Every Dehomag invoice to every client for every machine and punch card was reviewed by IBM Geneva for correctness and then verified by financial supervisors in New York. This fiscal procedure applied to both Dehomag's billing within Germany and in the conquered nations and territories of Nazi Europe.
32
For example, Dehomag generated four small invoices in spring 1940. Invoice #04/26469 billed March 13, 1940; invoices #04/28499 and #04/28500 both billed May 21; and invoice #04/28612 billed May 27, 1940. These invoices were missing from Dehomag's periodic submissions. To track them, New York accountants made a written request to Geneva on December 23, 1940. Taylor in Geneva issued a detailed two-page single-spaced item-by-item response on February 14, 1941, with a simultaneous written request to Dehomag in Berlin to resubmit the invoices in duplicate. On February 26, 1941, Dehomag accountants sent a letter in German to Geneva confirming that a new reconciliation statement would be sent out; a translation into English was forwarded to New York. The four invoices were ultimately tracked: one was for $525.60, a second was for $46.77, a third was for $23.44, and the fourth was for $1.52.
33
At IBM, every penny counted.
But on March 12, 1941, Germany's cracking wartime economy put an even greater strain on the flow of money from Dehomag. Reich Economics Minister Walther Funk warned at the annual
Reichsbank
stockholders luncheon that "drastic restrictions" on corporate profits would soon be announced. Dividends in excess of 6 percent would be subjected to "prohibitive taxation." The only way to correct reduced profits was a voluntary increase in capitalization permissible during a brief investment window; 6 percent of the higher capital investment would of course yield greater profit sums. In other words, only those who further invested in the German economy could continue to reap significant profits. Funk's words sent off alarm bells throughout IBM.
34
More bells sounded when, in late May 1941, IBM realized that Dehomag was cutting prices to support the German war effort without IBM's permission.
MEMORANDUM TO THOMAS J. WATSON
From: J. C. Milner
Subject: German Rental Prices
May 23, 1941
We have heard from the Geneva office that the German Company have reduced their rental prices to customers by approximately ten per cent. This will naturally mean that our royalties will be affected in the same proportion. Although we have no recent figures from Ger many, we would estimate that the ten percent reduction would mean a reduction of approximately 1,500,000 Reichsmarks in the gross annual rentals of the German Company.
35
On June 12, 1941, the Reich issued its profit-restricting regulations. Those profit limits affected not only IBM, but profit bonuses for Heidinger, Rottke, and Hummel as well. The German managers knew that if IBM did not increase its investment, bonuses would not be possible. A loophole in German law, however, allowed the board of directors—with or without majority approval—to reinvest its funds in the company. Dehomag had accrued millions of blocked Reichsmarks in undistributed profits waiting to be allocated. The Nazi board could vote to reinvest that money, thus increasing the stock of the company. More stock meant more shares. Under German law, when a company increased its shares with new investment, the new shares were allocated in the identical proportions as the existing ownership. In other words, the percentages would remain the same—just everyone would own more—as in any stock split. These new shares would be distributed without taxes.
36
Heidinger and company decided they would rush a vote through to double the capital of the company, from about RM 7.7 million to about RM 15 million, using IBM's blocked profits. They would force a vote with or without IBM precisely because the law allowed directors to vote reinvestment without shareholder consent.
37
Much more was at stake for IBM than just reinvesting its profits into the Dehomag. Up until now, although IBM retained about 85 percent of the shares, the 15 percent owned by Heidinger, Rottke, and Hummel were restricted shares. Unlike most stock holdings, Dehomag shares could not be routinely sold, collateralized, or transferred like ordinary shares in any company. The shares were owned only so long as the three managers remained with the company and could not be sold to anyone other than IBM. Moreover, each man had obtained the shares not by an ordinary purchase but through a large paper loan from IBM that was canceled when the loans were "given back." In essence, the three German managers owned captive stock that Watson controlled.
38
If Dehomag's total stock doubled to RM 15 million, the new shares would be distributed 85 percent to IBM and 15 percent to the Germans—with one extraordinary difference. Fifteen percent of the new shares would proportionately flow to the three Germans automatically. Restrictive covenants would not apply to the new shares. Heidinger, Rottke, and Hummel could sell or trade their shares to anyone, including the new cartel. And the shares would be distributed free—no loans, no payments.
39
Matters began coming to a head when the Dehomag requested that an additional profit should be declared so bonuses could be paid. IBM took a hard line. On August 27, 1941, Schotte, who was now permanently headquartered in New York, cabled Geneva: "Re: Dehomag. No dividends to be declared." IBM Europe Manager W. C. Lier was about to dictate a letter to Dehomag advising as much when distressing correspondence arrived from Albert in Berlin. Albert warned that the German board's true intentions were not just to declare profits, but to double the stock from blocked funds and distribute shares before any restrictive covenants could be imposed.
40
Lier shelved his letter to Dehomag. Instead he cabled IBM NY: "Albert confidentially advises: Dehomag preparing another meeting which may decide without IBM represented. According Albert, Dehomag planning increase capital to such extent as to get [shares] out of IBM control. . . . Kiep not sufficient since can be outvoted."
41
All understood that IBM would be compelled to vote in favor of—or more precisely, authorize—the stock split. There were so many reasons. First, it was the only way to extract a hefty 12 percent dividend from revenues and circumvent the Reich's new profit restriction. New York wanted that. Moreover, Albert knew IBM could not control the numerical vote of the board. The vote to split would prevail in any event. But New York could not allow a vote to be taken without IBM's consent or involvement—even if that consent was pressured or begrudged. Such a precedent would lead to unending business decisions without IBM's involvement. First it would be Dehomag. Then Dehomag would maneuver the other European subsidiaries. Watson would not permit it.
