that really caught the Americans’ attention. More aware than most of the looming shortfall in oil reserves, Standard had already begun searching for alternatives. In the early 1920s the company had bought several thousand acres of farmland in Colorado because it hoped to extract oil from the shale beds there if and when the technology became available. The news that IG Farben might have acquired this capacity was intriguing but also slightly alarming. If the world did run out of oil or if the IG truly was planning to make synthetic fuel at prices competitive with natural petroleum, then clearly Standard had to gain access to such technology before anyone else.

  In March 1926 Frank A. Howard, who ran the Standard Oil Development Company, arrived in Ludwigshafen to see for himself what all the fuss was about. He was given a grand tour of the huge plant and its glistening laboratories, with his IG guides making absolutely sure he saw enough of the hydrogenation procedures to whet his appetite. As they had intended, Howard was staggered by the scale and ambition of all the research and development on display, especially the work being carried out on synthetic fuel—demonstrated to him on a small pilot installation because Leuna had yet to go on line. That evening, Howard sent a cable to his boss, Walter C. Teagle, the president of Standard Oil, describing his epiphany in suitably dramatic terms: “This matter is the most important which has ever faced the company.… [IG] can make high-grade motor fuel from lignite and other low quality coals in amounts up to half the weight of the coal. This means absolutely the independence of Europe in the matter of gasoline supply. Straight price competition is all that is left.” A few days later Teagle, who had been visiting Paris, came rushing to Ludwigshafen. He went on the same tour as his subordinate and was just as stunned. The implications of the fuel technology were simply breathtaking. Unless Standard found a way to control, or at least to cooperate with, this new competitor, the commercial foundations of the global oil industry could be completely undermined.

  Bosch had hooked his fish. Now he had to reel it in. The first moves, on both sides, were cautious. The Standard executives believed that the Germans were unlikely to sell their Bergius patents outright—or at least not for any price that the American oil company could afford—and suggested instead a limited partnership to bring the new fuel to market. Bosch provisionally accepted the offer, subject to negotiations on the level of Standard’s investment, but realized that if he pushed the Americans too hard and too quickly he could still scare them off. He forced himself to be patient and put his energies instead into getting Leuna operational.

  That work had gotten off to a promising start. There were some teething problems with the Bergius technology, to be sure—it was difficult to find the right catalysts and build the new high-pressure installations—and progress was slower and more expensive than the company wished. But in April 1927 the first Leuna gasoline went on sale. That year one ton of the fuel was produced. By the end of the following year, output had risen to twenty-eight thousand tons. By 1929 more than sixty-seven thousands tons of oil products would be coming out of the factory gates and the company would be well on its way to meeting its target level of a hundred thousand tons.

  In the meanwhile, the negotiations between Standard and the IG waxed and waned. In an attempt to force the pace, Bosch went to the United States to meet Teagle and Howard but returned, in low spirits, without a conclusive agreement. Then in August 1927 there was a small breakthrough. In return for the American rights to use the Bergius process to improve the quality of its natural crude oil, and a 50 percent share in the profits from selling licenses to use this technology
to other partners, Standard agreed to invest in a joint research and development program with the IG and to build a plant for this purpose in Louisiana.

  The agreement still didn’t quite satisfy either partner. By now Standard was convinced that the Bergius process was one of the most significant scientific developments in the history of the oil industry. When it had begun applying the IG hydrogenation technology to crude oil, it had come up with extraordinary results—more than doubling the amount of petroleum that could be refined from one barrel of crude. Standard naturally wanted to use the technology in all its refineries, not just those in the United States, but was prevented from doing so by the terms of the deal with the IG. When its executives considered what could potentially be done with coal—as abundant in America as it was in Germany—they salivated at the possible returns. They simply had to broaden the agreement.

