IBM and the Holocaust (20 page)

WHEN HERMAN HOLLERITH
designed his first punch card, he made it the size of a dollar bill.
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For IBM, information was money. The more Germany calculated, tabulated, sorted, and analyzed, the greater the demand for machines. Equally important, once a machine was leased, it required vast quantities of punch cards. In many cases, a single tabulation required thousands of cards. Each card was designed to be used only once, and in a single operation. When Dehomag devised more in-depth data processing, the improvements only bolstered card demand. How many punch cards were needed? Millions—per week.
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Punch cards sped through the huffing machines of the Third Reich like tiny high-speed mechanized breaths rapidly inhaled and exhaled one time and one time only. But Hollerith systems were delicate, precision-engineering instruments that depended on a precision-engineered punch card manufactured to exacting specifications under ideal conditions. Because electrical current in the machines sensed the rectangular holes, even a microscopic imperfection would make the card inoperable and could foul up the entire works.

So IBM production specifications were rigorous. Coniferous chemical pulp was milled, treated, and cured to create paper stock containing no more than 5 percent ash, and devoid of ground wood, calk fibers, processing chemicals, slime carbon, or other impurities that might conduct electricity and "therefore cause incorrect machine sensing." Residues, even in trace amounts, would accumulate on gears and other mechanisms, eventually causing jams and system shutdowns. Electrical testing to isolate defective sheets was mandatory. Paper, when cut, had to lie flat without curl or wrinkle, and feature a hard, smooth finish on either side that yielded a "good snap or rattle."
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Tolerances necessitated laboratory-like mill conditions. Paper thickness: .0067 inches plus or minus only a microscopic .0005 inch. Width: 3.25 inches with a variance of plus .007 inches or minus .003 inches. Two basic lengths were produced: 5.265 inches and 7.375 inches, plus or minus only .005 inch in either case. Edges were to be cut at true right angles, corners at perfect 60 degree angles, with a quarter-inch along the top and three-eighths along the side, all free from blade creases with the paper grain running the length of the card. Relative humidity of 50 percent and a temperature of 70-75 degrees Fahrenheit was required at all times, including transport and storage.
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Printing of the customer's name and specific project name was to be legible but not excessively inked and in no circumstances sufficient to dent the card or nudge it out of its plane, which could microscopically alter thickness. Text or numbers had to be printed in precise positions to line up with punching devices and machine gauges. IBM instructions to mills declared, "These specifications are absolutely necessary" and any variation "could distort the result."
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Only IBM could make and sell the unique punch cards for its machines. Indeed, punch cards were the precious currency of data processing. Depending upon the market, IBM derived as much as a third of its profit from card sales. Overseas sales were even more of a profit center. Punch card profits were enough to justify years of federal anti-trust litigation designed to break the company's virtual monopoly on their sale and manufacture.
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When Herman Hollerith invented his technology at the close of the previous century, he understood the enduring commercial tactic of proliferating a single universal system of hardware and ensuring that he alone produced the sole compatible soft goods. Hollerith was right to size his card like the dollar. IBM's punch card monopoly was nothing less than a license to print money.

In the Third Reich's first years, Germany was completely dependent upon IBM NY for its punch cards. Even after the factory in Lichterfelde opened, German manufactured machines were useless without cards imported from the United States. Card presses would eventually be built in Germany, but until that time, Dehomag was constantly scrambling to import the millions of cards ordered each week by its customers. To guard against sudden shortages, Lichterfelde needed a six-month supply—enough to fill fifty-five railroad cars. Half the stock was stored off-site in leased warehouses, and the rest in the factory.
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So vital was the production of paper products that in May 1934 the Reich Ministry of Economic Affairs sought to regulate mills. An Economics Ministry decree placed an eighteen-month moratorium on establishing, closing, or expanding paper mills without the specific permission of the Reich. Dehomag hoped to have its card presses in operation before the moratorium expired.
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IBM was making so much profit in Germany, it was causing problems. About $1 million profit was suddenly earned by the end of 1933, this at a time when nearly all of German industry was being battered due to the international anti-Nazi boycott. Dehomag had sold an unprecedented 237 percent of its 1933 quota—outpacing all IBM foreign operations combined. Yet Nazi business precepts denounced large corporate profits, especially those earned by foreign corporations. No wonder a nervous IBM auditor in Europe conceded to IBM NY, "Dehomag is in an extremely dangerous position, not only with respect to taxation, but it may be cited as a sort of monopolistic profiteer and, where primarily owned by foreigners, it may be seriously damaged by unfriendly publicity."
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For Heidinger, IBM profits were good news. His personal bonus, expressed as a stock dividend, would total nearly a half million Reichsmarks. He wanted his share. But Watson was not so inclined. Reich currency regulations sequestered profits into frozen bank accounts disbursable only within Germany. Heidinger could be paid, but not Watson. Moreover, newly enacted decrees taxed profit dividends harshly. If Watson couldn't receive his money, he saw no reason why anyone else should either. As the chief stockholder, Watson voted that no dividends would be paid.
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Heidinger would not abide Watson first usurping Dehomag and now usurping his share of the profits. Dehomag's extraordinary growth was an accomplishment Heidinger had personally sculpted by virtue of his Nazi connections. He wanted the financial reward he felt he deserved. The war for control of IBM's money in Germany only escalated.