42
Most of all, if IBM voted against reinvestment in Germany at this crucial stage in the negotiations with the Nazi Party it would only reinforce the perception that Watson was unfriendly to the Third Reich.
Albert urged IBM to be represented at the meeting, which seemed to be planned for mid-September, and unequivocally vote its majority in favor of the stock split. If nothing else, IBM could cooperate in the stock split on the condition that the new shares distributed to Germans were brought under the same restrictive agreements as the prior shares. However, to appear for IBM, Albert needed a proxy. Chauncey had foreseen such an emergency before he left Germany in the spring. He left a formal proxy in the custody of a third party, a secret source he could trust to follow his explicit instructions—a source in Berlin, one who was beyond the reach of the Nazis.
43
Albert physically needed the sequestered proxy in hand so he could dis play it at the board meeting. August 29, late in the day, Lier cabled NY: "Albert stating third party holding IBM proxy for him. Desirable proxy handed to him. . . . Albert states imperative he obtain proxy in order [to] protect IBM interests. Suggests you cable third party hand him proxy. Also suggests we cable Dehomag Albert our attorney who should be invited all meetings and participate all Dehomag affairs. Albert urging speedy decision. Please advise."
44
It was morning in New York when Chauncey received Lier's emergency dispatch from Geneva. He responded before the end of the day, Friday, August 29, instructing his secret source in Berlin. The source did not receive the cable until the next Wednesday, September 3.
45
S
EPTEMBER 3, 1941
Harrison Chauncey
International Business Machines Corporation
590 Madison Ave.
New York
Dear Chauncey:
Your cable of August 29 requesting me to turn over the power of attorney to Dr. Albert has been received and your instructions were carried out this morning when I personally handed him the document in question and gave him your message. He assured me that your instructions would be carried out to the letter. If developments do not move smoothly, there is a possibility that I shall call you on the telephone or write you in detail as Dr. Albert advises. Briefly he stated that Mr. Heidinger was attempting to take advantage of the dividend limitation decree, which was issued since you left Germany, to force the issuance of new stock.
When you left here I thought we would see each other in New York before this time, but as events are moving so slowly I have settled down for the winter. Paul Pearson, whom you will remember, is scheduled for home leave and may be passing through New York next month. There is a possibility that he will bring you a message if developments between now and then justify such action. Please remember me to Mr. Watson and Mr. Nichol, and with all good wishes to you.
Sincerely Yours,
Sam E. Woods
Commercial Attache
United States Embassy
Berlin
46
Although five Germans now sat on the Dehomag board, few of them could appear in Berlin for the rush meeting Heidinger planned for September 19—not even Heidinger himself. Heidinger lived in Munich. So did Schulte-Strathaus. Dr. Vogt, Heidinger's brother-in-law, lived in Berlin but was in poor health, and not available on such short notice. Arrangements were made for all three unavailable directors to sign proxies. Each signed on September 16 proxy forms prepared by Hans Mahr, a Dehomag attorney. These proxies empowered either Kiep or Ziegler to vote per specified instructions—to generate a stock split. Kiep was loyal to Watson, but the former German consul in New York was still an official of the German Foreign Ministry. The pressure on him was immense. He would have no choice but to vote as instructed on the proxy by Heidinger and his clique. There was no chance Kiep could cast his personal vote against reinvestment in Germany, so he would have to join with the majority.
47
Albert was holding IBM's proxy, conveyed by Woods, but no instructions from Watson. The new German law did not
require
profit taking; it only offered corporations a window to double their dividends on the condition that more money was reinvested in the Reich. But IBM would have to vote for the stock split for a host of reasons—that seemed clear. Albert needed a decision—fast. If IBM was isolated by its own board, and voted against German economic support, it would only seal the view that IBM was an enemy of the Hitler regime.
Yet, at a time when America was closer than ever to entering the war, Watson was profoundly uncertain how doubling the investment would be perceived. If it could appear that the investment was somehow compulsory, then IBM could simply explain it was required to comply with the law.
Woods could not provide such a statement, since the law was clearly optional. But he was willing to read such a statement from Albert to IBM NY, allowing IBM to transcribe the conversation and in so doing create a record of what appeared to be government coercion. A phone call was arranged.
S
EPTEMBER 17, 1941, 10 A.M.
N
EW
Y
ORK
T
IME
W
ATSON
: Hello, Mr. Woods.
W
OODS
: Hello, Mr. Watson. I am going to read a message to you from your attorney. This is the message:
"As you know, a special law, enacted June 12, 1941, provides that the dividends of any and all companies organized under German law are from now on restricted to six percent. . . . they can, according to certain detailed descriptions, increase their share capital out of their surplus. This is to be done by the board of directors, not by general [shareholder] meeting. Dehomag intends to increase their share capital out of surplus by 100 percent—RM 15,400,000—and will then be entitled to declare six percent dividends on the 15,400,000 Marks, which is equivalent to 12 percent on the original 7,700,000. The obvious advantages of this are . . . transfer of sur plus . . . without shareholders paying well-known high taxes. . . . This law can practically be considered compulsory. (In other words, it is compulsory that this be done). . . . I strongly recommend you send a cable of approval."
The message was transcribed as coming from Woods and therefore was envel oped in the authority of the commercial attache.
48
Joining Watson in the conference call were Nichol and Chauncey. Woods was actually excited to speak to Watson himself. Indeed, Woods immediately had Albert's message typed into a letter to IBM NY, adding, "It was good to hear your voices and I am looking forward eagerly to seeing you when I pass through New York the next time I am at home."
49