  Bosch, on the other hand, needed Standard’s money—and lots of it. Despite the early successes, the new plant at Leuna was proving ruinously expensive, as continual breakdowns and technological failures pushed operating costs through the roof. Synthetic fuel was being produced and the IG’s publicity machine was doing a fine job of convincing the outside world that all was going well, but the truth was markedly different. The fuel was costing far more to produce than anticipated and only by selling it at a massive discount could the IG could keep its price competitive with that of traditional gasoline. The losses were piling up—reaching RM 85 million by 1929—and the fuel was still nowhere near commercial viability. Every month the figures seemed to worsen and with every gloomy report the complaints of the skeptics on the combine’s management committees grew harder to ignore. There were even muted suggestions that the project be abandoned before it began jeopardizing the IG’s financial stability. Bosch realized that he would have to find a solution before his colleagues withdrew their support.

  In November 1929, accompanied by Wilhelm Gaus, August von Knieriem, the IG’s lawyer, and Hermann Schmitz, the combine’s financial genius, Bosch returned to the States to make Standard an offer they couldn’t refuse. Although he knew that his government would never let the IG completely surrender the German rights to a process that promised to secure the nation’s future economic self-sufficiency, he could still sell Standard the rights to the rest of the world.

  As he’d expected, the Americans leapt at the opportunity. In return for 2 percent of Standard’s stock—546,000 shares with a cash value of around $35 million—Bosch gave up all the IG’s rights to fuel hydrogenation technology outside Germany. The two giant businesses set up a joint firm, Standard-IG (80 percent owned by the Americans, 20 percent by the IG), to exploit the patents and know-how arising from any future research and development in the field. Howard Teagle would also join the board of the IG’s new U.S. subsidiary, the American IG Chemical Company.*

  Emboldened by the partnership, Bosch dangled another tempting carrot. Oil wasn’t the only product that could be extracted from coal, he told Standard’s bosses. It could also be turned into synthetic rubber, a product known as buna. So far it was proving too expensive to produce commercially compared with natural rubber, but these costs could be reduced significantly if buna was made from oil, which Standard obviously had in abundance. Given buna’s potential as a raw material for motor tires and Standard’s close links to the U.S. automobile industry, there was a clear synergy to be exploited. Would they be interested in cooperating on this project, too?

  They were. A few months later Bosch sent Carl Krauch to the United States to close negotiations. Another new business was to be formed. Called Jasco (the Joint American Study Company), it would be owned jointly by the IG and Standard and would develop new processes in the oil-chemical field, especially any that led to the production of buna.

  Bosch was pleased. Yes, he had handed over most of the global rights in the technology to the Americans but he had kept the right to make synthetic fuel in Germany, which, given his country’s oil deficiency was bound to bring in enormous profits eventually. With $35 million worth of Standard stock now resting comfortably in the IG’s accounts—and contracts with a powerful possible competitor safely signed—Bosch felt he could focus on the combine’s other concerns.

  And then the wheel turned yet again. Bosch had based his whole synthetic oil strategy—indeed the IG’s very future—on the premise that oil was going to be in short supply and that demand and prices would soar. But in late 1930, to the astonishment of all who had predicted an oil famine, massive new reserves were discovered in Texas. The finds came as the Great Depression began sending demand for automobiles (and the fuel that drove them) into rapid decline. When new oil reserves were found in the Middle East the following year, oil prices collapsed and the future for Leuna suddenly looked very bleak. In 1931, after almost RM 300 million of investment in Leuna, the cost price of synthetic oil stood at around forty-five pfennigs a liter. The world sale price for a liter of natural petroleum was around seven pfennigs. The differential made the IG’s product impossibly uncompetitive. As the IG’s losses began spiraling once again, its financial stability was badly shaken. Soon even some of Bosch’s closest collaborators were openly calling for the closure of the fuel project. Unless he could find yet another solution, the IG’s boss faced the stark prospect that the combine’s synthetic fuel project—and his career with it—would end in ignominious failure.