Conflict arose in 1933 as soon as IBM announced the merger of its existing German subsidiaries, the million-dollar expansion, and new factory construction. Since Heidinger owned a token share of one of the old minor companies being folded into the new larger Dehomag, he expected his stock to be purchased as part of the consolidation. Watson refused, even though the buyout amounted to only RM 2,000, or about $500.
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On September 25, 1933, IBM's European Manager, Walter Jones, placed the question squarely with Watson personally. Heidinger, reported Jones, "now thinks IBM should take this [RM 2,000] off his hands and asked that the matter be submitted to you." A New York auditor acknowledged on Watson's behalf that IBM did in fact need Heidinger's shares to effect the merger. But the auditor added, since "the stock at the moment is worthless . . . [because it has] lost its entire capital through its operations . . . we do not think it would be fair for IBM to pay him anything for it."
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Heidinger knew his stock had become worthless only by virtue of the losses engineered by Watson to avoid taxes.

Heidinger fought back. He went directly to the Reich tax authorities, briefed them on IBM's entire complex merger plans, and asked for a formal ruling on the company's tax avoidance strategy. If Heidinger couldn't get his $500, it would be costly for the parent company. Quickly, IBM learned it was very expensive to fight the feisty Heidinger.
¹⁰⁶

Tax officials proposed an assessment as high as a half million dollars. Protracted negotiations ensued with the tax boards. Streams of letters and cables crisscrossed the Atlantic. Numbers, from the ferocious to the moderate, bandied between IBM offices. Heidinger had positioned himself to "save the day" by negotiating the taxes down to a quarter of their proposed assessment. New York began to comprehend the process. IBM auditor Connolly at one point understated the predicament: "I should not be surprised if he [Heidinger] set up scares [with government officials] and talked them off for the sound of it."
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Financial battling between Berlin and New York seemed endless. Heidinger continuously tried to extract bits of compensation and sometimes trivial sums of expense money. IBM would block him through its controllers, managers, and attorneys. Heidinger would then retaliate by aggressively "consulting" Reich bureaucrats, which invariably led to added costs. Connolly openly asked in one letter if Dehomag could just pursue its corporate business without Heidinger "running to the German government every time for approval."
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One conflict came to a head at the June 10, 1934, Dehomag board meeting. Heidinger wanted IBM NY to pay his dividend taxes resulting from the merger. He also resented the highly detailed financial reports required each month by IBM auditors. Watson refused to pay Heidinger's dividend taxes and his auditors would not relent on their micromanaging oversight. At the board meeting, Heidinger angrily threatened that if his view did not prevail, than Dehomag was no longer an independent German company, but a foreign-dominated firm. As such, he would notify authorities in Berlin. Dehomag would then be assessed an extra quarter-million in special taxes and "prohibited from using . . . the word
Deutsche
" in its name, since that term was reserved for Aryan businesses. Without the word
Deutsche
in Dehomag, he warned, government and commercial contracts would be lost. Minutes of the June 10 exchange were omitted from the meeting's written record. Details, however, were summarized in a separate letter to New York.
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Ironically, when it came time to making capital investments, Heidinger took a completely opposite approach. In a memo asking IBM NY to undertake an expensive expansion of facilities, Heidinger asserted, "The management can merely submit proposals; the decision as to whether something should be done about it, is the responsibility of the owners."
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Ultimately, IBM and Heidinger forged one battle-scarred compromise after another, howsoever transient. But no matter how insolent or disruptive Heidinger became, Watson refused to disengage from Dehomag's lucrative partnership with Nazi Germany. In fact, Watson was determined to deploy as many lawyers, accountants, and managers as necessary—and personally visit Berlin as often as required—to make sure IBM received all the profit—frozen or not. The fight with Dehomag would continue—not to reign in its technologic alliance with the Third Reich, but rather to ensure that the profits continued and remained unshared.

WATSON KNEW
he needed to stay close to developments in Germany. In 1934, he visited twice. The first was a brief stay in late June to oversee the final merger of four IBM subsidiaries into the new larger Dehomag, a transaction long delayed by negotiations with the tax authorities. In addition, a new management and stock participation contract was needed for Heidinger. Watson wanted to be on hand if any last-minute disputes arose with Heidinger.
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When Watson visited Berlin that June, the Reich's forced sterilization program was just ramping up. Everywhere, Jewish misery was evident. Nazi Brown Shirts noisily blocked the doorways of Jewish-owned shops. Unemployed Jews were moving out of their homes. Signs declaring Jews "not wanted" were prominently posted outside stores and cafes. But Watson did not focus on the Nazi war against the Jews and other non-Aryans. He was concerned with IBM's market victories in Germany and his war against any potential competition. IBM's only possible rival was Powers.