  The solution, when it came, lay far beyond the IG’s clinically clean laboratories and comfortably appointed committee rooms. It was sometimes easy to forget from that vantage that there was a world outside—and that this world was changing. Germany was once more in political and economic turmoil. Its street corners had become battlegrounds, its beer cellars and meeting halls the setting for fierce demagogy, vicious bigotry, and angry brawls. The IG’s leaders watched these developments with aloof distaste, only reluctantly getting involved when the turmoil threatened to spill over their factory walls and rational words were needed to calm things down. But the combine was too big, too powerful, and too central to the national interest to be allowed to remain on the sidelines for long. At a time of growing economic crisis, German self-sufficiency had become a key maxim in a revolutionary and violent new ideology. The IG’s control over one of the secrets of that self-sufficiency, and its enormous financial exposure to the costs of developing it, had made it uniquely vulnerable to pressure and persuasion. Soon Bosch and his colleagues would be faced with a choice: to oppose the revolution that threatened to sweep over Germany and risk financial disaster or to join it—and so ensure IG Farben’s survival.

  6

  STRIKING THE BARGAIN

  For most of the middle years of the Weimar Republic, IG Farben’s involvement in politics was largely a matter of tactical expediency. If the IG had a unifying corporate political philosophy (as distinct from the individual convictions of its senior executives), it was simply one of supporting whichever party believed in letting the combine get on with making money. With much of its revenue coming from exports, the IG was keen that the Germany authorities maintain good relations with the country’s former enemies, while lobbying steadily and quietly for the revision of the most hateful parts of the Versailles Treaty. Domestically, the company wanted stable government that didn’t interfere in its affairs, low taxes, low inflation, limits on the power of organized labor, and support for agriculture, the main consumer of its synthetic nitrate output. Farben’s position was straightforward economic liberalism; anything else, be it excessive red tape or political extremism, was thought to be bad for business. The eventual restoration of German power was something to be hoped for, as it would strengthen the IG’s long-term fortunes, but patience and diplomacy were the best way to bring it about. Even when there were disagreements between the firm’s leaders (Carl Duisberg was notably more nationalistic than Bosch, for example), these usually had little bearing on their common approach to running the company.

  To a degree, then, it made sense to try to advance the IG’s corporate a
genda by giving support to politicians and groups that were friendly to business. But in Weimar’s fractured coalition politics it wasn’t always easy to identify who these might be. The left, of course, was problematic: as the party of the workingman and the trade unions, the Social Democrats (Sozialdemokratische Partei Deutschlands, or SPD) would hardly be likely to advance policies that quashed the power of organized labor. Moreover, though pillars of the republic’s democracy, they were also the architects of its tax-funded social and welfare system, which big business detested on principle. Farther to the left, the Communists (Kommunistische Partei Deutschlands, or KPD) were completely beyond the pale. Evidently bent on undermining Germany’s political stability, importing Bolshevism, and destroying capitalism and private property, they were ideological anathema to everything the IG stood for.

  The right had its problems too. In theory, Alfred Hugenberg and the conservative German National People’s Party (Deutschnationale Volkspartei, or DVNP) might have qualified for support as they were undoubtedly probusiness and opposed to organized labor, but they were too doctrinaire and intemperate to be relied upon. In any case, Hugenberg’s unfortunate habit of leveling accusations of treason against anyone who had been involved in the Versailles settlement didn’t exactly endear him to Carl Bosch, one of the treaty’s leading negotiators. The extreme right was even more objectionable. For most of the middle years of Weimar, the various small splinter parties of exmonarchists, extreme nationalists, and beer hall xenophobes were simply too fanatical to be taken seriously. Even when the Nazis (Nationalsozialistische Deutsche Arbeiterpartei, or NSDAP) began to emerge out of this herd in the late 1920s—largely because of their better organization, their paramilitary violence, and the growing cult of personality around their leader, Adolf Hitler—their hate-filled anti-Semitism and contempt for democracy were still a long way from gaining mainstream respectability. In parliamentary terms they were scrabbling away on the margins, competing for a few Reichstag seats with better-supported fringe groups such as the Economy Party (Wirtschaftspartei).